How Real Estate Investors Avoid Over-Leverage & Bad Deals | David Gudmundsen

David Gudmundsen (00:00)
And it’s interesting where, you know, everyone makes money when the market’s going up. And it’s it’s easy, you know. You know, it nobody knows you’re swimming naked till the tides retreat. And it’s important where a lot of times if you’re not ready to pivot, I’ve seen guys get knocked out and get knocked out hard. Last go around in two thousand five and six, everyone was thinking this thing was going to run forever. And a lot of the guys have been in the business a long time, saw the writing on the walls and and were able to pivot. And if you didn’t, you you really got you really got hurt.

Joseph Crooms (02:07)
Hey everyone. Welcome to Investor Fuel Real Estate Pros Podcast. And I am your host, Joseph Crooms. I’m joined today by someone I’ve been looking forward to chatting with. His name is David Gudmundsen. Is that right, Dave? Did I get that last name right?

David Gudmundsen (02:25)
Close enough, Gudmundsen. So it’s it sounds easier than it looks. It’s it the spelling looks a little so—

Joseph Crooms (02:30)
Well, you know what? Thank you for that correction. So no one liking the guest to pronounce you got that day. So so look, Dave, we’re happy to have you here. Say hello to everybody.

David Gudmundsen (02:44)
Hey, how you doing, everyone?

Joseph Crooms (02:45)
Great, great. I think our listeners are going to get take something away from how you’re approaching the investment end. You mentioned that you’ve been in real estate for quite a while. So let’s dive into it. So first of all, for people who may not be familiar with your world, your niche, give us the short version. What’s your main focus these days?

David Gudmundsen (03:06)
Right now it’s private money lending. I’m out of Arizona currently and you know, doing private money lending, but I’ve also, you know, own rentals and been involved with flipping land and homes over the years and as well as I used to do some brokerage, but not anymore.

Joseph Crooms (03:23)
What’s the name of your business, Dave?

David Gudmundsen (03:24)
Higley Capital.

Joseph Crooms (03:25)
Even Lee Capital. And what markets are you only in Arizona or is or you know, throughout the state or where?

David Gudmundsen (03:31)
Mainly in Arizona. I mean we’ll look at other stuff, but mainly our focus is Arizona.

Joseph Crooms (03:35)
Okay. What caught my attention about what you said, you know, not only are people watching the market, but how do you tell what what the market is going to do? You sort of gave me some preemptive thoughts that you may or techniques that you may need to see what’s going on. Can you share that with us?

David Gudmundsen (03:55)
I mean, I’ve been r investing in real estate for thirty years. I’ve been through a couple couple market cycles. And it’s interesting where, you know, everyone makes money when the market’s going up. And it’s it’s easy, you know. You know, it nobody knows you’re swimming naked till the tides retreat. And it’s important where a lot of times if you’re not ready to pivot, I’ve seen guys get knocked out and get knocked out hard. Last go around in two thousand five and six, everyone was thinking this thing was going to run forever. And a lot of the guys have been in the business a long time, saw the writing on the walls and and were able to pivot. And if you didn’t, you you really got you really got hurt. And one thing I’ve tried to do is I always look at the market and says, okay, if the market, and this is what I did last go around, I had a lot of rentals and I sold just about everything in 2004 and 2005. Because I thought I said, okay, if the market was to pivot, what would happen to me? Well, I was highly leveraged, I would have got knocked out. I said, Well, I don’t want that to happen. So I made some adjustments, sold a bunch of rental properties. And then I said, Okay, based on if the market was to pivot, what would happen? I’d hang on, but I’d hang on for dear life. Well, that doesn’t sound fun. So I made some other adjustments, sold some rentals, paid some other stuff off. And then I said, Okay, what would happen now? Well, I I’d be able to ride through and it wouldn’t be that bad. And I made some additional adjustments. And I made enough adjustments where I wanted to profit where when the market’s low, that’s the time to buy. Everybody has this thing where, you know, it’s it’s very simple. Everyone thinks of buy low, sell high. But it’s not true. I I look at all the guys that submit loan requests and everyone has this thing where they’re trying to leverage to their eyeballs. And I haven’t known too many investors that have gotten into trouble from being under leveraged. They always seem to get in trouble when they’re over leveraged. So whether the debt doesn’t cover the the payment doesn’t cover the rent doesn’t cover the payment, or they’re if they’re forced to sell, they’re not able to sell and get out because they owe more than it’s worth. But I think it’s important to be able to, you know, see no one’s gonna predict the future, but you kind of get a feel when we’re at the top or at the bottom. And I kind of felt that too. I had a bunch of land holdings that I liquidate in 2021, 2022. ‘Cause I saw that is interest rates starting to shift and pivot. And you know, everyone was payment sensitive. So when the payments go up, a lot of deals that made sense with low payments didn’t make sense with high payments.

Joseph Crooms (07:19)
Let me ask you this question. Where are you flipping more homes now or or you say you’re diversified? Can you share the diversity of your package, of your portfolio?

David Gudmundsen (07:30)
Sure. So I have I’m down to nine rentals. I still have some land I have down in Pinal County. I’m in the process of splitting. But my main focus right now is doing private money and hard money loans that just myself and a business partner do, and we just do with our own capital. So and it’s it’s interesting because we get a lot of loan requests. So we get to see what these deals look like. And a lot of times it’s interesting where borrowers will borrow as much as you’ll give I mean, we’re the we’re the brakes. When they come to us, we’re the one that have to get them to pump their own brakes and hey, you what? I mean, I know you can buy this deal for X amount of money, but we’re not gonna loan you that amount of money. You know, in the hard money business, it seems like some of the borrowers want the lenders to take all the risk. They want us to put up all the money for them to buy it. They want us to put up all the money for us to rehab it. We just aren’t willing to take that risk. It’s gotta make sense for for for us as well. So—

Joseph Crooms (08:28)
What are some of the the causes that you would have to break? I mean, you know, we won’t break on everything that they want, but what are some of the things that, hey, break, we we need to discuss this. Well what would that discussion look like?

David Gudmundsen (08:39)
Or you know, like there’s came across a deal the other day where one of my friends wanted me to look at it and it’s one that we didn’t fund, but was interesting where I typically would say it’d be based on inexperience or maybe the over optimism. The experienced people are over optimistic. The less experienced ones just don’t know what they don’t know. And I think it’s important to really have people that you can call like phone a friend where I’ve been doing this thirty years. Anytime I get into a deal, I still have another set of eyes look at it because you need to have that other experience look at it to see if there’s something that I’m missing.

Joseph Crooms (09:15)
So I called you for a loan. What what is and I have fifty thousand dollars, right? And but what are some of the questions you would ask me?

David Gudmundsen (09:25)
I mean, a lot of times when we get loans placed through other brokers where they’ll, you know, they find the client and we just fund the deal. But I want to know if they if they’ve renovated stuff before, what kind of experience they have doing this, because I don’t want them to, you know, get their experience on my dime. So because in this business where once you get down to it and you do it do enough of these, it’s kind of a rinse and repeat. So but we’ll we don’t we do some fix and flips. We do some where the landlords own the properties free and clear and just need to do a quick cash out. We’ve done some land deals before where those are tough to finance at other places. We did a commercial, small commercial last week on something, but we’re mainly just looking at the equity. So—

Joseph Crooms (10:12)
Yeah, what is your book of business as far as volume now? What would you say your your monthly is?

David Gudmundsen (11:00)
As far as what?

Joseph Crooms (11:01)
The your your book of business that you have.

David Gudmundsen (11:03)
You I mean it depends. I mean, it’s just eps flows where sometimes we have where we’re getting lots of loan requests, some we’re we’re getting fewer ones, but we do we do vet them and we don’t take every one we get, but it could vary from week to week. What we’re what’s interesting though is we’re finding is is a lot of investors are getting hung up on deals that they thought would be easy to get in and out, and they’re getting stuck where we’re seeing a lower volume of the flippers where they’re starting to pull back a little bit because I mean think about it. If you’re sitting on ten homes you’re making payments on that are you’re trying to sell that were just fixed up, you’d you’re gonna be reluctant to go take on a couple more projects.

Joseph Crooms (11:44)
How would you describe your book of business, commercial, residential, you know, how how would you what would you say I do on a commercial, would I do in and in residential, and and also land ownership? How would you describe that?

David Gudmundsen (12:00)
As far as with what I own or the the business that we’re doing with the loans?

Joseph Crooms (12:04)
Which which which what’s your your book of business in?

David Gudmundsen (12:07)
My book of business. You know, it’s you know what’s interesting is is in this business, I think a lot of us are ADD where we just we we’re always chasing the shiny object and you know, but what what’s interesting with my businesses is every once in a while I’ll get burned out in a certain aspect of my business and I’ll just rotate between the four businesses that I typically have done over the last thirty years where I’ve done brokerage, I’d gotten away from doing that, like real estate brokerage as a realtor. I own rentals, you know. I I sometimes I’ll gear that up during different segments of the market. I really geared up my rental business when I was buying in 2009, 10, 11, and 12. I was having the rentals then and had a number of them. And then the fix and flip business, whether it’s homes or land, and then the hard money business. So out of those four businesses there, I was able to over the course of my career rotate or lean more into any any one of those. Because everything, every piece of the business has a season. And there’s a time to be all in and there’s a time to be, in my opinion, all out. You know, in two thousand six it was a good time to be brokering stuff, but it wasn’t be a good time to be buying stuff. And the ones that got into buying stuff, you know, were really hurting in nine. And in nine, it wasn’t a good time to really broker because the everything was priced so cheap, but it was a great time to buy. So and land.

Joseph Crooms (13:32)
So you’re into all four. What—

David Gudmundsen (13:34)
Correct.

Joseph Crooms (13:36)
How did you decide what to keep, what to sell?

David Gudmundsen (13:38)
You know, it depends on personal preference where I started to really pin back layers of my rentals years ago. And and what I even did recently was is I live over in like, you know, East they call it East Valley. It’s like Mesa Gilbert area, Arizona. And I wanted to get my kids more involved in the business. So I had a bunch of rentals in West Phoenix. So what I did was is just 1031, the ones in West Phoenix over to the Mesa area there. That way it’s a little closer to home, easier for you know my kids to get involved in the business. So but you know, I think and I think you have to have an overall investment strategy anytime you invest. I I’ve often talked about my my three box theory. First box would represent your immediate needs. Maybe that’s commissions. Anything that you anything that you can do to generate money that’s going to cover your basic needs in the next 30 days. That would be your first box. The second box would be your medium range, time range, six months to 18 months. That would be stuff. Maybe it’s a it might be ground up. It could be land splitting, that kind of thing. And then you have your third boxes, which is going to be your long term. You know, long-term rentals that you’re gonna, you know, hang on to and eventually, you know, get paid off. And you know what’s interesting is is everyone in real estate, it’s not everyone, but a lot of these investors, everyone likes to talk big numbers. I have 10,000 doors. I have all this stuff. You know what’s interesting is is I mean, is it better to own one percent of 10,000 doors or to own just 10 houses and have them free and clear? And sometimes in my opinion, less is more where you get to a point where, you know, I’m fifty six years old and I don’t have the fire in my belly that I I did once. I just want to work an hour or two a day. That’s it. After that, I want to go, you know, play basketball at the gym or go do this, have fun with family and friends. And I think the reason we get into this is also lifestyle and the and and what that brings us. And I don’t think you have to have all these huge numbers of doors and staff and and and all that. I think there’s something about just keeping it simple, you know, keeping it small and keeping it all versus, you know, being very, you know, something. Part of something big, but you’re you’re a small piece of that something big. And my preferences is the first where I’d rather just keep it small and keep it all.

Joseph Crooms (16:07)
Dave, so my question is, what is what is your max all all together, what would you say, all right, this is my hard stop, I can manage this. What was that number?

David Gudmundsen (16:19)
As far as owning rentals or what would—

Joseph Crooms (16:22)
I’m saying your whole package or you know, ’cause you said you cut back on quite a few. So the those that you have, you say, I can manage this, I can work. What was that hard number for you?

David Gudmundsen (16:33)
You know, I mean ho I’m hoping to answer the question right. I I was able to do I mean I I had it one time. I had sixty homes and you know, I had thirty or forty, I think, commercial tenants. So managing a hundred myself and I was still doing it, still playing basketball four days a week in the afternoon. So i it wasn’t that tough for me to do even the I I don’t think those are bigger numbers compared to other people that I’ve you know heard in these forums. But you know, I think it just depends on on how hard you want to drive. And I did have some help during that time. I had a bookkeeper that came over a couple of days. I had a maintenance guy that was taking care of the lot of stuff. But you know, the older I get, the less I want to do. And now I could, you know, I only have the nine rentals in my loan portfolio. And like I said, I can do that in an hour or two. And it just, you know, it’s easy to do. But I think the older you get, the more efficient you get where you try to say, Okay, what can I do to save myself steps? One thing I did, you know, years ago was when I was a lot busy, I made a spreadsheet of every task that was associated with my business. And then I assigned a dollar value to that task. And I said, okay, a lot of these tasks like pulling data, I used to do a lot of direct mail and marketing. So I said, Some of these tasks I can assign to a VA in the Philippines for, you know, five bucks an hour, seven bucks an hour, whatever it costs back then. And then I had some tasks where I could delegate out for twenty-five dollars an hour and fifty dollars an hour. And my philosophy was is I need to focus in on the five hundred dollar an hour task. And everything else, I just need to be able to delegate that out. So and I didn’t have a big team. I just had a bookkeeper, a handy person, and a VA. And they got they did eighty, ninety percent of the heavy lifting. And it I was only there just to make the crucial decisions.

Joseph Crooms (18:23)
Okay. Sounds good. What’s been the key to keeping your machine running smoothly?

David Gudmundsen (18:29)
You know, the ability to look at something and see the problem before it became a problem. I had an experience where I one of my friends brought me a deal that one of his it was an associate of his that their their son got into a bad deal and he wanted me to look it over. And I don’t remember all the numbers. I think the retail value was five hundred thousand. And when you when you’re analyzing investment, what I typically do is I know what I can sell it for. I just back out of that. I said, okay, five hundred thousand, it’s gonna cost me ten percent cost of sale, that brings you down to four fifty. Let’s just say it’s gonna cost you fifty to fix it, that brings you down to four hundred thousand. And let’s just say you wanna make fifty thousand dollars profit, that means you have to pay three fifty for it. And what’s interesting was is it was a terrible deal. I mean, I looked at it and I knew in you know two minutes that it was a bad deal. And I think that the the the problem people have is that you need to have that group around you that can help you vet stuff that they don’t have an objective or or they don’t have a vested interest in the outcome of your decision. And and what I mean for that is you wouldn’t go to your insurance agent and ask them, hey, do I need more insurance? Well, yeah, you need death, disability, dismemberment, all this other stuff. You want to ask somebody who doesn’t care if you say yes or no on that deal. They don’t have a vested interest. And just by looking at that deal, 30 seconds a minute, I knew it was a bad deal. And this this person had bought this thing for four and a quarter. They’re already gonna lose money and they didn’t even know it yet. And they’re gonna do the full renovation, try to sell it in this slow market. And I think that the trick is really to be able to, and it just comes through experience and being able to phone a friend, see the problems before their problems.

Joseph Crooms (20:16)
I see that relationships are very important in this business. When it comes to building relationships and growing your network, what’s made the biggest difference for you?

David Gudmundsen (20:26)
Being able to surround yourself with people of s with similar goals and ambitions. I’m going to a investor retreat next week up in Pinetop and it’s gonna be a bunch of and a friend of mine’s putting it on. It’s a cabin that he has and there’ll be probably six or eight of us there just talking about real estate for four to eight hours. And I think it’s important to get part of these groups where you I’ve you always heard the thing your your net worth is tied to your network and who you run in circles with. And it’s important to have people with those similar goals. And what I find is there’s always going to be peop people that know more than you and they’re there, you know, if you need them. But I also think it’s we have an obligation to help those that don’t know as much as us and give them those opportunities because everyone was mentored by somebody, any successful every every successful person I know has been helped by somebody along the way. And it’s fun. I I I enjoy helping others as well. It’s it gives us an opportunity to to teach those who want to learn and and I was taught by those that I wanted to learn from.

Joseph Crooms (21:35)
Last question as far as as on your investment, do you p find people coming mo more to you about flipping in home flipping homes, residential or commercial?

David Gudmundsen (21:45)
It’s with my lending business or—

Joseph Crooms (21:47)
What you lend in, which which what do you find people are more apt to to to want your money for? Is it for flipping homes or or residentials or real commercial?

David Gudmundsen (22:00)
It’s a mixed batch. I would say more residential than commercial. But what’s interestingly enough is we find a lot of investors that own these things free and clear and they just they found a great opportunity. So they just need money in a week or less. And they might not necessarily be flipping them, but they just have an opportunity that they need to get quick cash for to to use for something else. So we have a lot of that where it’s a cash out refi to buy something else.

Joseph Crooms (22:29)
So can you explain like what would they be interested in?

David Gudmundsen (22:32)
You know, we never find what they’re looking to do with the money. We just know that because a lot of these are brought to us by mortgage brokers. We work a lot with mortgage brokers where they bring us the deals and we just as the investor fund it, but they make the points. So but but usually it’s some kind of investment opportunity, but we don’t really dig into much more than that.

Joseph Crooms (22:51)
Okay. So you’re very much into investment now. You don’t flip as much. You don’t purchase as much or land. Well, which one do you miss?

David Gudmundsen (22:58)
You know it’s I like l flip and land’s fun because there’s not a whole lot of moving parts to it. The f the flipping what’s tough is is it seems like everything pre-COVID versus c post COVID has doubled. Everything cost of labor, cost of materials, seems like everything has really gotten expensive. So it’s with what we do now is is we I just enjoy the piece of just either occasionally flipping land and doing the loans because it’s just not that much work. Cause you get to a point where you can kind of look at a deal and you just kind of know if it’s worth it or not within a minute or two. I mean that’s how long it takes us really to analyze something. It’s like, okay, they need, you know, 250 and the house is worth five hundred. It’s like, okay, it’s a no-brainer, you know. So but I d I do miss flipping a little bit, but sometimes it it seems like right now it’s it’s a little tougher that you’re kinda going uphill with the wind in your face ’cause it’s tougher to sell stuff.

Joseph Crooms (23:59)
Thank you for sharing that, Dave. All right, so we we had a pretty interesting discussion and but unfortunately we’re running out of time. So but relationships are everything in this space. And is there anything else that you think that’s very important that you would like to share with us?

David Gudmundsen (24:15)
No, nothing that comes to mind. I would just, you know, challenge everyone to look for look for those that are not doing as well as as the is the rest of us and it’s important for us it the gifts that we’ve been giving, I think it’s given, I think it’s important for us to share. So, you know, I’m you always looking for opportunities to to share my knowledge with other people. And I think it’s important to do that without any any upside for ourselves where I think it’s just giving’s just that. It’s it’s it’s there to give without expectation. So and that and that’s why I I challenge those that that that have the knowledge that they have to spend the time to look at see those around us that could benefit from the knowledge that we’ve been given.

Joseph Crooms (25:02)
Thank you for sharing that, Dave. Thank you for your humanitary attitude about life. So we’re about to wrap up. If someone wanted to reach out to you, connect with you, maybe collaborate, learn more about what you’re doing, what’s the best way to reach you, Dave? And you can repeat it twice.

David Gudmundsen (25:17)
Sure. Email is [email protected] and it’s [email protected].

Joseph Crooms (25:27)
And one more time for somebody that’s a little slow, gotta get a pin or whatever. This one more time.

David Gudmundsen (25:34)
Yeah, email is [email protected].

Joseph Crooms (25:39)
Perfect. Well, I appreciate your time, your story, your perspective, your philosophy. Enjoy your family and and your time. I I I see that you were a basketball player, so I I was one too, so I great social game, isn’t it?

David Gudmundsen (25:54)
Absolutely. Great for exercise. So—

Joseph Crooms (25:56)
So we need more people in the space who are doing it the right way. Thanks again for being here, David. So very—

David Gudmundsen (26:02)
Thank you. Appreciate it.

Joseph Crooms (26:03)
Yes, and for those of you tuning in, I know you got some value from this, especially that last statement. What you learned, make sure you return. Make so subscribe to our station. And remember, we got more conversations coming from operators just like Dave, who are out there doing real business, helping real people, and building better communities. So we’ll see you at the next episode of what? Investor Fuel Real Estate Pros Podcast. Hey, Dave, tell everybody you talk to him later.

David Gudmundsen (26:32)
Hey, thank you. Appreciate it.