Real Estate Investing 101 for Beginners | Debt, Leverage, and Buying Your First Rental

Paul David Thompson (00:00)
I would say you want to make it a mission in your life to collect as many assets as you can because I feel like, well, just in any industry or any economic system, there’s only three ways to make money. One of those is earned income, a job. That can be 1099, W2, it doesn’t matter, just earned income. The second way is through government transfers, which is like getting basically gifts from the government. This is SS4, your Social Security.

Section 8, kind of things and maybe someday soon UBI who knows some version of that probably is coming down the pike And then number three is owning assets and getting the dividends from those assets

Scott Bursey (02:14)
Welcome back to the Real Estate Pros Podcast, the show where we connect you with the industry’s top minds and strategies to build your portfolio. I’m your host Scott Bursey. And today we’re getting back to the essentials, the foundation of building lasting wealth through property. Joining me today is Paul Thompson, the founder of Real Estate 101. Paul’s mission is to simply

simplify the complex investment concepts and make real estate accessible to everyone from their first time investor to the seasoned pro for a refresh. Paul, welcome to the show.

Paul David Thompson (02:47)
Thanks for having me. This is going to be lot of fun.

Scott Bursey (02:48)
Yes, it is awesome to have you here. And Paul, if you could introduce yourself, let us know how your career began perhaps and what you’re up to here recently.

Paul David Thompson (02:59)
Mm-hmm. Yeah, so I took real estate kind of late in life. I was an engineer first, so I got an engineering degree and went off into the world and was a corporate drone for 17 years. And about 15 years into that process, I realized that you know I’d been climbing the corporate ladder and maybe my ladder had been against the wrong wall all along. And I really always…

dreamed and fantasized about one day going out doing my own thing, but I just never did it. And I kind of had this wake up call moment where I thought, you know, I’m vulnerable to the vagaries of the corporate world. it wasn’t a matter of if, but when I was going to be laid off. It’s just the kind of nature of the beast. We were in an industry that was acquiring each other constantly. And even if you’re the acquiring party,

the corporate politics sometimes lands where you’re somehow out. You’re found redundant or unnecessary or basically what it turns out is I was making too much money. And they’re like, oh, we can have somebody else do this same job for less, so we don’t need this guy anymore. And so the cold equations of corporate America were going to hit me sooner or later, and I knew that was coming. So I wanted a different way to make a living. And I looked at a lot of different options. In real estate, it just seemed like the

kind of the final frontier for the average person to really be able to make meaningful wealth without having to come up with some new clever business idea. I didn’t have a new business idea in my head. I wasn’t the kid growing up that was selling candy. Like I was the one buying the candy, right? And so I came into entrepreneurship much later in life. And so real estate just became a kind of a natural way because when it boils down to it, the business is very simple. It’s not that hard to understand. All you’re doing is renting rectangles.

And there’s a lot of it out there and you can use all the benefits of real estate to get into these properties. And so I was 37 years old and it was the year 2015. I bought my first rental property and that was kind like my gateway drug. When I got that first check for like $600 or whatever it was, it was a very small amount. I thought, oh, okay, I just made money while I sleep. So how can I do this some more? And so the rest of the 10, 11 years since then, I’ve been figuring out how to do that more and more.

Scott Bursey (06:09)
That is awesome. And making money while you sleep is the goal. Awesome. So moving slightly toward operations, since tenant quality dictates cash flow, what is one non-negotiable step investors should take in their screening process, would you say?

Paul David Thompson (06:14)
Ha

One non-negotiable that I learned the hard way, which is not something you hear people here talk about a lot, is you want to see if they’re a litigious person or not. So I have had some very expensive lessons. Probably the most expensive lesson I’ve had so far is getting involved with a tenant, a resident of a property who had a game plan.

and she and her husband were litigious and they would buy the property on like a lease option from you. ⁓ Kind of like owner financing really, land contract. And they would pay for a little while ⁓ and then they would sue you and they would like just make up stuff that you had done wrong and just make up stories about how ⁓ like you were not doing something right. I live in Arkansas.

in the law in Arkansas is that if you’re an individual, you can represent yourself. If you’re at LLC and you’re not an attorney, you cannot represent yourself. So I had to pay an attorney to defend myself. They did not have to pay anybody to sue me. And so they could draw this thing out as long as they wanted to. I would just keep clicking up legal fees. And I finally ended up having to settle. And I can’t even say exactly the amount I had to settle per our settlement agreement.

found out later that this was a pattern that she did. I looked up that if she had had a lawsuit in the county I was in, but I didn’t check for the entire state, which you can do just a different, different drop down in the same Court Connect service. I just didn’t know to do that. Had I done that, I would have seen that she had done this in several counties prior. And so she was just hopping around playing this game of basically living for free and then suing people, ⁓ claiming that they did something wrong when in fact they didn’t.

Scott Bursey (08:19)
That is, you know, some, that can be frustrating. And what was the way that you rebounded from that experience?

Paul David Thompson (08:31)
Well, the lesson learned was to ⁓ always check this when you’re doing business with somebody, make sure that they’re not litigious. This is a very easy search to do to see if somebody has sued before. basically doing a background check and not just like, I say I’m going to do a background check, but no, like actually paying for background checks and doing a full search in the state and perhaps even the country of if they’ve been involved in any sort of lawsuits. And it does take a little bit of effort to go through all the different places to search, but

It can, I wouldn’t say ruin your life, but can sure make your life miserable for a while.

Scott Bursey (09:07)
not taking shortcuts. That’s the nugget that I’m getting from that. Absolutely. Paul, interested to know for our listeners trying to understand the financing side, you know, what is 101, the 101 concept about debt or leverage that every beginner must process?

Paul David Thompson (09:10)
Ha ha.

Yeah.

Well, the biggest ⁓ risk that you’re taking as a real estate investor is the debt that you take on. It’s not the tenants, the story I just talked about. It’s not the other ⁓ challenges you might hear about, which they exist as well. But the biggest risk, the most likely source of failure, is going to be the debt that you take on. And so going into any sort of deal, ⁓ understanding that the debt that you’re taking on ⁓

and the way it’s structured. And so we really try to avoid using banks whenever we can now. And not that banks are bad, but banks are there to protect themselves, not you. And all the paperwork is written by a team of lawyers in such a way that they’re going to be protected over you, period. Especially when you go into commercial lending, like what I do, we’re into five plus units, and we’re getting commercial loans. Commercial loans are often what they call demand loans.

meaning that the bank can call the note on you for any reason, even if you’re paying, which happened to a lot of people in 2008, happened to people back in the 1980s when the tax laws changed. And they just pull the rug out from underneath you. you have no recourse. They have all the recourse and you have none. And so being aware of that risk when you go into it is something you want to keep your, be aware of.

when possible, avoid that risk by doing loans with sellers, what we call seller financing, so that you can negotiate with a human, set up a win-win scenario such that one party doesn’t have a disproportionate amount of power over the other and can just crucify the other next person when they so choose.

Scott Bursey (11:55)
That’s a really good explanation of the debt side of the equation for a lot of people. I think that’s going to resonate. I completely agree. It’s not about getting rich overnight, Paul. For those just starting out with limited capital, what’s a practical entry-level strategy you often recommend?

Paul David Thompson (12:18)
Well, if you’re very new to the business, ⁓ you want to keep your job, which is, you know, I often teach how to get out of your job, but you want to use that income as long as you can because it does make you bankable, it does make you credible, and it gives you the ability to pay your bills. It’s really hard to get into an environment where you’re going to be thriving when you can barely survive the month covering the bills.

So you want to have a foundation, a good financial ⁓ sturdy foundation before you take some of these calculated risks with real estate because it costs money to own property. And when you own property and you don’t have any cash, you can get exposed very quickly. even to like when you feel like you’re playing the game correctly, like bad things can happen to good people. And you can get in a situation where you really don’t have the flexibility that you need to be able to solve problems with the cash you have.

And so I really want to tell people to think about how to be in the business where they’re earning an income, but they’re not yet owning the property and they’re learning the business. So you’ll kind of learn to earn. So this can be things like wholesaling, can be a real estate agent, it can be a property manager, it can be a real estate broker, it can be a mortgage broker. These are all businesses and services that are kind of tangential to the actual owning a real estate itself.

And it gets you exposure and credibility in the marketplace while you start to understand what’s happening. And then you can earn the income that you need, have the solid foundation of both time, knowledge, and money. And then you can go out and buy properties. And I really believe very strongly we should all be going out there and buying and investing in assets. But it’s hard to do that when you don’t have any cash.

Scott Bursey (14:04)
That’s some good advice. House hacking is such a powerful tool. Once an investor has their first property, what are the top two common mistakes you see them make when they try to scale up their portfolio?

Paul David Thompson (14:12)
Mm-hmm.

⁓ There’s like two sides of this equation. This is like kind of a bimodal deployment here. So on one side, people say they want to scale, and then they don’t ever do it. They sit around ⁓ in their safety and comfort zone and never actually take the necessary action to actually go out there and do the business. On the extreme other side of this bimodal equation here is people who take on way too much risk too quick.

And I would say I very much fell in that category. Like I wanted to scale and I got out over my skis. And it’s very easy to do that because you just go around, kind like you go around to the Monopoly board and you just buy up everything you land on and you run out of cash. And then you get a bad chance card and something happens to you and then you got to pay a bill you can’t afford. Like in my case, it was a lawsuit that I mean, I didn’t cause it, but you know, I’m still responsible for it. And so you have to deal with these responsibilities.

and you want to be in a position of strength. So you don’t ever want to over-leverage yourself to where you’re leveraging yourself out of a position of strength.

Scott Bursey (16:10)
Absolutely, I’m with you on that. And that’s some more excellent advice. Systems and moderate budgeting. Before we ramp up, if you could give our listeners just one piece of immediate homework to improve their real estate knowledge, what would it be?

Paul David Thompson (16:20)
Hmm.

So you’re looking to improve your real estate knowledge. Boy, I tell you, ⁓ become a part of a community that’s associated with whatever your affinity is. So if you’re in Airbnb, or you’re in Rentals, or you’re in Flips, I don’t care. Pick a discipline. And focus on that discipline, and surround yourself with ballers in that discipline. You want to be in the room where you’re the dumbest person in the room. And if you ever feel like, I’ve made it,

Go find one of these rooms, you’re realize that you haven’t made it yet. And that little bit of discomfort allows you to stretch yourself and realize, OK, there’s other levels to this game that I need to now figure out how to get there.

Scott Bursey (17:15)
Excellent views there as well. Is there anything else you’d like to share with our audience today?

Paul David Thompson (17:22)
I would say you want to make it a mission in your life to collect as many assets as you can because I feel like, well, just in any industry or any economic system, there’s only three ways to make money. One of those is earned income, a job. That can be 1099, W2, it doesn’t matter, just earned income. The second way is through government transfers, which is like getting basically gifts from the government. This is SS4, your Social Security.

Section 8, kind of things and maybe someday soon UBI who knows some version of that probably is coming down the pike And then number three is owning assets and getting the dividends from those assets

I want to be in a world where I own the assets and I’m waiting for the government and society to figure out what’s happening with job and transfers Because that’s changing soon, but we don’t know exactly how I hope they figure it out But I’m not real confident that they will it’s gonna be a lot of

The transition’s gonna be very painful for a lot of people. And I don’t want to be in that position where I’m waiting for them to figure that out. I want to own the assets that I’m getting paid for while that’s getting figured out.

Scott Bursey (18:33)
that note you know the world of AI how is that contributing to your your business?

Paul David Thompson (18:41)
In our business, we actively use AI to help source deals and analyze data and build tools internally. We are not in a place now where we really are software developers, but we build our own software, which is crazy to think. I don’t really go out and buy software that much anymore. I go out and build software with Cloud Code. If I want something to happen inside my business now, ⁓ me, my marketing team, my assistants, we are

actively using cloud code to build our own tools and automation systems and list like little agents that go out and do the things that we so we were being Kind of our work is being compounded by the power of AI and automation and We’ve actually lowered our cost because we now canceled some of our subscriptions Because we don’t need that software anymore because we just went and replicated ourselves

Scott Bursey (19:34)
doesn’t get much more technical than that. Solid gold device from Paul Thompson. Paul, thank you so much for sharing the fundamental principles of real estate 101 with us today. For our listeners who would like to, ⁓ it was our pleasure. If somebody wanted to reach out, collaborate with you, what’s the best way for them to reach you?

Paul David Thompson (19:38)
Ha

Thanks for having me.

Yeah, the best place to reach out and find me is on my Instagram account. I’m at Paul David Thompson. I have the curse of a common name, so I use all three of

Scott Bursey (20:10)
And that’s Paul Thompson from Real Estate 101. Go check out his resources. And to all of our listeners, thank you for tuning into the Real Estate Pros Podcast. Remember, your first property is the hardest. But with the right foundation, you can build an empire.

Scott Bursey (20:25)
Until next time everybody. Oh yes, absolutely. Very, very good. It was a good conversation. And I think one that everybody, including myself is walking away with a lot of nuggets from that conversation until next time, everybody keep your standards high and your vision clear. We’ll see you in the next episode.

Paul David Thompson (20:26)
thank you for having me. I’m sorry. Sorry. Sorry.