Why New Real Estate Investors Should Buy a Rental Before Flipping Houses

Debra Cleveland (00:00)
I— the book that I wrote, they just wrote, I guess they have there. It’s called Just Do One for Fun. And this, whoops, this book is focused on the retiree. So for her, it’s something to do during retirement that’s fun, it’s interesting, it’s profitable, it’s a way to give back to her community. But for that business person that’s busy building a business, they usually have a family, they’re committed to their community. Now they’re— they’re going into the rental business, right? They’re going into owning rental property. I always encourage them first to buy your first rental property.

Dylan Silver (02:04)
Hey folks, welcome back to the show. Today we’re joined by Deb Cleveland, real estate investor, educator, speaker, and community revitalizer who’s spent nearly four decades transforming neighborhoods through real estate. Deb, thanks for taking the time today.

Debra Cleveland (02:19)
Dylan, thanks for inviting me. I’m so excited to be here.

Dylan Silver (02:22)
Now, for investors who are scaling their business or are thinking about getting into the real estate space and maybe have businesses outside of real estate, what are some of the things they should keep in mind before buying their first property?

Debra Cleveland (02:38)
Wow, that’s a— that’s a really great question. I— I think what happens with successful business owners is that there’s an illusion. I see it over and over again, Dylan, where investing in real estate is going to be as easy as it was building their business, but they forgot that they’re five years into their business and it took quite a bit to learn it and to master it and to start scaling it. Real estate’s no different. It’s a business to learn. And yes, you bring all that wisdom that you’ve gotten from your core business into the real estate sector. What I do with clients is I get them really clear. Clarity is so important. You know, we know that in business, we know that in real estate investing. As far as what is our overall financial objective, that’s the first thing I ask them. Do they want to build a half a million or a $10 million real estate portfolio? And I really check in with them like, what’s realistic for them? Like for some people, they’re saying $500— $500,000, but they really want about a two to three million dollar real estate portfolio. Then once they have a numbered number, Dylan, then we look at, okay, so where do you want to invest? What type of property do you want to own? What type of tenant do you want to serve? And then once— once they have that number and they’ve got that information, they get clear about the area they want to invest in. They may not know at first. It takes a little— it’s a four-week course that I take them through. It’s so easy to reverse engineer. So say if they picked like— I invest heavily in the Finger Lakes area, like the first-time homebuyer market, which is— I love single-family houses. Don’t— don’t hate me. A lot of people are like… and I didn’t used to. I was the— the duplex queen. I had a lot of 10, 12-unit investment properties. And by mistake, on my 20th year of investing in real estate, right after the crash, I got stuck with a house that I couldn’t flip because of what was going on in the world. So I rented it. And the interesting thing— thing that happened for me is that, my God, that— I forgot that I owned that property. The— the rent came in every year. The— I had to shoehorn this— this client out of there so I could flip it six years later. But they mowed, they took care of the snow, they paid all the utility. The only thing I was responsible for— I didn’t have a mortgage on it, but if I did, it would have been mortgage taxes. And they paid all the utility. So that’s the first— the first thing I do is get them, get, get clear on them. And then we go into some of the mindset things is: what’s your purpose? And what is the purpose for taking your hard-earned money that you’ve made in your business and investing in real estate? Is it to have that second home in Florida? This was mine. I mean, that was my— my goal, and I accomplished that. I have a home in Sarasota, Florida. It could be to send your kids to college. You know, if you’re in your 40s and you’ve had children and they’ll be off to college in the next 12 years, what better way than to invest in real estate where you have just a 15-year mortgage? So at that 12th year or so, when they’re ready to go off to college, you’ve got the money to— to put them through without them taking on debt, nor you taking on debt. So whatever that is for them, it’s— so philanthropy, maybe it’s some passion project you want to do with that money. Maybe you just want to enjoy your retirement and have a high, but five-figure income coming every month ’cause all those mortgages are paid off.

Dylan Silver (06:34)
Now, when we talk specifically about fix and flip, if we can get a little bit granular here, you know, for folks who are looking to cash flow this way and you get a faster return, part of the concern is, well, you have to buy the property right, and then you also have to manage contractors and subcontractors, which can be challenging, especially for folks who haven’t done this before. Do you recommend or, you know, even dissuade folks from getting involved as flippers if they’ve, you know, seen HGTV and that’s the extent of the knowledge that they have?

Debra Cleveland (07:07)
It— I— the book that I wrote, they just wrote, I guess they have there. It’s called Just Do One for Fun. And this, whoops, this book is focused on the retiree. So for her, it’s something to do during retirement that’s fun, it’s interesting, it’s profitable, it’s a way to give back to her community. But for that business person that’s busy building a business, they usually have a family, they’re committed to their community. Now they’re— they’re going into the rental business, right? They’re going into owning rental property. I always encourage them first to buy your first rental property. When you buy your rental property, you’re going to get a small team together. You might have just one contractor that has a key to that property, so they get the main maintenance calls. But now you’re getting a feel for the industry. You’ve been out looking at properties. You’ve got a couple of people that you’ve got lined up to take any kind of maintenance issues or calls, and then you can say, “Wow, okay, so I feel comfortable with this. I’m a year into this.” And you start— you actually start stumbling across some fix and flips. I would discourage people from getting right into it. I do feel like it’s a great way if you want to replace your primary income, which is what I did the second leg of my— I retired at 48 years old. And then it was— the fixing and flipping was actually— was… I used to call it wardrobe money. Don’t— don’t hate me.

Dylan Silver (08:25)
Hey, we all need a little bit of wardrobe money, Deb.

Debra Cleveland (08:28)
My God. So yeah, it’s— it’s a great business. It takes a bit to learn. Both businesses do. And that’s what I really encourage when I work with clients. It’s like, this isn’t a race. Let’s do it right. Like I sat with someone over lunch and I went to congratulate and— and celebrate, he had just bought a 30-unit property. And what I discovered in talking to him is that the other 30, his 60 units, 62 units altogether, are in bad areas— high vacancy, high maintenance. And I’m like, “Who— where did you learn this?” You want to stay out of those D, E, F, G markets because they’re— you won’t want to stay in the business if you— if you make the mistake of investing in those areas. And I really— that’s something I— that’s something I really enforce with my clients is: these are the areas you want to invest in. These are the areas that you’ll stable rents, the properties appreciate, they’re easy to own, manage, and maintain, and you’ll enjoy being a real estate investor.

Dylan Silver (09:26)
You know, you don’t wanna find yourself on the opposite side, right? Becoming a tired landlord, and then someone is gonna come and offer money on your property because now you’re— you’re distressed, not necessarily the property, but you as an operator can become distressed. So you mentioned buying in areas where it’s easier to maintain, you’ll have stable tenants and, you know, people wanting to move in there as opposed to wanting to leave. When you’re looking at fix and flip opportunities though, there has to be some level of distress present, right? And so what is the physical level of distress or— or even neighborhood level of distress that you’re comfortable with and would recommend clients look at if they’re looking for a fix and flip?

Debra Cleveland (10:42)
So these are— this is for the women. So the men will say… yeah, women— the women are really intuitive. So we can go— we can actually feel it. Like when we drive in, I know I can. When I drive into an area, I can feel it. I can feel the ups and downs, the dips and the— and the… and it can go from block to block. You could be on one street and it looks beautiful, there’s a lot of resurgence going on there, and then you go one street over and you can just feel the dip. There’s— the lawns aren’t mowed, there’s garbage all over the lawns, there’s papers taking out. It’s the— the real classic things you look for. And if there’s too much of that, unless you want to do the heavy lifting on that street because the street over looks like it’s having revitalization, stay away from it. I look for— I don’t have to look too much. What I do was strategic— strategically set myself up with insurance companies, churches. I went down and introduced myself to code and the assessor’s office and introduced myself to the mayor of the city that I invest in. And I said, “If anyone’s in trouble, I’m your girl. Have them call me if they’re falling behind on their taxes.” Sometimes it’s just taxes, Dylan. It’s not even that the house is that deferred. But many times, if they’re behind on their taxes, they haven’t been able to afford to keep the house up either.

Dylan Silver (11:57)
Now when we talk about the physical structure of the home and foundation and roof and plumbing and electrical, sometimes these things can become pretty thorny, especially as you start taking up floors and wall— taking down walls, etc. When you’re trying to, you know, hedge against unforeseen problems, how do you do that? Are— are there certain maybe decades of homes that you stay away from or an age of the home that you don’t like to look at?

Debra Cleveland (12:22)
Wow, that’s— thank you for asking that question. I have my clients stay in the— the— the 14 to 1600 square foot home. And if you can get something that’s all on one level with a basement, my goodness, those are dream houses to— to renovate because everything is on one floor. It’s the si— it’s a manageable size. And the ranches sell, they sell so quickly. I mean, literally they’re on the market for like three hours because there’s such high demand because the baby boomer market is the largest market we’ve ever had, and those are the ones that want those. And a lot of the— the actual— the— the couples that haven’t had their first child either love— love those properties, too. There’s a lot of demand for those ranches. The ones that I have them stay away from is— if I go over all of this, because if they, say, go in the basement and there’s wa— water, there’s sewage, and or if they see a crack, you know, a foundation crack. So I have them look at things. If it’s a big house, I tell them to pass on it. The challenge with women when I work with them is they get really emotional. They get very excited about the house. I’m like, “Okay, let’s look at the numbers. Like, let’s back up.” And I lived, Dylan, inside of my first six fix and flips as a single parent. And that’s how I learned how much it costs for— how much time does it take to actually gut a house. Like, I just got— I’m gutting one right now. It took two guys, two days to completely gut the inside of a house. That’s all it takes. I remember I used to think, “My God, this is gonna take two weeks.” But if you have the right— if you know what you need done, you have the dumpster there, they have their tools, their gloves, their crowbars, and— and they don’t have to slow down because they’re not sure what to take up. Like, you’ve been really clear with them, you’ve really marked it or you’ve gone through a list that you’ve created, it goes really quickly.

Dylan Silver (14:05)
Now, when we talk about managing crews and contractors and subcontractors, this is some of the trickiest conversations that investors have. Even established investors can find themselves in situations where things aren’t getting done on time or things are going over budget or things need to be redone. How have you been successful in, you know, 400 plus flips managing contractors?

Debra Cleveland (14:29)
Contractors like this tiny— I like tiny crews. Like, I like— I have a lead. I look for my lead, and my lead needs to be able to do every single skill— like he can do tile, he can do hardwood floor installation. He doesn’t have to be able to do a roof or a furnace install; I can get somebody to do that. What it is for me with my guys is I really care about them. And typically the contractors that I find, they’re not employable because they— they— they’re kind of like the Wild, Wild West in a way. But once I start working with them, they know I really care about them. And I share part of my profit. I pay them well and I share part of my profit when I flip a house. So they have something to look forward to at the end of the project each time that we do it together. So you don’t need the— thing when people think about flipping a house, they go, “My God, I need all these people.” No, you need one lead and you need— we need one other person that can do the gutting, the painting, the weeding, the landscaping, hauling stuff out into the dumpster. You don’t need a big crew. You might need— you will need other services. Like you occasionally might need a mason. Occasionally you might need a roofer. Occasionally you might need someone to resurface your driveway. And then you have your list. So, you— those are one-offs, but you want your— your lead— you want him to be highly skilled, you want to commit solely to him, and you want to really treat him well.

Dylan Silver (16:31)
You’ve done so many of these. I would love to know what one project sticks out as something that was either a big challenge or, you know, that immediately comes to mind as something you’re particularly proud of.

Debra Cleveland (16:42)
My God, that is— well, I just did it, Dylan. I just finished it. It sold in three days. So over a salad with my real estate agent, I go, “You got anything for me?” She goes, “By the way, I think I do.” She said, “I didn’t think of you because it’s— it’s— it’s— it’s challenging.” And I said, “Well, what’s going on?” And she said, “Well, it’s a church and they’re trying to evict the pastor.” I go, “I don’t want to be in the newspaper over evicting a pastor.” When I drove up, Dylan, there was the church and then two more houses. And I— so I called her and I’m like, “Is this three properties?” And she goes, “No, I think it’s just the church.” And I said, “Pull— pull the tax map and let’s see what it is.” It was three properties, and they would have given me all three properties for $89,000 if I would have evicted the pastor. And I said, “I’m— I’m not interested in doing that, but I’ll get you an attorney. I’ll— I’ll support you in getting that moving down the road.” So I ended up buying it a year and a half later for $117,000. And the church was a smaller footprint. It came out absolutely stunning. And I decided— I could have done a lot of things with this church. I could have made it into a multi-unit. I made the other two into just single-family houses. And I just kept going and sitting in the church. I just kept going and sitting in the pews and getting up on the choir balcony and looking at the stained glass, and I said, “You know what? This wants to be a house. I’m gonna turn this into a glorious, gorgeous house.” And I just about made news with it because so many people followed me on this journey, and they were making comments like, “What are you gonna do with the ceiling windows?” and “My God, you know what? Are you gonna make it into a multi-unit?” But it was just— it was challenging because the sewer line had collapsed between the church and the house in the back. I hadn’t done a dig like that. That was a— I wanna say that was about a $20,000 oops. And the— the survey lines were all over the place, so I had to go in front of the— front of the— the board for the city of Geneva and get a change of use. I hadn’t done that before. So there was a lot of things I learned— new people and older— old people that I’ve known for a long time, I got to see again. And I just feel really good. It came out absolutely gorgeous. And it was— it was a commitment. It’s a commitment. There’s the word.

Dylan Silver (18:55)
Hey, I mean, you’re— you’re definitely not wrong. I mean, when you’re talking about one property, it can be challenging, but three… and then you mentioned some issues with the sewer lines, that can be very challenging. I wanna get granular there if we can. The— the sewer lines, when you found that there was an issue there, did that slow things up? Did you need to get additional permits for that? What did that look like? Because that can be very challenging for folks who haven’t dealt with that before.

Debra Cleveland (19:21)
So it— it all was challenging. So the survey line went directly down through the— the middle of the church. I had to do a change of use, which means they sent out a postcard to the whole community— that zip code— saying that I’m changing it from a church to a house. So I thought I might get some pushback from that, but I didn’t, which was interesting. I had to go in front of a hearing and all— and— and plea a hardship. And I said, “Well, the hardship is that we need single-family houses for families in this community, and this footprint is small enough where it would be a gorgeous single-family house.” So they granted it. And then it was the survey lines, and then I had to— because the two houses were in the back and the only way you could access it was going through the parking lot. Well, I pulled the parking lot out and I made roads back to these houses. So I had to also work inside of— what is that called?— the— shared— shared space agreements with— with— there we go. The easement for the driveway. Thank you.

Dylan Silver (20:19)
Myself for getting that one. Wearing my realtor hat there. Those are very tricky to— to do, and I— I’ve heard cases where, you know, not being granted one of those can really, you know, blow up a deal. What I’m hearing when you’re talking about getting in front of the community and having to explain why you want to have this go from a church to a single-family home and then getting the easement, you’re very much involved with the community and have built trust there. That’s something that some investors— many investors— struggle with because they might be great at underwriting the deal, they might be great at managing the crews, but then if they need community buy-in on a local political level, that can be challenging for folks. You have done that successfully. Any tips for folks?

Debra Cleveland (21:00)
Have integrity. Integrity spreads like wildfire. You know, be a great landlord. Take care of your properties, mow the lawn, trim the hedges, paint your front porches every year, take care of your resident. If there’s any maintenance issues, that’s a— I would say the biggest— the tiniest tip that makes the biggest impact is when your tenant calls in, no matter how you take the call, whether it goes into a— some sort of a software system, somebody needs to get back to them inside of the first 30 minutes. That’s— that’s the hit. Not that you have to take care of it inside of 30 minutes; you just have to respond. We respond within two minutes. When it— when a maintenance issue comes in, we actually say, “We are— we’re aware of your maintenance issue. It’s on our list. We’ll have somebody over there, depending upon the severity of the issue.” I mean, usually it’s something very tiny because my properties are really nice. It’s within— usually within that day that we get to them.

Dylan Silver (21:52)
Now, for folks who are looking at all of this that goes into flipping and not just the X’s and O’s, but also the component of community involvement, is there a psyche or someone personality-wise that makes a good flipper, or can anyone become a successful flipper?

Debra Cleveland (22:13)
You ask great questions. So this— this— this is the— this is the personality: you need to be organized. If that’s something that’s your jam and you love being organized, my God, you’ve got half the battle down because it— it’s systematic. First you gut, then you do the electric and plumbing, and then you do any framing, and then you do the drywall. It’s very systematic. But if you don’t have that kind of organized, systematic mind, you might start gutting here and then you’re working over here. Now you’ve got a gut over there and it’s… I’ve actually bought many product— projects from people that when I walked in, I could tell they didn’t have a system in place. They got overwhelmed. The other thing is: give yourself a— if you buy a fix and flip and you think you can get it done in three months, get it done in six. Like, take your time, be patient with yourself. You don’t want to do things over. You don’t want to make— just— just be really… I think the biggest thing, Dylan, Dylan, is learn how to price out labor. Know what the labor cost is in your market. It’s different in every market. I mean, my market here, I can pay as little as $35 an hour for that lead person and as much as $65 for the— an hour for that person. I don’t pay my guys by the hour because they don’t work for me. They work for themselves. So what I do is I price out, okay, so this is how many hours this will take. This is the amount I’m willing to— the bid amount I’m willing to pay for this work to be done.

Dylan Silver (23:37)
Now you also earlier mentioned as well that your contractors take part in the upside in the profit on the deal as well. That’s very unique. I haven’t heard that before, but it seems like a great idea because you have people then bought in. When— when did you start to implement that?

Debra Cleveland (23:54)
Started that in my first business. I started a small business out of my spare bedroom, and I grew it into a two million dollar company as a single parent with a high school education. And in that business, I just knew that we all need to do— to do our job at our best in order for— for the business to be profitable and to grow. And I put a scale down: if we hit this number, this… and everyone— the bookkeeper, the— the guy that did the— the shipping and receiving, my lead— got… I mean, everybody got a bonus. Even the p— I— I ended up owning eleven retail stores inside the GM plant selling logoed merchandise, and even these little store ma— managers got a bonus every quarter if we hit our numbers.

Dylan Silver (24:36)
We are coming up on time here, Deb. I know that you have a masterclass. Can you tell our audience a little bit about that and then maybe the best way for folks to find out more?

Debra Cleveland (24:44)
So they can go to my website, which is www… or debcleveland.com. It’s my name, debcleveland.com. And there’s a page that says “Work with Me.” The entry to work— to do any program with me is just this little four-week program. There’s a waitlist right now for that, and that’s where they create the roadmap for success. That’s the first thing. There’s no sense in us— me teaching you the business unless you really have a clearly defined roadmap for yourself. And that’s a— such a small investment to do that little course. And then I see if I think you’re a good fit for my masterclass, which is called The Sacred Path to Riches: Millionaire in the Making.

Dylan Silver (25:22)
Deb, thank you so much for your time today. Thanks for joining us.

Debra Cleveland (25:25)
Thank you, Dylan.