Listen to the Podcast Here: On the debut episode of The Real Estate Nerds Podcast, where we give the information you need to be the best investor. We take a look at the human side of investing and ask some of the most successful individuals in their fields about their best deals, bad beats, and the lessons they’ve learned through their experiences. Today, our host Scott Smith, an asset protection and real estate attorney, asks real estate investor Scott Sutherland about the best deal of his life. Description Useful Resources References Approaching the Real Estate Market for Hidden Opportunities [1:00] Scott Sutherland has been investing in real estate full-time for eight years. Originally a product of the tech industry and traditional stock investing, he made his real estate debut after following investing strategists such as the Motley Fool. He credits his early success to bravery during a fearful time in the industry. [3:35] Scott Smith points out that most in the market are brave right now. The two conclude that this is a good reason to be conservative, and skeptical of promises of absurdly high returns. The opinions of professionals matter more than the opinions of everyday investors. [5:53] When asked what he does differently than average investors, Scott Sutherland highlights his early experience investing in Austin, TX duplexes during a market decline. He concluded that cash-flow doesn’t lie, regardless of what other investors say in times of fear. He pointed out was that his worst-case scenario was still a success. [8:17] Scott Smith comments on Scott Sutherland’s tendency against following the herd: “If you say you’re different, you’re arrogant. But you might be different in the right way.” [10:00] While Scott Sutherland acknowledges the power of diversification, he also appreciates going with what you know: “The more you know about a given business, the more effective you can be at it.” In his case, a major piece of his business is short-term rental (AirBnb). Tune in to hear the details of how his short-term rentals contribute to his larger strategy, as well as some of the nuances of this type of investing. [15:08] Scott Sutherland always looks at the numbers when considering or analyzing investments: “Cash flow is your bird in the hand. Appreciation is the two in the bush.” [15:30] Scott Smith points out that you can only gain one piece of expertise at a time, and asks Scott Sutherland’s thoughts on expanding into different asset classes. [16:00] Scott Sutherland uses a sports analogy to describe this process in real estate: “It’s still the same sport, you’re just learning different shots.” Having an area of expertise doesn’t mean you’re done learning. While Scott Smith prefers joint ventures with more experienced investors for learning new things, Scott Sutherland’s personal approach is more cautious when it comes to partners and their risk. Both agree that harnessing the expertise of others is a vital element of growth as an investor. [19:55] The two Scotts briefly debate the value of striking out on your own with new types of investments. Scott Sutherland shares his balanced approach: “There’s a lot of satisfaction in knowing you could go it alone, but choose to work with others.” Analyzing Scott Sutherland’s Best Deal: How An Ugly Green House Got 5,000% Returns Scott Smith probes Scott Sutherland for his unique perspective on his 2010 deal and what made it such a success. [23:53] Our host and guest dive into the details of Scott Sutherland’s big win, focusing on what Scott saw that other investors didn’t. When asked what circumstances led up to his best deal, Scott Sutherland points to sheer necessity. One of his best deals happened to be one off his first, and was born out of the desire for him and his new wife to live in Austin’s sought-after Zilker area. They eventually settled on a duplex that had recently been foreclosed on, planning to live in one side and rent out the other. [25:15] One of the major lessons Scott Sutherland learned from this purchase is a piece of advice he continues to share with new investors and anyone buying a property: “If you’re not the best buyer for it, particularly in a competitive market, you’re not gonna get it. Or if you do, you’re probably going to overpay for it.” He believes this deal worked in no small part because he and his wife were a particularly good fit for the property. In general, he believes assets can be optimized for particular types of people: renters, families, developers, etc. [28:20] The day Scott bought his property, it was dramatically underpriced. He actually chose to overpay for it by $40,000. Scott Smith acknowledges that most investors and brokers, possibly including himself, would have thought Scott Sutherland was insane for this choice. But it was the smart move to secure the asset, and has since become part of his greater strategy. He has since made multiple successful investments by offering higher than asking price, but lower than market value. [29:30] But Scott Sutherland stands by it, based on the philosophy that “pigs get fat; hogs get slaughtered.” Overpaying a little bit guaranteed he would get the asset. [30:05] Scott Smith sees the wisdom in Sutherland’s strategy: “If you want safe investments, everyone is going to agree with you. And that’s great. But if you want to do something different, everyone is going to think you’re wrong.” [33:00] While Scott Sutherland’s primary motivation was to find an inexpensive place to live, He paid 0.55, or $1,500, down on a duplex worth $350,000. But over time, he found other ways to make the property more profitable. His low financing arrangement allowed him to close on the property and still have funds left over for re-investment. He was eventually able to rent the second unit for $1,500/month. [36:00] Scott Sutherland’s entry into vacation rentals in 2012 was inspired by a vacation he took with his wife. She observed that they could do exactly what the owners of their rental property were. [39:00] The very next year, Scott Sutherland’s next door neighbors moved out. This created an opportunity: Scott bought the property and continues to use it primarily as a vacation rental, a highly profitable choice for a location that hosts festivals such as SXSW. As for his original investment, it is currently valued at over $800,000: nearly a 5,000% return rate on his original down-payment. What Investors Can Learn from Scott Sutherland’s Duplex Win The two Scotts end the show by analyzing the best aspects of Scott Sutherland’s 2010 deal. Together, they share the major lessons they have learned from the deal itself and their broader real estate investing experiences. [42:00] Scott Smith observes that the “magic” of this deal happened on the front-end, with Scott Sutherland seizing an opportunity others didn’t even notice. The house itself was hideous when he bought it, but Scott Sutherland saw its potential and knew its location was extremely valuable. He has always liked properties that need some fixing up. Forced Appreciation: The Beauty of Being the Scummy Neighbor [44:00] Scott Sutherland’s penchant for visually unappealing or even beat up properties is actually part of his strategy: “Whenever you go into a neighborhood, you want to be the scourge of the neighborhood.” He sees neighborhoods as an average of the homes. Given his affinity for duplexes, he is keenly aware that his neighbors’ property values are likely to lift him up. Forcing the appreciation of his assets is a tactic that has been extremely lucrative. [46:00] Scott Smith asks if Scott Sutherland has a tip for those interested in vacation rentals or short-term rentals. Check your local regulations and assume nothing. Austin, TX, for instance has regulations on short-term rentals. A real estate agent familiar with local laws can assist you. His own properties have fared well as “mid-term” rentals as a result of local regulations. [51:00] Scott Sutherland recommends that new investors seriously consider using the same strategy he did by investing in duplexes. There are many benefits, particularly for investors who live in one unit and rent out the other. If there’s a management issue, you can simply go next door. Risk is fairly low in good locations that are likely to trend well, as the income tends to off-set an investor’s expenses. The Takeaway: Be Willing to Be Different and Be Smart About Risk Scott Smith’s takeaway from his guests story is this: “Know what your realistic downside risks are, and if you can afford them, take them.” [56:00] If your worst-case scenario isn’t that bad, it may be worth taking. If you’ve run the numbers and are willing to get uncomfortable, even to the point that other investors call you crazy, you too can see the opportunities that other investors don’t. Connect with Scott Sutherland Scott Sutherland is easiest to reach via his website. He is generous with his time and enjoys offering his insights to fellow real estate investors. While his expertise lies in the Austin area, his knowledge can be applied to many markets and situations. Listener Resources Thank you for joining us on today’s episode of the Real Estate Nerds Podcast. For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook. Don’t forget to subscribe to stay up to date and have the most current episodes of the Real Estate Nerds Podcast directly in your listening library. Every subscription helps us create new, custom content for you. What did you think of today’s episode? What would you like to hear more about in the future? Leave your thoughts and questions in the comments section below, or leave us a review in the iTunes store. We love hearing your feedback, so fire away. Join us again next week for the rest of a fascinating conversation with Scott Sutherland. Next time, Team Scott S. Squared will be breaking down the “post-mortem” of deals to look for even more lessons on becoming better investors. Thanks for listening! Hosted by Scott Smith, Lead Attorney and Founder of Royal Legal Solutions. Schedule your personal consultation now. If you have questions about our content or suggestions for future episodes or guests, reach our podcast team at [email protected]. About Scott Sutherland Scott earned his Engineering degree from Texas A&M in 1995 and his MBA in Finance from Southern Methodist University in 2002. He is an active property investor specializing in distressed properties, rehabs, and buy and hold rental properties. He operates the web site www.RealtyStake.com to share his investing knowledge. About Jason Hartman Jason Hartman is a successful real estate investor, author, speaker, and podcast host who owns property in 11 states. He is the CEO of Hartman Media Company and JasonHartman.com, where he has authored 11 books and is the producer of 15 podcasts, including the popular Creating Wealth Real Estate Investing Show. He is dedicated to educating investors on the economy, markets, and strategies for how to create positive cashflow from income property investments. Jason is also started The Jason Hartman Foundation to provide Financial Literacy for Youth. His work has been featured in Forbes, NPR, MarketWatch, Investor’s Business Daily, The Wall Street Journal, Realtor.com and many more. For more information, learn more about Jason from his full biography on his website.