How to Take Risks Cautiously in Real Estate - The Scott Florida Story

TRANSCRIPT

Part 1 - Scott Florida

Mike Pine: [00:00:00] Welcome to the hidden Money Podcast. This week, Kevin and I are super excited to have our friend Scott Florida from Common Grace Capital joining us. Scott is an amazing dude and I consider him a good friend, although I've only known him now for two or three years. We've been working together as he spun up his first syndication.

He's syndicating in the real estate arena, but that's not all that Scott's doing. That's just what he started to do. He's got an incredible life story. Scott is a pastor. He is an investor. He's a real estate professional. There's a whole lot about Scott that we're going to unpack here and try to share with our audience how Scott is finding the way to leverage hidden money out there, not just in the tax code, but in the rest of our economy.

Thank you for being here, Scott.

Scott Florida: Hey, thanks for having me, Mike. It's so great to be on with it, man. It has been fun building that relationship and getting to know you and your family. It's very cool stuff.

Mike Pine: Yes, it is very cool to have you on here anyways. Scott, who is Scott Florida? How did you get here? What's made you the man that you are [00:01:00] today in three minutes instead of three hours?

Scott Florida: All right.

So, first thing is, started out as a pastor for the last 30 years, been serving full time ministry, and that has been my profession and my passion, and my heart is still very much excited about the ministry and about the work of the ministry. Our first investment in real estate came in 1997.

We were looking for a house, couldn't find one, and had some friends that owned a duplex, and they invited us over to their place. This is... wow, we're looking for a house, and we're like- Man, this duplex is super nice!-- And he's like- Yeah, it's not too bad because the resident on the other side helps pay the mortgage.-- Like- Hey, that sounds great.

And actually the house, it was in a great location. It had better amenities and was a little bit larger than what we thought we could afford based on what the numbers were shaken out to be in our community, and so, we ended up buying the duplex, and that ended up being a great investment for us.

The lady lived next door, she was a widow and had [00:02:00] a relatively young child that was still living with her, and so, we were able to take care of her and really provide good, consistent housing for her, take care of the lawn, and whatever needs she had, as well as what was needed at our place.

So, worked out really well. A couple of years later, bought another duplex that went well, invested with my parents on that one. and so, fast forward a number of years, and family started growing and we're starting to feel the pinch of the financial side. We wanted to stay at the same church and continue to raise our family in the same community and keep our investment there,

but the financial side became pretty difficult. So, we started going back to our rental property and trying to figure out- can we tweak this and can we make this more effective? and so, that began this whole education investment, as well, a couple other things that happened during that time... like I said, our family started to grow.

We ended up adopting a couple of children. We already had six, [00:03:00] and so, we adopted two more from Ethiopia...

Mike Pine: Six

is never enough. You've got to have more than six....

you know how it

is...

Scott Florida: Hey, we had five bedrooms, and so, we figured everybody needs a roommate. So, you've got to do an intro.

So, that's how that ended up working out, and again, all that is just pieces of how God has led us along the way.

In 2009, we bought a foreclosure. That's what provided those five bedrooms for us, and then we were like- Hey, is there more that we can do? Adoption had always been on our radar as a possibility, and so, we stepped into that. Well, when the girls came, they came as teenagers, so we had, probably, four years that we knew we had with them,

and so, the idea of managing those duplexes... and I started managing my friend's duplex as well, so we had six units that we were managing- 12 toilets, 6 furnaces and all that goes along with all of it. So, we were like- We've got to do something different. And so, that's when we first hired a manager, [00:04:00] and learning to hire a manager and having somebody that was handling that level, or that responsibility, changed the profile of what we could do because it gave us the ability to scale when you're doing the repairs and doing the fixes and all that kind of stuff yourself. That really limits your scope,

but when we added that manager, that really made a big difference, and we hired a good one. It just happened to work out really, was a former colleague of mine that was also former youth pastor, and so, that was immediate grounds for trust because we worked together in the past, and then he just really nailed it,

and so, that went really well. But what we found out was, over the years... this was about 2014... over the years, we had deferred some maintenance. So, when he took over, rents went up because he's a professional, and so, he was getting better rents, and caring in a more significant way for tenants, where, if they had a problem that wasn't immediate, I was- Hey, I'll get to [00:05:00] it this weekend- where, he would go over there and fix it right away.

So, that improved how the residents felt as they were being cared for. But then, the overall picture improved, except for that deferred maintenance, so, we actually lost cash flow on a practical side because we had so much catching up to do. So, there was a lot that we learned during that time, and kind of dialed in, that we feel has been really helpful for us as we've gotten into syndication.

So, about that time too, like I said, we were pouring on the education side, really learning as much as we could, and so, in about 2017, we started learning how to buy real estate outside of our current market, how to maximize equity. Like I said, we'd had those properties for a long time, and so we knew we had some equity in there, and we started learning through the real estate guys and some of our friends, our mutual friends, how to maximize the equity in those properties that turned out really well for us.

We purchased some additional properties out of state and learned how to manage... [00:06:00] property manager was out of state as well... and we also started teaching other people how to invest in rental properties, because we'd made those good connections, built those good relationships, we wanted to share that with others, and the turnkey market was a place where we felt like we could help people do that because we built some good relationships there, as well, with people like Mid-South Homebuyers and Terry Kerr and Liz Nowlin from that group,

and so, that's a wonderful place to take people to- Hey, get started in real estate, and start figuring out how that whole system works... and so, that was a big piece of our puzzle going forward, was starting to educate other people about how to do that, and that kind of led to syndication,

and that was our next big step.

Kevin Schneider: Yeah, I was so curious of how you get to that point because to me it would be daunting to just be like- Okay, it's time to get other people's money, not just my... I mean, putting my own money at risk is one thing, but then when I start going and getting friends, [00:07:00] family, or other outside investors' money, and being responsible for that, that's got to be kind of a scary step.

How did you have that faith or how did you get to that point where you're like- Okay, I'm ready to... are you still doing full time ministry

and this? So, you're doing all this?

Scott Florida: No, actually, my last day technically was May 31st, and so, we are just now going into that stage of being full time.

I spoke at a camp for about three weeks, and then we finished out one final missions trip with the youth group, so that was another week, and so, we've been either getting ready to go or going for these last two months or so,

and so, we're just now getting into the place where we are- really steady, full time at the real estate syndication thing. And so as far as your question goes, like I said, we've been investors since 1997 in property, that's just local single family stuff, and then now out of state, and so,

we feel pretty comfortable with [00:08:00] that world. That's a world that we understand, the world that we know. We know there's risk to it, but we also know how to mitigate that risk. Property management is enormously important. It's your front line of defense in protecting your investment, making sure that the people that are in your investment are safe and well cared for, that they're treated with dignity and respect, but also held accountable, They have to do their part.

We can't just provide free housing. It has to be that they are carrying the load that they need to carry, and so, a good property manager provides that. So, once we've got the confidence over 25 years, almost, of property management and leadership in that realm, we've come to a place where we feel pretty comfortable walking people through it and teaching them how to do it, but also doing it on their behalf,

and like I said, we started out by just teaching people how to do it, but there's some headwinds to doing it yourself. You have to have a major down payment. [00:09:00] You have to know the various markets and to choose a market that fits with your investment philosophy. You need to be able to understand how to manage the manager and make sure that the manager is doing the part that you hired them to do.

You have to understand the insurance side and make sure that your property is insured correctly. And then, you have to manage the day to day, but lending is also a big piece. Do you have enough for a down payment? And do you have the- what's that credit score that you need in order to get the loans?

And so, all that stuff has to be dialed in, and so, as we were teaching people and working with people, we had people that- Yeah, let's do that! and it went very well for them. Of course, it was a good time- I mean it was 2017, 2018. That was a great time to buy property, if you were going to buy property,

because things just continued to rise over the next four or five years. Cash flow steadily increased and it worked really well. But also, it was our people that bought, purchased in good markets with good [00:10:00] management that helped carry the load there, and so, what we saw was our big heart is for ministry professionals,

and then also, people that want to do more, say, Kingdom -focused work. They want to invest in special needs or helping out communities in various ways, and they need the resources in order to do that. So, if we can find ways to help them, the larger investors here, accredited investors, be able to partner with non-accredited investors, people that are in ministry,

that are eagerly serving the places that they want to serve, like we were. I mean, we were in the same church for 27.5 years, and that was something that we were able to do in part because of how things went on the real estate side, because my wife stayed home and helped just play the huge role in the raising of our children.

And of course, I did as well, but you know, with working full time, that limits the scope of that, and so, having her be able to play that role that she wanted to play and we [00:11:00] wanted her to play, that was really big for us. And so, what we are hoping to do now, going forward, is to provide opportunities for people to stay in the places and the ministries that need them, not just the places and ministries that can afford them.

So, we're hoping that through our real estate syndication work that we can bring those accredited investors who need tax help alongside those non-accredited that are in ministry, and in frontline work that needs some cash flow, and bring those two together to accomplish some really cool things, and that's part of what we've been able to do in our first syndication.

We've got investors from California to North Carolina and Texas, Michigan. We've got also, missionaries that are from South America, Europe and Asia, all in the same project, and so, that's one of our goals is to make that kind of thing happen. And again, like going back to what you and I talked about, or what you asked about [00:12:00] regarding the comfort level, we also surround ourselves with an enormous amount of great mentors.

We tried to recruit the best in the business, including our CPA, Mike Pine, because we really want to make sure that we're doing it well, and doing it right, and we've been willing to spend that extra money to have our numbers reviewed. We make sure Mike goes over any deal that we're looking at, and crunches the numbers after we've crunched them to make sure that we're running them correctly.

Things like that. So, the combination of great mentors, the importance and the need that's there, all push us in that direction to say- Hey, this is important work, and you need to step into it and help make it happen.

Kevin Schneider: Yeah, that's awesome, and that's a tremendous story that you have, and looking at getting into a syndication, your syndication is a little bit different. Now, when we typically see syndications, we typically think of large deals, like we're going to go buy a $20, $30 million apartment complex.

Do you want to be a part owner in this? And you are taking a [00:13:00] different route in a different avenue, you're going down. So, can you tell us about why... well, tell us first what your syndication is, and then why you chose that over the big multifamily deals. Was it economical? Was it just your passion of single family homes or...? Just give us a little backstory on that.

Scott Florida: Yeah, that's a great question. I think it started with us feeling confident in single family homes because that's what we've been doing for the last 25 years. When we step into a multi family experience, that's going to be different than what we're used to and where we feel like our wheelhouse is. Now, that doesn't mean that we won't head in that direction because we certainly have good friends that are top tier people,

and we're actually even working on some training in that area as well, but that's an area that we'd have to grow into. It's not an area where we immediately feel confident because we've been in that space. So, it starts with that level of confidence- Okay, this is what we know- because again, it's those [00:14:00] areas where, from my perspective, when we're trying to take somebody somewhere we haven't been, that's a risk.

I don't know this terrain. I've never been here before, but I think it's a great idea. I think you're in for some potential trouble there, but if you've got somebody who's walked that path and done that thing for 20 years, 25 years, then there's a little bit more confidence- Okay. We know what we've been around this corner a few times,

and so we know what to expect forward. So, I think for us, that's one of the biggest things is knowing that, and then, as far as the size of the deal, yeah, some of it is just getting our heads around the size of the projects and the scope of the projects, and limiting the risk as we get started.

So, we see ourselves investing more going forward in larger projects that would be 20, 30 single family homes or duplexes, triplexes, fourplexes- that type of investing, and then long term, ultimately, probably, stepping into some multifamily and a few other type of projects that we're [00:15:00] interested in as well,

but the key right now where we feel is really our sweet spot is in those places where the communities need housing. As we look at the landscape, we know that affordable housing is a significant need, and there are communities that have houses that are what we would call 'don't wanters'.

They're the kind of homes that nobody really wants to live in, and they don't want to, it's too much of a rehab project to step into, and so, the teams that we're working with in our syndication, either we're doing it personally or we're working with teams that do it, and they're doing the rehab and then selling us the property once it's completed.

Then we manage the property and carry the property going forward.

So, that's where we feel comfortable and feel like we can make a difference and also help investors as well- get invested in a real asset that fights inflation and that sets them up with some cash flow that they can use. One of the things we have with eight kids and that massive

load to carry- just buying a [00:16:00] set of cleats was something... a matter of fact, my daughter just got married in May, and she's in the process of moving out, and actually, yesterday, we were looking at that and she pulled out her cleats that she wore from 9th to 12th grade. She wore the same pair of cleats and it became a badge of honor.

I mean, there was a moment there where it was- Ah, I don't know this year if we should buy new ones. And then it was like- No, I'm just wearing these the whole time. So, that capacity to buy a set of cleats, if you have another $100 a month in cash flow, as a parent, that can help you make that purchase and feel that dignity of- Okay, we can do this.

Let's get these cleats, and there's some, like I said, the dignity that's connected with that as a provider to be able to offer that to your kids, and so, those kinds of things are what we are hoping to provide because they had such an impact on our family as well.

Mike Pine: I think you made one very key point in answering Kevin's question, is- why stick with single family houses? Because you knew them, you got good at [00:17:00] them. You can't really scale up a business or a service offering unless you're good at it and know how to do it, before you can start scaling it. That's the track you took,

and that's there's some major hidden money in that. If you know how to make money with one property and you've done it enough times, then certainly you can apply that knowledge to 10 properties, to 30 properties.

Scott Florida: Yeah, absolutely. Matter of fact, it's funny, Dave Ramsey was connected with Alex Hormozi and they were talking about this particular thing, because that was something that stuck out to Alex as he's following Dave and talking with Dave. David had told this guy on one of his podcasts- the guy had asked, 'Hey, why shouldn't I invest in these other things?

What should my portfolio look like?' --And he said, 'What do you know?' --He says, 'I know real estate.' --He said, 'Well, if you know real estate, then 80% of your portfolio ought to be invested in real estate. You do what you know.' --I think that's a key thing, and again, that's where you feel confident too, Right?

You feel like- Oh, I understand this. I know this. [00:18:00] Oh, yeah, we've been this path before. We know that you have termites sometimes that show up and we know how to deal with it. We know there's sometimes runners that don't work out well and they don't take care of the property. You've got to rehab it and you know It's not the end of the world. You figure out those details, but you also know- Okay, If I don't get these things in place and manage it, well then, you lose good runners too, and so, all those kinds of things are pieces of the puzzle that you dial in over a period of years that can really help you, like you say, the bottom line in the long run.

Mike Pine: Awesome. Let me just back up for a minute. I think some of our listeners probably don't have any alternative investments yet. They're considering real estate. They should be, with seeing the hollow prices in the equities market right now.

How do you get started in that? You and your wife did it because you had some friends, and y'all just started your first duplex,

but if for just our average listener that really wants to start investing in alternative investments, and they're looking at real estate, and maybe single family houses or [00:19:00] duplexes, what's some advice you would give them?

Scott Florida: Yeah Well, there's a number of things that you've got to get in order, and make sure that you have in a good spot. It's rare to find a syndication opportunity that you can just jump in on. In syndication, there's lots of different types of syndication investments that you can create, but typically they come in a 506(b) or 506(c), and the 506(c) is for accredited investors only.

So, that's typically not available if you're trying to just barely get going with your real estate investment. A lot of times that's not really an option for you. A 506(b) is one where you have to have an existing relationship. And again, I'm not legal counsel, so this is not legal advice, but you have to have a pre-existing relationship with someone in order to be able to invest in their projects,

and then, even at that, that particular syndicator can only offer 35 slots- can only have [00:20:00] 35 non-accredited investors in each of their projects, and so, you have to know somebody in order to get started in syndication. So, if you don't know somebody, then the path forward is typically going to be-

Okay. One, I've got to get my credit score straightened around so that I can get a loan on a home, and then, I've got to save up a down payment. And again, one of the reasons why we like Memphis and we like Mid South Homebuyers is because it's a great place to get started. You can typically buy a home from them for $150,000, sometimes less than that,

and that's a tenanted, completely rehabbed property from top to bottom. And so, one of the reasons why we encourage people to consider them and to look at them is because they're just a solid, solid place to get moving when it comes to your real estate investing. It's almost like investing in real estate with training wheels.

And part of it is because they come alongside you and hold your hand [00:21:00] and kind of walk you through it, and so, as we were starting to train people and teach people how to do it, we would do that- work walking side by side with Mid South through the process, and then we'd be talking with them- Okay, here's the other pieces that you need.

Make sure you got your insurance lined up, and again, Mid South helps with that, but those are all pieces of the puzzle. So, I think the first piece, besides all of those little details that I just mentioned with getting your credit score up, saving for a down payment, the other significant piece is education.

You've got to get your head around what you're doing and nobody's going to just come alongside and say- Hey, this is how you do it. You've got to have that commitment yourself to say- Okay, I've got to figure this out and really commit to it. In 2017, there was a moment for me where it was like- Hey I've got to figure this out, and God, please help me because I got to figure this out,

and I started just to go down the path of education, and I mean, it was hundreds of hours of podcast listening. I mean, I'd be mowing the lawn, slap on the [00:22:00] headphones, and we'd be driving and I'd be running through podcasts, and just trying to make sure I understood it, and was able to, connect with it.

And then, if you're going to invest, make sure you invest alongside people that have just great reputations. They do their work and they're honest and they work with integrity. So for me, I think those few things would be a good place to get started. Education, get your credit score in the right place, get some down payment reserved.

And again, part of the process is finding where that hidden money is, and if you've got it in taxes or something along those lines, that would be a great place to be- you start off with a good tax return that helps get you moving in the right direction. You add in, being able to pull some equity from another property that you own.

That might be another way to get started too. We work with a company called Equity Strategies and Stephanie Riley, and she does an incredible job of helping you find equity, and arbitrage that [00:23:00] equity into other projects that produce a good return as well. So that's another way to help you get rolling.

Mike Pine: Great tips. So when you decided back in 97, this is something you want to do, you've obviously, probably, worked on your credit score and everything you just mentioned. You still got to make the leap of faith, like it's scary to go into a new investment field. It's scary.

You work hard for your money; you could lose it all in any type of investment. You have to take some risk.

Maybe we need to involve Lori, your wife. How did that conversation go? How did you actually make the decision to just do it?

Scott Florida: Well, honestly, what we did, and this is what we do in just about everything that we do is... She's tuned into taking risks- adoption is a risk, right? I mean, stepping into any kind of work is a risk.

One of the pieces that had an impact on me that really helped me is I've got some friends that are mechanics. Now, my dad was good with cars, but he would never fix his brakes, and I'm like, 'Brakes, dad, most people say that's the first thing you fix.'-- And [00:24:00] my dad's argument was, 'That's the thing that you most got to get right, is you've got to get the brakes right,

and so, I want somebody who's done that before.' --And then I got to thinking about my mechanic, and thinking- Oh, my word! He does brakes all the time. He takes this enormous risk every day to put that wrench on a set of brakes, but he knows it and he understands it. And so, when it comes to investing and things like that, what we came to was- Yes, there's risk, but we feel pretty good about the risk.

I had some background in just basic repair. When I was working in between, during the summers, when I was in college, I worked at a restaurant rehab company, and we'd go into a restaurant and we'd do whatever needed to be done, and in that process, I learned to roof, I learned to lay tile, I learned to do plumbing, learned to do electrical, I even learned to do wallpaper.

We did trim carpentry, we even fixed a few machines, and so it was just this broad spectrum of experience, and [00:25:00] just got to the place where I felt comfortable, like, I think, I can probably fix it if there's a problem, and you add to that just some grit of- We'll just figure it out.

And Lori is very much that way, too. She's an entrepreneur at heart, and she's just willing to take some risks and say- Hey, we can't just sit here forever. We've got to make a move, and I think too, coming from the pastoral background, the Bible has been just central to my life from the beginning,

and one of the passages that I think God used to challenge me in that particular area was there's a story in the book of Luke. I think it's in Luke chapter 19, and Jesus is telling this parable about this guy who owns this big... I think it's a plantation, or something along those lines...

and he's got his people come in, and he gives them an investment. He's going to be gone for a while, so he gives them, I think it's- one guy gets 10 Minas, the other guy gets 5 Minas, and he gives the other guy 1, and he says- You've got to invest these things.[00:26:00] and he says- Go out and do business.

He doesn't even tell them specifically what to do. He said- Go out and do business. And so, the guy who gets the 10, and he brings back 10 more, and he says- Hey, well done! Another guy gets 5 - brings back 5 more.-- Well done! And then the guy that gets 1, he's trying to protect it, and he's trying to make sure he doesn't lose the money,

and so, he buries it, so it's safe, right? And he's the one who gets in trouble, and there's a piece of it that to me, it's like, you cannot not risk, because when you decide you're not going to risk, that's actually when you take the most risk, and so, for me too, I'm just thinking about how to... and I know that's a part of where you and I have a very shared heart, which is

how do we maximize what God's given us here, and try to make the most of it,

because this is a very limited time frame that we have on this earth to make a difference, and to make a dent that, maybe, Steve Jobs would say, but us for very different purposes, but how do we make a dent and make a difference? And so, for [00:27:00] us, you can't do that without taking a risk,

and so, there comes a point where, again, it needs to be measured and needs to be calculated, and need to think about it. I had a conversation one time, and the friend was talking about how, 'This is where money people here, and we're careful with what we invest in...'

-- and my comment was, 'But money people are also risk people, that they're willing to take a risk when they know where they're at, and where they stand in the overall picture, but they know they've got to make a move. Otherwise, nothing happens.

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