Updated: Nov 9, 2020
Joey Chan joins the show to explain how to scale a house flipping business, how he learned about OPM, and the art of the prehab.
For more information about Joey Chan, visit
0:00 - Intro
1:28 - How did Joey get started in Real Estate?
8:22 - Other Peoples Money is how Real Estate is done!
12:56 - The Pros and Cons of College
15:01 - Investment Properties
20:27 - Secret sauce to source deals
27:57 - Contact Joey Chan
Joey Chan – Joey has owned a construction company for the past 17 years consecutively and to enhance his knowledge became a certified Home Inspector in 2006. In 2008 Joey started investing in real estate purchasing his first non-owner occupied rental home in West Orange, NJ. In 2010 he purchased a commercial real estate property in Jersey City. He has been involved in real estate ever since. To date Joey owns double digit rental units, mortgage notes and have been directly involved in over 40 real estate transactions.
Joey also owns other businesses as well including a restaurant of 6,000+ SF, and a Kitchen Cabinet Sales Showroom. Joey and his co-host Johnathan Boyle has a weekly real estate podcast Newbie Real Estate Investors which can be seen or heard on Youtube, Apple Podcast, Google Podcast, Spotify and many other popular podcasts.
The Passive Cash Flow Podcast is for beginner or experienced investors. Subscribe today to learn how you can diversify out of the stock market, own a part of an apartment building & start earning Passive Cash Flow!
Peoples Capital Group has been helping passive investors build wealth in NJ real estate for 10 years. Visit www.PeoplesCapitalGroup.com to find out if you qualify to start earning passive income and pay less taxes via investing in real estate. IRA's and 401K's are accepted.
Aaron Fragnito: You figured out that other people's money is the way that everyone does real estate, and that is the secret to fix and flipping many houses and then when you went out and bought an ugly home?
Joey Chan: I did. I bought a bunch. We just went on a roll. We just kept buying, we bought a bunch. We were buying probably one or two a month.
Joey: Our crews couldn't keep up, really. We had to start subcontracting it out.
Aaron: All right, ladies and gentlemen, welcome to the Passive Cash Flow Podcast. We have an amazing guest today. I've known him for some good times here. Joey Chan. How are we doing today, Joey?
Joey: Good. How are you doing, Aaron? Thanks for having me here.
Aaron: Excellent, my friend. Excellent. Thank you, our listeners for joining us here today on the Passive Cash Flow Podcast hosted by People's Capital Group. I'm your host, Aaron Fragnito, and we're going to talk to Joey today about his construction side of his business. Joey specializes in construction, raising capital, and flipping houses, and flipping house is a crazy part of the business, full of lots of challenges. He's cracked the code of how to do that the right way. I know we usually are talking about apartment buildings or raising capital or IRAs, but today we're going to talk about construction and flipping houses. Joey, how did you get started in real estate?
Joey: Well, Aaron, I got started back in 2008. The first house I did actually was since I've been a contractor for the past 17 years. Back in 2008, I was just in it for about five years at that time, and I thought I knew everything at that time too. I bought a house actually on a share of sale for the first time, it was a little ranch and I was going to make this little ranch into a like a little McMansion, but because I realized, you know what? This is a really bad time to do this because the market had just crashed and everything else. I said instead of doing that we decided to make it a rental.
We made it a single family rental and we held on to it for about three years, and then I split up with my then partner because we actually owned a small lumberyard at the time. That lumber yard I lost tons of money on that lumberyard, and that's why we basically decided, hey, we're going to split up and we're going to liquidate everything we own.
Aaron: Lumber Liquidators, you own Lumber Liquidators.
Joey: That's right.
Aaron: That's a great company known, congratulations.
Joey: Yes, I wish I bought some. That's how I got started into the whole buying houses and things like that. About three years ago, I got more into the fix and flip game. The way I got into that was I discovered hard money because back in 2008, I didn't know anything about hard money. I didn't even know it existed, had no formal education on what hard money was or anything. I went to a whole weekend event, listened to the seminar, but that was a few years earlier. I was always looking for deals and then I never found a deal. Finally, I decided, you know what? I'm going to give partnership a try again.
I partnered up with a partner and we went and did a deal together. We flipped a house in Bloomfield, it actually went well, we both made money and I was like, "Wow, this is not as hard as I thought.’’ We went from close to close in about a little more than six months, it was about six and a half months. That's pretty good, and I made some money. I got addicted I was like, "Wow.’’ I'm doing this for other people and the biggest thing was, I didn't figure out the financing, that was the big key. In that my unofficial first deal I put in my own money. I saved up my money, put it in.
After that I figured it out and I said, you know what? I got to raise private capital because I talked to a lot of other people and I always said, "Hey, how do you do this 100% financing thing? What is that all about? How do you do that?" Everybody the way they tell you it's actually a very easy formula that people don't even tell you. The 100% percent just means that you're using other people's money.
Aaron: Sure, OPM.
Joey: Exactly. That's all it is. The way we do that with the hard money is we just get private and money. That's it we combine private money with the hard money and there's your 100%. Actually, it's more than 100. We actually get probably I would say about 120%.
Aaron: Yes, because you got closing costs.
Aaron: You got operating costs. You got holding costs. Absolutely, and that's a great way to fund fix and flips. That's how boy, we funded fix and flips in so many different ways. We've done hard money with an equity partner, which you're talking about. With a hard money loan, you need to come up with about 20% down generally, and hard money lenders will give you maybe even 90%, sometimes 10% down. Generally, the less you put down the higher the rate is and then they tend to give you 100% of the construction costs granted it appraises properly with the after repair value appraisal. Then the equity partner might own 20%, or whatever it is you need to give them for them to make the proper return on investment.
Yes, we've done it that way. Now we actually fund our fix and flips through private investors that bring in about 110% of the renovation and the property, and then that cover our closing costs as well, our holding costs. Then we actually structured so the interest payments accrue, so we don't have to make monthly interest payments, which are nice. Now there's one-year loans we got to get it done in a year, which is always the goal with a fix and flip. Really, you're done in six months but that's good, because it allows us to bring in all the capital from one source, but it's taken years to develop that.
He's in a first lien position, gets a 10% plus one point on his investment so it makes a good return on investment for the private investor. We've done millions of dollars worth of investments with him so he's comfortable moving forward on the properties. We have a couple accredited, large scale investors that do that. What you're explaining is also a great way to do flips, and you have the equity partner who owns a certain amount of equity that brings in all the operating cash. Then you use the hard money lender, as the majority of the cash you need to buy and renovate and they're going to be in a first lien position, that hard money lender. The equity partner does not have a lien position ideally, right?
Aaron: Exactly. They own equity and that's how they make their cash flow or their return on investment, and that's how they protect themselves as well. Similar to an equity position, we buy an apartment building like the one you see behind here. All right, now you're at the point where you're raising capital, you figured out OPM, other people's money is how real estate's done, right?
Joey: Yes, for sure.
Aaron: Aha moment, were you watching a late-night infomercial who explained it all to you or when was the aha moment?
Joey: No, that was definitely not the aha moment. As you know, I'm pretty involved in a lot of meetup groups and stuff like that and our common friend, Nick Tang, probably I tribute that to him who preaches that. Use other people's money to do your deals. I learned that from him. I would say probably about two and a half years ago. I had gone to his meetups and stuff like that, listened, listened, but just by listening and not doing it doesn't really sink in. You think, "Oh, I'm going to save up this amount of money, because I don't want to give up any of the equity," or "I don't want to give any of debt. I don't want to pay their interest rate.’’ That's my thinking because your parents ingrain that into you. Don't have debt, don't have debt. He changed the way I think about it, it's okay.
Aaron: Debt's a tool and debt can be good and debt can be bad. There's good debt and bad debt. Good debt is low interest debt or debt that you're using to make more money. It can be a hard money loan on a fix and flip that has a lot of equity and a large profit potential. It could be a long-term loan at a low interest rate on a cash flowing apartment building. Bad debt's credit card debt, student debt. These are debts you really don't want to have but they're debts we all tend to have to build our businesses or live our life. It's okay to have a comfortable amount of credit card debt or student debt but that's not really taught in schools.
I was an entrepreneur major and I wasn't really taught the power of debt. Maybe we were taught, "Oh, leverage is a tool,’’ but they don't really break it down in college. I came out of that just knowing what a franchise was, what a debit and a credit was. I learned Calculus 2, for some reason, I learned statistics, I took all these stupid core courses you have to take in college to, for some reason, get a business degree, and I couldn't tell you one thing about calculus. I can't speak any French. I went to French level three but you're so right. You go out there, that's how you learn. You don't learn from a guru, you don't learn from a book.
I'm glad that Nick Tang, very smart man, check out his events if you haven't listeners, pushed you to a point where you understood good debt and bad debt, and then use debt as a tool to start flipping houses.
Joey: Yes, for sure. I started off right from college. I was a finance major, so I knew numbers, I was a Series 6 and Series 63. I had those licenses. I did mutual funds and I also sold retirement accounts, IRAs and all that fun stuff but even so, doing all that, I really didn't know anything about money or how to make money. That was the crazy thing. I thought I knew. Even though I was telling people how to save, “Hey, buy VUL and put your money in there so you don't pay taxes on it. Take a loan from it so you're not paying the taxes on it.’’ I was teaching people things like that but, like I said, I didn't know how to make money. That was the crazy thing.
Aaron: It's funny how money works, how wealth works. We all pay so much money to go to college, you, a finance major, and me, an entrepreneur major, and coming out of college and saying the same exact thing. College doesn't teach you how you become wealthy, it teaches you how to work for someone, how to learn a craft. There's nothing wrong with that. It teaches you how to show up on time and work when no one’s making you work. Those are all important things but I got to say, I did find that there's a huge gap in higher learning, and then what the real world actually expects of you.
When I got into real estate or when I graduated college, I really had no idea what I wanted to do. My college advisor said, "Oh, you should go get a job at this enterprise Rent-a-Car and if you work enough, one day, you can retire at age 65. They can start you there at $30,000 a year with benefits.’’ It's a tough economy, it was 2009. "Go do that.’’ I found it interesting that he's telling an entrepreneur major to go work for another company in your entire life and maybe one day you can retire at 65, and it depressed me. I was like, "Boy, that's not why I went to college to be--
Joey: That's hilarious.
Aaron: -I want to own my own business." He's like, "Well, the economy's bad. It's not a good time to start a business." I'll never forget that the worst advice you can ever get is from someone who's not successful. In my opinion, this guy, he wasn't successful. He didn't really know what he was talking about and just had some bureaucratic position at this university and gave me terrible advice, "Go get a job and work there for 40 years and then don't start a business in a down economy." The best time to start a business is when the economy is down. That's when you get started.
Joey: Right now.
Aaron: Right now, during the Corona. Right now, get out there. There's so much opportunity, there's so much capital on the sidelines that people are looking put to work. They just would need to find the right operator, the right opportunity. I digress. Anyway, you figured out that other people's money is the way that everyone does real estate and that is the secret to fix and flipping mini houses, and then you went out and bought an ugly home?
Joey: I did. I bought a bunch. We just went on a roll, we just kept buying. We bought a bunch. We were buying probably one or two a month. Our crews couldn't keep up really, so we had to start subcontracting it out for other crews. Then because also we couldn't keep up, we said, "You know what? Let's also sell them. Let's wholesale them.’’ We went to-- You saw me at the auctions back then. We started going to auctions just to try to find more deals and stuff like that. Then we said, "Hey, these were actually bad deals, so let's wholesale them because it needed so much work.’’ It was crazy.
Aaron: I couldn't believe what people pay at the auctions.
Joey: It's unbelievable.
Aaron: It was good around 2015 to 2017. I remember there was a year we made a million dollars in wholesale fees. We would walk in there and then there was one day we bought a property, a two-family, in Belleville for $30,000. It's just wasn't on the list, no one knew about it, it just popped up and we were like, "What is this?’’ Looked it up on Zillow, we're like, "It says two-family. It says Belleville.’’ Paid the $30,000, bought it, wholesaled the contract the next day for $130,000.
Joey: That's amazing.
Aaron: We made $100,00 on the wholesale fee. Really, those were the days. You could crush it and all.
Joey: That's a really good one because I bought-- I still own-- Actually, I was there earlier today. We have a two-family in Belleville and I think we bought it mid-2018, somewhere around 2018, and we paid about 190 including the wholesale fee. Imagine the gap from what you were talking about, 30,000 up to 190,000. That was cheap.
Aaron: Now you go to the auctions and-- They're not going on right now but towards the end of 2019 there, in the 2020, they were really-- We just stopped going after a while because everyone's there. There really are so many rookies that just were overbidding, overbidding and you just know they're going to lose their shirt on these properties, or you see them pop up again because they don't bring in the other 80%. That's what happens. You put down the 20% and these investors realize, "Oops, I made a bad investment,’’ and not put up the other 80% and then three months later, it pops up at auction again.
We would see that a lot but now it's very crowded. I am told that some of the auctions are opening up again. I know Warren County opened up, so that's interesting. There was one property auctioned off there, so we'll see what comes with that going down the road. You were able to fix and flip properties, you had a number of properties going and you were making some money?
Joey: Yes, we started making money. What we did with the money was we bought some holds. We bought some properties and we held the property just like that Belleville one.
Aaron: You have a nicer portfolio today?
Joey: Not a huge portfolio. We have about 18 units, mostly two-family, three-families.
Aaron: Do you find you're able to actually cash flow on the smaller multi-families because I find it hard to cash flow on them sometimes?
Joey: We bought them at such good prices that we do cash flow. We still did a nice cash out refinance. For example, towards the beginning of 2019, I bought a three-family in North Newark and I bought it for $120,000.
Aaron: A good price.
Joey: For $120,000, I put in about $80,000 to fix it up and I cash flow about almost $2,500 a month on it.
Aaron: Positive net cash flow?
Aaron: You were able to refinance to get your entire initial investment back?
Joey: Correct. I refinanced it. I took about $115,000 cash out refi.
Aaron: On top of the investment?
Joey: Yes, on top of the cash flow.
Aaron: Yes, because a three-family in North Newark appraises at 400 these days.
Aaron: You put 80 into it, you bought it for 120, you got some holding costs, you're in 215, something like that, and you're able to pull out 290,000, 300,000, right?
Joey: Yes, we pulled, I would say, about 325 or something like that.
Aaron: You're still cash flow positive on them.
Joey: Yes, absolutely.
Aaron: It must have a lot of bedrooms to get that type of cash flow?
Joey: That's correct. The first floor has five bedrooms, actually. We combined the basement with the first floor. That's how we did it.
Aaron: 2019 deals were tight. Sounds like you found a good one. I don't want you to disclose necessarily your secret sauce, but it's so hard to find a good deal right now. The auctions have closed up and they were dried up anyway. Where are you sourcing deals these days without giving away too much of your secret sauce?
Joey: Sure. We're doing some cold calling right now. We have a VA that helps us cold call. Believe it or not, we find a lot of deals on Facebook.
Aaron: Facebook, really?
Joey: Yes, on Facebook. We're just a little more diligent than other people. I go after almost every deal. When somebody posts a deal that looks like garbage, I talk to them, I explore and I see if there's still room in there. I show them, "Listen, I have this much in my account. I'm ready to close."
Aaron: The thing about Facebook is, I found that some of the people posting deals don't control the deal at all. They maybe just saw it on the internet and are reposting it and they'll be like, "Hold on. Let me get a hold of the guy I got it from, who will get the guy he got it from who gets a hold of the guy he got it from.’’ By then you're paying 5,000 each person and then one of them has like, $100,000 fee. You're trying to figure out, get through the port, get through the BS.
Joey: We swim through all that and get to the actual person.
Aaron: Interesting. Facebook. I'm a member of all those Facebook groups. I post in them, but I got to be honest. I never really look through them I got to say. I just post in them consistently. I've tried to deal with a lot of Facebook, I've tried to sell deals on Facebook too like wholesale out properties, but I just find so many tire kickers.
Joey: There definitely is a lot of tire kickers. You just have to know who is. After you deal with them one or two times you know that's all they are. They want to explore every deal. You understand who's actually doing deals. The guys that are posting like, "I just finished a flip. I just sold this property.’’ Those are the real guys. The ones that never actually post anything, you know they're not real.
Aaron: That's great advice. Look for the guys that are actually posting the stuff they're doing. Exactly. That's really what it's all about. There's a lot of people just out there that are going to waste your time. If you can weed through the BS, weed through the noise that's where you find your best deals.
Joey: Last December 2019, we sold this deal. It was a deal in Union, New Jersey. We bought it for 120. We put about another 120 into it. This was a hoarder house. We put about 120 into it. We sold it for I want to say, 387. We did pretty well with that deal. Again, that was a deal on Facebook. The owner actually posted it on Facebook, and there was probably about 30 people that responded to that post. The thing was, we kept following up. We ended up eventually taking the owner to lunch. We explained to them, "We can close on this deal. We actually care about you.’’ He ended up giving us the deal.
Aaron: You really go above and beyond to find these deals.
Joey: We're not doing super high volume. We're not doing, 10, 20 deals a month. Not that we have a lot of time to waste, but we actually follow up.
Aaron: It's about quality over quantity. I found in this business, you can do a lot and make small margins or you can do less and make large margins.
Joey: That's why you went into the apartment syndication space, right?
Aaron: Exactly. The idea is that, with apartment building syndications too, you can do one big deal and do well with it. If we're buying $3 million buildings or so, if we just buy two to four a year, we hit our goal, we're flipping houses. You got to find a new one every two weeks. We're flipping less now. We have a good flip going on right now, we just finished it. It was under contract. It fell out of contract. We're like, "Oh, shucks,’’ and then we got three offers like $30,000 above list price. We're like, "All right, a blessing in disguise." The market is so hot right now. We have about six other properties we're flipping. We do a lot of pre rehabs right now.
We're not even necessarily renovating them completely. Some we do a little bit of work on, others we renovate. Four out of five properties, were really just pre rehabing a little bit and selling to other investors, which for our listeners, that means you're really not renovating it like Joey's got renovating some of these properties. He's putting in all the whistles and bells, he's got pass a home inspection, an FHA appraisal, you got to pass all these things. It's got to hit all the marks. We actually like just getting it at a good price, cleaning it up, cleaning it out, and then selling it maybe to someone like Joey who's going to go take the extra step. That can work too. Have you ever done that before?
Joey: We've done a few. In June we actually sold five properties in June and three of the five were that.
Aaron: That's a good number for June. June was a tough month this year.
Joey: It was a good month for me.
Aaron: Good. Things are going back around on our side, too. We definitely had a big pause in closings and acquisitions and fundraising for a few months there, but things are really picking up nicely now. Rain collection stayed strong through those times as well. That's nice for the holdings. Finally, the markets hot again and it's crazy on the buy side. Finding deals is the hardest part of our job, right?
Joey: Yes. It's tough right now. A lot of the homeowners we talk to, they think that just because the rest of the market is hot, and their house is going to sell for just as much, even though it needs a ton of work.
Aaron: I was looking at a property today and the guy was like, "160." I'm like, "No, it needs 160 work. There's no way we can pay this.’’ The ARV was like the mid twos. He's like, "Buy it for 160, put 160 into it, sell it in the mid twos. You get your money back. What's wrong with that?’’
Joey: Well, we don't know how to do math here. That's what's wrong.
Aaron: I love it when realtors tell you how to flip houses and they've never flipped a house before. It's a good deal. Sometimes you can run into out there. Joey, this has been great here. Let's wrap up. How can people contact you to learn more about what you're doing and what are you looking for?
Joey: Definitely. Again, I'm reachable on Facebook, on Instagram, Joey Chan on Facebook, Instagram is, njhouse4cash. Those are the two places I'm at most often. We're looking for people that want to get involved in fixing flips and smaller deals, not the large syndication space where they get their money locked up for a few years. People that want to do some passive investing as well. I'm not trying to steal your people.
Aaron: No problem. That's why you're out here.
Joey: People that want to partner up, whether they want to take a large equity position or just a debt position where they can just learn from us as well.
Aaron: Great, excellent. Email me that link. I'll put it in the show notes.
Aaron: Thanks a lot for joining us here and thank you, our listeners for listening into the Passive Cash Flow Podcast. I'm your host, Aaron Fragnito and you can learn more about People's Capital Group at peoplescapitalgroup.com. We buy apartment buildings, we have short term rentals that we're raising capital for right now. It's actually fully funded, very hot part of our business. We are buying a building every three to six months here in North Jersey, managing with our in-house management company, and always looking to team up with new investors and add them to our pool of investors.
We've been doing this about 10 years. If you want to learn more about how you can participate as a passive investor with People's Capital Group, go to peoplescapitalgroup.com. Be sure to subscribe to our podcast here, listen to more episodes. We come up with an episode every single week. Thank you so much, Joey Chan. Be sure to send me that information. I'll put in the show notes and we'll catch up soon my friend.
Joey: Absolutely. Thank you. Good seeing you.