Why It’s Dangerous To Be Overleveraged In Real Estate With Dylan Tanaka

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Leverage can be a good thing for your real estate business because it allows you to do a lot more than you can by simply using your own resources. But too much of a good thing can also be bad. As a new investor, you need to learn that you have to be careful with leverage because when you get overleveraged, that’s when you get into trouble. To actually run a successful real estate business, or any business for that matter, you have to build cash flow in one way or another. That’s what today’s guest, Dylan Tanaka, has to say to anyone who’s trying to build a real estate business in this rapidly shifting market. Dylan has been in the business for over 20 years, so he clearly knows what he’s talking about. In this episode, he talks about his observations and predictions of the real estate market in Metro Detroit and beyond, his ideas on the importance of relationships and active listening, and a lot more. Tune in to hear more of his insights!

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Why It’s Dangerous To Be Overleveraged In Real Estate With Dylan Tanaka

In this episode, I’ve got my good friend, Dylan Tanaka, here. Dylan, thanks for being here.

Tim, I’m super excited to be here. It’s been a long time coming and I finally get to be in the studio and chop it up with you.

Dylan, why don’t you take 1 minute or 2 to tell the readers a little bit about yourself?

I’m from Metro Detroit. It’s one of my famous sayings. I’ve been investing in real estate for many years. I’ve done everything from single families to multifamily, borrowing money, lending money and everything in between.

I start every episode with a segment I call the Bottom Line Up Front. When I was in the Marine Corps, if we were briefing the general, they always taught us to lead with the most important thing in case they had to get up and leave or something. What I want you to do is take two minutes and talk directly to the audience. What are some things in this market they should be focused on, paying attention to, things they should be trying to do or maybe some things they should avoid? Give the audience the bottom line up front.

The most important thing that new investors need to learn and be very careful about is leverage. When you get over leverage, that’s when you get in trouble. We might be moving into a bit of a real estate shift. Everyone is talking about it. I haven’t quite seen all of those numbers come through, but since I’ve been around long before the foreclosure boom and then after those days, I know what happens if you get over-leveraged. Lesson number one is to make sure that you don’t get over-leveraged. It’s easy to do, especially if you’re good at finding lenders or private money.

The second most important thing I would say is you have to be able to be nimble. We talked about this the last time we sat down. You have to be able to look in a lot of different directions. Business is not just one way. I’ve been in the business for many years and I’ve done almost every segment of single-family investing and a little bit of multifamily. It’s because the market forced me to do that. If I wasn’t able to shift myself, pivot and do different things like partnerships, taking on my deals, working things out with private lenders and all those different aspects of real estate investing, I’m going to end up failing.

Let’s talk about that. I’m a lender. We were pushing some 80% loan-to-value products. The industry as a whole pulled back from that a little bit. If someone’s business is built on max leverage, what are some symptoms that are maybe diagnosed?

Weakness is what it is. Most entrepreneurs will tell you this, not just real estate guys. “Cashflow is air.” You have to create that cash coming in. If you’re leaning on those lenders, always using their money and not having any of your own, there’s no cushion. We’re in Dallas, but we’re talking to people worldwide. Every market is different. It’s the thing that I always say, “When the tide goes out, they’re going to see who’s not wearing their bathing suits because it can get tough.”

I don’t ever want to sound negative, but I want to be real. We all want to be in this business. I want every single person to be successful so do you. The better you’re doing, the better they’re doing and the better we’re all doing because a rising tide lifts all ships, especially as real estate investors. It’s hugely dangerous to be over-leveraged. As a newer investor or even someone who’s been in the business a long time, you’ve got to learn how to use your cash or bring that in somehow.

In Metro Detroit, what are your areas of focus? You’re a hybrid agent and investor, so you play on both sides of the closing table as the advisor and execution. What are you personally focused on?

I shifted myself a couple of years back and said, “This market has been crazy,” especially in Metro Detroit. We were talking about Jimmy Kimmel and Johnny Carson, which tell our age. He’s a lot older than me and I’m older than Tim. We were talking about the late-night guys and Detroit was the end of the butt of the joke or however that was. The city itself is better than it’s been my entire life and probably halfway through my parents’ life.

I see values going up. I don’t think that even in Detroit or nationwide, we’re going to have that crazy slide that we did before because you and I both know that it’s much harder to get qualified. It’s not really hard, but it’s a lot tougher than it was years ago. I see values stay the same. As a broker, I have a team of 20 or 30 agents underneath me and they work more with investors just like I do. I play that line.

The thing that I see is if you’re coming out too high unless you’re in the hottest markets, which Salt Lake City is supposedly one of the hottest markets in the whole nation, if they slid, Detroit and Chicago are going to slide. Dallas is going to cool down a little bit. You have to learn how to be realistic and not think that you can have a scratch-off ticket and win.

You and I are both in the Investor Fuel Mastermind. I always enjoy hearing your perspectives and the way you’re able to refocus people back in. There’s so much perspective. It’s easy to be positive when the entire market is swinging up the pirate ship ride at the fair. What do you focus on when it reverses course? Maybe not all the way. I’m not saying we go all the way back to the bottom, but there are markets like San Francisco, Salt Lake, some parts of Phoenix and price bands in Dallas, even that is getting a little frothy. How do you change your focus when things aren’t going exactly your way?

I always tell people, “You got to roll your sleeves up and get to work.” For the last several years, a lot of investors haven’t had to focus. They aren’t building their business. We talk about wholetailing. For the audience, if you don’t know what that is, you buy a house, list it and sell it. You do almost no work to it. Not to say that that’s a bad business model but that only works in certain cycles, unless you’re lucky and you can’t make money being lucky all the time.

You have to build a business that’s a business and not a hobby. You have to have deep networks like you have for several years in the business. You’ve got guys and girls you’ve been friends with forever. You’re connecting to them constantly, giving more than you’re asking for and then all of a sudden, it comes right back around to you.

Relationships are important to be able to pick on the younger generations. They don’t know how to get belly-to-belly like this, build things and talk about, “Tim, I hear you all the time in Investor Fuel especially.” You’re connecting with people like some crazy guy in Florida who’s doing this or this lady up in Minnesota. It’s like, “How does he know these people?” You’re listening. Even though you and I talk a lot, we both listen well. If we can’t listen, then we can’t help people. The more we help people, the more of that comes back to us.

Dylan, I want to dive right into being an active listener because it helps when we’re buying these houses at the kitchen table or you’re at a networking event and you hear someone with a need and if you can solve that need. You’re an agent, so you got to dial into what the customer is looking for. Tell me some of your tips and tricks for being an active, attentive listener.

I got a secret trick, so we can’t let everybody know this. I’ve been through a lot of seminars like you and also sales training. I’ve been doing sales training in front of audiences since I was twenty years old. You almost have to be an actor, but it’s more than being an actor. You have to be an active listener. In your head, I’m ADD or ADHD, whatever that is. I’m drinking coffee and having fun. I’m thinking about what we’re going to do after this.

For me to focus, I have to almost create sometimes acronyms in my head. Like you being in the military, you had check downs in your mind, especially if you had a brain like mine. What I teach, and I’ve stolen this from other people, is FORM. At a networking event, we already know each other or maybe we don’t. The first thing is Family. “Tim, how’s your wife doing?” She’s the brains behind the operation.

I’m always joking with my guys too, even ladies, but you got to be careful because people are very sensitive. I don’t have to be super sensitive with you. Next is Occupation. “What’s going on? How’s RCN doing? What else do you get going on? What are some new products? Where are you at? Where were you moving into?” Next is Recreation. You do a lot of bull riding, right?

More horseback.

With recreation, it is like, “What do you do? Do you golf, sail or boat?” It’s when you’re hanging out with successful people, whether it’s at the cigar bar or different networking events downtown, wherever you live or at some of these high rises going out to exciting things. What do they like to do? M is the Motivation, which is, “What are we trying to do here?” I eased into it. You don’t come up and go, “I need some money.” That doesn’t work, so what do you do?

I’m always trying to talk to the RCN reps. We’re not underwriting deals in the trade show. We’re just trying to make friends and make people like us. The number one topic people like to talk about is themselves. The thing they like to think about the most is themselves. Your FORM is Family, Occupation, Recreation and Motivation. It gives them the opportunity to talk and think about themselves.

Even if you’re humble, you can drag it out when you’re talking to guys about their families. If I had my phone, you could look at social media that 99 out of 100 people that we meet are going to have some type of social media presence. You can do a little bit of recon. I’m not saying get weird. No cyber stalking, but I’ve taught, specifically, guys at Investor Fuel this. This was more in the beginning. I’ve been in for a few years, so I know almost everybody, except the new folks. I would have a checklist of whom I wanted to talk to and the different things I wanted to do.

I got to get three selfies in a day. People are like, “That’s silly.” “That’s okay because I got your address. I’m going to send you a picture card of us doing a selfie.” Your wife is like, “Who’s that guy?” You’re like, “It’s my buddy from Detroit. Next time I’m going out that way, I got to let him know even if I’m flying into the airport and flying back out.” No one wants to hang out in Detroit with me.

In all seriousness, when you do those things and show people that you’re thinking about them before yourself, it opens that door to doing more business. When you’re sitting down, more importantly, at that kitchen table, you got to learn how to ask questions. It’s not like it was years ago. I’m not a hard closer, but I would sit there with my $100,000 check and it was written to the title company. You’re like, “I’m not taking lesson 101. What do I do?” “No problem. Tim bought your house back for $1,000. Have a great day.” There were a million people like that. You had to hard close because the sheriff’s sale was right there.

It’s not like that anymore. It’s like, “What’s this house doing to you? What is it worth? Is it worth coming here every Saturday and mowing the grass? You can’t go to your kids’ T-ball game because you have a crappy rental house. Is that what you want? You made a bunch of money in cashflow anyway. Why don’t you get rid of it at this point?”

You worked the recreation and the motivation component into that statement. Don’t you want to go to the Little League game instead of mowing the grass?” That’s funny. I’m going to shift gears here because I do want to come to hang out with you in Detroit but not actually in Detroit. About an hour and a half North of Detroit on the big, fresh water in the Great Lakes. What is that market doing? I’ve been seeing a lakefront home for $450,000, which seems like it should be more than that.

If they’re on the big lakes and they’re 2,500 square feet or bigger, they’re almost all going for 6-ish at least because we have Airbnb buyers coming in from around the nation. There are guys that you and I know who have been dancing around this for a few years. They’re going to Minnesota and Michigan because, at $450,000, it’s a steal.

I have a lot of friends. I don’t have any Airbnb on the water yet. I have plans to have them, but I’m late for the party. The only way for me to get deals is to buy direct. The market is hot, so I’m not going to waste a bunch of time buying direct with those guys because I’m not focused on that. However, friends of mine are getting $750,000 a night on the big nights. Do those numbers.

I can’t let my wife read this episode because every week, she’s like, “Look at this one.” I’m like, “No.”

The cashflow is amazing. The winter is tough in states like Michigan and up in Illinois and Minnesota but in the summer, it’s so hot there and exciting. It’s for the Baby Boomers and maybe even the Gen-Xers, which I still think that I’m a young Gen-Xer and I am. Everybody from Michigan goes to Florida. That’s where we go. We don’t go to California. It’s too far away. Instead of taking these family trips and flying all over the place, the pandemic has scared people. Whatever your belief is on that, I’m not worried. I flew down to Dallas to hang out with you.

Think about this. If you can drive an hour away, you can have a 3,000-square-foot home with 6 bedrooms. It’s on a great lake. Those great lakes are 40 degrees until July. They’re big bodies of water. You can have your whole family there within an hour. People can come in and out. I like this too. It’s going back to that Americana versus saying, “I’m going to Cancún,” and getting stupid. Now, you get to spend time with your friends and family.

You and I know a lot of Airbnb investors. One of our good friends, Kevin, is going to be on the show soon. He’s an RCN borrower and we love what he’s doing. How sustainable is that? Do you think that becomes a larger investor play or more family and friends pooling their money together? What do you see up there in those Great Lakes areas?

Homeowners associations are a big problem. This is something I’ve always said. When you’re playing in somebody else’s ballpark, this is being nimble. You got to be able to play every position. If the state of Michigan says no more Airbnbs, you’re toast. If they want to throw on an 80% tax, does our government likes to tax us? You never know. I don’t know all the municipalities, but people are telling me there’s a hotel tax on Airbnb. That’s what scares me.

What doesn’t scare me is in the Midwest and even down here in Dallas, if there are lakes in Dallas, if you could have a home on a lake, people want that forever. They want water. There’s something about us humans and water or mountains. You’re either a beach person or a mountain person, they say. You have an asset that’s $500,000 or $600,000 that’s bringing you in a breakeven, let’s say, on a 30-year mortgage. It’s a lot better than having 3 houses along an 8-mile road. You know, the Eminem song. Three houses bordering Detroit that you’re always going to have section 8 tenants in. What is that asset worth?

One of the powers of this business is you get cashflow, tax benefits and appreciation.

We never bank on Metro Detroit.

I always refer to owning investment properties. It’s like an inflation index annuity stream with an underlying asset base that appreciates. Even though you don’t bank on appreciation in Detroit, you’ve had an appreciation. Replacement cost the loan but dictates that the existing real estate goes up. I see you coaching, mentoring and doing a lot of accountability calls with Investor Fuel and other investors doing sales training. Why don’t you spend a couple of minutes telling me the things that you’re seeing some people doing right and wrong and maybe some trends that you find exciting and/or disturbing?

Here’s what I think. The market has been crazy. Everybody is a genius. I don’t even have my watch, but I’ve got a Citizen eco drive that I’ve been wearing to foreclosures for ten years. It cost me a few hundred bucks. I don’t have a Rolex or drive a big Mercedes. You have to be prudent. I’m not talking about the guys who have 9,000 houses. I’m talking about the guys who have made their first few big deals. It’s exciting, but they’re not growing.

It’s nice to have a nice watch and be in a Mercedes. There’s no doubt but wouldn’t you rather have a bunch of cashflowing assets in our very early 40s versus our late 20s? You talk about Kevin Lee. Kevin has got nothing but assets that kick off cash. He loves that stuff. You look at that and go, “Okay.” My fear is the Instagram All-Stars, what I call them.

I love it and I hate it because there are so many 15, 16 and 17-year-olds, which is wild, coming to our live events and they’re like, “I want to flip houses.” They’re riding their bikes to go drive them for dollars. You got to love it. It does warm your heart, but sometimes when they get that money too quickly, they’re not building. It doesn’t even mean the young guys but the ones who are newer in the business.

What’s the biggest mistake you ever made in real estate? Not keeping as much of it that you could have. I’ve owned hundreds of properties. I’m not sitting on a lot because I had to churn and burn. I had to eat. How do we teach the new investors to try to keep as many assets as they can? Especially going back to Airbnb, I could have bought those things for $250,000 decades ago. In 2022, they’re $600,000.

I have houses that I still own. If I sold them in 2022, the sales price would be approximately 700% greater than what I paid for the asset. We’ve got houses in Mesquite, Texas, that we paid $40,000 for that are worth $350,000 to $360,000 in 2022. It’s insane, but it’s not because if you go back and look at the history and the math, I’m a big fan of stats. It is very consistent. It’s compounded. People don’t understand the compounded nature of appreciation. It’s not a straight line. When it compounds, the rate of growth has to continue going up because it’s stacking on top of more every month.

I like to start this segment with something I call The Money Minute. I found that it’s one of my favorite parts of the show. Imagine there’s an investor out there and they’re only going to get 60 seconds’ worth of advice all month. This is all they get to hear. After this, they’re shut off from the world. They have to go operate their business. Think about it. You’ve got 60 seconds to impact someone’s life and business.

The most important thing that I can tell any new investor is number one, I truly believe that all real estate investors should have their real estate license or at least someone on their team should have their license. Almost all the states are talking about legislation where they’re going to force wholesalers to have a real estate license.

Number two is you can make a lot of money in commissions. Number three is you stay in control of the transaction. That’s super important. The first thing you should do as a real estate investor and even if you’ve been in the business for a long time is you should be looking for private lenders at every single turn. If you have money for deals, deals will find you, but if you only have deals, you’re going to have to give up more equity to get the funding to put those deals together. Those are my two best tips. Get your real estate license and hunt for private money lenders all the time.

That was good because a lot of people don’t understand how important money is in this business. Even though you started the show by saying they need to have their cash, that should never be enough. I don’t think either of us thinks that they should have enough of their cash sitting around that they can fund their entire business.

I tell people all the time, “You don’t want to look for money when you need money. When your bank account is empty, it’s a bad time to talk to a new lender. You always look for money when you don’t need it.” I love the advice about private lending. I never got my real estate license. I just married a realtor. We’re going to go into rapid-fire, Dylan. I’ve got some questions I want to run by you. Try to keep your answers short and your temper shorter. Here we go. Are we in a bubble?

Yes.

Is it a price bubble or an affordability bubble?

A little bit of both.

How do you think interest rates get?

I think that we’re going to see high sevens.

On a 30-year paper?

I think so.

Do you think that would be in the fall of 2022 or 2023?

We have an election coming up in 2024, so I think it’s going to happen before that.

I go around telling people that they got to pay attention to replacement costs. I consider it the low comp. Do you think that this bubble will affect all price bands or just the high-end stuff?

It will affect anything over that $200,000 or $250,000 mark, which has become the new first-time home buyer price.

How do you solve the affordability crisis that we’re in?

You have to force savings, which is impossible unless you raise interest rates like crazy. Nobody saves anymore.

It’s funny. I was looking at a stat. There was only one red arrow for the month to data from the National Association of REALTORS and it was the net new listings. It’s down 24% year over year. Less people are selling and buying, but the net new listings are still going on the market at a rate of 13% higher than in 2021. Prices are going up and inventory is staying below normal with less new inventory coming on the market. Which wins, supply or demand?

That’s what’s saving us. There’s this talk about student loans. That pushes more money into the market. I’m not big on stimulus because that’s artificial, but if it goes another 40 years, you and I are going to smile.

Do you think the solution ends up being 40-year mortgages?

They have had 40-year mortgages in Canada since I’ve been in the business. What do they care about? They care about the payment. That’s it.

If we have high-interest rates coming and a bubble, where are the opportunities for the customer or investor?

For the investor, if you can figure out seller financing, that’s always strong. There are a lot more paid-off houses and high-equity houses than most people think. We know that. You’re going to have to hunt. Unfortunately, some of the new people are going to go bye-bye, as that always happens. You’re going to have to roll your sleeves up, look at it and learn how to be more creative, not just because that’s sexy. I started when it was creative, but everybody wants to be creative. What I’m saying is to put a deal here. Between you, myself, 4 other guys and ladies, we can figure out 20 different ways to do that deal, instead of saying, “I have to pay cash and I can close in three days.” That doesn’t work all the time.

What’s the number one mistake you’ve seen an investor make in this business?

I still go back to leverage. The biggest mistake that I ever made was before the foreclosure days when I was under $30,000. I had over $1 million in equity. I felt pretty good about myself. I wasn’t buying the Rolex yet. Leverage will kill you, so you have to create some type of residual income. I don’t care if that’s from rentals or selling on seller financing. You have to figure out a way to bring in organic cash with the least amount of effort from you.

I was at a conference and someone was complaining about how he’s able to BRRRR all of the money out of the houses where he is in these things for zero down, but they don’t make money. I was like, “They don’t because you’re taking all of the equity out of it.” They make enough money to pay the bills and the mortgage. It’s an investment, but you’re not going to live off of it if you’re BRRRR-ing every dollar out. The biggest mistake you ever made was over-leveraging. What’s the best thing you ever did in this business?

The smartest thing I’ve ever done in this business was built my relationships. I spend a lot of time on them. I give more than I take, so eventually, that comes back to me. You have to be willing to sacrifice. It’s the same thing if you’re building a rental portfolio. It’s the slow man’s way to becoming a millionaire, even part-time. What about those guys and girls that we know who’ve stacked up hundreds of homes, people we talked about before the show? Look what they’re doing.

I have a good friend who’s got 100 or 120 units. It was unsexy because I was flipping and taking $40,000 to $80,000 houses and turning them into $700,000 rebuilds. I was a star. You make $80,000 to $90,000, which isn’t a lot. Look at how much you’re putting into that. It’s a lot of risks. Where does that $80,000 or $90,000 go? It went into the next deal. My guy was buying those for $40,000, $50,000 to $80,000. In 2022, they’re worth $200,000. They’re shutting $1,500 a month and he didn’t take any cash out.

The most common theme of all of our guests so far has been delayed gratification. That’s a good way to end this one. Dylan, any parting thoughts or shots?

Spend more time building relationships with private lenders and possible JV partners. Treat this business as a business and not a hobby.

I like the relationship part. You keep saying that. I love your FORM approach to networking. If someone wants to connect with you, what’s the best way to reach you?

They can find me on all the socials. Luckily, I am the only Dylan Tanaka around. I put something together for our readers of the show. They can go to www.TheDylanTanaka.com. I’ve got some cool stuff on there for them.

Dylan, thank you for being here. It means a lot to me that people take the time to sit down and talk with us. Thank you for reading. Remember, your network is your net worth and now, you’ve been growing both. We’ll see you next time.

Important Links

• Dylan Tanaka
• Investor Fuel Mastermind

About Dylan Tanaka

As a Hybrid Investor Agent, I have bought & sold over 300 single-family homes, a few apartment complexes & land development deals. Utilizing the power of my real estate brokers license & personal network I’m helping investors/agents nationwide create multiple streams of income by taking advantage of the power a real estate license gives an investor.

The following podcast program is furnished by RCN Capital LLC.  The information provided is for general educational purposes only and does not constitute any legal, tax, financial, investment or other professional advice. The views, thoughts, and opinions expressed of any speaker are the speaker’s own opinion and do not represent the views, thoughts, and opinions of RCN Capital LLC.   No information contained in this episode should be construed as financial, investment or legal advice from RCN or any individual, author, host or guest. You should always consult a financial advisor before investing.

• Cash Flow
• Metro Detroit
• Overleveraged
• Real Estate Business
• Real Estate Investing
• Seller Financing