Is investing in single-family real estate scalable? Dan Butler is proof that it is! Dan is a long-term buy-and-hold real estate investor in single-family homes, small multifamily apartments, and commercial buildings. With a breadth of experience and success in the field, Dan joins Sam Wilson to share practical tips to help you scale your single-family investments. He also shares advice on property management and the value of having relationships with your banks. Tune in to learn more about Dan’s investing strategies!

—

Watch the episode here:

Listen to the podcast here:

Scaling Single-Family And The Value In Bank Relationships With Dan Butler

Dan Butler is a long-term buy-and-hold real estate investor in single-family homes, small multifamily apartments and commercial buildings. Dan invests in solid business operators, utilizing his manufacturing operations and business building experience to partner with business owners to scale their businesses. Dan, welcome to the show.

Thanks for having me.

The pleasure is mine. This is a long time coming for the two of us. We met when I first moved here.

It has been a while.

I was just getting started in real estate. I had no idea what a property management company even was. I was looking for somebody and that’s how I got connected with you. That was the second house I had ever bought. I’m like, “I don’t know what to do with this.”

That was by Rhodes College.

I must have either left an indelible impression one way or the other. It’s probably in the negative but that’s impressive.

I’m not very good with names but somehow I remember houses. I don’t know what it is but I guess because it’s in the blood.

I was talking to somebody about that because they used to track foreclosures in the city. A buddy of mine ended up buying it several purchases later. I could spit out his address. It takes over a month of this, I remember the address. I’m like, “I haven’t looked at that house in years,” but I can’t remember what I’m supposed to be doing now. That’s hilarious. Let’s jump in here. These are the same three questions I ask every person that comes on the show. Can you quickly tell us where did you start, where are you now and how did you get there?

I went to engineering school at Clemson University and was in the manufacturing operations experience but I had a mentor in high school and college that invested in real estate. I had a yard care business and I was always helping him. I was the grunt guy. He taught me about wealth creation. He had a bunch of rentals and it was in his family. I knew all through college, I wanted to do real estate somewhere in the journey.

It’s one thing to buy it right but it’s another thing to leverage it right.

I remember reading Nothing Down For The 90s by Robert Allen. That was the book I remember reading, which took me on the trajectory but all the houses, apartments, and commercial buildings, I have never put money down on a project. That was the basis and the foundation of getting started. I moved to Memphis.

I had no idea that Memphis was the Mecca around the price-to-rent ratio where you’re going to take the rent divided by the purchase price. The ratio there is stellar. It’s top five in the nation for years. I don’t think it is anymore because of how high it has gotten. We can talk about that if you want. I moved here. I was here for a few years. I finally found a small multifamily apartment to buy and learned a ton of lessons.

I was underinsured and had no renter’s insurance. I got through it and said, “If I can get through this, I can get through about anything.” There were eight units that burned up. I was $100,000 underinsured on what their payout was. I was 27 years old and had no money to speak of. I was like, “I don’t know how I’m going to get through this.” I got through that.

I was doing the BRRRR strategy. It was an acronym. I wish I had coined it before. I started doing the BRRRR strategy over and over. I had a manufacturing career along with the buy and hold of multifamily, single-family and a few commercial buildings. I did that for several years and then built other businesses out of that.

At some point, you transitioned out of your manufacturing career and decided to go full-time into real estate. What was that transition like? Why did it make sense to do that?

My wife wanted me to do it two years before I did. This is a good key thing for your audience. She saw my passion and drive for real estate and believed in me personally. I wanted to get the house paid off. I didn’t want any notes of any sort besides income-producing assets. About two years before I quit, I had a plan and executed that plan to get things paid off and paid down. My goal was to live on $40,000 a year. That was what my thought was, and I jumped in. My business partner at the time was a CPA-CFA. I was in engineering operations and we saw 1 plus 1 was 3.

We created a property management and maintenance company, a brokerage for helping investors buy and sell, the lending business and finally, the virtual staffing business, which doesn’t fit in the vertical integration piece but it’s a business service. We have always been our biggest customer. We’re always the biggest property management client. Property management is the biggest client of the maintenance company and goes on down the road. That’s how we built the business. We started with being the first customer and built it out from there.

For those of you who don’t know Dan, he’s being very humble in what they have done. You have grown and built some amazing businesses with a lot of houses. At one point or even now, you have managed thousands of homes at a time and owned the lion’s share of that, which was a heck of a portfolio to build. You did that mostly on the single-family side.

We got up to 900 units, 300 of those are small multifamily commercials and the rest are single-family throughout the West Tennessee region and North Mississippi.

One of the things that we hear on this show and maybe you can debunk this myth for us, is that single-family is not scalable. Somehow you were able to scale it. How was that done?

 

I have talked to hundreds of clients over the years and people that are wanting to get real estate. I started with an apartment building but after that, I pivoted and did single-family. It’s a rinse and repeat. This is part of a bigger discussion around your balance sheet. I wanted my assets high and my low liabilities low. Having that W-2 early on helped me when I was transitioning because of the debt-service coverage ratio.

If you think about this, in the buying world, there are thousands of people that are willing to buy 1 or 2 houses at a time but the pool goes down of people that are willing to buy 5 or 10 at a time. We’re buying 200 in Jackson in December 2021. To me, that’s a significant portfolio size, especially nowadays. It’s hard to find that. Years ago, that would stress me out but when you create the system behind you to take care of it, you plop it in the system and go.

That’s where people don’t understand the demographics. You’re not bidding on many people when you’re trying to go up to their packages. That spreads your risk. If you buy, let’s say, these 200 homes. They’re all over the cities of Jackson, Humboldt and Dyersburg. They’re spread over 50 miles. Thankfully, we have two offices that hone that in a little bit but that helps spread your risk. Let’s say a hurricane comes through, a tornado, whatever that natural disaster or a fire, you’re mitigating your risk in that concept.

I have always said, “You want to go where everybody else can’t afford to play.”

It’s when others are zagging. That’s what I always say.

It sounds like early on, you started looking at portfolios, be it 2, 4, to 6 houses at a time. That immediately cut out a lot of competition.

We were fortunate. Here’s something I would share with the audience. We bought it right and leveraged it right. It’s one thing to buy it right but it’s another thing to leverage it right. What happened was when the market turned in ‘08, a ton of people were losing their houses because what they were doing was buying a house, fixing up, refinancing it, pulling $10,000 to $15,000 off of it, and living off of it. Whereas we would buy it and fix it up. We were only trying to get what we put into it. All we cared about was to get our money back and keep on moving.

When the downturn hit, we weren’t overleveraged. We still had equity. Even with the 30% to 40% reduction, we still had equity. We put things on fifteen-year notes. Long story short, where I’m going with that is we were with local banks. Those local banks started calling us and taking back 5 to 10 houses. The biggest one we had was 100 with a local bank that a third-generation family messed things up and were needing to be rescued. We got into that with no money out of pocket. It was the craziest and best deal that I’ve ever been involved with. We still own them to this day. It was a great deal for us.

I want to dig into that a little bit because it’s a hilarious story. It is every real estate investor’s dream is to get 100 houses and not put a dollar out to buy them. That’s wild and crazy. Were they all vacant? What was the turnaround strategy on that?

What happened was the third-generation family leveraged these 100 houses. They were free and clear. It was an old builder family up in Tipton County, which is one county over. They leveraged the houses to compete against Lowe’s, which was up the block. If you’re old enough to remember Paul Harvey, you can play that story out. They couldn’t compete. The prices were too high. People go to Lowe’s versus coming to their hardware. Unfortunately, that’s how it works.

Part of the entrepreneur’s journey is to get out of that bottom of the U.

The bank foreclosed, we came in, and the bank worked it out to where we bought it. They refinanced it, put on a fifteen-year note and let us do interest only for one year. The cashflow itself was able to pay that note and some room. To your point, there were 30 that were vacant at the time. Some of them have been down for several years. It took a while because we were trying to feed off the income that it was producing to fix it back up. We took two years and got them back running and all that good stuff.

One of the problems that people have had in scaling single-family is the maintenance and the upkeep on that front, especially if you’re buying 200 homes in Jackson in December 2021. How did you overcome the hurdle of driving all over town? “We got a shingle over here and an air conditioner over here.” That becomes a maintenance nightmare, I would think. How do you work around that?

Property management is key and property managers are built to drive around the city. Early on, we had people in different quadrants. This person worked in the North and this worked in the South. At one point, we had North, South, East, and West. Property managers get efficient that way by leveraging that capability. It’s the same thing on small multifamily. We would pick a day, go to that multifamily for one day and do all the work orders that were not quality of life or emergency. You’re not dinging that owner and not dinging me as an owner with multiple service charges and that stuff.

Property management is the key. You’ve got to have that in place to be able to scale like that. That’s one key lesson I’ll kickback. In the first 7 to 8 years, I did it all myself. I was picking up signs, collecting rent and signing leases. We realized on a run one time that, “This is crazy. If we’re ever going to scale this to even bigger, let’s say, 500 houses and it was just the two of us doing it all, we got to figure this out.” We started a management company to have fee income to manage our own.

If you’re in that world, you got to get property management. We were joking about me being on the roof. Shame on me for blowing gutters earlier because that’s not the best value of my time, that’s what we realized early on. That was not the best value of our time to sign tenant leases and handle maintenance and stuff. If we were going to scale, we had to change.

Especially with 500 houses, that’s a lot of tenants to manage, leases to sign and yard signs to put out. That’s an important part to hit on here because a lot of people see real estate as a get-rich-quickly. You can make a pile of money in a hurry. It can happen. You and I were talking and you said that your business has been more of a U-shape. You spend a lot of time in the bottom of the trough or maybe the fishhook. You go down and stay in the bottom with the fishhook for a very long time.

You’re trying all kinds of things and trying to make things work. That part of the entrepreneur’s journey is to get out of that bottom of the U.

That’s an encouragement to the rest of us. One, that there is a way out of that. You have to spend your time putting in your reps in order to climb that ladder on the way out. You have built all of these companies, put great people in them and scaled them effectively, which is awesome. That has been a journey for you. What’s the next step for you in business and real estate? What does that look like?

For me, I got a two-pronged approach. I don’t know if I will ever stop buying real estate. As you progress through, you change in your asset classes and how big the project is. We were talking about buying commercial buildings, small multifamily and packages. That’s where my focus is placed. What I want to do is leverage all that years of hard work to buy into other businesses that might be related or unrelated to real estates, like service businesses and those kinds of things that could create residual income for the future.

For me, the real estate journey was all about residual income. I remember sitting on a plane and laying out how I was going to get to 300 free and clear houses by the time I was 48 years old. That was my journey. I didn’t know all of the other things would start happening in the businesses I created. I was focused on the 300, free and clear by 48. Now, I’m trying to figure out how to build on residual income by investing in others that have good businesses that could create residual income.

 

I like the fact that it can be related or unrelated. Is there any thought of diversification in that?

Absolutely. We talked about this. I’m invested in Gus’s Fried Chicken. For me, it was easy to make that decision. I don’t know anything about making chicken but I know how to buy a commercial building, buy it right, look at the numbers, labor and certain percentages. We bought into a franchise that helped in that scenario. To your point, I met with a banker and hadn’t thought about it. They’re like, “Now, you’re on automobile stuff and in the chicken business. You have done a good job of diversifying yourself out of real estate.”

I hadn’t thought of it that way. That wasn’t the original goal but that is what has turned out. That’s going to help me as I continue down that road, real estate ebbs and flows. We’re very fortunate and blessed that we’re going to have some houses we’re going to buy in December 2021. I hadn’t bought anything all year. It has been a dry year. The powder is sitting there waiting to be fired. It’s hard to buy stuff, so you got to be prepared. That’s what I’m doing. I’m preparing the gunpowder for when real estate does change.

What are some strategies? You said that one of the things you want to do is to develop residual income. How are you developing that residual income without buying yourself another job?

That’s a journey that I’m on. If any of your readers have some advice, I would love to take it. I’m trying to find where I can be an investor. I just had clarity on this where I can use my balance sheet, lines of credit, cash, wisdom, knowledge and experience with manufacturing and building businesses to have a trustee or advisor type of role within a business that I want to look at. I don’t want to be the operator. I can bring these four things to the table. I’ve got clarity around that for myself and that brings value.

For real estate guys and gals that are out there doing this, think about that. You’re building a balance sheet and lines of credit when you have free and clear or equity in properties. You’re building up cash, hopefully, at some point and knowledge and experience that you can now help others. That’s worth something. What it’s worth, I’m still trying to figure that out but that’s part of my journey.

That makes a heck of a lot of sense. It’s gaining clarity about what it is you want to bring to the table and where it is that you don’t want to spend or find good use of your time. As you said, making fried chicken. For those of you who aren’t aware, Gus’s Fried Chicken has the best fried chicken you can ever eat, but you don’t know how to make Gus’s Fried Chicken. You want to be a balance sheet partner, bring some capital, advisory and move on.

That’s what I’m doing. I’m advising even HR, hiring people and those kinds of things. That’s where I can add some value. I’m going to hire the people. It has been fun. It has been a good journey.

When you rewind the tape, is there anything that you think through that you say, “If I could do it differently, this would be it?”

The biggest one I always come up with is I wish I had started a little bit earlier. Twenty-seven is young, but I could have started several years before. It’s a time journey and you can’t speed up time. You have talked to a lot more people than I have. It’s a 10 to 20-year journey to get through the startup, whether it’s business or real estate. I wish I had started earlier and used better tools to hire the right people.

Operating out of weakness is not the place you want to operate. You want to operate out of strength to be ahead of it.

Early on, we were hiring, for lack of better words, “You have property management experience. Come on and join us,” versus we use tools like Culture Index. If you’ve ever heard of that personality profile, it’s like a DISC and Kolbe. It doesn’t matter which one it is but pick one. We were talking about this before the show like Dan Sullivan and trying to find what you’re best at. You’re trying to line that up.

I wish I had learned that earlier on versus looking at a resume and going, “You’ve got manufacturing experience or property management experience. Come on board. It looks good,” versus, “Do you have the detail? Do you want to be on the phone all day long? Does your profile of how God made you match up with what job I’m offering?” We did not do a good job early on matching those together so we suffered from it. We had marginal results and sometimes losses in certain business units and stuff like that. We can tie that back to people and performance.

I forgot who it was, but it’s all about the hiring process. One of the things he helps you do in the book is to quantify the cost of a mishire.

I know what book you’re talking about. It’s expensive. How much do you remember it was, $50,000 to $100,000? He was like, “Something like that.” Think about it because if the time you’re paying the HR or recruiter, the onboarding and the offboarding, if they don’t work out, the efficiency within your business of something is not being taken care of during that absence. It is tens of thousands, if not $50,000 to $100,000 easily. People don’t think of it that way. We didn’t think of it that way. I’m being totally honest. I don’t think we thought of it that way early on.

It’s the desperation, a lot of times, for us as business owners, when you’re in a jam, that’s the worst time to hire. I have been there one too many times. You’re like, “I need somebody now.”

Operating out of weakness is not the place you want to operate. You want to operate out of strength to be ahead of it.

Those are oftentimes when those mishires are made and you go, “What did I do?”

You know, within the first few weeks and you’re like, “How do we get out of this?” You’ve got to figure out how to start over.

We think we can put duct tape on it. That’s a great thing to review and go, “If I could redo this, that’s the one thing I would do. It’s to slow down to speed up the idea.” I don’t know that there’s a way around that entirely, especially when you were hiring at volume. It’s going to happen at some point but the fewer times you can make those mishires, the better. When you think about the things that you have done right and I know it’s not in your nature to like, “Look at what I did well,” but what are some things you did well that you would suggest that other readers emulate?

It’s putting on the shortest notes as possible. I feel that goes against the grain of what a lot of people think. If you can put on a ten-year note, put on a ten-year note. I was thankful that I put everything on 15, 12, 10 or 5. I never was above the fifteen range. It’s painful to get out. My wife and I joke about how there was one year I paid $5,000 out of my checking from a W-2 job to pay property taxes. She’s like, “What are you doing? I thought this thing was supposed to make money or at least break even.” I was like, “We’ve got a lot of rehabs and it has been a tough season. It’s a $40,000 bill. I’m paying a portion of it.”

 

Out of that though, I had already spent tens of thousands of equity pay down in that same period. That’s how I looked at it. In that same vein, I spent a ton of time on bank relationships and still do. People come to me constantly and tell me, “I want to buy real estate or get started,” and I go point them back to the bank, “Have you talked to your bank?” I have a spreadsheet. It’s got every bank that I have a relationship with and I keep it in my notebook. I was like, “I got this deal coming up. Who would be the best one to match?”

You can learn who their board is and who’s going to approve this. If it’s a bunch of farmers on the board and you’re trying to buy a gas station, it’s not going to happen versus a bank that has funded a lot of gas stations. They understand the numbers, where it’s going and what they’re trying to do. Those would be the two that stick out in my mind. There are a lot more failures but those are the two that come to mind.

Going a little deeper on that, I don’t think about very often how each bank has its own appetite for a specific asset class. I have discovered that in my real estate journey, where one bank is like, “Absolutely not.” That doesn’t mean it’s a bad project. You could still be sitting on a gold mine. It just means that’s not for them. If somebody starting out in this business or maybe is on the single-family side and is going into the commercial side, is there a hack or a strategy someone should employ to go out? Let’s say you have a note deal, but you have an idea of what you want and what you’re intending on investing in. What’s the best way to begin those relationships with those banks?

You have to start local. The big banks are great. They’re very efficient and have good software tools and all the stuff but start local. Find several banks that you can get referred to, get with that commercial loan officer, and tell them your idea. Also, I would ask them, “Who have you seen be successful in this business?” I don’t think we realize how much of a plethora of information or knowledge that our bankers have. That’s all they do. All they do is look at deals all day.

“Who is the most successful and why? You don’t have to have names but who has defaulted, bankrupt, quit, sold or whatever that is and why?” Try to get an intro to the person that has done well and get that connection. It could be an instant mentor. That’s my nugget that I feel has been a secret sauce for me that I don’t mind sharing. I spend a ton of time with bankers.

That’s an encouragement to me as well to get out and do more of that. Certainly, the ax is not as sharp as it should be in my tool shed for that side of the business.

We have to be intentional, to your point, and make it a focus. I don’t have to do as much now but early on, to your point with newer investors, make your list. Start with three and make it a point every month to call them. Put it on your calendar and touch base. I would say a few things, “What’s going on? How’s your lending going? Who can I send you that you want?” Give that whole give or take. I want to be a giver in every conversation, “Who can I send you that will make you more successful or make more money for you in the bank?”

It’s not all about you. Truly try to send them people and connect them. Tell them what you’re trying to do and ask for guidance in what do they need from you to make it happen. I did that for a long time. Once a month, I would touch base with the banks. Years later, I’ve got bankers that I can call and get a deal done in 24 hours, looked at, approved and move forward. You can’t beat that. That’s a blessing for sure.

Dan, I have enjoyed this. It has been a blast hearing about your journey, how you started out, transitioning into real estate, the things you’ve learned and the companies you’ve grown. We didn’t touch on at least half of them but it’s certainly a pleasure having you on the show. Let’s jump here into the final few questions. The first one is this. If you could help our readers avoid one mistake in real estate, what would it be and how would you avoid it?

I would go back to my original one. It’s overleveraging and trying to make a deal work. Take the emotion out of it. There are other deals. I’m bad at this because once I get my claws into a deal, I’m trying to make it to the finish line. That’s my personality. Take the emotion out of it, stick to the numbers and stick to your gut. We all have guts and every time I have gone against my gut on trying to make it work, it’s tough on the other side. That would be my advice.

Take the emotion out of it, stick to the numbers, and stick to your gut.

I have a donut for the number of times I have gone against my gut and it has worked out.

That’s zero or if it did, it was not as near as what you thought it was going to be.

I love that, especially coming from an engineer. You’re super analytical.

I still went against my gut.

When it comes to investing in the world, what’s one way you’re making the world a better place?

I spend a ton of time in one of the poorest ZIP codes in Memphis and I think it’s a lot of our responsibility. We talk about the economic disparity between rich and poor and all that stuff. My question was always, “The government does help, but what are we doing about it?” My challenge to your readers and myself is to constantly say, “What can I do differently now than yesterday in helping the city be better?”

All we have is time, and I feel like it’s something that I want to pour into is to help others get out of poverty and try to find a better way. It might be one person at a time but to me, it’s a generational deal. That’s a whole another episode around my journey there. You think about one person and you could help change their lives like sisters, brothers, daughters and sons. You’re creating a new tree that takes a different path. Did I answer your question?

Yes. This is the last question for you, Dan. If our readers want to get in touch with you, what is the best way to do that?

My email is DanButler901@Gmail.com or my cell. The only number I have is (901) 289-7888.

Dan, thank you so much. I appreciate your time. Thanks for coming on.

Thank you.

 

Important Links:

• Dan Butler – LinkedIn
• Nothing Down For The 90s
• Gus’s Fried Chicken
• Culture Index
• DanButler901@Gmail.com

 

About Dan Butler

Dan Butler is a long term buy and hold real estate investor in single family homes, small multi-family apartments and commercial buildings. Dan currently invests in solid business operators utilizing his manufacturing operations and business building experience to partner with business owners to scale their businesses.