Want to never swing a hammer? You don’t have to! Want tenants to stick around as long as possible? They will! Too scared to have the rent raise talk? Let Dion do it for you! In this episode, we’re breaking down the ten different “Dionisms” (unconventional landlord advice) that have literally made Dion millions and can do the same for you.
Dave:
Do not buy properties in a good school district. Have your leases end in the winter. Let your tenants pick their own rent. You think you’ve been following real estate best practices? Well today we’ll explain why everything you thought you knew might be wrong. Hey friends, it’s Dave Meyer. Welcome to the BiggerPockets Podcast where we help you achieve financial freedom through real estate investing. Today’s guest is Dion McNeely, an investor in the Tacoma, Seattle area, and you may have heard Dion before on the Rookie Show or BiggerPockets Money podcast before, and he’s pretty famous for developing the binder strategy for raising rent. Deanne started investing with a huge amount of debt and a low income. He used only the most basic strategies and says he tried to be as lazy about his investing as possible. Today, fast forward, he’s retired with more passive income than he can even spend, so we’re going to get into the details of how he had so much success even when he admittedly put as little work as possible into his portfolio.
The other thing that I really like about Dion is that he’s always thinking outside the box and spending a lot of time challenging conventional wisdom. He’s actually developed these Dion ISS that really cut against the usual advice you always hear about how to manage your portfolio. These are things like having leases that end in the summer or buying houses in strong school districts. Dion actually says that you should never do these things, and if all of that sounds crazy to you, keep listening and you might just agree with him by the end of the episode. Here’s me with Dion McNeeley. Dion, welcome back to the BiggerPockets podcast. Thanks for being here.
Dion:
Howdy. I appreciate the invitation. I like to share my information on the Real Estate Rookie podcast. I tend to talk to those people who are just starting out, but this is the podcast that actually helped me reach financial freedom, so I’m excited anytime I get to come back here.
Dave:
Absolutely. Well, as you said, you’ve been on the BiggerPockets network quite a few times, but for those who are maybe new listeners or just need a refresher, tell us a little bit about yourself.
Dion:
So what I’m most known for is this thing called the Binder strategy where I don’t raise my rents. My tenants do, and we can cover that a little bit before we’re done today, but I didn’t start investing until I was 40. I got laid off from law enforcement because of the 2008 housing crash, was a single parent with three kids, found out about $89,000 in bad debt in my name. I didn’t know existed until the divorce started teaching at A CDL school making $17 an hour. So I had a lot of bad debt, not a lot of income, a lot of responsibilities, and decided to try real estate. Started out really bad, made every mistake I could think of. I think I was trying to make the full list of mistakes that you can. I tried to do it without a lease. I tried to rent to a friend.
I did all of those mistakes. Then finally decided to educate myself. Started house hacking in 2013 with a duplex when everyone was screaming, don’t buy because prices are higher than 2008, so it’s going to crash. Got another one in 2015 when everybody was screaming the silver tsunami was about to hit, so prices were going to crash. Got another In 2018 when everybody said prices are high in interest, rates are high. I was paying 7% interest rates that you can’t possibly do it then. And during the pandemic in 2020, I house hacked my second one at fourplex and bought a triplex when everyone was saying it was going to crash because of everything going on in 2021 when forbearance was ending, I bought another duplex and in 2022 I retired after 12 years of investing and now my kids won’t inherit a parent they have to take care of. Instead, they’ll probably inherit millions as just an accidental byproduct of me trying to figure out how not to have to work.
Dave:
Unbelievable. Well, it’s a very cool story and I want to get into some more of this. Let’s just start at 2008 just briefly and then we’ll move on to what you’re doing today. But you lost your job. It sounds like you were in a tough situation. This wasn’t a good time for real estate, so why did you choose to try it?
Dion:
So kind of an accidental problem. I owned a house and I couldn’t sell the house. I was upside down. I owed more than it was worth. Interest rates had gone up, so I was stuck with the property and I had some examples of people who had reached financial freedom. My brother has 10 paid off rentals and he retired about that time. I have a friend with 30 rentals, but he’d been doing it for decades and they used strategies I just didn’t have access to. Right. I was working full-time, raising the kids wasn’t very handy. My brother would buy a place, do a full rehab and then pay off the HELOC that he used to buy it. I didn’t have equity and deciding to do it was actually around that 2000 8 0 9 when I got laid off from law enforcement. It was a several year process to get my credit score fixed, get enough work history as a CDL instructor so that I’d be bankable. I moved from my house into an apartment and rented the house out so that I can get rental income on two years of tax returns to get around my bad debt to income ratio. And then when I bought that first duplex, moving from the apartment into the duplex, I’ve had a lot of friends and people that I meet say they couldn’t do it because they have family. And I think my family was the motivating factor to do it, not the excuse not to.
And I think until you have that conversation with your family, you don’t know if they’re going to want to or not. My kids were actually excited. My son said, wait, we get to move into an apartment complex where there’s a bunch of teenage girls and my daughter said, we get to move into a place where I’m the new girl. There was some TV show called New Girls, so thanks Hollywood for that. But they were excited about the moves and they didn’t even realize it was financial decisions making us do this.
Dave:
Oh, they were just pumped about it. That’s great. It’s a win-win for everyone. Fast forward to today, how many units do you have? And you had talked about paying ’em off. What’s your average debt on these properties?
Dion:
So when I was in growth mode, I wanted to maintain about 70% loan to value. So I would gain the most levered appreciation, levered depreciation, and I had the security of that drug that comes, that kills your dream, that paycheck that we all work for. And when I lost the security of that, I lowered my goal to 50% loan to value so that I wouldn’t be as levered when I was retiring. And the current portfolio looks like this. I have 18 rental units, it’s on eight properties, so it’s mostly duplexes, a triplex and a fourplex. I’m house hacking a duplex. Something that most people think of house hacking for is they think it’s the way you start in real estate. For me, it was the way I started retirement. Totally. I moved to an area I wanted to live in. I used to travel and there’s still somebody living on the property. I still don’t have a housing expense, but the actual cashflow from the property, just a quick breakdown is gross monthly cashflow from 18 units is 35,000. I have about 9,000 a month in mortgages going out. So that’s principal interest. Taxes and insurance used to be eight, but taxes and insurance went up. I set aside a little over 5,000 a month for repairs. So that’s about 15% that I set aside for future costs,
Leaving me with about $21,000 a month that I’m trying to figure out how to spend in retirement.
Dave:
Wow, that’s unbelievable. That’s a huge impact. Can I just ask how that compares to what you were making before you were laid off in 2008?
Dion:
So when my cashflow from rentals passed 2,700 a month, that was more than I was making as a police accident.
Dave:
So you’re like 10 TEDx that or eight x that or something like that,
Dion:
Right? Yeah, it’s significantly different. And that’s why I said that kind of sarcastically trying to figure out how to spend it, that’s the biggest challenge for me.
The not having money. So living frugally and then the dedication it took for a decade to reach financial freedom and to save every penny to invest for the next property. It’s a really hard switch to flip in our brain on how do I go to spending because I’m no longer saving for retirement. I don’t pay a penny in taxes. I haven’t paid taxes on rental income yet. I look forward to the day that I do. That’ll mean I make so much money I had to give some to the government. But that leverage depreciation is amazing.
Dave:
Wow. Well that’s incredible. It’s very cool and I think that is honestly, hopefully everyone listening to this gets to this point, but when you do reach that level of financial independence, it is tough to realize that you can buy a decent car or that you can afford to go out to eat a couple times more, and it’s a weird psychological shift that you have. It’s not about the money in your bank account, but like you said, you should have to just adopt this frugal mindset and a reinvestment mindset. At least to me, every dollar cashflow, you put it back into a new property. So my question is why not buy more properties?
Dion:
So I didn’t invest to live a frugal life. If I had to be frugal, I probably would just have stayed working. My goal was to retire and live the life that I felt like living, which is traveling and scuba diving and in many places as I want to.
Dave:
Oh, cool.
Dion:
And you guys have had Coach Carson on, he has a book out, small and mighty investor.
Dave:
Love Chad.
Dion:
Yeah, Chad is awesome and I really align with his. My goal was never the most amount of units or the most amount of cashflow or a big portfolio. What I wanted personally was the right amount of cashflow from the least amount of units, and it was a really simple math equation for me. I spend about $4,000 a month doing everything I want to do. So I multiplied that by four as a safety net,
Right? In 2018, I reached that from 2018 to 2022, I lived off of rental income and didn’t touch anything from my job to make sure it was like a litmus test. I don’t need it. So I had a four-time multiplier cashflow above 16,000. I don’t want more. One of the ways I grew is you have a choice of recycling cashflow or recycling equity capital. I’ve never done a home equity line of credit. I’ve never done a cash out refinance. I’ve never sold for a 10 31. That’s one of the reasons I have so much cashflow on so few units because I could have grown to a bigger portfolio with thinner margins if I use the equity and I try to redefine equity for everybody that I meet from, you have equity you can touch. That’s what most people say. I say you have the ability to add debt to an existing asset. So not adding that debt is why I have so much cashflow on so few units.
Dave:
That’s great. I love this philosophy in general, just showing that Dion, you literally eight Xed your income and with just 18 units, right on eight properties, which I say just, but that’s a huge, very successful portfolio. It’s just when you go on social media, you hear people saying that they have dozens or thousands of units. But clearly Deanna is demonstrating to everyone that you don’t need to have this massive ambition just for acquisition. But just by being diligent and being somewhat risk averse and just sort of sticking to the fundamentals and paying down your debt as much as possible, you can greatly increase your income even in today’s day and age with just a relatively achievable number of units. It doesn’t have to sound like this crazy number. I think for most people, even if you’re just starting out, the idea of acquiring eight units over 10 years seems reasonable and for most people it is actually reasonable.
So super glad you said that. Also wanted to just reiterate something I’ve stolen from Chad. He talks about the growth phase and then he talks about sort of the quote harvester phase, which you get to the end at your end of your career, which it sounds like what you’re at, which is when you start paying down that debt and that just want to underscore for everyone, there’s kind of different strategies, different tactics that you use depending on where you are when you’re acquiring properties, maybe you do use more leverage, but when you’re at the point, Dion’s at or Chad is at, that’s sort of when maybe you take risk off the table, you don’t grow your equity as much as possible. You focus on cashflow because you want to go scuba diving like Dion does, which is great. Well, thanks for sharing the update with us, Deanne, and congrats on all your success. Super, super impressive. We do have to take a quick break, but when we come back, I want to shift gears and talk about some of the quote unquote Dion iss, maybe these counterintuitive ideas that you have for your portfolio. We’ll be right back.
Welcome back to the BiggerPockets podcast here with Dion McNeely. We caught up on his portfolio over the last couple of years, but now we’re turning our attention to a bunch of different somewhat counterintuitive ideas or principles that you use in your own investing. Dion, I’m super excited to hear about them.
Dion:
So I think looking at things through fresh eyes is one of the most important things when it comes to investing. You can’t go out and study what somebody else did and copy it. You have to take what somebody else did or look at what hundreds of other people did and then figure out with your resources, your timeline and your goals, what they’re doing that would match your strategy and utilize a little bit from each one. And so some of the things I come up with that work for me seem to, I don’t want to say upset. I get a reaction when I tell other investors this.
Dave:
Okay,
Dion:
The first one I go with is I don’t raise my rents. I here’s so many landlords go, I don’t want to raise the rent and lose a good tenant. Well, if you don’t raise the rent, you’re going to lose a good asset. So what I did is I came up with the binder strategy, which is where my tenants ask me to raise the rent. So I’m not raising the rent, but my rent stays consistently growing just below market without having to have high tenant turnover or upset tenants or lose a good tenant. And so that’s been talked about here on BiggerPockets a few times. And so to me, that’s my first counterintuitive one.
Dave:
I have heard of this binder strategy through you, Dion, but for those who aren’t familiar, you got to make sense of this for us. You’re saying that your tenants essentially volunteered to pay more rent. How do you pull that off?
Dion:
So I buy properties from MLS with conventional loans, right? No, I don’t do driving for dollars, no wholesaling, no creative anything. I’m a super lazy investor. I was working and raising kids, and so I just had to add a property every couple of years and I didn’t need a big stream of properties. I just needed to find the right one. Every couple of years I preferred to buy ’em with tenants in place and usually the tenants were neglected. Properties weren’t taken care of very well. Rents were far behind. That’s why they were selling. So I go to the tenants, most landlords would want the place vacant. They would want to do a rehab and get market rent. So I didn’t have the time or the funding to do a full rehab and carry the burn rate of a place empty for a few months. I wanted to buy it occupied. That meant plumbing was probably working. Electric was probably working, not a lot of repairs needed done. And so I wouldn’t do this right away. I didn’t get to vet those tenants. I didn’t get to run their credit score or know their work history or eviction history. So I’d want to wait two months to make sure they paid on time. They didn’t call me for super trivial things. I didn’t get noise complaints. But once I decided I wanted to keep the tenant, it’s called the binder strategy because actually use a three ring binder.
Dave:
You actually have a binder.
Dion:
This is what I’ll
Dave:
Be doing soon.
Dion:
The cover is going to be a picture of the property with the current Zillow or Redfin estimate of what the property ISS worth. So you tell the tenants, okay, here’s the current value of the property. Your rent made sense to the previous owner, but my property taxes and insurance are going to be based on this and the tenant doesn’t care, but I’m showing them this is online, it’s just printed right from the internet. You can Google everything I’m going to talk about so you can verify what I’m going to say. The next page is a printout from Fair Market with what the rents are in the area for however many units the person is in. If they’re in a two bedroom or a three bedroom, this is what the government would pay me if a Section eight tenant moved in. If you’re buying military installation, I’m by joint base Lewis McCord, you might have the basic allowance for housing printout to see what the military pays for housing.
Then there’ll be a map with all of the rentals in the area, and then several pages of rentals available currently in your area with the same number of bedrooms as the one the tenant is. In this example, the tenant is paying about 1400, I think it’s 1460. A current rent area average is 2000 to 2100. So I’m going to print out some of the areas. They’re about $600 off as a landlord, if I go into the property and I say, I’m raising your rent a hundred dollars, I’m a jerk. I get flamed on social media,
I probably get an upset tenant. They probably start looking for other places. Maybe they move in with a friend or move in something else. But if I go in and I go, you’re paying 1460, section eight will pay me for this area, 1987. I’ve got several examples of 2000 to 2100. And then I asked the magic question, what do you think would be fair? Almost every time so far, the tenant came back with a little more than split the difference. So in this case, it went to 1760, so it was $300 increase. If I increase it a hundred dollars, it’s terrible and I have an unhappy tenant. If the tenant asks for $300 and I agree, they’re happy, but they’re educated, they see what it would be if they moved. I’ve had a lot of times where the tenant suggests an amount and I say, that would be fair for me, but that’s a bit much. How about we instead of 300 go up, two 50, bring it down a little from what they ask. So they actually walk away thinking, oh, I’ve saved money over what I suggested as my rent. Happy tenants don’t trash your property and happy tenants don’t leave. It’s actually pretty rare that they’ll move out.
Dave:
That’s right. Yeah. I mean, this is such a cool strategy. I love this idea. It really just speaks to the psychology of, you said it’s not really so much of this is not even math, right? Like you said, a hundred bucks, people are going to get mad. But giving people agency and also just you treat them like adults, you’re explaining to them your situation. And I think most people who are reasonable are going to look at that and say, yeah, I mean I am getting a good deal. If they pick a rent, they’re still getting a good deal. By your estimation, right? You’re getting what you need, Dion, they’re happy and they’re still getting in their mind still a good deal and you’ve given them some autonomy and sense of control over their own situation, which I would imagine goes a long way to having very happy tenants and high occupancy rates.
Dion:
One of the strategies I really love is from Michael Zuber. He was on the BiggerPockets Money show, one rental at a Time community. He talks about getting to four rentals. If you get to four rentals, you’ll find out if you want more. When I got to four, if I thought if I raised the rent and I have a tenant turnover every time I talk to the tenant about the rent, if I have a tenant turnover, I don’t think I would’ve wanted more. But coming up with the binder strategy and having such low tenant turnover, I was able to grow the portfolio. At no point when I was working did I think, oh, this is too much work. I don’t want another rental. It takes me about two hours a month to manage all 18 units. I can easily add that to my workload when I had a job. But that’s what Zebra said was get to four and then you’ll know when I got to four, I knew I needed a strategy that made it easier and to give me less tenant turnover because if it was a struggle, I don’t even know if I would’ve kept the four.
Dave:
Alright. That is a very, very interesting, and it’s not counterintuitive actually, once you explain it to me, it makes a lot of sense, but it’s not obvious. It’s something that I think a lot of people would not see coming. So thanks for sharing that. What is your second deism?
Dion:
I like my leases to end in the winter, and most landlords say I want my lease end in the summer because it’s easier to find a tenant.
Dave:
Interesting because I’ve done the opposite. I have to admit, if I had a lease coming up on a new property in November, I’d let them either sign a six month lease or an 18 month lease to try and get them in the summer. Because I’ve always had this belief that you have more demand in the summer. But are you saying kind of the contrarian view here works
Dion:
More people move in the summer? If your goal is to make it easier to find a tenant, sure. Have your lease end In the summer, my goal was to have the least amount of tenant turnover. I was working full-time raising three kids. I didn’t want it to be easy to find a tenant. I didn’t even actually want to be good at finding a tenant. What I wanted was low tenant turnover. Now if people move in the summer, that means less people move in the winter, kids are in school. Interesting. It’s harder because it’s cold. So I’ve had very little tenant turnover because most of my leases all but one right now end in December and January. That’s awesome.
Dave:
Do you ever get a situation where people ask to extend to the summer, they want to move out, but it’s November and they’re like, Hey, can I extend this to May?
Dion:
I haven’t yet. So there’s a couple of things I’ll do with my leases because I go to every one of my tenants and I say, you should not be renting. This is the dumbest thing that you do. You should be buying a duplex just like the one you’re renting. You should live in one side, rent out the other. So I try to talk all of ’em into getting on the property ladder. Part of it is they’re probably going to find my YouTube channel someday, and I want them to know I’m transparent. I’m trying to get them on the property ladder. So I tell the tenants, and I’ve had a few go, okay, I want to buy a house, but if I sign a lease, what do I do? And I say, well look, I need the year long lease because it makes me bankable for the next loan. So my lenders want to see that I have year long leases. But if you’re looking to buy a property, how about we make your lease termination fee $50?
Dave:
I love that.
Dion:
So when I introduce you to an agent and I introduce you to my lender and you buy a place, hopefully I’ve always wanted them to buy a duplex or something. But the three that have done it in this decade have always bought houses. So they terminate their lease anytime they want. So I’m helping them get on the property ladder. I have the lease that makes my lender happy and I’m kind of aware there’s a tenant turnover coming because they’re buying a house. If they find the one that they do, then I’ve never had a lender come out and go, I don’t like that your lease termination fee is so low. I don’t even think I’ve ever met one that looked at that part. They just go, what are the dates on the lease? Okay, what’s the amount? Great. That hits our DTI that we
Dave:
Need. Oh, that’s cool. Very cool. I really like that. That’s awesome. Alright, so those are the first two Dion iss. Just as to recap, it was tenants raise their rent, not Dion. And he prefers to end in the winter leases instead of in the summer. And just as a reminder, these are 10 principles, ideas, philosophies. Dion has evolved over the course of his investing career that are a little bit counterintuitive to what the common narratives about real estate investing are. So far I like these two. Hit us with the third one.
Dion:
I do not want to own a rental property in a good school district ever. Really? Why so? Why is the school district
Dave:
Good high property taxes?
Dion:
Because the property taxes are higher. Yeah, exactly. The funding for the school district. Yeah. My goal is not the biggest portfolio or the most cashflow. It’s the right amount of cashflow from the least amount of units. And then there’s kind of a sub goal of low tenant turnover. Why would I invest in a good school district when I’m aging out? My tenants kid leaves middle school, you don’t like the high school, you move kid graduates high school goes to college, you move. I have tenants in places that were living there 26 years. I purchased it there nine years later because they’re not in a good school district. They didn’t pick it because of the age of their kids or what they were going to get out of that local community based on schools. So I like the low property taxes. I like the low tenant turnover. It’s counterintuitive. I also really like the rent to price ratio that comes from getting out of those Class B and class A neighborhoods. So the class C neighborhoods tend to have the not quite as attractive school districts, which more lines up with my rent to price ratio.
Dave:
Curious de does that mean, are you still renting to families?
Dion:
I have some families that I rent to. Yes. I would never do anything discriminatory.
Dave:
No. Just curious. Who’s attracted to these properties?
Dion:
So this is a couple of forms of legal discrimination that I do. My goal is not to rent to families. All the pet damage that I’ve ever had totaled in over a decade, it’s $200, but the kid damage that I’ve had was tens of thousands. So I prefer not to rent to kids, but I can’t use it as a determining factor of to rent to somebody or not. But if I don’t invest in good school districts, I’m less likely to get families. And anytime I have repair in a bathroom, I won’t go out and ripped out all the bathtubs. But if I have a problem with the bathtub, I will take it out and put any walk-in shower. Having walk-in showers means also less likely to rent to families. So I do have a few tenants that have kids. That tends to be where my problems and damages happen.
Pipes that get completely 12 foot section of pipe clogged with otter pop trimmings from kids. It doesn’t happen if you don’t have kids. And that actually happened last year. So no, I don’t discriminate illegally, but I do target my tenants. Kind of like one of my forms of diversifying. Another deism is I’m a hundred percent in real estate. I don’t own one stock. I don’t own any crypto. I don’t have any money in a retirement account. And so since I’m all into real estate, I have to diversify. And one of my forms of diversifying in real estate is I want about one third military, one third section eight and one third working or retired. And if you ran an ad that said military only or section eight only, I’d get sued.
But if I run an ad on the base or if I send my listing to the housing authority and say this is the link to the place that becomes available on Tuesday, can you share it with your tenants or your clients? What type of tenant am I most likely to get? So I can control how I advertise, not what I advertise to avoid being sued. And I don’t maintain a perfect ratio, but I want about a third of each. So I’m ready for a pandemic, an eviction moratorium, a stock market crash or a prolonged government shutdown where it doesn’t hit my entire portfolio.
Dave:
Interesting. So you like military I assume, because it’s recession resistant. Very stable job. Same thing with retirement. I guess you probably have people who are on fixed income either relying on a pension or social security. And with section eight the government just guarantees the income. So you’re basically looking for any sort of tenant who’s not reliant on basically a private sector job.
Dion:
Correct. But diversified, I wouldn’t want to put portfolio of 100% military if there was a brack meeting and JBL M closed down base realignment and closure meeting or if the section eight program gets defunded or whatever could happen in the future or gets a pause in payments. So about a third ratio makes me sleep like a baby.
Dave:
That’s interesting. Yeah, I like this one. I mostly invest in downtown areas in bigger cities. And so my primary tenants are what you would call dinks, right? Double income, no kids, which usually pay high, but they turnover a lot for sure. These people move every year, every two years. That’s just part of the game. Luckily I invest in places where you can usually do that without a vacancy, but it’s definitely a sort of an opposite sort of strategy. I have bought in some solid school districts and I’ve always sort of used that as a strategy or I’ve started using that as a strategy to avoid vacancy. But it sounds like you’ve taken the exact opposite approach. It’s pretty interesting.
Dion:
Yeah, so I’ve had tenants that have lost their job and never missed a day of rent. So if you’re in a good school district, in a good area and you have two dinks high income, I have what I call dink wads dual income, no kids with a dog.
Dave:
And I’ve got
Dion:
Three couples that fit that bill. And I like the class C rentals because class B or A, the higher ends, more luxury, higher rents. If somebody loses $150,000 a year job, it’s kind of hard to replace it.
Speaker 3:
That’s true.
Dion:
And unemployment is a big hit to what they were making versus my police officer, my school teacher, my truck driver that’s making 20 to $30 an hour loses their job unemployment covers their bills for the month or two. And getting a job that pays almost the same is not easy, but a lot easier than finding that $150,000 job replacement.
Dave:
This makes a lot of sense. I think my general feeling is just trying to make sure that you’re matching the right tenants to the right assets like you’re doing. You know what these types of people that you’re trying to attract or looking for, you’re not overbuying for those tenants. You’re not under buying for those tenants. You’ve found product market fit for the type of portfolio that you want to build. And there’s no right answer here. I think some people might do the opposite, but I like your approach. I think it’s pretty interesting. Alright, so you actually hit on another deism you said just a minute ago about not diversifying into other asset classes. It sounds like maybe this started because of necessity, just given your financial situation in 2008. Is that why or was there another motivation there?
Dion:
So when I started educating myself, I found BiggerPockets. I found Rich Dad, poor dad, but I also found a lot of talks from Warren Buffet and Charlie Munger and I watched a couple of panel discussions. Warren Buffet would talk about diversifying, and then there’s guys like Kevin O’Leary, Mr Wonderful, that says no more than 20% in one asset class, no more than 5% in any one asset. So they’re big diversification cheerleaders. But Charlie Munger, who was Warren Buffett’s partner for decades, actually one time said, diversifying is the dumbest thing you can do. You’re going to master three or four asset classes. He says, pick one asset class and master it to go from poor to wealthy. Once you’re wealthy, you can diversify to protect your wealth, but if you diversify on the path to becoming wealthy, you never will. And I looked at that and I thought, well, I don’t understand stocks.
I don’t have a lot of money to invest. I can’t house hack a stock. I’m not an entrepreneur in any way. I’m a W2 employee. I’ve been a marine, a cop, a truck driver, a CDL instructor, like creating a business, not my thing, but taking the money I make from a W2 job and putting it to work in something that takes two hours a month to manage that I can handle. So I’m 100% focused in real estate. I diversified by having one third military section eight and working a retired tenants. But I also diversified the smaller my portfolio was, the more important this was. But I wanted my properties at least 10 miles apart. And in Washington that puts me in different counties or at least in different cities. Interesting. So that if the base closes or the port goes on strike or the hospital, something happens, only one or two of my properties would be impacted. So I’m diversified by being spread out in one market like two counties in the beginning, but different types of tenants spread out. Net worth now is probably an account cost of selling. So paying taxes, paying the agent fees and everything, a little over 3 million, which is a big number compared to
A lot of debt, $17 an hour to having a positive net worth. I don’t think I’m wealthy enough yet to need to diversify. I think a $10 million net worth I’d probably start looking at, I’ll probably buy some stocks or crypto or something, but I understand my asset class and I’m diversified in it well enough to be able to walk away from a job that had golden handcuffs at the end. I had been demoted all the way down to president of the company. I had $2 million golden handcuffs, and when I walked away, I walked away from that and don’t care because it’s really weird with financial freedom once your portfolio reaches a certain point, and I think it’s a LeBron quote, but he said, when you don’t have enough money is the only thing, and once you have enough money becomes just a thing. And it was just a thing at that point. So I’m not ready to diversify more yet. I could someday. And I think if you’re just starting out, it’s really important to focus on your asset class, whatever it’s, it could be stocks, it could be crypto, it could be running a business, it could be real estate, but pick one and master it.
Dave:
I totally agree with that. I do invest in the stock market quite a lot, but I didn’t for probably the first nine years of my investing career until I was making significantly more for my W2 job than I was spending every month. And I put some of it towards real estate, but some of it towards investing in the stock market as well. All right. Now we’ve done four. So we’ve talked about tenants raising their own rent leases ending in the winter, not good school districts. Don’t diversify. All of these are very, very counterintuitive. We’ve got six more to go. Give us one more.
Dion:
So I don’t know that we’ll get to all 10 if we have time, but the one that gets the most controversial responses, none of my properties are or ever will be in A LLC. Oh, really?
Dave:
Interesting. So you don’t have any partners.
Dion:
Exactly. If I had partners, I would have LLCs I was going to buy with my friend millennial Mike. We were looking at Gary Deanna buying a five plex together. We absolutely would’ve formed an LLC purchased that property together, ended up not getting the deal. But all my properties are in my own name, no LLC, long list of reasons why.
Dave:
This is such a big debate that we can’t get into all of it today. But if you want to go probably see the single most discussed topic on the BiggerPockets, this is probably the biggest debate. I am the exact opposite de I own every single property I own in an LLC. Just give me one major reason why you’ve never put an LLC.
Dion:
None of the benefits people expect. That would be the biggest reason. There are no tax benefits. I get every tax write off you do.
Dave:
That’s correct.
Dion:
Except I can’t write off the cost of having LLC, the cost of paying my CPA for each LLC that they file on or renew. It’s
Dave:
A lot.
Dion:
Right. So the second one, if you’re in California and your real estate’s in your own name, like my brother, you’re not rent controlled.
Dave:
Oh, interesting.
Dion:
You put that in an LLC, all of a sudden it’s owned by an entity rent control.
Dave:
Oh, I didn’t realize that. That’s really interesting. Okay. Well, I’ve always done it just for the liability reasons because in case someone sues me, I can isolate the assets in each LLC and I started investing with partners and so I’ve kind of just started doing it with LLC and then I just kept going.
Dion:
So if I could, well, the last thing on this before we go to the next one, but if you have properties and you put ’em in LLCs and you continue to buy properties, awesome.
My concern is always that new investor that doesn’t even have a credit score or a savings yet that’s thinking I’m going to form an LLCI won’t know how to name it. I won’t know how to pay myself from it. I won’t know how to separate my finances. So it’s not commingled. I won’t know that it’s more likely to get me sued. It’s going to make my insurance Costco up. It gets me about a half a point higher on my interest rates for my loans. If there’s all these barriers. They don’t even own a rental yet. That’s who I’m always concerned with when the LLC to debate.
Dave:
Yeah, absolutely. I totally agree. All right, we do have to take a quick break, but we’ll hear five more Dion ISS right after this. All right, we’re back with Dion McNeely. We’ve talked about five of his Dion iss. I don’t think we’re going to have time for all of them. So I think we’ve touched on a few here. So Dan, why don’t you just name a couple and then we’ll dive into one or two more as we have time.
Dion:
Yeah, I think one that we’ve covered pretty well is I don’t want a big portfolio. So many people when they start, they want a thousand units or 500 units. I’m not even sure I want the 18 that I have now. The other one is I don’t touch my equity. I’ve never done a heloc, never done a cash out refi. I never sold for a 10 31 yet I might. But the ones that I think really matter, and I get this from Grant Cardone, the first one, it’s why I prefer to invest in a blue state and not a red state. Most landlords say I want to invest where it’s landlord friendly and the landlord tenant laws lean towards the owner and I’m the opposite.
Dave:
I’m so curious about this because I think this is such a subjective thing. What state is better for real estate investors and people treat it like the subjective thing where there’s just a right answer and I’ll give you my opinion after this, but let’s hear yours first.
Dion:
You’re a hundred percent right. It depends on the person, the goals, the timeline where you have trusted boots on the ground, right? That’s where you want to invest. But one of the main reasons I like to invest in a state like Washington, which you can Google this to verify it’s the highest appreciating state for the last decade.
Dave:
Yes, it is.
Dion:
Mostly because it’s a blue state. They keep threatening rent control every year. It went into session last year, it didn’t come out and just because it was talked about in 2024, my plan was not to do a rent increase. I do 5% every other year after the binder strategy. But since it was talked about and it was in session and it could happen, I went and did the binder with all of my tenants. My rent roll across the board went up $3,300. So about $40,000 in profit last year just because rent control was talked about.
Speaker 3:
Interesting.
Dion:
And then in blue states, there’s a long process for permits. It’s expensive. The threat of rent control limits, investors desire to build here. So there’s less building, which means massive appreciation.
Dave:
Absolutely. Yeah. This is a supply and demand issue. You see in a lot of more red states, permitting is more abundant. And again, there are pros and cons. This probably means housing’s more affordable in those markets. There’s greater housing supply. There are definitely trade-offs here. But if you’re looking at appreciation, blue states definitely have greater appreciation on average over the long run if you look over 10, 20 years dion’s. Absolutely right. I’m curious though, Dion, because you said about rent control, they went up last year, but what happens if rent control actually does get passed? Then what happens?
Dion:
I can make an entire video out of just that. It makes the landlord stupid rich and it makes more tenants homeless.
Dave:
Yeah, it’s a really unfortunate idea.
Dion:
It is unfortunate. My brother hasn’t raised rent since 2006 on some of his tenants and because they’re talking right control, he’s probably going to, but I would do 5% every other year. I even mentioned it from 2013 to 2020. I did 5% every other year. Now Washington wants to cap it at 7% per year. And since I won’t be able to do an adjustment for a black swan event, like a pandemic, like an insurance tripling because of fires in California, whatever is going to happen in the future, since I can’t do big adjustments, I’m forced to do 7% per year. So I would get on a $2,000 rental, a hundred dollars in two years
Versus I will now get $140 more per month per year. I’ll triple my income, my profit because of rent control. It’s what people don’t understand. It’s historically been proven. Every city where it happens, rents push up the maximum allowable amount every single year. And then landlords aren’t stupid. So if you have a tenant who falls behind for whatever reason or they were behind when it kicked in, if three legal ways you have 90 days to get out, I’m going to rehab the unit. You have 90 days to get out. I’m going to sell the unit. You have 90 days to get out. I’m going to move into the unit. So we make more people homeless in a rising rent situation, we make landlords richer. So last year I reached out to all the legislators and I said, Hey, here’s what happens. If rent control goes in, I get richer. More tenants, rents go up, criteria to screen for tenants goes up. You make more homeless this year. The greed side of the landlord is saying, Hey, maybe rent control is not a bad thing. I don’t mind money. Money’s not a bad thing. It limits more building. It’ll cause more appreciation. I make more money off my rents. The human in me is like, no, I think I’m going to message all those legislators again and say what a bad idea this is.
Dave:
Yeah, it has just been proven time and time and time again to have the opposite of the intended effect. So I am with you. I think it’s just very silly, but I think it is a really important point about this idea that, oh, certain places are landlord friendly, certain places are tenant friendly. First of all, people look at those on a state level and it’s not always the case. You should be looking at them at a metro or at least a local level. And then the other thing is just depends on your strategy. If you are a house flipper, being in a place where there’s constricted supply is probably going to be in your best benefit. But if you want to do build for rent, maybe being in a place where it’s easier to get permits makes sense to you. It really just depends on your strategy. And I think Dion makes a great point of thinking critically and actually just aligning his own beliefs to the places where he’s investing. All right, Dion, I think we have time for one more. Give us your last deism for the day.
Dion:
The last one, and this comes up so much in every format for educating yourself on real estate, is the value add proposition for real estate could be the burr method. It could be buying and adding RV pads. It could be anything where you want to buy and add to it as the lazy investor. This is one of my deism where I didn’t want to do that. I invested for 10 years without ever doing one rehab. I finally did a burr after I retired. It’s my first and last one. It’s just too much work, the money that can happen. So my Brr made me about $300,000. I’ll just break it down really quick. I bought a DU for 400,000 off to MLS. I put about so that the contractor said 30, I estimated 50, I set aside 80, and I spent $62,000 rehabbing
Speaker 3:
It.
Dion:
It’s now worth about seven 90. Wow. So if I were to sell or do a cash out refinance, I’d get all my money back plus about 200 and something thousand dollars after expenses of refinancing or selling. So I made a couple hundred thousand dollars to absolutely not worth. It
Took 10 months. I would rather had 10 months scuba diving in Thailand and Columbia than 10 months managing a rental. If I was working full-time, I wouldn’t have had the time to manage the rehab as much as I did. So it probably would’ve costed more and taken longer to do so in growth mode. So many people get excited about the bird because they hear none of my money is in the thing and I’ll make a couple hundred dollars a month and I can rinse and repeat it a few times. So my deism is, I want right from the MLS, I want very little work. I want to spend $2,000 or less usually on the property. I want tenants in place. I’m not looking for value add. I’m looking for time because the magic trick is real estate is a get rich quick scheme. You just have to understand that 10 years is quick.
Dave:
I love that. That’s so good. I always say that’s not a get rich quick scheme. And I always point, I’ve done the math, I did this on a recent episode where I was talking about 10 to 15 years is a reasonable timeline. And you’re right, it is quick. The average career in the United States is 45 years. So if you could do this in 10 to 15 years, that is absolutely by any objective measure quick, except when you compare it to some of the unrealistic expectations that are sometimes pedaled out there.
Dion:
You’re right. It’s not the way to retire early. David Greeny actually mentioned one time. He says, if you need $5,000 a month to retire and you get to $5,000 a month in cashflow, you don’t retire. And I agree with him
Dave:
Totally,
Dion:
Because that would be silly. One eviction, one pandemic, one eviction, moratorium, whatever, and you’re tanked. But if you need five and you get to 20,
Dave:
That’s the place
Dion:
Now retiring. But it takes 10 years to get to that 20.
Dave:
I don’t know about you, but for me, I’ve been doing this for 15 years. It’s gone fast. I don’t know how you feel.
Dion:
When I was 25, I think a couple of years felt like forever, but when I hit 40, I thought, and this is how I ended a lot of videos, you are going to be alive in five years. You should start investing like it.
Dave:
Oh, totally. Yeah. That’s smart. I like that. Well, this has been a lot of fun. I really appreciate it. And honestly, just on a personal level, resonate with a lot of what you’re saying. I really like these contrarian views and just shows that you’re thinking a little bit outside the box and thinking for yourself and figuring out what works for you. And I know that when you’re a new investor, that’s not easy. You should be listening to this podcast. You should listen to Dion. You should listen to people and try and educate yourself as much as possible. But as you grow as an investor, you’re into your first deal. Your second deal. Just think critically, decide if the things that are common knowledge or common advice in this industry actually apply to you. And don’t do them just because other people are telling you to do them. Do them because they actually are aligned with what you want. I think that is probably one of the hardest things to do in real estate is figure out what you actually want. But Dion, man, you’re such a good example of that, exactly what you’re trying to accomplish, and you stick with it with really incredible discipline and you manage to avoid that fomo that I think captures a lot of people in this industry. So again, congrats on all your success and thanks so much for sharing your insights with us.
Dion:
No, thank you very much. I really appreciate the opportunity to come on here and share some of these thoughts with people, because in real estate or investing, there is no one right way, but there’s a one right way for the person watching.
Dave:
Absolutely. Right. Well said. Well, thank you so much for listening. If you think anyone who’s interested in real estate, who’s buying rental properties could learn something from Dion, I bet everyone in real estate could make sure to share this episode with them. We’d really appreciate it. Thank you again for listening. We’ll see you next time.
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Which Window Treatment Should You Choose?
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