If you want to earn that passive income in real estate, you have to be the bank. Lend your money to the right people, people who you trust. This is what real estate is all about. Join your host Sam Wilson as he talks to Scott Hollister on how to achieve financial freedom. Sam is a full-time real estate investor and agent. He is also the host of the Book Club Interview, combining two of his passions of reading and education. Learn how he got into real estate and transitioned out of construction. Listen to today’s episode to be your own bank and trust the right people.
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Invest In Real Estate, Be The Bank, And Be Creative With Scott Hollister
Scott Hollister, you are based in Connecticut, isn’t that right?
Yes, sir.
Welcome to the show. It’s a pleasure to have you on. There are three questions I ask every person who comes on the show. Can you very quickly tell us where you started, where you are now, and how you got there?
I started as a Connecticut teacher for a few years. I graduated from college in 2012. I started my first investment property, which is the two houses I bought. I lived in it and rented out the other. That was my first taste of real estate. I left teaching in ‘16, ’17 and got my license. From there, I was a full-time real estate agent and investor. Now, we do mostly residential, commercial sales, a bunch of rehab properties and a little bit of financing. It’s a good creative approach to bootstrapping. If you don’t have a lot of capital, you got to be creative.
You make it sound easy there. A teacher turned real estate investor. “We’re going to quit our full-time job, then we’re going become real estate and commercial sales brokerage. We still do our projects through creative financing.” There’s a lot to unpack there. Even inside that, there are a lot of very niche focuses that you could get in your lane and stay there, but it sounds like you’ve been able to branch out and do a lot of things at once. Can you give us the play-by-play of how you started stacking on the different iterations of your real estate investing business and why, perhaps?
There is a teaching, “Build one bridge. Stick with that bridge until you get to the island because even a bridge that’s 99% done still doesn’t serve its purpose.” I do a lot of hacks and that’s always been a trouble. My dad was a blue-collar worker. He told me to push into college. I saw them lose their house during the crash. That pushed me with my first paycheck to get that house hack and say, “This is what I want to do. I want to secure my income foundation with something that’s going to be strong in case if I were to lose my job.” I met a bunch of people at BiggerPockets and that’s how I started networking and learning a little more.
I got a non-renew teaching contract, which is a basic kick out the door and I got my license. We were flipping our second REO. I’m still swinging the hammer myself in the first five rehabs I did. I have a good construction background. It was tough as a first-time agent that first year. You’re doing 1 to 2 deals max. I had a strong and steep learning curve. Some of my best deals are where I got stuck with financing. That leads me to the financing part. I started as a broker. I started doing Meetups so I knew a lot of people that needed capital and had deals. My mom was in financing residential and then pushed to the hard money side. I started as a broker and then we do table funding now.
If I lend out $100,000 on a flip, I put in the first $10,000, the bank comes in with the next $90,000. It’s directly to me. It’s the same as a real estate investment. We make the spread off the difference, but I make the spread off the capital. If I had $100,000, now I can leverage it to $1 million of loans instead of letting out that $100,000 and letting it sit. Those are my two active incomes. My wife’s a teacher still.
We take those two active homes and we buy our projects. Mostly value-add and small balance commercial. I love focusing on being creative and finding the best capital. I love long-term fix that’s set it and forget it, but good cashflow. That’s it in a nutshell where we are now. We have a lot of equity in most of our single-family holds. I’m trying to look into 1031 and to value-add commercial and grow that next step.
You’re spitting a lot of stuff at us and I love it. There are a lot of pieces to pick apart here. Do you hold your license just for yourself on the brokerage side, or do you have agents and people who work alongside you now?
It’s just myself. I’m top 1% in the country for the brokers. I’m low-key, I don’t advertise and I don’t say anything. It’s word-of-mouth referrals, about 50% is residential. The other 50%, I would say is commercial. I love working in the 2 to 4-unit house hacking, someone who is buying their 3 to 10 properties with Fannie Freddie debt. That’s a nice little niche I like to plan.
The best investment for everybody is their own buy-and-hold real estate.
You’re keeping it simple on the brokerage side so you can feed yourself off of that. At this point, you’re not syndicating and borrowing other investors’ money. You’re doing this all on your own. It’s your own assets. Is that right or am I missing something there?
I still like borrowing debt. We’re probably 1 year or 2 out from syndicating larger deals. I’ve helped others in that space more of like a capital sense, but I’ve always been of the mind that I can’t take a dollar if I know for 100% fact that I’m going to follow through on that. I can lose $50,000 on a flip and recover. If I’m doing a $50 million syndication, my education’s there and I know a ton of it. It’s more of the competence, following through and also, being an expert in the market takes years. I’m doing things now to hit that in a couple of years.
I love what you said earlier about if you build a bridge 99% of the way there and it’s not complete. It’s still a worthless bridge. You master what you’re working on right now. Talk to us about the transition from still swinging a hammer to bringing in other crews, people and building a construction company. That’s oftentimes the technician having an entrepreneurial seizure. The guy out there that’s working his way who thinks, “I can start my own company because I can swing a hammer.” For you, you’ve done it. You’ve transitioned out of that. What was that like? How did you convince yourself that getting rid of the hammer was a good place to start?
When I was a teacher, a wide awakening moment led up to the construction part. I did personal training and was making maybe $50, $60 an hour. I also did this REO flip that I rehabbed in about 2 to 3 weeks. It’s mostly light stuff and I’m swinging the hammer myself. I’m 100% doing it and working fifteen-hour days. I ended up filling it with tenants, refinancing and pulling about $26,000 tax-free out for that 2 to 3 weeks’ worth of work and having the 25% equity left in the deal. I started running the numbers on, “How many hours would it have to be as a personal trainer,” and it was ten years to make that same amount. I’m like, “I got to start making money while I sleep.”
That passive income was a push. If I’m swinging a hammer, I can’t be stepping out working on the business. The construction company is more like a holding. We’ll purchase something and we have subs that handle everything else. It’s still difficult because I enjoy it and I can still swing a hammer. We built our dream home. I did a ton of work. I GC the project, finished the trim, paint and built the porch, a million things, which was the hardest project in my life. We’re in it now, so it’s good. It was tough and it’s still tough because if you have that skillset, you want to step in and do it.
That’s a challenge for a lot of us. You have the skills, knowledge, capacity, but is it the best use of your time? That gets very hard to do. Even then, you might even enjoy it. That’s the other thing. A hobby woodworker, but I have a background working in the wood industry and I’m like, “That’s fun.” At the same time, “It’s a total waste of my time. What am I doing when I can pay somebody else $20 an hour to come in here and do this? This is dumb.”
The table funding side is unique. Coming from a teacher’s salary, figuring out how to finance these things. I know you alluded to the fact that your mother perhaps was in financing. How did you work that out and when was the light bulb moment when you said, “I can make money on the spread and someone else is willing to lend to me that I’m going to lend to somebody else?” That’s a little bit creative.
I would say most lenders do it. It’s pretty industry-wide, but the way we backdoored into it is one, being a broker is great. If you have a nice skillset, you will always have a place. I always wanted to be the bank. I read a book a week that year and that’s why I started a podcast interviewing authors. I have this weird gift that I can backdoor into the right room, at the right person and at the right time. It’s the same thing. It’s connections, meeting people and going to events. We got into a small room of relationships where you got to be vetted and trusted with that capital, obviously.
It’s good because one, I could now be a direct lender. Two, it’s more of like a trust because as a lender, I like relationships. I don’t care about the deal and market. I care about the person or company behind it because if I trust them, it’s to get them to financing. You can’t be an expert in every single market. There are too many. I like that character. Commercial bankers look at the five Cs. Character, to me, is number one.
Looking from an investment standpoint, I truly believe that the best investment for everybody is their buy and hold real estate. The second is being the bank and investing in syndications because you get the benefits of it. With being the bank, your capital tends to be a little bit more accessible. It’s out for 6 to 12 months max. If you start doing it with the IRA, you can be creative with it and you’re protected. You are first position.
Let’s say, I came to you and said, “Scott, I want to borrow $100,000.” You said, “Cool.” You’re going to pony up $10,000 to loan me. The bank is going to give you $90,000. You give me the $100,000 minus points or whatever that works out. How does the bank collateralize its loan?
It’s the same thing. It’s weird because it’s a partnership, but you still go through all the underwriting processes and guidelines that they have. You incorporate them. That $10,000 investment is your skin in the game. With them trusting you with their capital, they want to see that you’re also invested because if anything happens, guess who loses their money first? Me. Think about it from a bank standpoint. They’re even lower in the loan-to-value. If you have a lot of capital to use but not the means to lend it, this is a good arm and they charged their base rate. You go out and try to earn a little bit extra on top. My portion makes that passive income were the points in the deal that’s the active income.
I’m sorry to niche down on this, but out of 370 or 380 episodes, we’ve not talked about this specifically yet. This is intriguing to me. How did that conversation occur? If you asked me, you said, “Sam, go out and replicate everything Scott told you.” I wouldn’t have any idea where to start. I’d be like, “You’re a bank, do you want to lend me? I’ve got capital, but I want to lend it out to people I know.” They’d be like, “Go away.” How did that happen?
It’s starting with the broker. You can start with the top ten national hard money lenders and you’d probably start as a broker that way.
As in a loan broker?
Yeah. Someone would come to you with a fix and flip, you say, “I’ve got the right capital for you. Let me connect it to you. Let me put the package together and present it.” From that, with a track record in relationships, now you start getting into the right rooms at the right time and say, “We also have this stable funding platform.” As far as a personal lender, let’s say you had a few extra hundred thousand dollars. I would say the same thing.
Do it with people you trust, probably in a local market that you can drive to and set your principles because you know as well as I that once you start bending on those, even with tenants, bad things happen. Hit your loan-to-value and say, “Maximum of loan is 75% loan-to-value. I want skin on day one. I want you to put 10% down. I’m going to take the first position and I’m going to be the last payee on insurance. If the place burns down, I get my capital back.” You get paid.
Even a unique one I like is the pledge of shares. Let’s say a borrower buys a property in an LLC and they default. They pledged their shares of the LLC, so now you don’t have to go through foreclosure. I wear those three hats as an investor. I don’t care about personal guarantees because I don’t take a dollar that I don’t payback. It gets a little bit scarier at that higher level, but mostly on the 1 to 4 is it’s a little bit easier to manage.
Build one bridge and stick with it until you get to the island. Because even a bridge that’s 99% done still doesn’t serve its purpose.
I love the pledge of shares idea. Back in the days, when I was doing a lot of hard money borrowing, it was not anything we ever did. It’s like everything else you mentioned, personal guarantee and first position lien. All those things were there, but the pledge of shares is a new unique approach to it that circumvents.
We pushed a couple of things more to the mainstream. It was interesting to beat through that. I learned a bunch. One, have more cash reserves. I made more money than I ever have in 2020 alone because of what happened with real estate but to see every capital provider stop during lending. That was an eye-opener. The local guys were still lending relationship-based, but it’s interesting.
At some point, you had a conversation with one of these national hard money lenders that, “I’ve been brokering loans for you. I have an opportunity to make some money on the spread. You can lower your risk. Let’s work out a program.” Do they then underwrite the whole deal and say, “No, Scott? Yes, Scott.” Do you say, “I’m moving forward with this? Get on board.”
We put the whole package and then me as a borrower and working with the scope of works and understanding construction. I can pretty much tell a 90% something rate that we’re going to fund it or not. Once that, then you have to go and check off everything through underwriting. “What’s your deal experience? How many deals have you done in the last few years? Give me your credit score, deal, purchase price, rehab and ARV. Here are our loan limits. Use your interest rate based on your track record.” From there, underwriting checks off everything. If you have no skeletons in the closet, it’s pretty much a check-off. In the appraisal, we lend off the after repair value. It’s an as-is after repair value and it’s backing into it. With insurance, we make sure that’s good and then fund it.
If you don’t mind us digging into maybe the profit side of this. Going back to not swinging the hammer, it sounds like there’s enough money in this for you to make it worth your time. Let’s take that same $100,000 deal. I know it’s round numbers, but what’s a deal like that turn for you on the $10,000 investment on the time you get your $10,000 on the deal. What’s that look like?
When you leverage it, it’s probably 40%-plus, but you have to factor in the time that you put and the effort. That’s the numbers on it if putting down that $10,000, but I’m always a fan of creating more passive income. Jay Scott’s a phenomenal advisor that you still have to have an active income to push into passive assets or you take the time to create it. It’s a charge between 2 to 3 points. If it’s a first-time borrower or a second time, I have to put more effort into time. If they have a scope of work, that’s 5 to 10 draws. That takes an additional time again. The points are based on how much effort I have to put into the deal. If you’re easy to work with, it just turns and burns.
As far as the percentage, let’s say a lender says, “I need at least 80% return.” You can go ahead and charge 10% and try to make that spread off of your capital. You can create a nice little passive income stream of a couple of hundred bucks per loan per month that’s out there. Once you get to a certain level, lenders like to sell those loans up to and package them and Wall Street’s buying a ton of it, but it’s way above my level. As a brand new beginner lender, I’m like step 2 or 3. I still don’t know what I don’t know. It’s way above me, but I know enough to invest in real estate, try to be the bank and be creative.
I love the idea because you can cycle that money. That’s one of the things for the hard money lenders side. You can cycle that money so many times a year. If you’ve got an efficient rehabber, I’m going back to my hard money days. We had a 120-day loan. Every four months, we had to recycle that money or we get recycled every four months. The loan was renewed. We were very efficient about getting in and out.
Rehabs were quick. We were through the point because we knew that that four-month window came up and there are another two points due, “Time to work.” That’s the beauty of being on the lending side. If you have $100,000, you can do ten loans. That’s pretty spectacular. As you said, there are lenders loaning at 8% and you are charging 10%. You’re getting a 25% bump right out of the gate for money that wasn’t even yours.
If you lend that $1 million a year and you’re making 2 to 3 points, there’s $20,000, $30,000 and that’s only $1 million. It’s like real estate. If you’re producing and selling $5 million to $10 million, you could do the math where you’re making a nice little income, but I’ve always liked to take a step back and make sure that I’m not heading down a bridge that I don’t want to be on. I have to focus and make sure, “Buy real estate.” It’s a nice little pause. What I would recommend is don’t get into this space unless you want to be a lender and build that bridge. If you want to do 2, 3 to 5 loans a year with your self-directed IRA or some other LLC, I’d say go to town would probably be the easiest money you ever made with people you trust.
When you’re 100% the bank, all you’re doing is lending your capital, it makes it a much more streamlined process. You’re not dealing with a third party. You’re lending your money and you’re getting a full return. It’s wash, rinse and repeat again and you’re not becoming a lender going through those hoops.
Once you move your own capital, it’s a lot less labor-intensive in the sense that you have to bring the whole package through underwriting, which is fine because it’s an asset-based program. It’s not like a Fannie Freddie underwriter where you would want to hit your head against the wall. It’s diversification and syndications. Own your own real estate and be the bank. Even though it’s 100% real estate, but I get real estate. I understand it. I love it. With lending, the downside is that you lose some of the tax benefits of holding real estate and the depreciation. It’s good to understand which one you want to go to. At the end of your career, you don’t want to do much and want to have your capital work for you. It’s a phenomenal place.
Before we run out of time here, let’s fast forward maybe into what it is that you guys are looking to grow into. I know you said you’re trying to get out of the single-family space, go into more commercial assets. What’s that look like for you? Walk us through that.
I like to focus on creativity. I’m trying to think a little bit smarter in the sense that I want to be very specific in the rifle approach to my investment strategy. All of my earlier single-families with the market, there’s a ton of equity. Instead of 1031 into an asset that’s already stabilized, I’m like, “Maybe I could 1031 into something that I can add a second-story apartment too that’s in Main Street. I love Main Street. I think they’re going to see a resurgence, especially around here. I focus on something that needs work that I can stabilize. I’m limiting my risks, working with a local bank that does a construction per mortgage with no balloon. I’ll take an arm. Balloons stress me out.
That’s what I’m doing. Hopefully, if it’s stabilized and the rehab came on point, which it rarely does, maybe then I can do a cash-out refinance. If I do that, let’s say five times, pull that original investment out and keep growing it that way. With that, I start working in that $1 million to $2 million space. With those same funds, I get that next level. Now I can look at syndicating and start to bring on people that I know and trust and say, “Here’s one of the best investments because you can be part of the deal and get appreciation.” That’s the growth path I’m looking to move on.
As far as the agent side, I’ve niched into working with all my contractors and other people in the real estate business to buy buildings with the SBA 504 loan. It’s a phenomenal product. We got one in 2020 on our business. I bought 2 commercial buildings and 1 residential duplex on one lot with10% down. We added a $55,000 rehab. I did a cost segregation study and wiped out all my agent taxes. My net in the building was $15,000 for three buildings. I love being creative.
Invest in real estate, try to be the bank, and be creative.
I look forward to tracking your progress here in the future and seeing what’s in store for you, Scott. This has been a blast. A few questions for you. If you could help our readers to avoid one mistake in real estate, what would it be and how would you avoid it?
It’s focus and you build that bridge. Unless they’re a little bit interconnected, then play a little bit but have your main bridge and build the other bridges while that one’s growing.
That’s a challenge for us all, the whole inch-wide and a mile-deep idea. That’s fantastic. The next question for you is, when it comes to investing in the world, what’s one thing you’re doing right now to make the world a better place?
We have a couple of great charities in Connecticut that I’m a huge fan of. Paul Newman’s The Hole in the Wall Gang Camp is in Ashford, Connecticut, where I used to be a teacher. We have a couple of other good local ones. I love Habitat for Humanity. We built a couple of houses for them.
Scott, if our readers want to get in touch with you, what’s the best way to do that?
LinkedIn, Facebook and Instagram.
If you’re trying to find the right Scott Hollister on LinkedIn, Facebook or Instagram, look for the guy with the killer beard. That’s his trademark look. Scott, thanks so much for the time. I do appreciate it.
Thanks, Sam. I appreciate it.
Important Links:
- Scott Hollister
- The Hole in the Wall Gang Camp
- Habitat for Humanity
- Facebook – Scott Hollister
- LinkedIn – Scott Hollister
- Instagram – Scott Hollister
About Scott Hollister
Scott Hollister is a full-time real estate investor and agent. His life’s purpose is to be a great family man, live long and healthy, enjoy life, give back, and achieve financial freedom for his investors and family.
He is the host of the Book Club Interview, combining two of his passions of reading and education. He hosts best-selling Author’s on his podcast discussing Business, Real Estate, and Life.
Scott attributes his love of learning from his past career as a teacher and coach. He taught Health Class, Cross Country, and an award-winning high ropes character education program. As an educator, he learned how to be patient, problem solve and pull the very best out of each and every student he came in contact with.
