Aaron and Bruce Norris are joined this week by Rick Solis. Rick is a retired appraiser, investor, teacher, and property manager. Primarily he is an investor now. He retired only two years ago when he was 48.
In one of their interviews, Rick told Bruce he was reading financial books when he was only 12 or 13. He was a freshman in high school, and one particular one he read was Think and Grow Rich. Bruce wondered how it even came on his mind to read this when he was so young. Rick said it was because his uncle Will had always been an investor and an entrepreneur, and Rick didn’t have a clue how he ever stumbled into that life. He handed Rick the book, and it was a pretty dry book to try to get through when he was only 14. His class did not enjoy it at all since it was an oral book report, and he put the class to sleep.
Rick did not understand a lot of the concepts at the time since it was really talking about contemplating a future that does not exist yet. You are really having to think about writing down goals as if they exist. Bruce could not even contemplate how you would know what your goals would be at 14. However, Rick had a goal at that age. Being a lazy kid at that age, he knew he did not want to work when he got older. He had grandparents who owned an RV, and he took a trip with them when he was 8 years old. He thought this is what he would do at their age. They were both retired marines, and they would travel around in their RV. He wanted this life and decided this in the summer of 1976. Since his grandparents were marines and it was bicentennial year, Rick remembered everything being about the 200th anniversary of the country. He spent that whole summer with them.
Bruce found it funny that Rick claimed to be lazy yet worked hard enough to retire at 48. Those two don’t seem to match. He was willing to go through what he did not like to get to where he was wanting to go, even unpleasant things. He was always a planner. One of his favorite fables was about the grasshopper and the ant. Rick always saw himself as the ant who always works all summer, saves up his food. The grasshopper was always out playing; and when winter came and the ant had everything and did not have to do anything, the grasshoppers were not well off.
Bruce asked how Rick ended up with real estate as his primary tool and if his uncle was involved in this too. Rick said he was and got him interested, and his mom was a loan processor and got him interested in doing appraisals. Rick dropped out of high school at 17 and was doing a part-time job delivering newspapers at night. He was up all night, and tv stations ended at 11:30 after the news ended. The only thing that was on after 11:30 was infomercials. Rick watched one when he was 18 years old that featured Tom Boo on his yacht with a dozen bikini clad girls and his cars. Rick wanted all this and bought the infomercials. Just delivering newspapers, he made $16 a day, $480 a month.
His seminar he bought cost him about a month or two of money, and they were not really good seminars. They were big books with huge font, double-spaced, nothing on the back page. It all really fit into a small paperback book, but it was the first course he took that really got him on the road and was the inspiration for the concept.
Bruce asked Rick when he bought his first house, which he said was in 1988. He was going to rent it since the books he read talked about acquiring everything he could and how if you had $1 million in debt you would eventually be a millionaire. The first one he bought in 1988 worked out so well, and for the rest of 1988 he kept buying tons of rentals. He was really focused on no money down, so he loaded up in 1988-1990, right at the peak. The things you could buy back then for no money down was basically all of San Bernardino. You could get this all day, every day, and he had all kinds of nasty, terrible shacks here.
At this point, it was at a peak but still a rough market. At one point, he had 20 units, and he never had a tenant show up to have a job. They were all on welfare, and they got paid twice a month, half on the first and half on the 15th. Bruce wondered if he worked with Section 8, which he said he mainly worked with welfare. He had to show up on the first and the fifteenth, and they were long-term welfare recipients living in his houses in their 30s and 40s. They have known how to work the system for decades, and Rick was showing up trying to get the rent. He was getting every excuse in the world from tenants. He wasn’t really buying people’s stories either.
Rick was crazy at the time in that he was twenty years old and walking around with the rent from 20 houses all in his pocket. All these tenants knew he had all this money and was surprised he was never killed for it. Even though he was required to report on the first and fifteenth, before he knew it he was out there every day collecting rent because they did not always have it. This was a lot of experience for him to have in his early 20s. He gave a large chunk away, only held onto a few, and by the mid-90s he only had a couple properties left.
Rick knew a lot in the mid-90s, but he wanted to respect cycles too and was gun shy. Bruce could have traded him a couple of his custom homes for his properties. All of Rick’s properties were Subject To, so he was able to trade some of it. There was one he was afraid of since he was one of his early ones he was going to let go. He didn’t even know if taking it Subject To would make him come after him somehow. He deeded it to the welfare tenant, and she was already 2-3 months behind on her rent. He took her down to the recorder’s office, recorded the deed, and gave it to her. He probably could have sat back and collected rent for a year or two and let it go, but he did not want this coming back on him. There is no point in doing this business model.
He took a seminar in early 2003, and the title was regarding how to make $1 million in a year or two. At this point, he had lost so much money flipping houses that he became an appraiser too. He was appraising, and he was a landlord on the side. He was still investing the whole time, buying loans and rentals. However, he was not aggressive. It was a sideline thing for his appraisal business. He took some of Bruce’s classes at Nick Manfredi’s club as well as listened to some of his books on tape. After taking his bootcamp, he started buying more houses. Instead of buying one or two a year, he was buying a couple month with another investor. They were flipping most of them.
When he took his seminar on how to make $1 million in a year or two, he was taught to hold them. After this, he held as many as he could. He was holding some at the time, but he would only get five, sell four, keep one. Once he did this, he would get five and keep all five. He waited and started selling them in 2005 and 2006. This was a huge pocket of profit. Rick would receive a hard money loan from Bruce to buy a house worth $150. Bruce would lend him $90, and Rick would buy it for $80. He was walking out of escrow with money in his pocket. The tenant would cover the payment, and then he would turn around and sell it. A year or two later, it would make another $150,000. There was so much money to be made, and he thought he was a genius in 2004, 2005, and 2006.
When Bruce wrote the crash report, he wondered if Rick was hurt by the downturn. He said he was really hurt, but mostly because of greed. He sold everything he wanted to in 2006, but he did not want to pay the taxes. This was his downfall. He did the taxes on some of them. Half of his assets were in an IRA, so he sold these and did not pay any tax on this. For the other half, he sold and took the profits, which he always invests in something cash flowing. In the last approximate fourth, he did a 1031 into other things he thought would weather the storm. However, these were a debacle.
He did some 1031 exchanges in California. He would find a house worth $250, and he would be paying $200. Worst case scenario was if it was anything like the last downturn, he may lose 20 or 30%. Rather than pay the tax, he decided to 1031 hoping it would drop. Some worked out ok. The ones he messed up on were the ones where if he would 1031 and buy three houses, then pay cash for two and put the debt on the last one, it was the last one that killed him. If he had a house worth $250 and had a private loan worth $175, that was ok until the $250 houses he had in Apple Valley dropped down to $75. The payment would be $1,200, which was exactly what he was getting in rent.
This model works great if you are in an out in a year. However, if you are holding out for a decade, with $1,200 a month rent it has already dropped 30%. He is getting $900 within a couple years. When you are holding out that long, roofs wear out and there are other maintenance issues. When you are in a 10-year span, things that do not occur in a year will happen. You will be replacing your air conditioner, water heater, and all your appliances. If you are in the High Desert, there is a good chance you will be replacing your roof.
Bruce asked Rick what he would do if he could do things differently. He said he is doing it differently right now. Rick performed a partnership that really worked well when very few do. Rick said he doesn’t even know because everything he was good at, his partner was not good at while she was a master at the things in which he was terrible. He doesn’t know how he got it to work other than that it was really fortunate for both of them and they both had the same goal to not work again.
Bruce wondered when he started building inventory. Rick said he started doing appraisals in 2004 and was almost retired. He had all these rentals and was waiting for them to sell. By 2008, everything he invested in that cash flowed had blown up in his face. By 2008, he was back to appraisals and was seeing the market crash. He did not know where the bottom would be, and he saw people buying things they thought would sell for $150 in 2008. By the time they got to the finish line, they would only get $130. He was nervous and waited until 2009. At this point, his partner began buying, and by late 2009 Rick started shopping and bought a few. By 2010, he went nuts and started to buy one every week or two. They bought in 2010 and 2011, and it was 100% REO. He thinks they may have done one mailer from which they bought a few. It worked great at the time, and they would send out 200 from which they would get 2 or 3 houses. Now you would have to send out about 10,000.\
Bruce asked how he chose the High Desert, which Rich said was a terrible mistake. Had he not chosen the High Desert, he would have been able to leave three times as much money. He chose the High Desert because it worked really well for him last time and he was copying Tony Alvarez’s model. He did not want to compete with Tony, but the High Desert was almost the same market. It worked so well from 2001 to 2006 and he thought he would hit a home run. He did well, but the houses he bought in Rialto had a way different worth. One house was worth four houses in the High Desert. Instead of getting 50 up in Hesperia, they could have gotten 20 in Rialto and Fontana. It would have been way easier to deal with and way less and better tenants, and they probably would have made a lot more money.
By the end of the 50 houses, he and his partner were so stressed out, considering their tenants were the worst of the worst. The tenant quality declined substantially from 2006 to 2016 despite the economy being better. The internet has made it possible for people to Google how to not pay rent or fight an eviction. In the early 2000s, they were dealing with a lot of retirees or people with two jobs. By 2016, they were dealing with the Jerry Springer audience. Even when you think you have a good tenant, what moves into your house will not be what is living there 2-3 years from now. The husband and wife could be divorced within that 2-3 years, and there will be somebody else living there.
Another issue could be job changes. People he rented to would not have their same job in 2-3 years. He could not get a judgement and collect from them since it was too much effort. When Bruce put together partnerships years ago, if he had a five-year partnership and everything happened as Rick said, there was always somebody who would pass away, get divorced, or go broke. Rick did not regret all he did, he just would not go back. He loves Vegas, but he does not even want to drive there. Bruce feels this way about Palm Springs and does not want to see the 111 ever again. He would drive there every day wondering what would change since nobody wanted what he had.
Rick always chose to manage them himself. His partner managed most of them. He mostly did 75% of the management while Rick would do 25%. A good chunk of his 25% would be something he did not want to deal with. He did a lot in the field since he did appraisals and was up there a lot. There were houses he had been to that Andrea had never even seen. She dealt with the paperwork and phone calls, which Rick hated. She was also dealing with the evictions.
His partner ended up selling her things and moving to Arizona since it was way easier to landlord there. Now she has a dozen really nice rentals and lives off of that. She is doing some stock market trading too and living the perfect life. All this and she is still young, but she knows how to work hard. If she and Rick were superheroes, she is Batman and he is Robin. He knew how to do everything when they started while she knew nothing, but at the end she knew even more than him. She ended up doing most of the work and heavy lifting. She would find 60% of the deals and was very good at negotiating. She could get houses at $.50 on the dollar and people would hug her. Rick is not like this.
Bruce asked Rick when he began selling, which he said he began early. He had a number in mind he needed to be done with, and he did not want to be greedy again. Also, the tenants and rentals were worse now and they could not go any farther. They knew they were walking away from millions of dollars. If they could just hold on another two years, they could have made way more. However, it was enough money for both of them, and they got out after selling about ¼ of what they had in 2014. In 2015, they sold the next pile of problems, and in 2016 they got rid of everything else minus just a few held over into 2017. He only has two rentals left now, and that is it. He may even have to get rid of these since he does not quite have enough money coming in to take him where he needs to be. He may run a little short in 2 or 3 years. He will either have to borrow money or sell those two. He will cross this bridge when he comes to it.
Rick has seen a lot of different philosophies of investors since he did appraising for all the borrowers. This was the big perk of doing appraisals. Mike Cantu will have his pile of rentals for the rest of his life. This is genius but not the type of model for Rick. He and Bruce are similar in what the intent or real estate was supposed to do for them. Tony Alvarez and Mike Cantu love real estate, while Bruce loves what it did for him. Rick did too, but after dealing with the tenants in Hesperia he hated it. Bruce would go on vacations and see a house that needed fixing. It was in his blood. Rick would just post the picture on Facebook and refer somebody else to do it.
Tune in next week as Bruce continues his discussion with Rick and what he invests in now.