Lee Ripma is a former consulting biologist who recently walked away from her high-salary job to focus on real estate investing full-time. So how was she able to quit her job after just 2.5 years in the real estate world? Today Lee answers that question and more.
Listen in as she delves into her best advice for aspiring investors and explains the biggest factors you need to be looking at when picking your market. If you have been thinking about quitting your job and starting out in real estate, this is the episode for you.
What You’ll Learn In Today’s Episode:
The biggest factors in picking your market.
Why people and relationships are so crucial in business.
How Lee got into real estate investing.
What finally pushed her to quit her day job.
Why she doesn’t care about cash flow anymore.
The importance of freedom in your career.
Ideas Worth Sharing:
“I think that getting started is more important than researching the very best market.” – Lee Ripma
“Freedom is my big driving value.” – Lee Ripma
“People and relationships really matter in business, and they really matter in real estate.” – Lee Ripma
Resources In Today’s Episode:
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Mark Hentemann: Hi. My name is Mark Hentemann and I’m a real estate investor. I started out in the early 2000s buying multi-family in Los Angeles with my first script payments as a writer on a new show called Family Guy. I was nervous about my prospects of pursuing a job in the entertainment business, and was looking for some kind of financial security. I found that in real estate. This is a weird thing for me to be doing, but real estate is a passion of mine. It’s been an avid side hustle for over 20 years. I thought there might be a space in the podcast universe for a show about investing in or from major expensive cities – Los Angeles, San Francisco, Seattle, New York, Denver, Austin – and for me it’s also a chance to have conversations with some of the smartest people I know in the investment space and I don’t get out much, so it’s also a chance to meet some of my heroes. I hope you’re able to get something out of this too. So with that, let’s jump in and get started.
Mark: Number one, how do you not be an awkward podcast host?
Lee Ripma: Well, maybe don’t ask questions like that.
Mark: Good. I have to get this down. You got a pen?
Lee: I’m in a completely different location.
Mark: Ah, yeah. Right. Good point. Okay, a bit of fun. Welcome Lee. Thanks for being on the show. So you were formerly a successful, highly paid environmental biologist who recently walked away from that career to pursue real estate investing. How did that happen?
Lee: Well, I started building up my real estate investments on the side and once I was educated to the point that I knew how to kind of do these investments, I had some passive income. I understood real estate. I quit my day job and went into real estate full time.
Mark: So you started investing on the side while you were a biologist?
Lee: I started in 2017 and so it was about two and a half years before I left.
Mark: What was the catalyst that finally made you quit?
Lee: I had been growing less and less interested in my day job, I guess. It felt just like a zero sum game to me. My heart wasn’t really in it anymore and so when I knew that I had this deal and I had some passive income, I just thought now’s the time. So I worked remotely, so I live in LA, but my job was still in San Diego and so I was driving, I was thinking about it and I thought, I’m going to quit in one month. I’m going down for this meeting and I’m going to quit that day. And as I was driving down, I was getting cold feet about doing it, but I ended up doing it, the thing that I had sort of set out to do.
Mark: It’s a big step. Hard to pull the trigger.
Lee: Yeah, it is. You know, it’s, it’s a lot of security. I had a pretty nice salary. I got health insurance, I got a 401k match, all the benefits of being an employee. Of course there’s a lot of downsides to being an employee as well, like limited income.
Mark: And trading your life for your pay check. People buy houses because that’s what they’re told to do, but then you kind of collect all these obligations. A house is a big obligation. A nice car is a big obligation and you just become trapped somewhere in middle age where you have all of these things you’re responsible for and accountable for and it just kind of can stuck away at your life.
Lee: And that’s really what I didn’t want. I really enjoy doing things outdoors. I love backpacking, I love skiing and I’ve always worked to not tie myself down to responsibilities.
Lee: Freedom. Freedom is like my big driving value, and so the house thing just didn’t make any sense to me. And then I found bigger pockets. And through that I learned how to value commercial real estate.
Mark: So that caused the shift.
Lee: Yeah. And so commercial real estate made sense to me. Single family homes never made sense to me because they were just valued on your neighbour can sell his house for this much so your house is worth this much, and that didn’t make sense to me.
Mark: Completely emotional and subject to the psychology of the market.
Lee: Totally, and that was why I never did it. I just would sit there thinking this has no intrinsic value. I don’t understand why I should do it. But commercial real estate has intrinsic value because it produces income and commercial real estate made sense to me.
Mark: And so what would your next step?
Lee: I learned enough about commercial real estate. I was looking at California and everything seemed to have negative cash flow. I didn’t understand value add really. I didn’t understand California investing at the time. And so I was really sold on cash flow because I’d been listening to bigger pockets and they always talk about cash flow. So I wanted a cash flowing market and San Diego isn’t a cash flowing market, so I decided to go out of state and that’s when I picked Kansas City.
Mark: I think that’s something that a lot of investors wrestle with, especially in California, in these big cities. Do you do it locally in your backyard and deal with the high cost of the city’s real estate obviously, or do you go for cash flow in some of these more attractive regions outside of LA, outside of California?
Lee: And at the beginning I thought, okay, everyone on Bigger Pockets is talking about cash flow. I got to get cash flow. Now with hindsight, I don’t really care that much about cash flow, but at the time I did and so here’s what I did, Mark. Keep in mind that I am a research scientist. I Googled top 10 cash flowing markets in the United States and I went down the list and it was Omaha, Nebraska, and somewhere in South Dakota. It was all these Midwest markets. I did not know anyone in any of them, and the only one that I had ever been to was Kansas City and I had been there in college and I was going to partner with a friend of mine from San Diego. He was a Kansas City Chiefs fan and there was a direct flight to Kansas City. And so I just thought, okay, how about Kansas City? And I got on a plane and I went to Kansas City and I did a lot of research while I was there. And I essentially ended up getting my first deal under contract then. It was February, 2017
Mark: How did you find that property and how did you find management? Cause that would scare me. You and I have talked about our various stories. I ended up investing in LA mostly because I didn’t know any better when I got started and I had a great fear of owning something far away that I couldn’t see and couldn’t get to.
Lee: Yeah, totally. And I’ve got some management nightmare stories, honestly. My first deal, it was a complete nightmare. Complete nightmare.
Mark: In my experience, I’ve had a lot of properties for a long time and sometimes I’ve had to step away from it partially because I’m running a show or in production, and I just have to leave it up to the property management company and I go come back to it and I see that things have slid so significantly. But fortunately in LA with my properties, I often come back and think, Oh my God, what a mess. But then I sell it and you get like, oh yes, this was more of an appreciation play. I kind of make up for it, but still wrestling with property management.
Lee: It’s tough.
Mark: The other thing that I think is interesting about our comparable stories is that you grew up in San Diego and live in LA, these major coastal 24 hour cities and you chose to invest in the Midwest, and I grew up in the Midwest and I’m in LA and I have invested in LA and I went 18 years of straight buying multi-family in LA, mainly because I didn’t know what I was doing. You know you were saying you didn’t know much about the Midwest when you got started, but I didn’t know much about anything. I didn’t know anything about LA when I got started. So we both started by default in these locations.
Lee: It’s kind of funny, right? I didn’t know anything about the Midwest. When I went down that list, I’d never been to any of the places on it and I’ve never lived in an area where real estate wasn’t really, really strong. I actually grew up in the Bay area and I lived in San Diego for almost 10 years before moving to LA. I’ve always lived in major coastal California cities. And so a real estate market that’s terrible, where the population is declining and properties are being boarded up, I’ve never seen that.
Mark: And I grew up in Ohio and I remember driving to high school, passing these big buildings that were just abandoned. I don’t know. I don’t know that I was aware of that consciously when I started investing. I think mostly I got into investing in LA because I had a little money and a broker kind of took me under her and found me a duplex and pushed me into it. You know, in retrospect, thankfully she steered me right. I didn’t know anything, so I just kept doing that in LA or trying to.
Lee: Yeah, absolutely. And I think we’ve both ended in the same place, which is now I love LA and I love real estate and LA and I’m doing development in LA now and I think the returns are amazing and I’ll still invest in Kansas City. I’ll still build that portfolio. But I’ve definitely now understanding the drivers of return on investment and understanding the different markets and strong markets versus cash flow markets and all these different things. I do really like LA now. I think that people focus way too much on the larger area, the MSA and saying, oh Cleveland or Oh Kansas City, when really what matters is your sub market and there is so many sub markets within Kansas City, within LA. There are some markets in Kansas City that are horrible. I would never invest in them, and there are some markets that are amazing and I would, and so you do need to look at the MSA and you need to look at the jobs and population growth. That is important. So I would say those are the two biggest factors, population growth, jobs and then another one, how much supply is there? If people are just building and building and building, then you’re going to have this oversupply.
Mark: Let’s go a little deeper on picking your market, whether it’s a major market or a tertiary market, whether it’s a coastal city or the Midwest. What are the factors that you want to look at? Because I think a lot of investors in high-priced cities are wrestling with this.
Lee: We talked about how much research I did Googling the top 10 cash flowing markets in the country. I think what I thought was it matters more that I get started and are people making money in Oklahoma? Are they making money in LA? Are they making money in San Diego? Are they making money in Kansas City? Yeah. People are making money in real estate in most markets in the United States. And so what I really wanted was a market where I knew it was strong enough and I could learn all these principles and that’s what I did. I think that getting started is more important than researching the very best market. I think there’s really just the very best market for you. For Kansas City, I was able to pick it for some logistical reasons. There was a direct flight there and I think that’s a good reason to pick it.
Mark: A huge reason. I think that’s one of the key factors is can you get there easily. You never know. You may be able to just watch it from afar, but if something goes down, you got to get there and get there quickly.
Lee: And the flip side of that is, it’s not like I know how to fix anything in my property. Like if my plumbing breaks and there’s water flooding in, I don’t know what to do. So having trusted people in the market you’re investing in is huge. And so having either making those relationships or maybe the relationships that you already have and having people who can handle that because you know, I have never had a situation where I have said, I have to go to Kansas City. I have to go right now and I’ve flown out there because something was going wrong with my properties. It’s never happened.
Mark: You’ve always had somebody in that market as your eyes and ears.
Lee: Yeah, and I think if you don’t, you’ve got a bigger problem than you’re going to have to get on a plane.
Mark: I’m envious of these people that they have a lifelong friend who’s in real estate in a faraway market, and that’s the person basically that allows them to invest in that market.
Lee: Absolutely, and you know, I didn’t have that in Kansas City and now I do. So you can get it.
Mark: So what do you think the biggest misperception or myth that’s perpetuated in real estate investing is nowadays?
Lee: One of the big ones is that because we live in a digital world, people and relationships don’t matter, and I think there couldn’t be anything further from the truth. You know, people bring you deals, people make the world go around and relationships really, really matter. You’ve got to have people who you treat well and who you compensate well for them helping you, and those are the people who are going to pick up the phone when you’ve got a plumbing disaster at 3:00 AM in a city that’s 3,000 miles from where you live. And so people and relationships really, really matter in business and they really matter in real estate. You cannot do any of this stuff alone. It’s very much a team and you need a team in place to be able to handle it. So I think that is a huge myth is that people don’t matter and that people will try to cut someone’s commission or they’ll try to talk down a contractor and it’s okay to negotiate with people, but you don’t want to make it so they’re making nothing and you’re asking them to just cut their profits to the bone.
Mark: Could you name who are your most key partners and key relationships that have benefited you the most?
Lee: In Kansas City, I actually structure my deals with local partners and so I don’t use management companies because of all the problems. I take on a local partner and I usually bring the deal and I bring more of the money but not all of it, and they bring the management of the rehab and the oversight of all of that. So I’ve got a couple partners who I really like working with in Kansas City who are awesome, and I’ve got a really great realtor in Kansas City who is an investor herself, and the local partners and then the local realtor/investor.
Mark: There’s no more stress that I’ve encountered in real estate investing than a lender that you don’t believe is going to perform. You know, you’re approaching your closing date and the bank is suddenly having problems.
Lee: Yeah, that is absolutely. That is the absolute worst, and that is why most real estate deals fall apart is over lending.
Mark: It’s surprising, but a lot of lenders I work with, they don’t really feel obligated to you. Even though you’ve signed a letter of intent, paid them money, they’re taking their sweet old time to thoroughly do their due diligence process, whether it meets your escrow timeline or not.
Lee: We need these other insurance requirements and you think like, I would have gotten you whatever you wanted, but now you’re doing it at the 11th hour and I don’t have time to do it. You know, and it’s just horrible. And then you’re having to extend and you’re having to leverage your own personal relationships. No, no, no. I promise I can close. Let me give you more money or let me put down more. You’re scrambling and it’s needless, because if they had just told you upfront, this is everything we need, you would have gotten it to them and it’s absolutely unnecessary.
Mark: Totally unnecessary headache. And not only that, but you’ve got your deposit at stake. I recently closed on a building in Austin and we had $400,000 as a deposit and once you hit your closing date and you’re not closing because your lender hasn’t performed, the seller could cancel escrow and keep your $400,000 or however much you put down. Next question is, when is our next recession?
Lee: You know, I wish I knew. I think the thing about real estate is that it’s cyclical. Everyone knows that it’s cyclical, but we don’t know when the cycles are coming and something has to happen for there to be a recession. And that’s the thing is that we don’t know is when is that coming? We know it will come, but it could be years before it does, or it could happen fairly quickly. I think the important thing is always thinking that it is cyclical so it is coming and never thinking like that won’t happen. That won’t happen to me. That won’t happen for a couple of years. That’s when you could really get into trouble and so just making sure whatever investments you have, you’re going to be able to finish them no matter what the economy’s doing and you’re going to be able to hold them and not lose them, no matter what the economy’s doing. You cannot control the market. You cannot control the greater economy, but you can control everything about your investment and that’s what’s great about real estate is how much you control you have. Making sure that you can weather a downturn always is so important.
Mark: That’s a great approach. Having reserve for all of your buildings because you’d be surprised at how your cash flow can go down and when your value goes down, sometimes the lenders have a requirement that you maintain a LTV of 75% max. They’ll go to you as a owner and say, your building has lost value. We need you to make up the difference to get your equity to where it needs to be to meet our LTV standards.
Mark: I remember in 2005, 2006 there was a prevailing notion because everyone had expected to experience a recession probably in like 2002 to 2003 started there. People saying, Oh, it’s over. It’s over. It’s similar to what’s happening now, but it kept going on and then all of a sudden there was all this media saying, oh, we’re in a new era. Alan Greenspan, our Fed Chairman is so brilliant that he’s navigated us into a place where we will no longer have these cycles, that we won’t go through recessions and we’re entering a new economic era. And then of course, 2008 comes and everything collapses.
Lee: If you look at the historical data, yeah, it’s coming. It’s always coming.
Mark: Markets aren’t logical. So often, like you said, it’s going to require a trigger. But once that trigger comes, all of the market confidence turns to fear and it could rapidly decline.
Lee: And the funny thing is people are always saying, oh man, I wish there was a recession so that I could buy a ton. If you’re saying, oh there’s a dip, I’m going to buy. The property values are going to go back up. So there has to be something that would truly cause you to not want to buy and for everyone to not want to buy it. That would be when we were in a recession.
Mark: Blood in the streets. I experienced this in 2008 people that were very smartly sitting on the side-lines in 2006 waiting for a correction because they couldn’t wait to take advantage of the discounted prices. I was one of them. Prices dropped by 15% in early 2008 and a lot of investors, me included, jumped in and I bought a 14-unit building and Lehman Brothers crashed right after we removed contingencies and then the whole thing collapsed. So that 15% discount that I thought I was taking advantage of was the beginning of a waterfall that went into one of the deepest recessions we’ve experienced. If you’re in the game for a long time, you’re going to be going through a few of these and like the things that you say, the value add, buying with the downturn in mind. You’re buying a building, you plan to hold it for five years or more, you’ll go through a recession and hopefully it won’t be an issue.
Lee: Yeah, and I’ve got just quickly, I’ve got this friend who always like, Oh, I’m just waiting for prices to go down and then I’m going to jump in and there’s going to be so many deals. He’s been saying that since literally like, I don’t know, the end of 2015 maybe, and he’s still never bought anything.
Mark: There’s really no easy way to deal with it. I guess, just keep investing. It’s like dollar cost averaging, keep investing into investments that will be resilient if and when the recession comes.
Lee: Exactly. Yeah.
Mark: So what to you is investment kryptonite? The biggest thing that kills an investment?
Lee: Well, there’s the obvious one that sellers can have unrealistic ideas about what they can sell a building for. This is happening a lot right now where people want way too much for their buildings. So that’s kind of the obvious one. But the thing that kills a lot of deals that I’ve seen is actually people. This comes back to relationships and people matter. And this just happened to me the other day where I submitted an offer for … this is for a development deal parcel. And the agent called me up and he was just awful. He was insulting me and all this stuff and I’m like, What? What’s happening? I’m just trying to buy this building. And I had submitted a full price cash offer and then I was like, yeah, cool. Never mind. I just bailed because I didn’t want to deal with him. Life is short and there’s other properties that will completely work. And so it’s funny because I had submitted a full price cash offer and he called me up. He had some aggressive counter or something. I was like, never mind. And then I saw that he had put it back on the market. It’s still sitting on the market. And he could have sold it to me, but I won’t buy it anymore.
Lee: And so I think that people really do tank deals. Agents doing things that are just foolish that don’t serve their clients. That’s a perfect example, him getting really aggressive when he had a perfectly good cash buyer. I made no sense. And so he’s doing his client a major disservice. So I think that people kill deals a lot. But then of course high prices are often why you can’t buy a deal or unrealistic expectations from a seller is why you can’t buy.
Mark: So you and I have known each other for a while and I have always thought of you is you’re a great combination of analytical research based scientist and also you’re incredibly proactive. As a project manager, you were just on fire all the time. You got stuff done. So you’re both very capable of taking action but also very good at the analysis. What steps have you taken as you grew as an investor that allowed you to become great at what you do?
Lee: That’s nice of you to say. I have a very high action bias, and sometimes if you ever hear people talk about disc assessments, and if you look at that, I am a very, very – I’m like an off the charts D, which essentially means that I’m just really driven by action and that’s kind of what we were talking about the markets and I say, well you just need to pick one and you just need to go for it and then you can always pivot later and I’m big on that. You know, taking an action that isn’t going to bankrupt you and just learning through doing and you’ll refine as you go. And as long as you’re not doing something that is going to bankrupt you, land you in jail or anything like that, then what is your real downside? Well, you maybe waste some time, you waste some energy, but you will have learned so much through taking that action. And so I’m always really big on that. You know, you want something? It’s time to go get it. You’ve got this deal under contract? Great. It’s time to go close it. I’m not afraid to work hard and I’m not afraid to research and learn the things that I don’t know. And when I first started, there was so many things that I didn’t know and I didn’t understand, but I never would have been able to learn them without going through the process.
Mark: Do you have any hilarious failure stories and what did you learn from those?
Lee: My first deal was honestly a complete nightmare. I bought, it was a four-plex and a duplex and I bought them at the same time and they were being sold by a distressed seller and I had only known about one of them. I only knew about the four-plex, but then I had done some research and realized that the investor owned a bunch of stuff on that same street and he was basically going underwater on all of it. He had overpaid for it originally. He was getting divorced and he was not performing on his note. And so the commercial loan that he had on everything was being called, so it was like the perfect storm of distressed seller. And so I made him a cash offer on this four-plex and this duplex at the same time. And I thought that I was really ahead of the game because I had identified this broker and the broker did property management and he also did rehab. So I was like, Oh, this is going to be great. I was like, okay guy, go over there, give me a quote to do all this stuff. And he had given me a quote for all the work and I was like, Oh, this is great. I know my rehab budget and I can really plan for this and it’s going to be perfect. They were also going to do my property management.
Well, closed and my rehab budgets were so off. This guy was a total …he did not know what he was doing. So my underestimating those rehab costs, I was sending the guy checks and he was uploading pictures and kind of had dropped off. So it was like, you know what? I told my partner, you know what? I’m just gonna fly to Kansas City. I’m just going to see what that guy is doing over there.
Mark: You’re in LA at the time?
Lee: I was in LA at the time and so I flew out there and I was like, Hey guy, meet me at the property at seven in the morning or whatever. He’s an hour late, and then it just snowballs from there. I didn’t know anything. When I started, I didn’t know anything about construction. So I get there and he’s doing all this work and he’s just doing a terrible job. I don’t know anything about construction, but I know about project management and I know what poor workmanship looks like, and both of those things were just awful. So I remember I called my partner and I said, we’re going to have to fire this guy and we did and got someone else in there who’s a great contractor. But my rehab was maybe $70,000 over what I had budgeted. I mean, it was just massive.
Mark: How much had you budgeted for?
Lee: And again, I thought that I had a quote from the guy who was going to do all the work, and so I think it was maybe 50,000 for the four-plex, just for the four-plex. I think my budget was maybe around 50 or 55 and this was a complete rehab by the way. And so if I had known anything, I would have known, Hey, that’s a red flag. You can’t do all that work for that money. But I didn’t so I ended up…my budget was around $120,000 in the end. A lot of people I think would have just quit. They would have just sold it in the middle of the rehab, but I have a lot of tenacity, I guess and I have a lot of belief in my own ability. I might go way over budget and these things might happen, but in the end I believe that I will be able to prevail though. And so it went way over budget. It went way over time. It was a really, really long process and rehabs are like that. Big major rehabs, they almost always go over budget and they go over time, and if you’re not prepared to weather that, you can get into a lot of trouble. So if you’re not financially prepared to weather that, it can be tough.
Mark: Yeah. It could go over cost, over budget, over time even when you have a good contractor. It amplifies it when you hire a flake and a lot of people have good talk. They can talk the game, but then when you’re far away trusting them, who knows what they’re doing?
Lee: Totally, yeah. And I think investors play into this where they want a great contractor but they don’t want to be a great client. So if you want a great contractor, be a great client. You need to treat people well. You need to make sure that they are actually making money. You cannot ask them to work for no profit, because if they’re working for no profit, they’re going to start cutting corners. They are going to put your job last, all this stuff. You need to make sure that the people who are working for you can feed their families and are making enough money and then you’ve got to pay them right away and you’ve got to have a really detailed scope of work. You’ve got to be really clear. There’s all these things. So if you are a good client, you can get a good contractor. And I think people don’t understand that relationship. They suck and they expect this other person to be great.
Mark: So you may have covered this, but I have this question, multifamily psychology. Which trait do you possess that you think has served you the best, and which traits do you think you possess that still holds you back?
Lee: We kind of talked about me really have this big action bias. I think having an action bias is really helpful in this industry. But I think building relationships is probably the thing that I’m the best at it. You’ve got to build these long term, trusting relationships and leverage other people, because I couldn’t even do this work myself if I wanted. I can’t even put in a ceiling fan. I can’t hang dry wall. So I’ve got to have people who are doing those things and having those great long term relationships and being able to leverage those relationships and get other people to work for you is what’s going to allow you to scale. I had to go to Kansas City and get really involved locally and make friends and relationships locally and that was huge. That was the key to my success. By nature, I am a collaborator and so I am a really bad property manager and I always put a third party property manager in between me and the tenants, because they’ll say, I can’t pay rent until the 15th. You can’t collaborate with your tenants to get their rents paid. But by nature, that’s what I do. So I’m like, Oh, that’s great. We’ll take some now, take some later. Oh sure, whatever. I even had a tenant who was like, you’re way too nice to be a property manager.
Mark: He told you this?
Lee: The tenant told me that, so I know that about myself and I don’t do it.
Mark: Create a buffer between you and those kinds of situations
Lee: So I think knowing yourself and knowing what you’re good at, which parts you can do and which parts you need to be tasking out.
Mark: Know your weaknesses and outsource them if you can.
Mark: Well, this is great. How can listeners reach out to you?
Lee: So I’ve got my own website called Redhair Holdings and then I also work for a company called Square One Residential, and that’s where I do the development work in LA. So both Redhair Holdings and Square One Residential, and I’m also really active on Bigger Pockets.
Mark: Well thank you so much for being one of my very first guests.
Lee: It was fun. Thanks Mark.
Mark: You have been very accommodating to me as a fumbling host.
Lee: You’re getting there.
Mark: I’m getting there. I’ll work on it.
Lee: It was really fun. I appreciate the opportunity, Mark.