Bankruptcy to Financial Freedom in Under 10 Years

Ashley:
Have you ever thought that a major hit to your finances would be the end of your ability to invest a divorce, bad credit, a missed payment, or even bankruptcy? Today we are going to hear a story from an investor who was in the worst case scenario for their finances, but still found a way to invest. Welcome to the Real Estate Rookie podcast. I’m Ashley Care, and I’m here with Tony j Robinson.

Tony:
And welcome to the podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, today we have Dia Martin who declared bankruptcy when her house cleaning business took a financial hit and was still able to close in her first house hack just two short years later. Now she’s grown her portfolio to be worth over $1 million and retired at the age of 35. Alright, cool. dm, thank you so much for joining us today and welcome to the Real Estate Rookie podcast.

Diem:
I’m so excited to be here, you guys. Thanks for having me.

Ashley:
So dm, how long have you been investing? I

Diem:
Bought that first house in 2016 and from the first to the second, it took a few years, but then after that it was one house after another and I’ve stopped buying for a couple of years now, enjoying the fruits of that labor. But yeah, since 2016.

Ashley:
Awesome. And what made you want to get started in real estate investing in the first place?

Diem:
Honestly, it was the teeing up to feeling like I needed to declare for bankruptcy because I thought to myself, how can I not find myself back at this situation again? And having grown up in section eight housing, my dad didn’t really know finances management. I wasn’t able to learn that from him. And even though I went to college for business, I didn’t really know how to manage my business. And so I thought if I was going to get out of this desperate situation, I really needed to figure out a long-term plan. And that’s when I started reading and listening to podcasts. BiggerPockets being a huge influence at that time, and that’s why I went into real estate.

Tony:
I love how we can take our past experiences and use ’em as motivation to build a better future. So kudos you DM for following those footsteps. Right now, I think a big question that comes up for a lot of rookies is where do you go to get the capital to invest? So what did that look like for you? How did you get the capital union to get those first couple of deals?

Diem:
I have always owner occupied my first few homes, and especially with having filed for bankruptcy, I think it was done in 2014, I think I filed in December of 2013 and it cleared in 2014. And so using the FHA loan, you’re able to get a loan for a home after two years from your bankruptcy file date. That’s not true with a conventional loan. And so using that loan product, I was able to save up a very small amount because the house was 300, I would say 350 or less a thousand dollars. And so three and half percent was, I think it was like 11 or 13,000 that I had saved up. And I asked for the seller to pay for closing costs. So really that was all the only amount of money that I had to have out of pocket. So if you start with being an owner occupant of a home, you can really go in quite low money down.

Tony:
Now we always talk about how investing in California doesn’t make a ton of sense and a lot of times because it’s cost prohibitive, but dm, you just said that it took you less than $20,000 to get your first property here in California. I just want to make sure that’s not getting stuck on people who live in an expensive market but feel like maybe they can’t do it in their own backyard.

Diem:
And I think even now, if you think of all the ways that you can’t do something, you’ll find a way not to do something. And people might say, well, interest rates are so high now. Well, but that was in 2016 now prices are so much more. Well, at the time, even the $335,000 house was kind of out of range for me. I had to drive an hour north. I bought my first house in Ukiah, and that was the sacrifice that I made for the bigger picture. I don’t own that house anymore. I eventually sold it and took $88,000 of equity out to reinvest in different ways. But you’ll find a way to say no. What you have to look for is a way to say yes.

Ashley:
So during that time, how were you able to save that capital to make your first purchase? What were some of the things you did to be diligent about saving?

Diem:
Yeah, it’s funny that you asked that because now I’m like, I don’t know if I would recommend this for other people, but I read Dave Ramsey’s book.

Ashley:
I did the same. That’s how I paid off all my debt.

Diem:
And so I think what Dave Ramsey is such a great starting point. It’s how to clear your debt, how to be on a stricter budget with yourself, with an end goal in mind, saving for an emergency fund first and then taking all of those extra dollars and putting it towards an investment in the future. But Dave Ramsey isn’t of the mindset of leveraging debt. And so that’s where we had to part ways. Thank you, Dave. It was good to know you, but that’s what it was at the beginning. It was Okay. Well, so starting from scratch was getting the successful bankruptcy, right, because then it eliminated all of my unsecured debt, which is credit card debt. I didn’t really have any assets. I didn’t own a house before that, and I had some really cheap company cars that I was able to keep and I was able to continue to run my business. And at that point, the business trajectory was finally starting to look up, which is why I was like, okay, now is the time to file. Because as I start to actually gain an income, I can either spend all of it catching up from the past or I can start a new path from here. And so any new dollars that came in that was beyond what I needed to absolutely live, then that was savings towards the first

Tony:
House. So for a lot of people, I think the bankruptcy can be a scary option. I guess what, maybe give us some background on what led you to make that decision for yourself. You,

Diem:
Yeah, I looked at debt consolidation as the first option and doing a debt negotiation, but when I looked at that pathway, it required for me to default or stop making payments for the creditors to see that they better negotiate a lower amount with me or they might not get anything at all that would gravely affect my credit score. And looking at the pathway to home ownership in the future, I compared that with the option of filing for bankruptcy, which I later learned that if you’re going to go that route, you ought to be paying on time until you actually file because that means that you will not have any derogatory marks for late payment. You will only have a derogatory mark on your credit for the one major event, which is the bankruptcy. So even though I had the bankruptcy on my credit and I had a decrease in my credit score, it was still in the high six hundreds and I was able to start immediately rebuilding after that.
So when I compared those two options, that’s why I filed for the bankruptcy. I certainly did a lot of research too to understand how I was going to get out of that right after I leased a car right away so that I can start having that on my credit to rebuild. And ultimately it worked out down the road, my highest credit score that I was able to achieve before the bankruptcy fell off, which I believe it took seven years to do. I was at in the mid seven hundreds and once it fell off, I was immediately over 800. I was in the low mid eight hundreds. So in my situation it worked out and I think it’s because I didn’t have any real major assets to lose at the time.

Ashley:
What was kind of the timeline of this? I’d love to know what was the amount of that debt, how long would it have taken you to pay that off, and how long did it actually take that time period? I think you had said two years going to bankruptcy and buying your first property. Can you compare the two different paths and the financial strain it would’ve caused on you going the other way?

Diem:
I would say 50,000 of debt. I claimed more because it was like everything I needed to put in there, I put in there, right, because I’m doing it anyways. But realistically, I think it ended up being like maybe 66,000 of debt that I cleared, but the 50 ish thousand chunk was what was holding me back. And when you think about the size of the down payment, right? I actually wrote it here. It was $11,725 to get a down payment into the first house. That would’ve been potentially six years later or six times, I guess six times the amount that I would’ve had to first pay off and then save for that down payment. Or if I was trying to save for an emergency fund simultaneously, that would be even longer. So it was pretty clear what the decision needed to be once I looked at all of those things.

Tony:
So exactly how much time after the bankruptcy and when you actually bought the first home

Diem:
Two years. I bought the first home in November, 2016, so I cleared the bankruptcy early of 2014. So I would say it’s probably two and a half years

Tony:
Later. Okay. So two and a half years now. You mentioned conventional was going to be a challenge, and I think you said you went with an FHA loan. Maybe just give us the POV of what it looks like to apply for an FHA loan, two and a half years post bankruptcy. Was there more focus on you as a borrowed? Were there maybe hoops you had to jump through that someone else didn’t? Just walk us through what that experience looked like from your perspective.

Diem:
Honestly, there wasn’t any added strain that was caused by the bankruptcy because this loan program in particular allowed for you to qualify with a minimum credit score, which I was passed. I think their minimum credit score was in the five hundreds even. Please don’t quote me on that. And mine was in the high six hundreds or mid six hundreds. So my credit score was fine. I passed the timeline requirements since the bankruptcy to qualify. The only thing that held me back was my income qualification because as an entrepreneur, they were going to take the average of the last two years with a business that was starting to make a turn for the positive. My current year would’ve qualified for income, but my previous year did not. And so I had to ask my sister and my brother-in-law to cosign for me, which they did. And with that, I presented them with an exit strategy that I would either refinance them out or I would sell the house, which eventually I sold the house and they were super supportive about that. They got a very nice Christmas gift from me that year. And sometimes it takes a village.

Tony:
And D, kudos to you for taking the time to really map out what path makes the most sense for me. Like I said, I think a lot people would be afraid of the big B word, but you did the math, you mapped it out, you said, Hey, what is going to give me the best path towards home ownership? So kudos to you for finding that right solution. But I think I also just want to highlight for the rookies that we’re not necessarily encouraging everyone to follow in dms footsteps. Exactly. And maybe file for bankruptcy. I think what we are telling you to do is to evaluate your unique situation and weigh all the options that are available to you and see what makes the most sense. And maybe it’s doing what DM did, maybe it’s go on a different route. Maybe it’s something that we haven’t discussed. But the focus here is what is the best path and what makes the most sense for your specific situation.

Ashley:
So we do have to take a quick break, but more from DM and how she grew her portfolio to eight properties just with house hacking. But while we’re away, make sure to check out biggerpockets.com/agent so you can find a great deal too from an investor friendly agent. Okay. Welcome back, dm. Walk us through your first real estate deal and kind of give us the breakdown of the numbers on it.

Diem:
Yeah, so the first deal was that house in Ukiah. I bought it for $335,000. That was using the FHA loan at the three and a half percent required down payment. So that was $11,725 with this particular house and many of the other purchases that I’ve made since then, I requested that the seller pay for closing costs, so I didn’t have to pay for any of that. This house also had a granny unit in the back, and I very intentionally purchased it because of that. And so when I went in, there was a tenant there that was already paying rent, but she pretty quickly after that left. And I was glad for it because I wanted to try out Airbnb. And so I furnished the unit, I rented it out on Airbnb. The mortgage monthly was around 2200 I believe. And so the Airbnb was just about covering all of that in terms of rental. And then inside the house, it was a two bedroom, one bathroom unit. So when I first moved in, it was with an ex-boyfriend at the time, which he contributed rent. And then when we parted ways, I had a roommate move in and he contributed rent similarly. And so I was living there mortgage free and utility free, and whatever I was saving up in lieu of that was going to be going towards the next house.

Ashley:
That’s such a great point there of how you’re saving money on what you would be paying and living costs. Because a lot of times you can look at it and like, well, I’m not cash flowing, but you’re saving what you would be paying to live anywhere else. And that can be a huge amount of money. Sometimes that is a huge savings and can really accelerate your investing journey by using this strategy. So dm, how have you used that first property to kind of propel yourself to the other ones?

Diem:
Yeah, when you think about saving money, the tagline is like, don’t buy a latte. But it’s like, what if you wiped out your entire mortgage payment instead and then saved that, right? Or don’t drive a big fancy car until you really can. So I think tackling those bigger savings would be the goal. And I saved over a period of time, there was a little bit of a pause in between because I realized that being in Ukiah, it was really hard. I’m super social and I love to see my friends and family. And the one hour commute, even though I was working from home, was really hard because of how often I wanted to see them. So over time, as I continued to save for the next property, I actually moved out of the Ukiah house once some time has passed. And I rented a place in Santa Rosa because I didn’t quite reach the benchmark for the down payment of the next house yet. And I replaced myself as a tenant of that house. I got another tenant to live with my roommate at the time. And so that income supplemented the rent that I was paying in Santa Rosa, I was still able to aggressively save more, but I also Airbnb bead my own bedroom in my own apartment, and I slept on the couch whenever I had a guest. So that was wild. And that also made dating life really hard.

Tony:
I got to give you some credit, right? Because you supercharge the house hack strategy where the first house that you bought, you had the A DU, and then I love the hustle of renting out the bedroom and the place that you were renting and sleeping on the couch. So kudos you for doing that. I guess just maybe give us in the listeners a sense of what your portfolio actually looks like today.

Diem:
Today my husband and I, we have two homes in Santa Rosa, California, one of which we live in, both of which are kind of like mega homes. So we bought them as single family rentals. We added either an A DU or JADU. And then we sectioned off an area to make into a one bedroom, one bathroom Airbnb suite rented by the night. So that’s five units because it’s three on the other one, two here, plus the one we live in. And then in Phoenix, Arizona, we have a single family home with a beautiful pool, and I wish I could be there more often. That was started out as a midterm rental and midterm rental, but when the market changed there, we converted it to a long-term rental. So now we don’t get to visit anymore. And then we have a house in Portland, Oregon, which has an attached A DU as well. And so in total that’s about eight units, but only amongst four properties.

Ashley:
Well, congratulations on building out your portfolio. One thing I really want to dig in is that you were able to pivot and change strategies. Could you maybe give some advice to a listener who maybe is using one strategy right now and it’s not working out for them, how you were able to make that pivot from midterm and short term to a long-term tenant? And kind of give us a little background of how that decision came about. I

Diem:
Definitely think this should be part of the analysis process when you go into looking at if a property could work for you, because even though I use these properties, especially the ones that are out of state, I use them as short-term rentals and midterm rentals to get the most cashflow. I knew that if that market took a turn, I could only get cashflow of what it looked like at regular market rents, right? For long-term rentals. And so when I looked at the number to see if this was a good investment, I needed it to at least cashflow as a long-term rental before moving forward and purchasing it with the idea of using it as a short-term or midterm rental.

Tony:
Now for Ricky’s that are just getting started, dm, I mean, do you feel that this is a strategy that still makes sense today?

Diem:
I do think that if the numbers work, then they work period. Now, you might find fewer options where the numbers work, but there’s no denying it that if the numbers make sense, you just can pursue it. And they’re also, on the other hand, there’s what we call a lot on BiggerPockets analysis paralysis. It’s like you could overdo it and not take action. So there’s a couple things that I think are important in terms of giving yourself a sense of security. The first thing is to make sure that the numbers make sense on a long-term rental market rent basis. The second thing is an option to split up the unit. Could you do that with this particular house that you’re interested in? If you needed to make it into two units or three units to increase the rent so that you can make sure that you cover your mortgage payment?
Is that something that you can do? Is it a renter friendly state or is it a place that will issue permits more easily for a DU conversions or reconfiguring the inside of a home? And then even in my Santa Rosa, my rental property, I think this is a great example of diversifying your risk. My A DU, there is a section eight tenant. The main part of the house is a midterm rental that’s furnished for 30 days or more. And then the suite that’s in the back is a by the night Airbnb. So in that one property, there’s already a spread of risk to reduce vacancy or ever having a point in time where it’s collecting zero rents.

Ashley:
Di how are you managing all of these different rentals, and what are your processes in place for this?

Diem:
So I do have an app. I use guestie. There’s a lot of different options out there, and that just helps me see through the various platforms like Airbnb, VBO, booking.com, it funnels all of it into one place or even bookings where I allow people to book direct and that helps me see who’s coming and going inside that app. You can do automated messages that say, Hey, welcome. Here’s your check-in instructions. And then you can also do, even on Airbnb, you can have pre-filled messages response. So if someone asks me what is around here, that’s good, I type it in and then I store that as a saved response. So the next time when someone asks me that, my response seems genuine and sincere because it is a response that I used at one time, but now I just have to click a couple buttons to give that same long-winded answer out. Outside of that, my dad, my husband, we have a cleaning army for the local ones if we need to do cleanings. And then apartments.com, I use to automatically collect rents for my private rentals or the long-term tenants. So just using a mix between strategies and systems. What

Ashley:
About when you are house hacking and you’ve had somebody you shared a room? Any tips or tricks as to when someone’s just starting out house hacking of things you need in your lease agreement when you are going to be living with your tenant?

Diem:
Well, if you are living with the tenant in your home, that’s a little bit more particular. So I don’t prefer having long-term roommates. So as my portfolio expanded where I could just live inside the house by myself, then the key is to have outdoor entry to those units and close them off or limit the access inside of your home. Like the downstairs suite with the bedroom and bathroom, they can enter through the side gate and they have their own door into their own unit. They don’t come into my house. Same thing with the ADUs or the J ADUs. As far as limiting things that could come up as a potential problem, it always is about setting it on the front end. So for Airbnbs having a list of rules that you explain upfront. And so when they break it, even if you’re not heavily enforcing it or creating problems with them, you can easily say by staying here, you’ve agreed to these rules, please make sure you respect them.
And I have found that over the years, that’s enough. Once I find a new thing that I should put in my rules that I didn’t think of before, I’ll do so. And then the rest is kind of like you just got to take it with all the successes that it comes with, right? There’s going to be some things and problems that you have to deal with and you don’t want to let it jade you because you don’t want to come across with new guests as like, oh, you’re going to ruin my property because last guy did. It’s just like even if I add a new rule, it’s with a friendly touch. And at the end of the day, I know I own the house. So if I really have to kick him out, I’ll just do that. But haven’t had to so far.

Tony:
Well, dm, we’re going to hear all about how you hit financial freedom, which is a goal for a lot of folks listening to this podcast. But first we’re going to take one last quick ad break. Alright, so we are back now. dm. I want to talk about financial independence, financial freedom fi. So did you have a financial independence goal in mind? And I guess what did you do to reach that number?

Diem:
I didn’t have a number in mind. I had a lifestyle in mind because the number can change, especially with cost of living changing or in inflation. But in my mind, financial freedom meant that the passive income or semi passive income that I earn on a monthly basis is enough to cover my necessities. And that also includes a little bit of traveling and then the work that I choose to do because I don’t really see myself just not working. I love it because I get to choose what I do and I design my own life. So in that sense, the work that I do, whatever income that it generates is going to be adding to savings for the next investment, adding to more trips that we get to take adding to I get to drive a fun zippy car. So those are the things that I strive for. And now I feel like I’ve achieved that, but I still work because I really like to,

Ashley:
And as you talked about, the lifestyle changes, I mean, setting your number now could be good for you now, but then as you said, your lifestyle can change as to different things that you want. And then that’s where it’s like, okay, I’m going to buy another property to actually go and pay for this or whatever I want. I want to do another vacation a year, so I’m buying a cashflow property that’s going to pay for that. And that’s okay. And I think sometimes you get caught up in defining too much of a number and then getting to the point where, okay, I’ve reached that number, I’m done. And first of all, if you’re an entrepreneur, that’s going to get really boring really fast. And so there’s the saying, fire where it’s financial independence, retire early. But you’ll find most often a lot of entrepreneurs, especially real estate investors, just take the PHI portion where it’s financial independence because they physically just can’t stop working.
And maybe that’s not actually working for a paycheck, but maybe that’s filling some kind of passion project or something like that. So I think that is a great way to look at it, is to what do you want your lifestyle to be? But also having that option of you still have a business, you still have a source of income, you’re still working so that if you decide that you want to increase that fine number of what you need, it’s still available there. And I think too often the concept of financial independence means completely not working at all, which is achievable, which can happen. But in real estate, there are so many ups and downs. Like next week I’m having a $4,000 plumbing bill come up, and that’s hitting my cashflow on that property by several months. And so I think having some kind of backup or having multiple income streams is a great way to reach even faster, but more importantly, to sustain having that financial independence too. So I guess dm, our kind of next question to this is what is next for your portfolio?

Diem:
Well, you’re right. Touching on that last point. I remember when I made my business plan out of college, I said, this year I’m going to make this and this much. And then when I get to $150,000 a year, I don’t know what else I’d want to do. That’s all the money I ever need to make. And then once I pass that, I’m like, well, crap, now I have to have new goals. And so I’m not really sure, but the essence of my values around financial independence remains true. It’s that it’s a lifestyle that I am pursuing, a sense of peace of mind. And one thing I will touch to on with the numbers that we talked about before is that with cashflow for real estate, please don’t forget to account for vacancy and repairs because it’s not really cashflow until you’ve accounted for putting some money aside every month for that.
And that’s the kind of peace of mind that, I mean, how could you have, because my net worth is 1.2 million now, but the real estate portfolio is about 2.6 million. It’s like how can you have that many properties leverage that much debt and still sleep at night? You get umbrella insurance, you make sure that the homes are properly insured to begin with, and then you have these savings that you continue to add to and you don’t take from, because eventually it’s going to be needed and you’re going to have to deploy it. So I just think the next thing is like, okay, well, if Jake and I want to have kids, which we don’t know if we do or not, but we’re thinking about that. So that would be a requirement of financial resources. What does it cost to have a kid? What does it cost for one of us to work a little bit less? And that would be the number that I would try to offset with the next set of investments.

Ashley:
I saw something the other day talking about how much it actually costs to have a kid. And I don’t know where this, it was just on social media, so I don’t know how accurate it was, but it said that it’s around $30,000. Your first year that you have a kid is what it actually costs you to have a kid, which is a huge chunk of money. That’s a down payment of property depending on what market you’re in.

Diem:
And I want to touch too, on the idea of having a kid in the circumstance of house hacking. Something that I’ve thought about is that only my JADU probably would remain in my home as a rental. I think that sweet, it doesn’t have enough soundproofing, and I may even need that as an extra room for akin. And so you get yourself into a lifestyle of getting used to no mortgage, no utilities, and then all of a sudden you have a lot of bills to pay for. And so that’s the drawback, I guess, about house hacking and this idea that if I moved out one day and wanted to have a house of my own with no renters in sight, then I would have to have enough passive income to cover for that mortgage entirely. And maybe that could be a future goal to level up to where all of my cash flows between the houses can pay for me to live on my own by myself and my little family. But yeah, that’s something that I’ve learned along the way is I am getting too comfortable here.

Ashley:
Well, Deanna, I think you kind of prove a great point as to, there was always this standard of house hacking of somebody saying, I have a family. I can’t house hack. I can’t have somebody renting a bedroom, or I can’t move my family from the primary. But there’s so many different options now that house hacking includes, for example, having a separate suite or a separate unit around my area in western New York, there’s a lot of properties that have walkout basements where there’s doors and lots of windows on one backside of the basement, and you could turn that into a suite adding an A DU, or maybe it’s adding a little tiny, a-frame or a cabin on a property. So many different options to actually house hack than having somebody move in with your family too.

Tony:
Well, dm, you shared a ton of great information throughout this entire podcast, and I’m hoping that you inspire quite a few of our listeners to A, there are ways to overcome some early financial hardships. B, there’s even more value in the hustle and the hard work that comes along with really focusing in on your goals. So I guess maybe what’s the biggest takeaway that you have for our rookie audience?

Diem:
I’ve learned a few tricks along the way that as a whole, one of my biggest tips is just to continue to learn and listen to podcasts like these. You just take one nugget away and it could save you thousands a year. As I listened to more people and their individual experiences, I learned more things. I learned about cost segregation, which is a higher level tax strategy on listening to podcasts from BiggerPockets or how you can remove PMI. Even if you put less than a 20% down, you can eliminate that mortgage insurance over time and you can make it even faster with certain strategies. So it continues to be a hobby and a learning like people with credit card points, right? That’s a whole game. Using credit cards and using points to travel the same can be applied to something that you perceive as complex as real estate.
It’s just one nugget at a time. And I think that is all of the learning that I’ve done over the years. Recently I got my realtor’s license, and now I’m an agent in California to help people because that’s that piece that I get excited about. It’s like there’s this whole arsenal of tools that I have for you. Let’s deploy these and help you build a legacy. Because I grew up in a hut. I was born in Vietnam, I lived on dirt. There was no electricity, no plumbing. And now I live in the land of the free with $2.6 million of real estate. It blows my mind, but it is literally just one nugget at a time.

Ashley:
Amazing. Well, dm, thank you so much for sharing your story today with us. We really enjoyed having you on and loved your house hacking journey and how you’ve been able to reach financial independence. And thank you for laying out your path for us so someone else can follow up. If you want to learn more information about dm, we’ll link her information into the show notes. Thank you guys so much for listening or watching. If you’re on YouTube, make sure you hit that like button. If you are listening on your favorite podcast platform, make sure to follow the podcast so you get alerted when new episodes are released. I’m Ashley. And he’s Tony. And we’ll see you guys next time on the Real Estate Rookie podcast.

Tony:
This BiggerPockets podcast is produced by Daniel ti, edited by Exodus Media Copywriting by Calico content.

Ashley:
I’m Ashley. He’s Tony, and you have been listening to Real Estate Rookie.

Tony:
And if you want to be a guest on a BiggerPockets show, apply biggerpockets.com/guest.