June 2022

UBS’s John Lovallo joins ‘Closing Bell’ to discuss a moderating housing market and where prices could go from here. With Ariel Investment’s Charlie Bobrinskoy.

Ashley:
This is Real Estate Rookie, episode 194. My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information and education you need to kickstart your real estate investing career. So Ashley Kehr, what is going on today. I see you don’t have your typical hip hop T-shirt on. You got some country on today. Felt like switching it up, I see.

Ashley:
Yeah. You know what? I feel like everybody knows my gangster side, so I got to show my countryside a little bit here.

Tony:
Got to represent both sides.

Ashley:
Got my Kenny Chesney, she thinks my tractor’s sexy, T-shirt on. Yeah, so I actually found the other day, this bin in our basement and it’s all my husband’s old T-shirts from when… I mean, he’s a, don’t want to brag, and I’m a lot younger than him, so he has all these ’90s T-shirts from concerts he went to. So I was going through all of them, I’m like, “Geez, some of these are cool, vintage, country T-shirts,” so I might start-

Tony:
There you go.

Ashley:
… throwing them out here on the podcast.

Tony:
You got your own thrift shop. Yeah, you got your own thrift shop in your basement.

Ashley:
Yeah.

Tony:
I love that. Well, what else is new Ash? What’s going on?

Ashley:
So my business partner, Joe, who’s actually been on the podcast before, he’s been pretty stagnant, shall I say, in his real estate investing in the past, probably, year and a half. He built his own house. He had a baby, so he’s been super busy. Well, he has been talking to me a little bit more about getting another deal, working on a project and today, I was so proud. He sent me a property and he said, “I set up the showing and we’re going at 5:30 today.” I said, “I am so proud of you for finding the deal, getting us to showing. Now, how are you going to pay for it?” He’s like, “Well, I’m poor, so you got to pay that out.” But, I was super happy for him that he is ready to get back into investing and taking some initiative after taking some time off. He has a full time landscaping business that he runs, so it is still his side hustle that he does, but yeah. Excited for him to get back into it.

Tony:
That’s awesome. What kind of property is it? Is it a single family or duplex?

Ashley:
Yeah, it’s a single family and it’s actually right near his house where we’ve also purchased a property before. This area, there’s actually a waste management dump site. I don’t even know, a landfill, I guess that’s what it’s called, and in that town… So he lives on the far end of the town and the landfill is on the other side of the town, so we purchase properties near his side because the landfill, they actually pay the majority of the property taxes.

Tony:
That’s awesome.

Ashley:
It’s something to do with, oh, because of the smell of the garbage. Well, you can’t smell it at all when you’re on the other side of the town. So the property taxes, I mean, are ridiculously cheap, especially in New York State, so we find that very attractive to purchase in this area.

Tony:
Tip for new investors, always look for the landfills. That’s where you’ll find the best deals going forward. No, cool. I’m excited for you guys. Keep us posted on how that deal turns out and I’m glad to see Joe back in the game.

Ashley:
Yeah. I don’t know. Joe was on one episode. We did a partnership. It was with Sarah too. We had her on talking about partnerships, so you guys will have to go back and find that in the one of our past episodes and take a listen.

Tony:
Yeah. Cool. Well, glad things are moving along. I mean, we’re busy, busy, busy, right now, but one of the things we did most recently that has been tremendously helpful is we hired some folks onto our teams. So we have four people that we added to our operations team.

Ashley:
Wow.

Tony:
So we’ve been ramping them up over the last couple of weeks, and it has been like a life changing experience to have some other people to manage all the different pieces of the operational aspect. We’ve got some virtual assistants that we hired for the front end guest communication, then we hired an operation’s manager that manages those VAs and deals with the bigger, more strategic issues that pop up. So me, Sarah and Omid are slowly getting some of our time back, so that way we’re not so much in the weeds and we can continue to focus on growing the business. Busy training people, but also, we can see the light at the end of the tunnel that it’s going to be one of the best decisions we’ve ever made.

Ashley:
Yeah. I remember Sarah did this Instagram reel where you guys went to Disneyland, I think. It was like, a day in the life of an investor at Disneyland, and it’s like, “Oh, got to take care of this call. Got to shoot this interview message.”

Tony:
Totally. All that was so real. People were asking, it’s like, “Oh, is that staged, where you guys…” And I’d be like, “Literally that is the life that we live.”

Ashley:
I’ve been with them places, and I know it’s real.

Tony:
Yeah, so excited to start building the team out so we can grow this into an actual business and not just a job for ourselves.

Ashley:
Awesome. Well, today we want to talk about, actually, some apps today that help manage your business easier, too. We both created a list of different apps that we use every day for different things in our business, and we thought maybe these would help you guys, be an interest of you. As real estate investors, we’re usually always on the go and we don’t always have time to sit down, at a computer, and pull up software or to go onto our computers and try different things out, so with apps, you do everything from your phone.

Ashley:
Some of the apps that I use when I am looking for deals, the first one, pretty obvious, is Zillow or realtor.com. Those apps just to scroll listings. The next is LandGlide, so this is an app that shows you parcel information, so you can input an address, or you can search, maybe if you’re driving around and you see a house, you can pull it up on the map, see who the owner is, the mailing address. PropStream is another one that is similar to that, and then there’s also onX Hunt. This is my favorite one. It’s actually a hunting app, so you can pull up information about the property too, but it also tells you, and LandGlide does this too, as to how much of the property of the parcel is maybe forest, how much is field? How much is the actual building? Are there other buildings on it? I think that’s really cool too, especially if you’re looking for vacant land deals or lots of acreage, you can find out what exactly that acreage is composed of.

Ashley:
Then there’s also DealCheck, which is just a way to analyze the property and will actually pull information from the Amalas, such as Zillow, into the calculator for you when you input the address. Then there is Homesnap, where you can actually take a picture of the property, and it will actually pull it up for you, the information on it, so it uses your GPS tracking on your phone, so you have to have all those location services turned on. But these apps also tell you too, the outline, the survey of the property. They’re not 100% accurate, but if you’re walking a property, I like to be able to see where the actual lines are, where the property ends and starts. Those are my big ones for finding deals.

Ashley:
The next ones that I use are more just to keep my head in place, and the first one is Personal Capital. So this is where I can link all of my bank accounts, all of my credit cards, even my investment accounts, and I can just open it every day and I can see just a little dashboard of what all my balances are on all of them. Then I use Easy Calculator, so this is a free app with so many different calculators. So I use it to compute interest only payments. I use it to compute principle and interest payments to pull up an amortization schedule. And then I also, sometimes when I think about, “Okay, if I put this much into my kids’ savings account, or their investment account,” and I see on average, it takes 9%, I like to see in 10 years how much money will kids have in their invested account. So those different calculators I like to use and they come handy. They’re so quick to open up.

Ashley:
Then the next thing is Google Tasks. So this links with all my other Google products, so Google Calendar, Google Docs, all these. So Google Tasks is just a really easy way to input things I need to do on the go and you can set them so they’re actually on your calendar to remind you. You just check it when you’re done and it disappears, but you can always go back and look at what you’ve actually accomplished for your day.

Ashley:
Then the last app that I’ve used is Hours Tracker. And I’ve used this two different ways, so Hours Tracker, I’ve used it as time tracking to see where my time is going, where I’ll just log in and log out as to, “Okay, I worked on my business for three hours here, and then I made lunch for an hour, and then I scrolled social media for an hour,” and it’s like, “Okay, there’s where my time is wasted. There’s where my time is productive.” But I’ve also done it to track different projects. Darrell that I work with, he’s used this too, is to like, “Okay, he’s working on managing this rehab just so we can get an idea too, of where his time is actually going.” So I found that app, Hours Tracker, very valuable. And those are the main apps that I use throughout the day, besides my text messages and my mail. Actually, I don’t even respond to text messages, so I wouldn’t even include that one.

Tony:
Well, Ash, that was like an encyclopedia of real estate investing apps, so it’ll be hard for me to top that, but I have a couple that I think are cool. The first one that I’ll talk about isn’t even about real estate investing. It’s about content creation and I’m starting with this one first because I think so many people can benefit from sharing their journey about investing on social media and other platforms. One of the apps that I was using is called Splice, so S-P-L-I-C-E, and it’s a really easy to use social media editing app, and it allows you to export in the reels or TikTok sized format. You can add captions and music and all kinds of other things, so it’s a really easy way to take your normal content, spruce it up a little bit, so it gets a little bit more love on social.

Tony:
The next one I use, similar to the Hour Tracker one, but it’s called Time, and this one directly integrates with QuickBooks, so that’s why I like that one. My CPA recommended it. I was using it more so for the real estate professional status, so you have to track your hours to show how much time you’re putting into the business, so we were using it for that reason, so time by QuickBooks. MileIQ is another one that I really like, so that one helps you track mileage on your vehicles. I can’t remember if that one integrates with QuickBooks or not, but QuickBooks has another version of a mile tracker app that’s really helpful.

Tony:
The next app that I use is the Schlage app, so at all of our short-term rentals, we have a keyless entry pad and we’re able to remotely unlock or lock that using the Schlage app, and then we can also create, delete and edit unique codes for all of our guests using that app as well, so the Schlage app is super helpful as a short term rental owner. The next app we use for the short term rentals is the Ring app. The Ring video doorbell, they have a whole suite of security devices. They also have the Ring floodlight camera, which we have at every single one of our properties, and that’s cool because you can check and see who’s coming in, who’s coming out. If you ever need to scare someone off of your property, you can make the alarms go off. We’ve had to do that once or twice, so the Ring gap is definitely a helpful one.

Tony:
Then the last one I’ll mention that’s productivity base or, probably not even productivity based, but the next one I’ll mention is the Loom mobile app, so if you guys don’t know, Loom is a screen recording website where you can go and take quick screen recordings of what you’re doing to give video instructions to someone, but they also have a mobile app. I found that to be super helpful because sometimes we’re out or we’re doing stuff on our phone and you can record a quick Loom on your phone as well, so that’s pretty cool.

Tony:
Then the last two I’ll mention, these ones are strictly productivity. First is monday.com, so we’re big on trying to have project management software for our business. We used to use Wrike, we’ve since switched over to monday.com. There’s a little bit more customization you can do there, but if we’re ever on the fly, we need to take track of something while we’re on the go, the monday.com app is super helpful.

Tony:
Then the last one is a Miro, so M-I-R-O. Miro is a brainstorming app where you can do… What are those things called? Little thing with the… Why can’t I remember what they’re called?

Ashley:
Like a-

Tony:
Anyway, it’s a brainstorming thing.

Ashley:
An organization chart?

Tony:
Or you can put-

Ashley:
Like a brain dump?

Tony:
Yeah.

Ashley:
Yeah.

Tony:
Or a chart. Yeah, exactly.

Ashley:
Basically think of a white board-

Tony:
You guys know what we’re talking about, right?

Ashley:
… with Post-it notes thrown up all over it.

Tony:
Yeah. It’s going to drive me crazy that I can’t think of what the heck that diagram with the lines. I don’t know why I can’t think of what this is called.

Ashley:
Yeah. Tony, actually just got me started using that too, when we started brain dumping ideas for the podcast. I have to say, I really enjoy it too, because right now, I actually have this huge whiteboard sitting in my living room and I think that this app is finally going to get me away from whiteboards.

Tony:
The whiteboard? Yeah, it’s a mind map.

Ashley:
Mind map.

Tony:
That’s what it’s called. A mind map.

Ashley:
Yeah. Okay.

Tony:
Yeah, so you can make mind maps, flow charts, all kinds of other things and just any brainstorming. For most people that are entrepreneurial, they have a thousand ideas a day, and it’s easy to let those ideas slip and you have this great idea and you never execute on it because it came and then it went, so for me, I love having the Miro mobile app because anytime I have an idea about any part of my business, I open up Miro. We have a board for that specific idea. I drop a little note on there, that way I can come back to it later when it’s time to execute, so the Miro app is something I use really regularly as well. So I think that’s everything on my side Ash. Those are all the big ones that we use on a regular basis.

Ashley:
Yeah. I’m definitely, pretty sure, I’m going to switch to that Time one, because I like that it integrates with QuickBooks because that’s what I use. Then I didn’t know that Loom had an app too, so I’m definitely going to download them.

Tony:
Yeah.

Ashley:
Yeah, so thanks Tony.

Tony:
There you go.

Ashley:
Thank you guys for joining us this week for this week’s Rookie Reply. I’m Ashley at Welcome Rentals and he’s Tony at Tony J Robinson on Instagram. We will see you guys on Wednesday.

CNBC’s Diana Olick joins ‘The Exchange’ to discuss this week’s housing data, including new homes, interest rates, homebuilder earnings and forecasts.

One of the biggest talking points of the last couple of years has been the gap between supply and demand in nearly every industry, from real estate to energy.

Inflation hit 8.6% in May, according to the latest CPI report and gas prices spiked to a record average of $5 and over across all U.S. states for the first time as the cost of an oil barrel climbs to $120. Broken supply chains have caused catastrophic supply and demand issues in nearly every sector of the economy, giving us the perfect storm of inflation. 

However, despite the outlook, AirDNA’s May Review indicated that supply, at least in the short-term rental market, might finally be catching up with demand.

Occupancy Falls By 8.6% As 84,000 Listings Are Added

In data generated by both Airbnb and VRBO, 84,000 new short-term rental listings were added to the market, creating a 57,000 net increase after removing closed listings.

In total, there are roughly 1.3 million listings available for rent in the United States, which is up nearly 25% year over year. This marks a record high for total available listings in the U.S.

While demand has been extremely high, especially as some reports suggest that this will be a hectic traveling summer, occupancy fell to 60.2% in May. 

While there doesn’t seem to be any worrisome signs to keep an eye on just yet, falling occupancy rates aren’t exactly an STR investor’s favorite statistic. Yes, listings were added month over month, but if demand is as high as it is, then you wouldn’t expect a sharp near 10% decline in occupancy heading into the busy season. Instead, occupancy is mirroring 2019s numbers more than 2021, for better or worse.

The fact of the matter is that supply outpaced demand in the short-term rental market, despite this summer supposedly being the season of “revenge travel,” as some pundits have labeled it. 

But when we consider the larger factors at play in the economy: high inflation, expensive gas, expensive goods, expensive flights, and a Fed determined to slow down inflation with historic interest rate increases. These are signs that the brakes need to be pumped on the economy, and it’s already starting. Typically, travel slows down with the brakes.

Understanding the American Consumer

In a survey conducted by Credit Karma in May, 51% of Americans reported that their financial situation was worse off than it was at the beginning of the pandemic. However, 30% of Americans plan to spend more money this summer.

Even more concerning, but adding to the surprising rationale, is that almost 33% of Americans reported taking on debt to afford rising gas prices. Yet, 22% said that they were planning to spend an extra $1,000 more than their typical budget. 

Why? Why do Americans, who are feeling tremendous financial pressure from a variety of directions, feel the need to bloat their travel budgets?

It turns out it has to do with making up for lost time (33% of respondents), taking advantage of normal life again (38%), and the fear of missing out (25%). While living life to the fullest is not bad, there are real barriers to travel that can and will prevent someone from going somewhere if it will result in financial instability when they get home.

This is where short-term rental investors or prospective short-term rental investors need to be careful.

A Warning for Short-Term Rental Investors

I’m not ringing the alarm bells and signaling the end of times. I’m just being cautious about a lot of the news and reports coming out.

While short-term rentals are by no means in any jeopardy at the moment, in fact, STRs can be quite “interest-rate proof” during these times. I will say to be careful of the reports on travel and a booming season.

STRs are rapidly expanding and continue to boast growth. Nor has supply met demand nearly enough to justify lowering prices. But there is a looming recession and clear indications that many U.S. consumers are falling behind in their finances. When you put these two together, one of the first budget items to get cut is travel, regardless of how much people want to get out and about. That’s just how economics works.

As an investor, you should be prepared for the worst. In this case, low occupancy due to a recessionary environment. Depending on your market and the type of rental you’re operating, occupancy varies with the seasons. Do what’s best for your business in the long term. Be prepared for economic fallout and changing STR laws (many local governments have turned their attention towards making it harder for STRs to operate in order to create more housing availability).

Don’t allow yourself to be blindsided. Many investors have enjoyed the short-term rental growth sparked by the pandemic. But now, times are changing again, and we must be prepared for what’s to come, good or bad.

Ready to invest in short-term rentals?

From analyzing potential properties to effectively managing your listings, Short-Term Rental, Long-Term Wealth is your one-stop resource for making a profit with short-term rentals!

Finding cities with the highest rental appreciation is crucial if you want to make a profitable investment in the rental market. Even in an expensive housing market, finding suitable buy-and-hold assets is possible if rent prices are rising. There are plenty of rental properties in great places for investors. 

The hot housing market in the U.S. means that it can be a boom time for investors—if you know where to look. According to Reuters, home prices are expected to rise by 10.3% in 2022. However, some analysts say it may slow down by 2024 to around 4%. Others have different predictions, such as a 10% price correction in either direction.

With rising inflation and the cost-of-living crisis, the rental market in the U.S. is set to grow over the next few years. So, where are the top cities with consistent growth in the rental market if you are considering buying an investment property? 

This article lists the best rental markets to invest in 2022.

The Top 10 Best Rental Markets to Invest In

Rental properties are an excellent way to earn regular income from secure investments. To ensure a high return on investment (ROI), finding affordable properties with excellent cash on cash return is crucial. 

A quick glance at a property value map makes it easy to see where the best investment properties in the U.S. are. For example, Florida, Texas, South Carolina, and Ohio all have cities with affordable housing prices, high rental yield, and tremendous job growth.

1. Orlando, Florida

The housing market in Florida always performs consistently well for real estate investments. High demand for single-family homes and global attractions like Walt Disney World and Universal Orlando means investors can make excellent profits off short-term rentals. Additionally, the amusement parks mean there are always plenty of job opportunities.

The average home price in Orlando is $367,000, and the median rent is $1,820. However, it’s possible to buy investment properties cheaper and lock in the same rental rates in some areas.

2. Tampa, Florida

Like the rest of the Sunshine State, Tampa’s housing market remains excellent for investors. Stock availability is the primary reason Tampa performs well, and home prices continue to rise. In 2022, the median sales price for a Tampa-area property was $390,000, and the average rental rate for a one-bedroom apartment was $1,897. 

It’s good to note that analysts predict that active listings in the Tampa housing market will drop, leading to a surge in rental demand.

3. Salt Lake City, Utah

The Salt Lake City housing market has experienced a boom in home prices and rental rates over the previous few years. Limited inventory, increased demand, and low mortgage rates have resulted in tremendous appreciation. According to some reports, the median home value in the city increased by 24.1% in 12 months. Similarly, rental rates have experienced a 21% increase. 

There is no sign that the Salt Lake City housing market will slow down in the coming months, especially as big tech companies like Microsoft and Adobe move in.

4. Austin, Texas

Austin has been one of the hottest real estate markets in the United States due to tons of investment and explosive job growth. According to the Urban Land Institute, Austin has the highest projected population growth over the next five years. You’d have to put Austin at the top of the list for real estate prospects.

The average cost to buy a home in Austin is $639,900, and the average rent is $1,735. However, it’s good to note that rental rates in the city are increasing at over 15% per year. Rental appreciation and year-round warm weather make Austin an ideal city to buy a residential investment property. The only challenge you may find, especially as a newer investor, is being able to find good deals in Austin.

With a housing market exploding as much as it is there, you’re paying top dollar for most properties.

5. Boise, Idaho

In 2021, Boise was one of the hottest housing markets due to a growth in home sales, a strong economy, and monthly rent prices. Factors that make Boise ideal for long-term investment include:

• Strong population growth.
• Steady growth in the jobs market.
• Low fixed-mortgage rates.
• Low unemployment rates.

Even during the COVID-19 pandemic, home prices in the city continued to rise. 

In 2022, the median house price in Boise was $425,000, a rise of nearly 28% compared to 2021. If you rent a house in the city, you can expect an average rental income of $1,574—a rise of over 50% over the past three years. 

6. Raleigh-Durham, North Carolina

Raleigh and Durham consistently appear on the list of best real estate investment markets. Compared to other cities in the U.S., the rental market in Raleigh-Durham is large—around 43%. In addition, the large student populations from Duke, North Carolina State, and the University of North Carolina at Chapel Hill mean there is always a demand for rental apartments. 

According to some figures, Raleigh and Durham’s homes sell for a median price of $405,000, a 22% annual increase. For interested investors, the average rent price in the metro area is $1,522. 

7. Cleveland, Ohio

Cleveland has an excellent market for investors wanting to invest in apartments. Although Cleveland hasn’t experienced the population growth of other cities, many young professionals are looking for rent accommodations in downtown Cleveland. In addition, in 2021, 10 Fortune 500 companies have a headquarters in the city. 

Cleveland is one of the most affordable cities to buy a rental property. Median home prices are as low as $115,000. With average rental rates of $1,238 in Cleveland, investing in rental properties provides an excellent ROI.

Overall, Cleveland is one of the best cities to find a good deal in. 

8. Houston, Texas

Houston is the 4th largest city in the U.S. and is continuing to grow each year. Excellent job prospects and a vast metropolitan area make investing in Houston real estate a sensible choice. However, investors find that despite the large housing stock, properties sell relatively fast. According to data from Redfin, the median days on market in Houston is currently 13 days.

Median home prices are 21% below the national average, which should make finding a good deal a little more possible. Overall, you can expect an average rental income of $1,263 per month.

9. Atlanta, Georgia

Atlanta offers solid investment opportunities for buy-to-rent investors. Over the past few years, the city has experienced a population boom, growing on average by 14%. Also, a rapid job growth rate—10% above the national average—continues to attract more residents to Atlanta. 

The median listing price of an Atlanta home is $412,000, and the average rent for an apartment is $1,812. 

10. Phoenix, Arizona

Phoenix is an excellent place for buying an investment property because of its affordable real estate prices and tremendous economic growth. Average home selling prices have surged by 17.8% since the start of the pandemic, making it one of the hottest housing markets in the U.S. In addition, the city attracts people from more expensive areas like Los Angeles and San Francisco. 

The median listing price of a home in Phoenix, Arizona, is $392,500 and the average price to charge for rent is $1,547. 

How to Analyze Real Estate Markets

Whether you plan to flip a home or buy and hold a property, an accurate real estate market analysis is key to your success. If all that sounds overwhelming, don’t fear. This guide explains exactly how to perform a market analysis, which will help you decide if an individual property matches your investment targets. 

David:
This is the BiggerPockets Podcast, show 626.

Zach:
I mean, there’s not a lot of difference. Whether you have a $200,000 single family in the Midwest, a $2 million deal in a more expensive neighborhood, you still evaluate the numbers the same. So don’t limit yourself looking at the larger deals and getting scared at participating in those, even if it requires bringing in some private money.

David:
What’s going on, everyone. I am David Greene, your host of the BiggerPockets Real Estate Podcast. Here today with my fantastic co-host, Rob Abasolo, where we get into an interview with the CEO of Rent To Retirement, Zach, was it Lemaster, or how did he say it? Zach Lemaster. You know what’s funny is when Brandon did these shows, he always messed up the last name, and now I, as the host, find myself doing the exact same thing. It’s funny, because when I was the cohost, I always knew what it was and as the host, I don’t.
Well, Zach gives us a great interview from several different dynamic perspectives of real estate investing. So Zach owns investment property himself all across the country, some of it small multi-family. We get in to talk about a luxury property that he actually bought in Colorado in a ski area that he’s going to be renting for $5,000 a night at peak season.
He also owns a turnkey company. You may have heard their name, Rent To Retirement. They are familiar in the BiggerPockets space. You probably heard his ads on our show. And we get into how he runs a company, how he hires, why he believes turnkey could be better for some people. Really good stuff. Rob, what was your favorite part of today’s show?

Rob:
I think it was really nice to hear his insight into turnkey properties. He really spoke a lot on stacking your strategy and staying hyper focused, because he’s had a very cool trajectory in his real estate journey. He went from being an optometrist to going into wholesaling, then to residential, then to commercial, and like you said, incredibly successful business owner as well. So just really fun to always dig into those stories a little bit deeper.

David:
Absolutely. Before we bring in Zach, let’s get to today’s quick tip. Today’s show, we talk about the W-2 mindset and how it doesn’t always fit into the world that we work in, which is an entrepreneurial space, what I call the 1099 environment where you don’t have clear paths drawn out for you for an employer to walk in. You’ve got this huge, immersive 3D environment. You can take any path you want and it can be very scary and unsettling when you bring a W-2 mindset into this world.
So ask yourself, in what ways are you operating in a W-2 mindset, ways that you may be and not know it? Is it a unseen expectation that other people should be telling you what to do? The thought that when something goes wrong, somebody else should be having to fix it and not you? The belief that you shouldn’t have to do work after 5:00 PM, or that during the hours of 9:00 to 5:00, you need to be working all the time?
None of these are rules that are hard and fast, set in stone, they are habits that we’ve created because we’ve worked in a W-2 world for so long. And if that’s you, that’s okay. But if you’re trying to get into the world that Rob and I and Zach operate it on a daily basis, that could be holding you back. So find out somebody, sit down and talk about what ways you might be experiencing a W-2 mindset that’s holding you back. Rob, do you have anything you want to add on that topic?

Rob:
No. I think it’s always very helpful to talk to someone who’s actually made the leap and has struggled with just going full on in the self-employed. And I think one, funny enough, I always used to say that I was unemployed and then Tony Robinson, Rookie host was like, “No, man, you’re self-employed, be proud of it.” And I was like, “That’s right. I am.” So find someone, pick their brain and learn. That’s all you can really do.

David:
All right. Well, that sounds great, Rob. I’d say without anymore ado, we should get into our interview with Zach. Zach Lemaster, welcome to the BiggerPockets Podcast.

Zach:
David, Rob, thanks so much for having me. I’m excited to be here.

David:
Yeah, we’re glad to have you too. So let’s get started by asking you, what does your portfolio look like right now with real estate and business?

Zach:
Absolutely. This is an ever evolving scenario, but today what we’re looking at, we mainly have transitioned to owning a lot of commercial retail space. That’s the majority of our personal holding. So we have 30 commercial spaces or doors, I guess that’s spread out across seven doors. We have 29 residential units. Two of those are single family in Canada that we own. My wife’s Canadian. Majority are here in multiple states. We have a couple duplexes, one fourplex in that. We have one very unique, large short term rental and we have 18 build to rents. Those are all single family.

David:
Awesome. And then what about from the business side?

Zach:
Yeah, on the business side, so what we’re doing is our core business Rent To Retirement, we’re a turnkey provider. And so we work in multiple markets throughout the US, mainly in Midwest and Southeast. We probably do about 50 houses a month. These are mainly single family or small multi where they are rehabbed, leased, and managed for our investor clients. And so that’s really our core business.

David:
Sweet. So you’ve got your wealth in real estate. You make your money and business in real estate. You are like us, a real estate nerd. So how did you get started in this whole space?

Zach:
Yeah. I think real quick to your point, David, it’s interesting is we interview a lot of people that are really successful in real estate and other businesses. There’s so many people that make money outside of real estate and other avenues and put it into real estate. And there’s so many people that flip houses, but don’t hold houses. I always thought that was a very interesting thing.
But going back to our story, so I’ll try to keep this somewhat short for you. We have a background in healthcare, I guess. My wife and I are optometrists by education. We met in school in Oregon. I think I initially got interested in real estate investing, as many people did, reading just Robert Kiyosaki, Rich Dad Poor Dad. That really stuck with me just in the mindset. I continued to always educate myself about different aspects of real estate, although, it took many years to actually take our first step into investing.
So we went to school in Oregon. I was on a scholarship with the Air Force after professional school. So I went in as a Air Force captain for five years, practicing optometry there. That’s where we started investing in real estate. My first house was a house hack, duplex. Used a VA loan to purchase that, excellent loan. We kept that house as a rental for many years, continued to move out of that and scale up over time.
One thing I always tell people is every single year, since that first duplex, which is over 10 years at this point, we’ve bought more and more real estate every single year and that has really allowed us to scale our portfolio where we’re at today. That’s just an internal goal we’ve set, just with that scalability mindset.
One other thing we did early on was wholesaling. We started to explore. Wholesaling we thought was an interesting way to just basically use a side hustle to make money in real estate and was, I guess rather low risk, at least initially. As many people have done, I paid a large amount, $25,000 for a course, money I didn’t have at the time just coming out of school, and so we put it on a credit card. I was very nervous about that, couldn’t sleep, worried about losing the money. I brought in a partner that ended up paying 50% of that and helping us get started with wholesaling.
We grew our wholesaling business to the point where we were probably doing 15 properties a month, decided to keep some of those as rentals and scale that over time, and then decided to also manage those, which many mistakes were made there of course. We started to scale over time, investing in different states throughout the US.
And I think that’s really a pivotal moment for us because that opened up our eyes, when we found out that, hey, you can invest out of state following, it’s really the same process as you can locally. And it’s all about your team and systems in place. And that allowed us to really focus on growing our portfolio in areas that had the best returns.
Some of the first two properties we bought were turnkey properties from a turnkey provider. These were South Side, Chicago, D class assets, numbers looked great on paper, high end rehab. And so it looked all good on the initial investment and they just performed terribly.
And actually the provider we bought them from, who also managed the properties. He ended up dying a year later, had a brain aneurysm. We were stuck with these properties. There was just nothing to do, no one to help us. But that was really the catalyst for us to start our turnkey business is, hey, we can go out there and do this on our own, and develop our own systems just through having to learn through those experiences.
So fast forward to where we’re at today, we’re investing in multiple markets throughout the US, scaling our portfolio and doing a lot of transition into the commercial space. We own a lot of commercial retail and that’s an area that we’re focusing on allowing us to scale up quicker, do the tax advantage benefits of cost aggregation studies on those. So that’s where we’re at today.

Rob:
So I want to jump back just a hair here, and I wanted to ask you … Oh, well, I mean, you mentioned you spent $25,000 on a course and you split it with a partner. A lot of people do this. My question to you is when you’re getting started, do you feel like the success that you had, the boost that you had from this course, did it come from the fact that you just spent money on it and you said, I am financially committed to this thing now, so I’m going to do it, or did the success come from the knowledge that you got from it? I’m always curious to hear, because I think it’s 50-50 for a lot of people.

Zach:
Rob, you hit the nail on the head, it was a hundred percent the financial commitment. It’s like, oh crap, I better do something because I just dropped this amount of money that I don’t actually have. Sure, the course had some educational stuff. You had a little bit of coaching. They reviewed some contracts with us. The reality is all that stuff was available online for free or just networking with the right people. But it’s definitely the financial motivation behind it. I don’t think that’s necessary, but definitely it’s going to light a fire under you to make sure that you do something in that scenario. That’s what happened to us.

Rob:
For sure. And so when you were first getting started, just so I understand the timeline, I know you said you were into the optometry industry, was that what really fueled your, I don’t know, the initial capital to get into this? Or how did that work out when you were first getting started? Or were you using the money from wholesaling to really fund the purchase of all your residential properties?

Zach:
Yeah, it was a combination. I mean, we were also in debt. We had six figure student debt, so that was a little bit of a burden, of course. Having the VA loan allowed us to purchase that first property with no money down. That was an excellent loan structure. But actually wholesaling rather quickly became the main method to fund a lot of the rentals that we were holding.
Wholesaling was key for us because it allowed us to evaluate deals, learn how to find and evaluate deals. And that I guess was crucial in allowing us to evaluate how to take on deals that we were going to buy and hold. But that was a great side hustle, I guess, that allowed us to build capital much quicker than we would just in our typical profession.

Rob:
Are you still in that? I guess it’s a little bit more of a front hustle at this point, but are you still in that world or did you move on once you built your backlog of capital and everything like that?

Zach:
You mean in the healthcare setting?

Rob:
No, no, in the wholesaling setting. Do you still execute that side of it at all? Or are you just now fully into the other niches that you discussed earlier?

Zach:
Yeah. Wholesaling is always an exit strategy that’s a potential. If there’s a deal that we’re not going to take on, we’re going to sell it to another rehabber. So, I mean, that is something we’ve definitely done, but it’s not the core business. Really, now, we buy a lot from wholesalers to actually take on, that we’re going to add to our own portfolio. So it’s something that’s not a main focus, but definitely I think it’s just an exit strategy to be aware of.

Rob:
Totally. Yeah. I guess it’s very rare that we have someone in your position here where you do have a really great business and you also have an amazing real estate empire. So just from a philosophical standpoint, I wanted to dig in a little bit on how you handle your investments and personal philosophy on how you’re funneling money from one side of the business to the other. And so what I was curious is do you take all the profits from your real estate side and just keep reinvesting that? Because it sounds like you’re always just growing your portfolio and buying more and more. Or is there a little bit of reward that you actually take from your real estate portfolio? Or do you live solely based off of business income?

Zach:
I mean, we don’t live huge, lavish lifestyles by any means. It doesn’t take much to replace the income that we have today. But I mean, when we started to earn significant income through our business, the tax burden was painfully real, and so a lot of our strategy now is to reinvest that money and that’s following our philosophy of how you should reinvest your proceeds. And so a lot of our active business we take and we put it into, at this point, now these commercial retail centers, run cost segregation studies on those to reduce our taxable income and just try to keep scaling that way. So I guess the answer, Rob, is just reinvesting it, absolutely.

Rob:
Yeah. This is something that I really find a lot of entrepreneurs and real estate investors struggling with, especially when they do have a business like you’re talking about and real estate and they just don’t know like, how do I pay myself? When do I pay myself? When is that appropriate? Because for me in my personal investment career, I’ve never actually spent any of the money that I’ve ever made in real estate. Not really anyway. I mean, not anything significant. I’ve always taken the profits that I’ve had and I’ve just dumped it back into the portfolio to just keep it growing.
And it’s really hard because obviously I feel like you do have to reward yourself every so often. But I’m in a similar scenario where I have another business outside of that and that’s where I’m … My income is mostly coming from that so that I can just protect the real estate nest egg that I’m slowly building over time.

Zach:
Absolutely. I love that.

David:
When it comes to what you really love about real estate, why you left your former profession to dive into this, what can you tell us? Was there a moment where you saw something that you hadn’t seen before? Was there an element of it you fell in love with? Was it a pure business decision? What got you into leaving your old job and going full steam into this one?

Zach:
I think probably the moment that we were just like, hey, we got to go full blown into this. This makes complete sense. It’s a simple fact that real estate, it’s not time associated. With working in the healthcare setting, you’re compensated based for your time in the chair, right? You can only see so many patients, you can only be compensated … Even owning businesses too, you’re wearing multiple hats. And a lot of healthcare professionals are not great business owners.
But just the ability to create income streams, where you are growing your net worth and providing consistent passive income, whether you’re actually working or not, I mean, once we saw the writing on the wall with that, David, that was very much like, hey, we got to go all in. We’ve seen a successful business model. We have a proven track record.
It was an emotional change though, too. There was a lot of people like, hey, you spent eight years of college going to school for this profession, what are you doing? So, I mean, there’s a little bit of that and it was an emotional change, but the best decision we made, absolutely.

David:
So this is probably a good point to ask you. We’ve talked about what we love about real estate, what are some of the challenges that you’ve encountered that you were not expecting when you first got into it or some of the things that stop you from growing at the pace that you wish you could?

Zach:
It’s an ever evolving world. You really need to stay up on legislation, on financing. I mean, financing is a huge thing. That’s been a big obstacle for us as we’ve grown our portfolio over time. One thing we always do is interview multiple different lenders to try to find the best financing options.
We hit a little bit of an obstacle with some of our commercial properties we purchased where they required … They gave us the best loan terms, but then they stuck us with all these loan covenants and requirements. They wanted a 10% liquidity requirement just sitting in the bank, just letting inflation eat that away. And they check that quarterly. So it’s just a little bit of a hindrance to be able to use that money to grow and scale. I mean, there’s all sorts of obstacles in real estate from all different capacities.
One thing that’s allowed us to be successful, I think is just being creative. And I also like that, that’s a challenge obviously with the obstacle, but being creative to find a solution to those problems, to be able to scale your portfolio, whether that’s a tenant, a financing issue, whatever the case is.
We’ve had some bad partnerships in real estate. I mean, that could be applied to business in general. We’ve lost a lot of money in partnerships that we jumped in too quickly and scaled too quickly with that unwound. But that’s just part of the game and staying out and trying to stay the course.

David:
Rob, as you hear this, what are you thinking about when you’re thinking about what your experience has been, and now we hear Zach’s doing this at a pretty big scale? What kind of thoughts are going through your head as far as the challenges that you’ve had as they compare to Zach’s?

Rob:
Well, Zach, obviously, you’ve scaled up and there’s a really big difference between running a 20 unit portfolio and a 100 or 200 or 300 unit portfolio. It’s a very interesting challenge. I think the scaling is something that a lot of people are … They have a lot of trouble because everybody has a very different idea of what scaling looks like and how to successfully execute it.
And so now that I’ve been doing this and scaling and growing my team and making this work for me, I’m starting to understand, and I don’t say this in a negative way, but it feels like I’m leaving the golden days of when I was learning everything and cutting my teeth and I could still make mistakes and I could still fail really big.
And now I’m really having to hold myself accountable and be like, okay play time’s over, we experimented. It was the wild west for the first five years of my career, but now there are a lot of things that I have to take in consideration and there are jobs on the line and I pay people, I pay employees. And so for me, I’m just in the throes of scaling.
But I know that even five years from now, I’m going to say that right now is the golden days, because I feel like this is going to be the most important period of my life is figuring out how to scale my business. And so yeah, I don’t know. I mean, I have a lot of respect for people that can grow a portfolio past 20 units, 20 doors, just because the team that it takes to do that is very difficult to build. It’s very difficult to find people who are on your page, on the same page as you, I guess.

David:
Yeah. So Zach, what’s your thoughts on that element of what you’re trying to build?

Zach:
Yeah, systems. I mean, systems and scalability is the hardest thing. I think it’s rather easy for a lot of people to scale their real estate business and portfolio to a few million with a handful of employees, but to really take it to that next level of growing your portfolio, where you have maybe 20 plus employees or you’re really making this a legitimate business, and really any business I think for that matter, scalability is tough and dealing with real big issues with employees. I mean, that’s a hard thing, I think we all are consistently facing.
And I haven’t figured that out yet, but every step we take on scalability, you try something out, if it doesn’t work, you try to implement a better system to do that and continue to add the right people to your team. That’s what it’s all about. I mean, we’ve heard the term or the saying of hire slowly and fire quickly. Sometimes we’ve done the opposite. But the right people are really what it’s about, creating those systems.

David:
So another challenge that investors face is where they live can have a geographical hindrance on their investing. So if you live in a great market, you don’t really think about this, if there’s opportunities to buy properties, if you’ve got cash flowing properties that are where you are. But if you’re in a market that’s not so great, you’re painfully aware that this whole investing thing sucks.
So you’ve had to learn how to buy properties in different parts of the country, that’s out of state investing. I mean, you’re actually in other countries with some of the stuff. What are some of the challenges that you encountered when it came to long distance investing and how did you overcome those?

Zach:
Yeah, I think the challenges of real estate really, there’s some challenges that don’t matter geographically because you’re going to have the same issues and then there’s some that are obviously. There’s this comfort, this mindset associated with, hey, if a property’s close by, I can solve this problem, which could be true to some extent, but it can also maybe take up too much of your time.
The reality is if you have the right people and teams and systems in place, it should follow the same process regardless of where you’re at. But investing out of state, I mean, finding good contractors, how do you build that team, whether it’s locally or in different areas? Obviously there’s different state legislation you need to be aware of and tax structures.
It’s like, what are the tenant laws and how do we know that we’re abiding by those? Can we vet tenants the same way that we do in this area? How does the eviction process work? There’s a lot of things to look at as far as managing the properties long term.
Internationally, I mean, constantly. And we have family that owns a property in Australia and many other countries as well. I always love to compare the US to those countries as far as a lending and tax structure, because there’s nothing else that comes close. I mean, there’s no such thing as a 30 year fixed loan in Canada or any other country. Australia does negative gearing where they actually buy negatively cash flowing properties to offset taxes. So that’s a constant reminder that the US has so much benefit to invest in. That’s why we have so much international money coming.
But as far as the challenges, I think they’re all really the same, David. I think you face the same challenges regardless of actual location and that’s why it’s vitally important to have the right people set up.

Rob:
Yeah. So I wanted to dive a little bit into it because I know you’re a big turnkey guy, right? And so I wanted to ask, what does that look like? What do you consider a turnkey property? Do you truly consider that when you’re investing in something that is in that category, a hundred percent done, locked down, ready to go, or do you still go into a potential turnkey property with any kind of renovation budget, whether it’s 3 or 4 or $5,000 just to get it up to your standard?

Zach:
Yeah. Turnkeys, I mean, we could go down many different rabbit holes with this, right? I think there’s a lot of people that have different opinions about turnkey versus doing syndications or something like this. I think in general turnkey, and obviously this is our business, but I think turnkey is an excellent option, if you’re working with the right people to allow you to scale, to allow you to have a little bit of hand holding starting out and allow you to diversify into different areas.
But it doesn’t make you immune to the same sort of challenges that you would have with real estate in general. When we look at turnkey, I mean what our definition is, is a house that’s newly built, because we actually participate in a lot of new construction. That’s about 50% of what we do at this point in time is build to rent.
But we want to see a house that has at least 8 to 10 years of life expectancy. So if your HVAC, your water heater, the roof needs replacing, then definitely those are your CapEx items, those are your biggest items to do that, and then of course lease and manage the property.
But we also, even though we sell turnkey products, we also buy turnkey. A lot of the commercial assets we buy, I would consider those even more so turnkey. Those are triple net leases, management pays our taxes, pays our insurance, pays our mortgage for us. Those are triple net leases often corporately guaranteed. So I mean, there’s a lot of different philosophies about what turnkey really is, but I think it’s really just going and having the right team in place to assist you in learning how to do that.
And I also think that turnkey is not the only option out there. We see so many people that are buying turnkey and this is the exact same thing with us too, Rob, is turnkey is a great way to invest in a certain area alongside what else you’re doing. If you’re doing your own flips, if you’re doing your own wholesaling, whatever the case is, it’s a great way to diversify into these different areas.
But as far as rehab budget, we have an expectation. We have different contracting teams in these different areas and they have a specific budget and line item, as far as what the expectation is. On management, we don’t do any internal management at this point, same sort of thing for property managers. We have a specific process we want the managers to follow as far as vetting tenants and how they’re actually managing the properties.

Rob:
David, are you buying any turnkey these days? Because I know obviously you’re the value add guy right here, Sir BRRRR, and I know that obviously that has been a very big component of your career. But obviously, I know that you’re a very busy and a very successful real estate entrepreneur. So as you grow in your business, I know that your time is more limited, does that mean that you’re typically looking for more turnkey stuff at this point? Or are you still in the value add space?

David:
I think that’s a really good question here. My heart is in the value add space, but depending on what I have going on at any given time, I’ve had to be humble enough to admit if I take on this project, one popped into mind right now, a property I have under contract in Savannah, Georgia that is in the historic district. It’s coming with short term rental permits. There’s a lot, I really liked about it, but in the inspection, it’s got some significant issues, like needs to be torn down to the studs at some point, needs a complete new roof.
And I was thinking, if I’m honest with myself, if I buy this thing right now, I am never going to manage that rehab. I’m not going to know what’s going on. I don’t have a person in place that I trust that could manage the rehab. That’s the wrong move for me, even though it’s got a ton of value add potential. I won’t be able to execute on that.
And I’m probably more geared towards when we say turnkey in the short term rental space is what I’m looking at. I need something that is coming furnished, doesn’t need a whole lot of work, out the box is good to go. And I recognize I’m not getting the built in equity I used to have, but I’m not going to be bleeding, trying to find how am I going to get furniture brought into this place, when we are having the supply chain shortages.
And how am I going to get a contractor in one of these really hot markets where it’s very difficult to find them? It’s going to be 90 to 120 days before someone even starts the project. And then I got to sit in the permit line that’s going to be really long because everybody else is doing the same thing.
So it is a balancing act that you’re constantly having to go through. And at times the turnkey option is definitely better for me, but there could be a moment where everything’s running great with the businesses, I’ve got good hires in place, people are doing good, and I’m going to be like, hey, this is the opportunity to go take on a bigger project.

Zach:
David, I think that’s a crucial point, just being realistic with what your capacity is right at this point in time. And if your time is limited based on other things that you’re doing than your business or building your portfolio, I think a lot of people are looking for … They may get distracted with … If you don’t have the time to dedicate to a deal, then you’re not going to perform on it, to the best of your ability. And so it’s just being realistic with what you bring to the table and what your time capacity is and what fits your goals at this point in time.

David:
Yeah. And that’s an important thing to acknowledge in real estate in general, because there is a temptation … I need to come up with a name for it. This is where I missed Brandon Turner because he was so good at coming up with clever names for things.
But it’s this idea that there’s a part of human nature that wants to ask the question of what am I supposed to do, just give me the blueprint and I’ll just go do it, as if life works that way, as if there’s just a path that everybody can walk, and that isn’t the way that this goes. There are many paths, and depending on your skill set, your time, your goals, they’re all going to be different. And part of, I believe at least, part of being good at real estate is knowing yourself well enough to know what type of properties that you should be getting into and where your time is better spent.
I think that’s one of the reasons that I went out and I built businesses and built teams instead of just focusing on buying a whole bunch of smaller properties is I had a skill set where I like leading people and I’m a visionary, whereas somebody else, that’s not what they’re good at. They’re really good at bookkeeping, and so they just need to be running syndications and buying multi-family properties.
And it’s both frustrating when you’re new trying to figure it out, but it’s beautiful when you’re experienced because all of a sudden the tree explodes into branches and you have all of these different ways that you can walk in that makes your job more fun.
And I know Zach, one of the things that you believe in is this concept of strategy stacking. It’s, hey, you’re good at this asset class, what’s the next asset class that you can bring in that will complement what you already got going on. Can you share what that strategy is and how you’ve worked it into your business?

Zach:
Yeah, absolutely. And I think so many people, especially starting out, David, they get the shiny object syndrome, right? And it’s like, oh, I want to do this, I want to do this. And that’s a beautiful thing about real estate, there’s so many different ways that you can make money investing in real estate and be successful, but you can’t start with all of them at once.
And so you need to stay hyper focused on what makes sense for you and then just understand that as you continue your journey, real estate investing is a lifelong journey, that there’s going to be multiple different ways that you can learn about and participate in. That’s exactly how our business and our personal investing has grown over time.
We bought our first duplex and the next year decided to buy two more duplexes and continued to scale over time. We tried wholesaling. That was a lot more work than we initially anticipated, but that allowed us to learn how to evaluate deals. Guess what? We wanted to decide to keep some of those deals, because we really liked the idea of long term holding. Then we started to build this business and be successful with that, investing in different areas.
Started to make more money. What do we do with that money? We got to put it back into real estate. We didn’t want to own 500 single family houses. I think I heard you refer to your portfolios, like herding cats at some point in time and that’s very much the case. I love single family, but only to a certain degree. And so we needed a place to scale quicker and larger deals takes those tax benefits.
There’s all sorts of different strategies to invest in real estate. And that’s the beautiful thing is you can be successful in multiple at once, but you got to stay hyper focused with one strategy at that particular point in time. Learn it, succeed at it, and grow over time.

Rob:
Yeah. So when you’re entering a new strategy, I guess, because it seems like … So looking at your portfolio, you did wholesaling, residential, now a little bit of commercial, you’ve succeeded at it. Is it a matter of, oh, I feel like I’ve succeeded at this, time to try something new? Or do you think of it as more like, I need to master this strategy before I move on? What’s your mindset there?

Zach:
Yeah. I wish I could tell you that I have this clear action plan, Rob, but it’s more or less learning about a new strategy, being intrigued by it, because if you’re interested, if you’re passionate about it and you’re interested in a strategy, then you’re obviously going to migrate towards that more and want to learn about that and take it on.
I’ve always been attracted to the idea of commercial in general, just because it’s longer term leases. Now there’s a lot of risk and volatility with that as well, make no mistake about that aspect of it. Single family and residential I think is just your bread and butter, solid way to build wealth, at least initially. But that’s been something I’ve always been interested in, just to be really passive and have these long term leases in place. So we decided we wanted to invest in commercial, well, probably five to six years before we even bought our first one, but it was just talking with the right people, learning about that.
But the next and when we hear about different strategies, and this applies to the tax side too, when we learned about cost segregations and investing in opportunity zones and things like this, my mind was blowing because I was like, there’s really ways to completely reduce your taxable liability, if you’re in and invest in real estate doing the same things we were already doing. We love real estate for all these reasons. So it’s learning about it and just continuing down that path until the next thing comes up.

David:
So what are some practical examples that you can think of where the average listener can sort of … Let’s say somebody starts on the small multi-family path. I think that’s probably the most common way everyone gets started. Rob, you were part of the Pokemon generation. So was Pikachu the first Pokemon everybody gets?

Rob:
No, you usually choose between Bulbasaur, Charmander, or Squirtle.

David:
Okay. So real estate’s just like, it’s the same thing. You’ve got the small multi-family road, maybe that’s Bulbasaur. Then you’ve got the single family house hacking road, that’s Squirtle. And I don’t remember what the other one you said was, but there’s another route that-

Rob:
Charmander.

David:
Charmander, right? Maybe that’s going to be like just buying single family homes in cash flowing areas, like Kansas City, lower price point areas. So there’s typically those three passives people start on, you’re going to house hack, you get into single family or small multi-family.
Small multi-family is probably the most common way that people get started. You learn the fundamentals of real estate, the best. Zach, you mentioned you have a lot of duplexes, triplexes across the country. That’s not a coincidence.
So somebody gets 7, 8, 9 of these things and they start to experience what I call that herding cats feeling. It’s like in the cartoons where there’s a leak in the submarine and they stick their finger in it. And then another leak pops out and then they stick their finger in, another one they stick their toe. And then they got to let go of one finger to go plug in another one, and the water’s coming out from there.
And for me, it was like every single day, another little leak was popping up and none of them were going to sink the boat, but they were freaking annoying. And it wasn’t fun to be investing in real estate because I’m dealing with these very small problems of a leak going on, a sewage line breaking, an air conditioner going out, a tenant complaining about something.
And I just thought, I could sell 25 of these houses or replace it with one house 25 times as big or as good or an apartment or something and get the same benefits, but not the 25 different holes that I’m having to plug. So for me, that was my moment where I realized, all right, I need to get into a different asset class.
I guess what I’m getting at here is can you share some practical examples of what a listener who’s got seven or eight small multi-family properties that’s ready to get another stack added onto what they’re doing, some possible scenarios that would work for them?

Zach:
Yeah, absolutely. I think that’s really what a lot of people think about when they’re trying to achieve financial independence or significant passive income is how do I scale up into some of these larger type of deals? And there’s multiple things you need to do to position yourself to really be the most attractive investor.
Biggest thing is on the financing side. I think that’s why starting out with single family, small multi-family puts you … Not only does it give you the experience investing in real estate, but it also positions yourself in the best financing position. When a commercial type of lender, whether we’re talking commercial, retail, office, industrial, multi-family, when they’re evaluating you as a borrower, they’re going to look at your track record and your performance.
Most people are not jumping right into real estate, buying a 50 unit apartment complex. I think it’s a great way to scale up over time and also show the bank that, hey, I can be a successful investor buying and holding these properties and running them successfully. And that’s going to dramatically change the type of lending that you can accomplish. Having that experience gives you the confidence as well, to look at larger scale deals and just changing your mindset about that.
But I think financing is the biggest thing to really look at, make sure you’re having a successful portfolio. Other than that, I mean, there’s not a lot of difference whether you have a $200,000 single family in the Midwest, a $2 million deal in a more expensive neighborhood, you still evaluate the numbers the same. So don’t limit yourself looking at the larger deals and getting scared at participating in those, even if it requires bringing in some private money.
Practical examples though, I mean, running a business successfully with those smaller rentals, that’s huge, and also scaling your team over time. As I mentioned on the managerial side, your management … And David, did you have management on … I mean, you weren’t doing your own management, right? You had employed management? It was still this herding cats feeling, even though you had management?

David:
Yeah. Even with the managers that were in place, they still had come to me and they’re like, “What do you want to do with this? What do you want to do with that?” And it was, well, the bid that you got. I remember one of them, there was a sewage line that broke underneath one of the properties and they came back with a bid for $46,000 to fix it. And I remember thinking like … I mean, I wouldn’t let a house go to foreclosure, but that would make more sense than what they were wanting me to spend on this.
So I said, “All right, well, who did you talk to?” They gave me the name of the company. And I said, “Did you send anyone else out?” No. Would you like us to? I was like, “Oh.” I’ve told this … Here’s a side note. Property management companies go through staff so fast that you can tell someone, this is what I want, and they probably hired three people since the last time you spoke to them and that person has no idea what you had said to the first one. So you’re always reiterating these instructions.
And we sent somebody else out and he said, “Oh, I can fix this for $2,700.” They ran a scope through the line and figured out where the problem was, whereas, the initial bid was, they were just going to rip out the entire floor of the home to try to find where the leak was. And I just remember thinking I could have easily just replied yes, fix it, and threw $46,000 at a $2,700 problem, and that was with property managers. So my issue was more, I needed to hire a person that could manage your property managers, and I wasn’t able. That’s been a very difficult thing to find.

Zach:
So practical examples from that, and I agree with you a hundred percent is yes, knowing how to manage your managers. If you need to hire an asset manager at some point in time, it’s worth doing that because they will also allow you to be more successful and more passive.
But I mean, even in that scenario with your property managers, even if they took care of the issue, which clearly in your case, they didn’t because they just gave you the first, most expensive quote and left it at that, but even if they take care of everything and you’re just hearing about it, that’s just so much noise and it distracts your mindset from what’s actually …
And that could be a super successful property that sell and have huge appreciation in the future, but there’s so many of those issues that are distracting you from being able to focus on your business. So focusing on how to manage the manager, how to find and vet good managers, and how do you solve individual problems when they come up? Sometimes it takes getting on the phone and calling those contractors and being creative and finding the right people to actually solve those problems.
It’s the same type of issues, single family house, it’s just maybe a larger scale issue, but solving those problems is probably one of the best skill sets you can have in learning how to follow through with that.

Rob:
I’m curious, David, what was that job title? Was it property manager, property manager?

David:
Kind of.

Rob:
Or was it property manager, property manager?

David:
So that is another issue I run into in business where your staff is always asking for a title or a job description. There’s this like, I need to know what’s my title, what’s my job description. I was like, well, I’m hiring you to do all the stuff that I don’t want to do and there’s a lot of different things. So I don’t know that I could possibly come up with every possible thing that could come up. But can I just trust that if you have to send an email out through MailChimp, you could do that. Do I need to include that in your job description?
I don’t even think I called him an asset manager, because every time I put something out for that, I got people that wanted $200,000 a year. But basically what they had to do is sit in front of the email that all of the property managers would send the statements and their repair requests to and handle the emails that came in with some degree of common sense. And if you ran into a big problem, no, I need to go bring this in front of David and learn from what he did and fix it.
So I learned quickly that giving the title asset manager was not a good idea, because it was like, oh, well, I’m an asset manager for this huge corporation and they pay me 250,000 a year, so I’ll come work for you. And I’m like, no, this is only like three hours a week of work that I actually need done.

Rob:
Yeah. I sent out an email yesterday that was like eight roles. And I put in the email that each role would require like one to two hours a month. It wasn’t anything. It was to help the people in my program. I’m trying to like expand the capabilities of it. But I had a lot of people that reached out and they were like, “Oh, I want X amount and X amount.” I was like, “Oh, no, no, no. As per my email, it’s like two hours a week, maybe. It’s not a lot.” So I think that’s probably pretty common.

Zach:
Well, no one’s going to care as much as you care about your properties, and so how do you make that hire? How do you find someone that can make those executive decisions for your portfolio? It’s tough. But if you find a good property manager, which that’s a tough job, right? I mean, that’s a tough business. It’s really like you have mad owners and you have mad tenants and you’re just in the middle of it, but there are good ones out there that can usually, if you give them good direction, handle the majority of the issues.

David:
Yeah. I would say to the people listening, if they’re trying to figure out how do I get into the next step, I really believe, and Zach, I’m curious if you would support this, and you as well, Rob, a big hindrance to people being successful in our world, which I’m going to call the 1099 world because it’s just, you’re responsible for your own success here, is they bring a W-2 mindset into it.
They’re expecting structure and rigid rules and a 9:00 to 5:00 schedule and all these things that we’ve been conditioned to expect from grade school, into the workplace, to where it’s just like we almost have a moral system set up around you shouldn’t have to work past 5:00, or weekends you should have off. And if you’re asked to do something outside of that, it feels like you’re being taken advantage of, even if you sit in the office and do nothing for seven out of the eight hours you’re getting paid for, right?
So when somebody comes into our world with those expectations, it’s very difficult to adapt to some … You could have a problem at a short term rental. Let’s say that there’s a mouse running around inside there at 9:00 at night. And the tenant isn’t looking at it like, oh, I’m bothering the person, they’re, I want this mouse out of this house and you don’t want a bad review. So the right thing to do is to jump in and fix it.
If people could have that flexibility with understanding that you are getting paid to solve problems and they could pop up at any given time, but there’s benefits to this as well. I personally think we would have more people in our space that were able to get more involved in what the three of us are doing and therefore, they would learn. Zach, do you take a similar opinion to that?

Zach:
Well, that’s the hardest thing, David, is finding staff that has that mindset. I mean, the entrepreneurial mindset, there is no 9:00 to 5:00, there is no on, off. And that’s a hard thing too. I think that we can probably all attest with this. I mean, sometimes you need to turn off your own mind and focus with your family when you’re at home. That’s a hard thing to do and I’ve struggled with that. It’s like my wife constantly reminds me.
But to find someone that has that same sort of mindset, I don’t know how to do it. I mean, it’s the biggest challenge is finding good people. And if you have someone that has that entrepreneurial mindset and to keep them, I don’t know, they would likely want to be some sort of partner to some degree at some point. How are you going to compensate them and keep them happy to stay? That’s a tough thing. What do you think, Rob?

Rob:
Yeah. This is hard, with the W-2 and the 1099 thing is we want all the good things of the W-2 world when we’re 1099, but none of the bad things. And so it’s like, we want our cake and we want to eat it too. And that this is something I deal with a lot. I’m a podcaster, a content creator, a real estate investor, there is no moment in which I’m not thinking about really those three things, other than if I try to turn off at 5:00 or 6:00. And my wife and I have an incredibly flexible life, and so do the kids, but it is not fun when I come home at 6:30 because she’s like, “Well, you can come home at 4:00, right?” And I’m like, “Well yeah, but if I don’t work, we don’t we don’t pay the bills,” kind of thing.
And it’s really similar even with hiring employees and everything, because I’m the entrepreneur, they’re not. And so the meeting of the minds there can be very difficult because I have to really make them understand, especially my assistant, who she’s my property manager and everything, and I have a lot of sympathy for her because she’ll be messaging Airbnb guests at 7:00 in the morning, 7:00 at night, midnight, 2:00, 3:00, but she might have downtime from 1:00 to 6:00 PM because there wasn’t a single peep on it. So it ebbs and flows.
And I think you’re right. I mean, I think you just have to prep people that it’s like, look, it’s cush when it’s cush and it’s not when it’s not. When it rains, it pours. You have to really understand that with the real estate space, because it’s never a 9:00 to 5:00 thing. It’s a 9:00 to 9:00.

Zach:
But that’s what you’re building. That’s what you’re growing over time. You got to put in that work now. You got to be willing to do what no one else will right now to build that type of lifestyle and portfolio long term. So it’s just part of the game.

Rob:
Although, I will say that when I was living in an apartment and stuff broke all the time and I would put in my maintenance requests, they wouldn’t come fix it for two or three weeks. I wish I could do that, where things go wrong and I’m like, yeah, I’ll give it a couple weeks and then I’ll fix it. I am envious of that.

David:
All right. The next segment of our show is the deal deep dive. In this segment of the show, we are going to dive deep into one of our guest’s specific deals to see how it turned out, how they found it, and a bunch of other juicy details. Remember that you can do more deals yourself with the help of BiggerPockets tools and resources. So be sure to check those out. So question number one is what kind of deal is this?

Zach:
So the one we’re going to be talking about today is right up Rob’s alley. This is a luxury short term rental out in the mountains in Keystone, Colorado. We actually found it basically just through broker relationships. It was listed and poorly marketed and then just became a stagnant listing.

Rob:
Okay. And how much was the deal?

Zach:
So it was listed at 4.8 million and that was far over list price, far over market value. Of course, Zillow has it at 5.5. And I think that they were going off of that as their pricing structure. But no one, there had been zero activity on it, no bids, anything. And it was listed by a broker that wasn’t really, I think checked in and was maybe on the ski mountain more than they were answering their phone. So that’s what it was listed at.

David:
Okay. And then how did you end up negotiating it to get it in contract?

Zach:
So we looked at it. And we don’t have a lot of short term. I mean, we have limited short term space. And so this was really a big learning lesson for us is evaluating it, looking at areas for value add. So this is something we looked at as, hey, obviously we need this, the numbers to make sense, be positive cash flow. We evaluate all these deals, even if they don’t make sense on the surface, just to see what kind of opportunity there is there.
So what we did is we basically gave them an offer. We saw that this is a stagnant listing, no activity. And so we just put an offer in. Our initial offer was 3 million, and so that was significantly less than what they … And especially in today’s market. They told us, well, they didn’t even respond, that’s just insulting. And so that’s what we did. We threw it out at 3 million.
We heard back from them later, I think it was three months later, still no activity on it. And it’s a unique house too. It’s like 9,000 square foot, 8 bedroom, 11 bath, just a very large, unique house, I don’t think a lot of people wanted to take on either. And we ended up going under contract at 3.2 ultimately.

Rob:
Sounds very, very familiar to a deal that me and David just did. How did you fund it?

Zach:
So we actually used a second home loan for this property and this will be a good learning lesson, just on the financing side to look at what different financing options are out there. Because of the price point on it, we were told by probably 20 different lenders that no way can you do a second home loan with 90% loan to value, this is jumbo, this is above our underwriting criteria that we would allow for. And so most lenders were quoting, I think it was a 60 to 70% loan to value on it. They also didn’t know how to value the property. They’re like, well, why are you buying it below market value? What’s wrong with it?
So we actually ended up finding a good credit union locally that had done some financing for us commercially in the past. We got a second home loan with 10% down. They actually waived the mortgage insurance because there was no company that would provide mortgage insurance at that price point.
And the interest rates as well, we almost used an ARM product on that, just because interest rates were a little bit more volatile at this point in time. ARM products were still, I think we got a ARM quote at 3.75, but we ended up getting a long term fixed product at 4.25 on it.
That’s the interesting thing too, some of those larger loans, and on the commercial space, you can actually get a lower interest rate than … I mean, those interest rates have less volatility sometimes than your single family.

Rob:
When was this again, just so that I know?

Zach:
Yeah, so we just acquired this earlier this year.

Rob:
Okay. Yeah, because we just closed our 3.25 million house at, I think six and a half, or no, 6.25. So just a little bit over yours.

Zach:
Yeah, and that’s a tough thing. We were getting a lot of quotes at … So this was obviously a couple months ago, interest rates were definitely different than right now, but still, we’re still seeing some quotes on, again, ARM products below that 4% and it’s just, I think finding the right credit unions and banks to explore with.

David:
So what did you end up doing with this deal?

Zach:
So this is a short term rental. There’s not a huge value add as far as renovation, it was built in 2001. So it is dated and we’ll put some renovation into it over time, but really the opportunity with this one is the property manager, which was also the listing broker on it. So you can imagine how that property was run.
It’s large enough where it’s a wedding venue in the summer, as well as corporate space. So it actually has quite a bit of activity in the summer. But they kept the rental at, I think it’s $1,700 a night throughout the entire year. I mean, I think that’s probably rule 101 with short term rentals is having dynamic rents, especially in peak season. Ski season, that property is projected to rent out between 4 to $5,000 a night in peak season, and she was still renting it out at $1,700 a night.
Now, she kept it rented for 340 nights last year, but obviously there’s much more upside potential. So that’s our use of it is obviously going to keep the short term space, probably do a little bit of value add just in the renovations, but also increase that income significantly.

Rob:
Well, I guess we sort of talked about the outcome. Is there any other specific outcome that came out of that, or we’re still figuring out exactly where you’re going to net out, right?

Zach:
Yeah, this is a new deal for us, so we’ll look at it and see how it performs over time. We’re excited about it. If there’s a huge equity position, maybe we’ll do something with that, or look at 1031 in the future, but I don’t know. I mean, we’ll plan to use it of course maybe a couple times a year when it’s not rented out.
But we’re excited to see how the path goes and just on initial projections, I mean, they did … Just in using dynamic rents and not changing anything else about the property, we were able to increase the income by over 30% on it, and that’s huge.
And so that took it from being a property that didn’t cash flow at all, at 90% loan of value, we would’ve been losing quite a bit of money on that to actually being a positive cash flow, which has been hard to do.
We’ve been looking in this area for short term rentals for probably three or four years now and it’s always a scenario where it’s like, okay, we’ll buy it. If we’re not putting 30 to 40% down on it to make it cash flow, it’s not going to cash flow. We just could not find anything. So I think the ability of finding something at this price point, unique house, undervalued rents, we’re just excited to see how it performs over time. Have you guys out to ski in the winter.

Rob:
Oh yeah, count us in.

David:
So what lessons would you say you learned from the deal?

Zach:
I would say, well, we didn’t really talk about too much of the negotiation. I went straight to the point of what we actually ended up acquiring the property at. There was a lot of tactical conversations throughout the process of, oh, we have this person, we have some people, because they knew we were interested in it. We were the only people that viewed the house. Even though we gave them a low ball offer, it was, hey, we’re interested. We have some other people that are interested. They’re putting in these offers and countering us.
And we just stuck to our guns the whole time. We knew the number. This wasn’t an emotional buy. That’s the biggest thing I think in this one, David, this was not an emotional buy that you can easily get yourself into, I think especially in the Airbnb space, if you plan to use it. But we knew where our numbers were to make it make sense and we stuck to that the entire time and that allowed us to actually acquire it at the price that we needed it to.
It was a waiting game, but we just stuck to the numbers as well as exploring different financing options. That’s a huge thing. I encourage everyone to look at least 5 to 10 different lenders for every deal, even if you have a lender. I think we so often fall into this category of, hey, I want to use a lender that I’ve been using, because I feel loyal to them and I feel comfortable and it’s easy, I don’t have to turn in all my docs.
Well, lenders are not created equal and they’re quite dynamic as well. So if you have a good relationship with someone, absolutely explore that, but every deal is different and definitely be willing to look at different loan options out there. We had so many people that tell us that you cannot finance that, a 90% loan to value. We don’t have mortgage insurance on it and a lot of people said that’s just not possible. So those are the biggest takeaways. Also, just looking for value and sometimes that takes some time, especially in today’s market.

Rob:
Awesome. And lastly, who was the hero on your team for this deal?

Zach:
Ooh, is this a new question? I don’t know if I’ve heard this one before.

Rob:
It is. We’re throwing you a little curve ball, Zach. The old switcheroo.

Zach:
Well, my wife’s a hero. I have to give her the shout out because even though we … I got emotionally attached to … I was willing to pay more than we should have, but she was the one that really reigned us back in and said, “No, we’ll find something else. You don’t need this. Don’t stretch this to make it work just because you’ve been looking for three years for something like this. If it makes sense, it does, and if it doesn’t, we’ll find something else. It’s not a big deal.” And so I think really that is the biggest aspect of just keeping us focused, knowing the numbers and going through our criteria. And so definitely wife is a hero on this.

Rob:
They always are.

Zach:
Yeah. Yeah. She made me say that by the way, she knew that we were recording this.

Rob:
She’s standing on the other side of the camera like, you better say it.

Zach:
Yeah.

David:
All right. Well, that brings us up to the last segment of our show, it is the world famous, famous four. In this segment of the show, Rob and I will ask you the same four questions we ask every guest and we’re excited to hear what your answers would be. Question number one, what is your favorite real estate book?

Zach:
And I don’t have anything that hasn’t already been said. There’s been so many good books. A huge Kiyosaki fan, but probably for right now, The Millionaire Real Estate Investor, Gary Keller. That one’s just huge for me, and I try to read that once a year, section two, talking about the different stages of think, buy, own and receive a million. That’s huge, implementing systems. I mean, that’s just an outstanding book and encourage everyone to read it if they haven’t.

Rob:
Great. Great. Question number two, favorite business book.

Zach:
Business for us, I mean, this kind of goes to what we were talking earlier about the entrepreneurial mindset, so the E-Myth absolutely, or E-Myth Revisited on this one with Michael Gerber. This is definitely something that I try to read consistently as well to remind myself to focus on the business, not so much in the business. I think this is a crucial book for anyone running a business in any capacity and definitely something that is just how to build a team, focus on systems. It’s an essential book.

Rob:
Awesome. And when you’re not building a turnkey empire and a commercial empire, what are some of your hobbies?

Zach:
So as I mentioned to you before the show, we have a one year old, that’s our hobby right now. We’re loving that. We used to travel quite a bit. Right after we got married, we did a seven month honeymoon and visited like 30 countries, scuba dive a lot. We love to travel. We’re excited to get back into that once the kiddo’s old enough to do that. And then other than that, just enjoying nature out here in beautiful Colorado.

David:
In your opinion, what sets apart successful investors from those who give up, fail, or never get started?

Zach:
I think I’m going to say I’m going to use three terms because I believe that all of these are essential for people to be successful in real estate. First of all, they need focus. You got to stay focused on what path of investing you want to participate in. If you’re a new investor, don’t get the shiny object syndrome, choose a path and take action and follow it.
But the biggest thing over time, I think is just staying the course. Tenacity and creativity are the two other keywords. Real estate has a lot of obstacles and it’s not easy, right? This takes a lot of time. This takes work. This isn’t a get rich quick type of scenario and it’s challenging and frustrating, but as long as you can stay consistent to invest in this lifelong journey, generational journey, as you teach your children how to be a successful investor as well.
But you got to stay the course and be creative about solving problems. There’s always a solution, multiple solutions often, and put in the due diligence to find out what those are.

Rob:
Very wise words to live by, Zach. Lastly, can you tell us where people can find out more about you?

Zach:
Absolutely, our YouTube page. Although it’s a newer page, we’re trying to put out as much educational information about all things real estate. So our page is just Rent To Retirement, Rent, T-O, Retirement. They can go to our website as well. That’s renttoretirement.com, to learn more about our team, different things that we have going on. If they’re interested to learn about turnkey investing in any of the areas that we operate in. And that’s got links to all our social media accounts as well, so that’s a great place to start.

David:
Rob, how about you?

Rob:
Well, you can find me on YouTube as well on Robuilt. That’s R-O-B-U-I-L-T. And you can also find me on Instagram, @robuilt, and TikTok, @robuilto.

David:
All right. And if you like the interview that you heard today with Zach, go check out BiggerPockets’ YouTube page. We have a ton of stuff. I guess it’s called a channel, not a page. Tons of stuff on there, different interviews. I’m interviewing people. Rob’s got some stuff that’s on there. Lots of different BiggerPockets personalities that if you want to get deeper into this world, there’s plenty of content. And then be sure to check out biggerpockets.com/podcasts, where you can see the other podcasts that we’ve got for you to listen to on specific topics. If you want to follow me specifically, I am davidgreene24 on Instagram and everywhere else.
Zach, this has been fantastic. We really appreciate you being here with us and sharing your information. Is there any last words that you’d like to leave with our audience before we let you go?

Zach:
Go out and take action. It’s a crazy world right now, high inflation, interest rates are crazy, competitive markets. There’s still deals to be had and people are still being very successful in real estate. Don’t let that stop you. Educate yourself and take action. It’s been fun guys. Thank you so much.

David:
Awesome. We’ll let you get out of here. This is David Greene for Rob power-coif Abasolo signing off.

A perfect storm has been brewing in the U.S. economy. Supply constraints coupled with increased demand built up during the pandemic have led to rapid inflation. The Fed is now taking action by raising interest rates significantly, a move that has many worried about the impending recession soon to follow. While a housing market crash is not anticipated, economists are predicting more inventory and a cooling market due to the interest rate hikes. 

In an episode of BiggerPockets’ On the Market Podcast, we spoke with Nick Timiraos, Chief Economics Correspondent for The Wall Street Journal, to get his thoughts on the Fed’s plans now that the Fed has increased its interest rate by 0.75%, the most aggressive increase since the 1990s.

The Difficult Task of the Federal Reserve

Timiraos says to think of the Federal Reserve System as “a bank for banks,” because the Fed controls short-term interest rates. The Fed doesn’t directly set mortgage rates but determines the interest rate banks pay to borrow from their reserves overnight. 

The Fed is charged with the difficult task of monitoring and maintaining the economy’s health in a couple of ways. “They have two goals assigned to them by Congress: to maintain stable prices and to have maximum employment,” explains Timiraos. “And you could think of that as the most employment possible without having inflation. And those are their two goals. And then, in addition to all of that, they’re charged with regulating the banking sector.”

When the Fed reduced interest rates at the onset of the pandemic, they were trying to stimulate the economy. As they increase interest rates like now, they’re doing it to slow down inflation, which inevitably slows down the economy. 

What is Causing Inflation?

The problem started with the $5 trillion stimulus package for pandemic relief. The federal government’s response resulted in much higher inflation than we currently see in other countries. In the short term, it may have appeared that they achieved the intended result of providing more financial stability to families. But national debt must be repaid. The government must, at some point, tax more than it spends. Federal Reserve economists estimate that pandemic spending contributed about three percentage points to the inflation we are experiencing now. 

In the long run, any government attempt to stimulate the economy by creating money without also increasing production leads to harmful inflation. But the impact of the pandemic was so swift and far-reaching that it would have led to deflation if the government hadn’t stepped in. And meanwhile, food and housing insecurity was rising. About one in five children may have experienced food insecurity during 2020. So despite knowing that distributing more money into the economy would debase the currency, the federal government was most concerned with the greater implications of starving children and broad housing insecurity.

Then, when lockdowns were lifted, there was a pent-up demand for goods and services, along with extra money for consumers to spend. “You have a lot of demand. You have more people working, making more money, spending money on things,” says Tirimaos. 

But, at the same time, global supply chain issues have prevented producers from keeping up with demand. That’s pushed the inflation rate to 8.6%, according to May’s CPI report, and now the Fed will do whatever it can to keep that rate from rising. 

“The Fed can’t do a lot in the near term about the supply side of the economy,” explains Tirimaos. “They can’t create more oil, they can’t create more houses, their tools just don’t do that. So when they talk about bringing supply and demand into balance, they [need] to get lucky, they need to get supply chains moving again.” 

Or, they need to do something to curb demand so that a balance between supply and demand can be achieved. 

That’s the goal of raising the benchmark interest rate. When the Fed’s rate rises, its effect spreads into the mortgage market, the auto market, and increases the cost of borrowing business loans. Overall, people become less likely to borrow and purchase homes or vehicles. “And also businesses hire fewer workers. And so people have less overall income. And so they don’t spend as much money,” says Timiraos. 

Why the Fed is Taking Action Now

If inflation has been a problem since last year, why is the Fed suddenly getting aggressive with interest rate hikes? 

During the pandemic, specific supply-constrained industries, such as new and used cars, saw the highest price increases. “And so for a while, of course, the Fed infamously said, and a lot of private sector economists agreed that this was transitory,” says Timiraos. “The idea behind that was that inflation was really driven by the pandemic. And assuming the pandemic was over with quickly, inflation would be too.” 

But more fuel has been added to the fire since then. The war in Ukraine caused inflation in the global energy market and supply chains never recovered as well as they needed to. The problem no longer seems transient, which has the Fed concerned. 

“They’re worried that one year of high inflation is okay, but if we have a second year of that, people are going to begin to build expectations of higher prices into their wage setting and price setting behaviors. And that psychology is something the Fed really strongly wants to avoid.”

The Fed’s goal now is to achieve a neutral interest rate, says Tirimaos. “A neutral interest rate is the level the Fed thinks isn’t providing any stimulus to the economy. If you think of the economy as a car and the Fed is the driver, they’re taking their foot off the gas. They’re not pushing on the brake, but they’re trying to find that place where they’re no longer pushing on the gas, not necessarily stepping on the brake.”

The Fed is “not trying to induce a recession,” says Federal Reserve Chair Jerome Powell. But it will do whatever it takes to slow down the overheating economy, which could very well implicate a recession.

What About Asset Prices?

Real estate appreciation isn’t factored into the Fed’s assessment of inflation, but the Fed is charged with overseeing the financial system’s stability. So in that way, Tirimaos says, they’re concerned about rapidly rising asset prices. “Now, there’s been a big debate over the last 10 years which is: should the Fed raise interest rates even if inflation’s contained and even if they’re meeting their mandate unemployment, but to prick a bubble? Because an asset bubble could jeopardize their ability to achieve both of their other goals. And the argument has generally been, no, we shouldn’t use interest rates. We shouldn’t raise interest rates to prick asset bubbles.”

But in 2022, inflation is so high that the Fed needs to raise interest rates regardless. Curbing the asset price boom simultaneously is a “happy coincidence” rather than a direct goal. 

Still, a cooling housing market aligns with the Fed’s goals. “They want [economic] activity to cool, they want to remove some of that excess demand that you have right now. And so if you’re in situations where homes that used to be getting 10 or 30 offers are now getting three or four, for the Fed, that’s probably a healthy development.”

What This Means for Consumers and Investors

The Fed is attempting a “soft landing” that won’t result in a recession, but the chances of this are slim, with history as a guide. Dave Meyer, VP of Analytics at BiggerPockets, writes, “As the Fed raises rates, many parts of the economy will be negatively impacted.” These include a falling stock market and a loosening labor market. “With all these factors converging, I believe a recession will likely come in the next couple of months.” 

The best thing Americans can do in preparation for a recession is to save aggressively and invest for the long term. Experts recommend adjusting your budget to bolster your emergency fund in anticipation of layoffs. Once your emergency fund is adequately funded, invest in the stock market while prices are low—or invest in real estate, which is typically more stable. 

Investors relying on mortgages to make deals will have their margins constrained by rising mortgage rates, so they’ll need to factor that into investment decisions. Make sure the deal is profitable with the current rate, but remember that refinancing may help increase your profit margins later on if we see interest rates fall again.

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If you’re anything like me, you grew up believing rental properties were inherently profitable. Within that belief, you likely didn’t know how they made money, just that they did.

Well, in this article, you can learn precisely how rental properties make money. Overall, they make money in five different ways.

Cash Flow

Cash flow is what’s left over from the rental income after all expenses are paid. Cash flow may also be referred to as “net income” (as compared to “gross income” which is the income before expenses are taken out). 

Cash flow can be positive or negative. Positive cash flow means there’s excess income after the expenses are paid, and that income gets to go right into your pocket as profit. Negative cash flow means the costs have exceeded the income, and you now have to pay out of pocket to cover those.

You can calculate your cash flow on a monthly or yearly basis. Decide which you want to look at, total up your expenses for that period, and subtract that expense total from the rental income total. What’s left is your cash flow. 

A nice thing about positive cash flow is that it can act as a tremendous buffer against shifting real estate market dynamics. For example, suppose the real estate market crashes and the value of your property decreases. As long as you’re still collecting cash flow from the property, you can wait until the market corrects and the value of your property goes back to where it was. 

In that situation, you wouldn’t even know we were experiencing a recession since you’d still make the same amount of money from the property each month. 

Compare this to a negative cash flow situation and the market tanks. You may get stuck in a position that forces you to offload the property at a loss because you can’t afford to maintain it through the recession.

While not the highest profit center of all, cash flow can serve as a critical foundation for successful rental property investing.

Appreciation

Probably the most popular form of profit when people think of rental properties, appreciation has been a consistent performer over time and one of the biggest players in what makes people so wealthy from real estate.

Appreciation is when the value of a property increases due to various factors. 

The three main causes of appreciation are:

1. Improving a property
2. The location

Improving a property

Rehabbing a property will create appreciation because that rehab has now increased the property’s value. In most cases, the increase in the value of the property will be more than what the investor had to pay to complete the rehab. 

For example, let’s say you buy a $100,000 property and put $30,000 into a rehab. With all of the improvements, the property is worth $150,000. You only put in $130,000 ($100,000 plus the $30,000 rehab), but now the property is worth $150,000. There’s an extra $20,000 in free money thanks to the appreciation generated by the rehab. 

This kind of appreciation is called forced appreciation.

Location

The location you bought the property in will also be a primary driver of appreciation. If the demand for housing in the area—the broader market or the specific neighborhood—rises, so will property values. Demand may rise due to general market growth, or it may be because you bought in an area that got intentionally gentrified, which could force quicker and more dramatic appreciation. 

In addition to improvements and demand increasing the value of a property, an investor may likely also experience appreciation in the market value of rental income. Rents inevitably increase over time due to several factors, but what causes appreciation to the value of a property will usually trigger appreciation in rental values as well. When the rents increase, your cash flow will increase proportionately.

While appreciation is one of the highest profit centers of a rental property, it’s also speculative. It’s never a guarantee that the reason you believe a property will appreciate will pan out as you assume it will. You should always consider contingency plans on how you expect a property to profit should the appreciation strategy fold. 

The other consideration to remember is that rental properties are long-term investments, and often true appreciation potential is experienced over the long-term rather than the short-term.

Building Equity Through Mortgage Payoff

One of the coolest things about owning a rental property is that your tenants’ rent check is most likely covering your mortgage payment! Hopefully, it’s covering more than that, but if it’s at least covering your mortgage payment, it means that you aren’t the one paying down your mortgage—they are.

Here’s an example: You buy a $100,000 rental property with 20% down. That means you paid $20,000 upfront and the remaining $80,000 is the balance on the loan, in addition to interest payments. 

Over 30 years, the mortgage balance is paid down every month through the income you receive from your tenants. At the end of those 30 years, $80,000 has been paid off and you now own the property free and clear. The $80,000 isn’t immediately liquid because it’s in the form of equity, but it’s your money, and you can either keep it as equity or pull it out of the property and use it however you wish. 

The bottom line is that you turned $20,000 into $80,000, plus any appreciation that’s most likely occurred over 30 years.

Tax Benefits

*Disclaimer: I’m not a tax expert. You should consult your CPA for all tax matters involving your real estate investments.

Rental properties are among the most advantageous investments within the IRS tax code. Essentially, rental property income can wind up being tax-free income when filed correctly.

While that may not sound like profit in your pocket right away, think about how much you end up paying in taxes on your normal income. If you’re in the 33% tax bracket, you could pay $33,000 in taxes on a $100,000 income. 

What if you were able to keep that $33,000? Isn’t that a hefty amount of money? The tax benefits aren’t exactly black and white, but they should at least give you a perspective on how substantial the profits from these benefits can be. 

The primary way rental properties generate tax breaks is through write-offs. When you write off an expense, it decreases your taxable income, decreasing how much you owe in taxes. If you have sufficient write-offs to decrease your taxable income enough, you could bring your tax liability way down or even zero it out.

The write-offs for rental properties come from two primary sources:

1. Expenses. Most of your expenses on a rental property can be written off. For example, property taxes, insurance, management fees, repairs, maintenance, mortgage interest, etc. How these are written off is specified and you should consult your CPA for help on those.
2. Depreciation. The IRS assumes that a rental property will degrade over time, so they allow you to write off perceived wear and tear on your property. The IRS provides a specific equation to be used for depreciation. 

With the expense and depreciation write-offs reducing your taxable income, you stand to receive a notable amount of money taken off your tax liability each year, which in turn equates to profit in your pocket.

Hedging Against Inflation

Inflation, possibly one of the most hated words in the English language, tends to strain our lives in myriad ways. But is inflation always bad? When it comes to rental properties, inflation is actually a good thing. The more inflation, the more profitable your rental property may be.

Inflation causes the dollar to become worth less than it used to be. Assume you get a fixed-rate mortgage today on your $100,000 rental property. While $100,000 is worth $100,000 today, what if $100,000 is only worth the equivalent of today’s $70,000 at some point in the future when the dollar’s value goes down? That’s how inflation works.

As mentioned earlier, rent increases are caused by a lot of different factors, and one of those additional factors is inflation. When a tenant’s rent payment increases due to inflation, your fixed-rate mortgage payment doesn’t change, resulting in even more cash flow.

As with appreciation, inflation helps with both the overall equity in your property and the tangible cash flow hitting your pocket.

Applying the Five Profit Centers

It’s exciting to know how rental properties can make money, especially since the profit comes from five different directions. Having owned my rental properties for 10-12 years, I can personally vouch for all five profit centers. I vaguely understood them when I started investing, but it wasn’t until I owned my properties for a substantial amount of time that I could see how lucrative each profit center is.

One of the best things you can do as an investor is to understand each of these profit centers and apply the knowledge to your analysis when looking at prospective rental properties. 

There are two keys that you should know when beginning to analyze the profit potential of a rental property:

1. Contrary to what a lot of us were taught to believe about rental properties being inherently profitable, not all rental properties are. This is important to know so that you are prompted to analyze the profit potential of a property stringently. But also, if you run across a rental property and your analysis of it doesn’t suggest a profit, it may not be that you’re doing your analysis wrong; it may just be a property that doesn’t stand to be profitable.
2. Every rental property you look at may create a different balance between the profit centers. For example, an extremely high cash flow property may not come with much, if any, appreciation potential. Or the nicest house with the highest appreciation potential may not offer much in the way of cash flow. Or maybe cash flow is low, as can happen with higher interest rates, but you’re investing in a time of extremely high inflation, so suddenly, the inflation profit center takes the lead.

No two rental properties will make money in the same way at the same rate. In most cases, there is a risk versus reward trade-off. Mismanagement of a rental property can cause even the best property to not see a profit. But when you take the time to understand these dynamics and how rental properties make money and apply that to your buying decisions, you stand a much higher chance of experiencing noticeable profit from the properties you invest in.

If you’ve owned rental properties for a significant amount of time, what has your experience been in seeing returns from these five profit centers?

Find financial freedom through rentals

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Dave:
Welcome to On the Market, everyone. Today, we have certified deal junkie, James Dainard, joining us to talk about a super important topic that is on most people’s mind right now, which is what does a good deal even look like in 2022. But before we jump into that super interesting topic, James and I are going to be talking about some confusing and often contradictory data coming from the housing market right now.
Hey everyone, welcome to On the Market. I’m Dave Meyer, real estate investor and VP of Data and Analytics at BiggerPockets. Joining me today from Seattle, we have James Dainard. James, how are you?

James:
I’m doing well, man. Just try to keep up with this market right now.

Dave:
Yeah, it is a little confusing, and we are definitely going to get into that today. But before we do, I’m sure everyone who’s been listening to this podcast for the last couple weeks knows who you are. But if we have any newcomers with us today, could you just give us a quick explanation of your experience as a real estate investor?

James:
Yeah, of course. Like you said, I’m a certified deal junkie. I’ve been an active investor now for, and I can’t even believe it, like almost 20 years. I started when I was 23 years old as a wholesaler knocking doors in Seattle, Washington. We only buy in the Pacific Northwest, King, Snohomish, Pierce County. And we’ve gone from wholesaling. We used to wholesale 5 to 10 deals a month, and now we’re buying about 5 to 10 deals a month, and we’re a very active flipping company developer up in Washington. We usually flip about a hundred homes a year, build about 30 to 40, and then we lend money up there. And then we’re very active buying whole departments indicators where we’re doing a lot of value-add construction on the multifamily side.

Dave:
Yeah, James is a super experienced investor, and you should see his face when we talk about deal analysis. He just lights up. He gets so excited about it. So we are lucky to have him on the show today to talk about how to underwrite deals right now in 2022.
But before, James, we’re going to jump into some of our headlines. And as you said, we have some really confusing headlines. So I want to play a new game. I made it up. It’s just called Market Forces. I’m going to read you two market forces that seem to be opposites, but are existing at the same time right now, and I’d love to hear your opinion on which one is more important or which one’s going to win out. There seems to be these tug of war between opposing market forces, and I’d love to hear your opinion.

James:
I would love to hear what these questions are. That is the truth. Everything’s being contradictory right now. One thing says this, the other says this, and it makes it very confusing.

Dave:
It absolutely does. Okay, so let’s start first with demand versus supply. This is classic economic question. For anyone who hasn’t been paying attention to this, demand has been dropping off. You see that mostly reflected in… The data I like to look at is the Mortgage Banker Association Survey. I’m not sure if you follow this, James, but they actually just came out yesterday and said that mortgage demand reached a… I think it was like a 22 month or since 2019, it hasn’t been this low. So we’re seeing demand really fall off. But at the same time, so demand is low, we are also seeing supply remain pretty constrained. And as of this recording in early June, we still only have housing market data, really reliable data from back in April. But at that point, active listings were also down 10%. So we’re seeing lower demand and lower supply. So it’s unclear, in that kind of condition, where prices are going to go. So which one do you see winning out, lower demand or lower supply, in the battle for housing prices right now?

James:
I mean, demand is always key in anything that is moving in the market, whether it’s housing or… If demand is at an all time high or low, the transactions just don’t move in general. I believe demand is more important than inventory, because inventory can change with seasons, it can change with what people are actually doing right now. I think there’s a lot of things as we go into a different type of economy, and we possibly could be going into a recession, those are things that are still forecast down the road. So I do believe that the inventory is going to adjust up as demand starts to fall.
Cost of money, it gives people that reason to really slow down and think about things now, where if it’s really cheap, you always make that impulse buy or whatever it is, right? If something really pops up on Amazon, I’m going to be like, “Oh,” and it’s that impulse click buy. I do it a lot quicker. But if it costs more and I have to think about it, it just causes everything to slow down.

Dave:
Yeah, I think that’s a really good point that especially with inventory, demand, it’s not just like… Inventory is not a reflection purely of supply, like long-term supply. Inventory is a reflection of both new listings, how many new listings are coming on the market, and how many people want to actually buy that. So as demand declines, and I did misspeak, it’s a 22 year low for mortgage demand, not a 22 month low, that the mortgage bankers just announced. Yeah, it’s pretty big difference. That could mean inventory is on the rise.
That brings me to my second question, which is a little bit confusing to me. So Redfin came out with some data that on June 2nd, so it’s pretty recent here, that shows that as of June 2nd, the number of listings that had price dropped had doubled since February. So back in February, it was about 2.5% of listings were seeing price drops. Now it’s at 5%. Which historically, let’s be honest, is still not super high, but doubling is pretty significant.
But at the same time, 57% of properties are still selling for above list price, and the average list to price ratio is still 103%. So we’re still seeing most things go over asking, but at the same time, we’re seeing price drops. Super confusing market dynamics. What do you make of this? And which one do you think is going to be more important over the rest of 2022, let’s say?

James:
Well, the first thing, I think the data’s just a little bit behind right now. And part of that data that’s been recorded actually was on a lower interest rate. Because the rates were about four and a half to four and three-quarters when that data started recording. And when we started seeing the transition with a lot of our fix and flip… Because we get a very good basis of what’s going on in our market. We’re in affordable markets, we’re in expensive markets. And as we saw the transition, we were still getting a lot of movement. Because I think the buyers in that market were so beat up and they were so trained mentally that if anything popped up on market, it was going over list.
Because we’d have brokers… We would list a property and we’d have a review period. And we would miss our review period in that transition, and we would still have brokers call us saying, “How many offers do you have?” And we are like two or three days out past a review period, so that means we have no offers. And the next phone call will be from a broker, going, “How many offers do you have on the table? Do you have a pre-inspection? Do we need to waive? Do you take escalators?” And we’re going, “Wait, but we missed our review period.” So I think it’s just buyers in the market were getting trained, so it started recording more.
What I’ve seen recently in the last week or so is I have seen a lot of price drops. I’ve been seeing that, and so I do think that that 103% data point is going to change next month, when it all records out.
And the pending sales, they are selling. The properties are selling. They’re selling quickly, but we’ve seen a couple things. Either people are pricing about 5% to 10% lower off peak right out the gate, because they kind of have FOMO right now. They just want to make sure their house gets sold. Or I’m seeing these 7 to 10 day price drops, which, in my opinion, as a real estate broker, doesn’t make any sense. If you price your home and you run your analytics and you come up with your comparable value, you need to feel good about that number. And if they’re not selling in the first 7 to 10 days, brokers and sellers are getting a little bit of panic and they’re cutting price pretty aggressively because they’re just not used to these market conditions. They’re used to seeing 40, 50 people come through their house on a weekend, and now we have four to five, and they’re getting concerned. It’s causing a little bit of market irrationality and it’s causing the whole market to kind of cut, because everyone’s starting to chase each other, which is going to affect these data points.
But I do think price drops are going to be, as people try to figure out where the magic sweet spot for affordability in the market is, we’re going to see it a little bit at irrational, which is going to throw all these data points off. That’s why it’s really important for any listener is look at the data and hear the information out of it, but take a step back and always look at the big picture. Like if I hear inventory doubles, I’m not that concerned, because that means we went from two weeks to four weeks, and four weeks is still four months lower than the normal amount of inventory in the market. So don’t get caught up on these crazy little headlines, because the headlines can freak you out, but then you really have to take a step back and go, “Okay, what does that really mean?”

Dave:
Well, that’s why we brought you here for, Between the Headlines segment every week, James. Thank you. That’s super helpful.
One question before we move on is can you help ground us? You’re saying that a 7 to 10 days price drop is crazy. Back in 2014, 2015, whenever there was a more balanced market, what would you expect, as a broker, for the amount of time for a home to sell? Or how long would you wait before dropping price?

James:
We always factored in at least 45 to 60 days on the sell back in 2000… I would say from 2009 to ’12, we would actually factor in 90 days. And then from ’12 to ’16, we were really factoring about 30. We got our craft pretty dialed in at that time to where we were coming out as the nicest product in the market, so we would factor about 30 to 45 days, maybe 60 in a slower market. But that’s a normal amount of time. I think over the history of real estate, the average market time is like four and a half to five months. That’s normal, right? And it really should be, right? Buying a home is a huge decision for somebody. This could be a house that they’d live in for the rest of their life or raise their kids.
People started rushing so much because they had more FOMO rather than looking at what their long-term goals were. They had the FOMO of, “I’m going to miss out on the cheapest money that’s ever been out there in the world. I’m going to never have a house because there’s no inventory for sale.” And then they came off the pandemic and they were going stir crazy, so they wanted their own place to have to be more settled. So this mindset has really caused the market and the rules of the market to change, and you have to be patient.
So when we go out on a price, no matter what, unless I get zero showings or one showings, I’m not making a price adjustment. I have to run a very in-depth CMA on the property, go through the comparables, feel good about my price, mark it at that price, and then judge inventory. But I’m not going to cut price for at least three to four weeks, unless I dramatically overprice out the gate.

Dave:
Okay, thank you. That’s super helpful because I think when you see people… This increase in price drops, it’s not necessarily because they’ve been sitting on the market. Days on market is still 15 days right now. It’s still incredibly low. Some of the lowest that we’ve ever seen. So as James said, you see these headlines, it’s tempting to get sucked into this and be fearful, but do your due diligence, understand what the data is actually saying before you make any decisions about this.
Before we go into our due diligence part of the show, I do want to just ask you, it seems, in the last couple shows and today, you’re… Would it be fair to say that you are a little bit bearish in the short term about the housing market right now?

James:
I think everyone should be bearish on all investments, to be perfectly honest. I think the amount of money that got pumped into our market and the amount of assets they got inflated is just concerning. And it didn’t inflate just gradually. It hockey sticked up everywhere. So anytime there’s a hockey stick, I’m a little bit more bearish.
But at the same time, when I think the market is bearish and people are getting a little bit of caution and there’s some… There’s definitely investor fatigue out there right now. People have had this wild 24 months, and people are starting to pull back. That is also when I’m trying to buy the most, because there’s always this over-dip in correction, where everyone’s trying to figure out what’s going on, everyone wants to sit on the sideline. Well, if everyone’s on the sideline, that allows me to run the run on the field pretty freely. And yes, we’re being bearish in our underwriting, but we are still being aggressive on our purchasing. I think we did… I mean, we’ve closed like $5 million or $6 million in real estate in the last 45 days. So we’re still actively buying, we’re just buying under a new mindset.

Dave:
Well, that is a perfect segue to our due diligence topic for today, which is what is a good deal in 2022. Very excited to hear what you have to say about this, James. We’ll be right back after this.
All right, James, let’s get into your favorite topic. Let’s talk about deal analysis and what deals you’re doing right now. I’d like to break this down, because I think for different strategies, deals obviously look differently. What’s a good buy and hold versus what’s a good flip or a good wholesale or maybe even a syndication or passive deal. So let’s just start with buy and hold investing. Are you doing buy and hold investments right now? And what are some of the key metrics that you’re looking at or rates of return that you’re targeting in your deals, given this confusing market we were just talking about?

James:
Yeah, I’m definitely still looking at purchasing property and keeping them in the long… I mean, we just closed a nine unit in Renton, Washington. I just closed a triplex in Issaquah, Washington. And for me, I’m aggressively looking for rentals right now, because I do believe that rent is going to still go up. I know it had a huge jump the last 12 to 24 months. But with the cost of housing, I think rents are naturally going to get pulled up. And for me, I always like to know where is the upside, where’s the opportunity. So buying real estate right now, even with rates high, is a great idea for people. It’s a heads against inflation. It gives you a place to park your money, so you’re not losing money on your dollar right now.
And when we’re looking at these rental properties though, because we have that big inflation factor, we are looking for… For me personally, I won’t buy any deal unless the cash flow is higher than the inflation rate by two points. So if I think the inflation… For me, I don’t believe the national reported inflation rate. I think it’s right now around 8%, based on what I’m paying for things. So I’m targeting everything at least at 10% to 11% on my cash-on-cash return.
If I don’t have that, I don’t want to be cash flowing less than what the dollar could be going down at, because I just don’t think… You’re not getting ahead of the market. And for me, as a… I’ve been doing this now almost 20 years, so I feel like I’m getting old. But I still have a lot of runway, I think, and I want to stay ahead of the market and keep growing rapidly, because I’m not at that kind of, I would say, stabilization phase as an investor where I can passively just kind of invest and live off that. I’m still trying to grow. So for me, it’s really important to be ahead of the inflation rate.
I’m also looking at what kind of finance am I having. Commercial banks right now are being pretty aggressive, and so we are still able to get very good lending out of our local banks and they’re cheaper rates. So right now, as we’re looking at properties too, we’re going towards those 5 to 10 unit buildings, because the bigger players aren’t really aggressively looking at those, and the small mom-and-pops investors, they’re kind of getting locked up a little bit and they’re afraid because… They’re so used to this mindset of, “Hey, this property’s for sale for this price, and it’s going to sell because the market’s so hot, so I’m just going to sit off the sidelines.” Whereas what we’re doing is we’re looking at what’s not selling and we’re going to aggressively go after that with the right metrics in play. And because there’s no demand, we’re able to actually get these properties under contract right now at numbers that we haven’t been able to do for the last 24 months.
So we’re making sure that we are above the inflation rate and we’re going where our banks are being loose with the money that gives us the best financial performance. Those assets that we can get the cheapest money on with the lowest demand is going to be the best possible deal.

Dave:
There’s so much to unpack there. Let’s start with the inflation rate. How did you come up with the 2% above the rate of inflation as your metric? Is that because you expect inflation to go up another 2%? Or is that just sort of like a bare minimum you’re looking for because you need some real cash-on-cash return?

James:
I’m a cash-on-cash return junkie. That is my main metric. And a lot of people don’t use it as heavy as I do, but I mean, for me, as a simple investor, is I have this much capital, how much is it going to make me every year? I just like keeping things simple on that route. That’s done really well for me over the last 15 to 16 years. But yes, I want to be ahead of the inflation. I want to be making that cash-on-cash return.
Also, I think at some point, we could see a hockey stick in inflation too, with all the supply chain issues. I mean, we could have food shortages. There’s some other impacts that we’re reading in the market that could make it jump again. Again, I don’t want to underestimate the jump. So if I core believe that, then I need to plan accordingly for that and really put it inside my metrics. So it gives me a little bit of padding on the 2% in addition to… I just want to make sure I’m beating inflation. I don’t want inflation pushing me around. If I can outsmart inflation and out-return it, then I’m okay.

Dave:
Yeah. But I think that there’s probably… I’m thinking one, if you’re finding 10% cash-on-cash return deals, give me one, and I’m curious how you’re finding those. But two, is that a good return? Would that have been a good return for you in a less inflationary environment, or is this an adaptation that you’ve made based on what you’re seeing in the market?

James:
I constantly… Every quarter that I was… Even every six months or so, I really look at what I’m doing with my holdings. The most important thing any investor can do, including myself, because it helps keep me focused, is narrowing my buy box. What is my expected returns in certain areas? So in areas that were more B2C rated, I was always going for 10 to 12, because I think it comes with more of a hassle. It requires more management, there’s more expenses. So I always want that extra padding in there.
In better neighborhoods… For example, I purchased this triplex in Issaquah, Washington, or I have one in Queen Anne, Washington I recently purchased as well. They’re really good neighborhoods. So I dropped my cash-on-cash return down to like 6%, because I had such a high appreciation factor in there, and I was buying in the neighborhoods that were moving the most. These are also neighborhoods that aren’t going to have as much movement on the drop either. This is where people want to live. But right now, if I’m buying that same deal that I bought five months ago at a 6% return, I’m going to be… In my opinion, I’m losing money, because the inflation’s beating it out at that point.
So I’ve adjusted even in the good neighborhoods. Now I’m at more 10% on the good neighborhoods, and in my B2C rated neighborhoods, I’m actually dealing with more 15%. The reason that’s even higher for me is because in those neighborhoods, I’ve had more wear and tear on my properties in general, and construction costs are also a lot higher. So my maintenance repair costs have jumped up quite a bit as well. So I factored in the extra return there also to offset costs that I have to keep up with in the inflation.

Dave:
That’s fascinating because I have typically taken a similar approach where if you’re in a good neighborhood where there’s a good prospect of appreciation, willing to take less cash-on-cash return, because your maintenance is probably going to be less. You probably might have less turnover between tenants, and there’s costs associated with that. But does that mean that you’re… Are you able to find deals in good neighborhoods with a 10% cash-on-cash return now? Or are you focusing more on different neighborhoods that have higher cash-on-cash return, but may be less desirable to live?

James:
No, we are definitely seeing the transition over… Right now, I would say the buy and hold hasn’t quite, quite got there, but we’re seeing it on the fix and flip for sure. But again, it comes down to that perception of what the market is. So everybody is getting… They’re pulling back a little bit. It’s like they’re getting all the bad media. They’re paying more at the pump. They’re paying more at their grocery store. And everyone’s seeing the signs. I think a lot of people that were investing in the last 5, 10 years also went through 2008, whether they were growing up and they had a bad experience at their own household, or they were an investor or homeowner that it maybe didn’t go so well, and there’s that whiplash in the market.
So as people are pulling back, we are definitely seeing more opportunity. Because the thing is construction’s gotten way more difficult, things are harder, it’s harder to find guys, things cost more and it’s became a pain point for a lot of investors. So value-add has already had this pain point where people are like, “I don’t really want to deal with this. It’s giving me that floating target. The construction’s hard. It’s just such a headache for me. I don’t want to do it.” So that was already in the market.
Now the money makes all list prices look bad too. When you really put the numbers on most stuff that’s listed, it does not make sense at all. But as those days on market start to accumulate, that’s where sellers start really fluxing. And we have contracted some fairly good buys recent… I mean, we just got one in Everett, Washington for $50,000 a door. We haven’t been able to buy at that price range. It was a nine unit. It needs a lot of work, but stabilized, it’s going to be a 9.9 cap. The cash-on-cash return is going to be over 20. Those things usually trade at about 150 to 175 a door. We’re at 50. That was stuff that we would get back in 2012 to ’14. Heavy fixers didn’t people want to do with it. Higher rates back then, so people didn’t really want to mess with it. But we were able to get that deal now. And it really comes down to, again, just cost of construction, the processes behind it, and then a little bit of fear in the back of the mind where people now are not pulling the trigger.

Dave:
So was that sitting on the market? Is that where you attribute the… Is that why you got the deal for such a good price?

James:
Well, that one was actually an investor bought that one six months ago, couldn’t figure it out, and then now they are like, “I just want to get rid of this.” Because they’re in the planning process and because they’re nervous, they were willing just to kind of cash the deal out and call it good. They’re taking a little bit of a haircut too.
And that’s the thing. When people get nervous… I think for the last 24 months, people thought they… Or not thought. They’ve obtained a lot of wealth through equity, and in their brains, they feel like they’re way wealthier than they actually are. Equity is only good when you realize it. And then what happens is as people are seeing their bank accounts go up with this equity and they’re feeling better and better, they’re spending money. They have real wealth. And once it starts coming down, people start really freaking out, and they want to capture that wealth right now. They don’t want to go back to not having as much money again. So it kind of makes people be a little bit irrational. But I would say we’ve been able to do this in the last two weeks. It’s really on these current transactions.

Dave:
Wow. That recent.

James:
It’s very recent.

Dave:
Are you getting deals on the market too? Like that nine-plex was an investor deal, but are you finding things on the MLS too where people are selling for under that list price? Because you just said that with the list price on a lot of these doesn’t make sense. So how are you making them make sense?

James:
We are actually getting more on market deals done than off market, because-

Dave:
Really?

James:
Yeah, because here’s what’s going on right now is these wholesalers, for the last 24 months, they’ve been… I mean, they’ve been getting paid.

Dave:
They’re having good times. Good times for wholesalers.

James:
They have been crushing it. And every investor, wholesaler, it’s like you’re courting them every time. How do I get in bed with you so you bring me that deal first? What do I need to do? I mean, that’s what we do a lot in Seattle. We help wholesalers because we just want them to bring us the deal first, because we don’t want to miss out.
So these wholesalers have also been trained that if they get anything under contract, they can sell it to anybody. But what’s happening now is they’re turning around to these investors and there’s nobody taking it, because the margins aren’t there anymore. And a lot of wholesalers are also newer to the market, so they haven’t been through any kind of life cycle of real estate, and so they don’t understand that people buy differently at the time.
So the wholesale deals are actually still pretty heavy. Also, these sellers have been getting harassed for 24 months, so they haven’t… And the transition’s so recent, they haven’t really caught on either. We have been getting more calls from off market sellers re-engaging. Those leads are up probably four times of what they used to be.

Dave:
Wow.

James:
We use a room called Call Magic. They call out… They do mass amounts of contacts. We used to get about five to six leads a day, or I would say every two days. We’re up to like 15 leads in those two days. So people are definitely calling more, but they’re getting a gauge really on what it is.
The on market’s beautiful because a seller gets it listed. They see how many people are coming through, right? They get the reports. They get to see what’s happening in real estate today. They know that homes were selling in five days, 90 days ago and selling way over list. And then they roll their house out on market, and nobody wants it and no one’s even looking at it. They get real very quickly. I like doing transactions with people that are real on their numbers. So we’re able to use a lot more logic on the market based on days on market, showings, inspections, and data points, and we actually get a better margin on market than we do off market right now. Substantially better margin, to be honest.

Dave:
That’s fascinating. I mean, you are ahead of the data right now. As you were saying, most real estate data comes a month, six weeks in arrear. So we’re sitting here in the beginning of June, we’re looking at a last full month of data in April. But what you’re saying is just in the last two weeks, things are already starting to shift. So this is super valuable for our listeners, so thank you for sharing all this with us.
So you basically said cash-on-cash return in terms of a buy and hold is your main metric. Do you ever factor in appreciation into a buy and hold deal? And if you do normally, are you doing it right now?

James:
Any property I buy, and I’ve always trained myself this way, I look at it on a 10 year basis. So in our rental pro forma… Because we want to see how well does this deal do over 10 years. If it’s commercial, what’s your principal buy down. What’s your accumulated cash flow over the 10 years?
And then we always put in two standard metrics, but we don’t use the high ones. Appreciation. For the last 30 to 40 years, real estate has appreciated, I think, an average of like 3.5%. It’s been crazy the last two. So that’s what we put into our appreciation box. We use the average over the last 20 to 30 years. So we factor in a 2% to 3% appreciation over 10 years. I don’t think I’m going to get that over the next two, but I will get it over the time. So I just use a normal metric.
Same with rent increases. I think rents will pop even higher over the next 12 months, but we do a standard 3% rent. It depends on what your market is. We kind of just put in 3%. 5% is kind of standard right now. So we pro forma that over a 10 year basis. A 3% rent increase on the growth as well. So we just use standard. We won’t factor in short term.

Dave:
Got it. Okay. So one rule of thumb in the buy and hold world that a lot of people are familiar with is the 1% rule. Which if you’re not familiar, or the rent-to-price ratio, basically it says, if you divide your monthly rent by the purchase price of a property, it should equal 1%. So as an example, you buy a place for a hundred grand. The monthly rent should be at least a thousand dollars a month. The theory is that this is a good proxy for cash flow. If you hit that 1% rule, you’re going to have a good cash flow.
I’ve actually done some data analysis into this, and there’s truth to that. There’s about a 0.85 correlation between the rent-to-price ratio and your cash flow. So that’s pretty good. Pretty strong relationship.
I’ve written extensively about the 1% rule and my own opinions about that. But I don’t know if you know my opinion about it, so I’m going to ask you first. Do you think the 1% rule is a good rule of thumb or represents a good metric that people should be using in today’s day and age when they’re looking for buy and hold deals?

James:
I think on a general, I think it could be usable. And I think your numbers at around 85, that’s about dead on, because your cost of mortgage on that is going to be about, let’s say… That’s going to be about 0.65% of that. Roughly in there. And then your other expenses is going to get you around that 85%. I think it’s a safe way to look at things on a broad basis to help you get through that first step of underwriting.
Would I ever buy a deal based on that? Absolutely not, because each market is so… There’s so many variances in each market, depending on where you’re investing or I’m investing, it can have a lot of variance in it. But as a quick rule of thumb, I do think it works fairly… It’s like my first set of scrubbing. Does this work real quick? Okay, let’s take it to the next phase. Because also as an investor, your time management is such a… I’m a huge deal junkie. I’m looking at 40, 50 deals a week, minimum.

Dave:
That’s crazy. That’s awesome though.

James:
That’s why I was emailing you so late last night. I was just crunching… And there’s so many more to look at right now too. So it’s like a kid in a candy store. But it’s a good first way to do it. And I think as a general, it has enough padding in there, and it also doesn’t have too much padding to where you’re going to get frozen up every time. So it’s a reasonable rule to use.

Dave:
All right, I like it. My general thinking is that it’s a good way to screen neighborhoods. Like if you wanted to pick a whole market, like if you wanted to say, “I’m interested in finding a neighborhood in Texas,” it’s a good way to sort of zero down. But when you get to the actual deal level, I think it really kind of falls apart.
So what I’ve recommended to people is if you see a rent-to-price ratio that’s like at 0.75 or even 0.8, that’s worth considering. Again, you might not want to pull the trigger on a deal that has a rent-to-price ratio that low. But it’s not worth writing off a deal just based off of the 1% rule until you fully underwrite a deal. Because I’ve seen deals as low as 0.75 rent-to-price ratio deliver really strong cash flow depending on taxes and insurance and maintenance. There’s just so many variables that rent-to-price ratio doesn’t account for.
So I generally think that these rules of thumb are helpful, but a lot of times, it frightens people because they can’t find that 1% rule. But they’re not fully even underwriting these deals and don’t actually know what the cash-on-cash return would be at the end of the day.

James:
Yeah, and there’s so many things that factor in that too, like how much work do you have to put into it, what kind of… If it’s turnkey, move-in ready, then it’s probably going to work fairly well. But you have to factor in your time, your money, and your resources in there. Those are the things that that’s not going to capture very well.

Dave:
So if you had a rule of thumb to use for buying in 2022, would it be 2% above inflation? Is that sort of your north star right now?

James:
Well, a combo, because I’m still that walk-in equity guy. A great equity position is a great equity position. But yes, that’s my general rule on cash flow. I want to be at least at 2% above inflation, and that’s minimum too. I do shoot for higher, but I’m also prepared to do a lot of construction work and heavy lifting to get me in a better position too. So the more work you get, the more cash flow you get too.

Dave:
Yeah, makes sense. All right, great. James, this has been super helpful. So for everyone listening to this, seems like according to James, at least in your market, James, there seems to be some buying opportunity right now. And even on market, there’s opportunities to find the kind of returns that James, as a deal junkie, is looking for. So that’s encouraging. I’d like to switch now to flipping. Because you also are doing a ton of… How many flips do you do in a year?

James:
Too many. I think we-

Dave:
You can’t count.

James:
… do about 150 with our clients a year, where we help them design them, find them, source them, put the plan, implement the plan. And then we do about 50 this… We were doing about a hundred, but now we do about 50, but they’re bigger projects. So it’s about 50 a year. Right now, I think we have like $15 million to $20 million in projects going.

Dave:
Wow.

James:
In flips. But they’re expensive. They’re just more expensive ones. So it’s definitely the most… It’s the fewest amount of deals I’ve been doing, but the most amount of capital for sure that we’ve had out.

Dave:
Interesting.

James:
We’re trying to work smart and not get us spread out.

Dave:
Well, that raises a good question. Well, raises my next question. I’ll just call my own questions good. But raises my next question, which is what is a good flip look like to you in this kind of market?

James:
There’s three major things that we’ve done to transition, and it’s been a pretty rapid transition. We’ve only take these steps about four to five weeks ago. The less people I’m seeing look at houses, the more we’re padding our margins.
The first thing that we’re doing is we’re adding contingencies to all of our construction costs and costs in general. The cost of fuel, the shortage of materials and labor are real things that are not improving. They’re getting worse. So any deal that we’re looking at, we look at our rehab numbers and we add 10% to 20% on. That’s the first thing we do, because that’s our middle core cost.

Dave:
How do you come up with a 10% to 20%? Are you basically taking numbers and comps from your last deal? And then how did you settle on 10% to 20% as your padding?

James:
For the last 12 months, we’ve used 5% to 10%, because it was a little bit less variance. Plus, there was a little bit more appreciation… The market was doing well, so you’re going to be a little bit more aggressive.
As it starts to flat line out… And by all means, I don’t think the market is going to go into a total, total spin, but I do think there’s great opportunities coming. As it flattens out, there’s just more risk. You’re not getting that extra upside that we’ve seen that’s going to pay for those overages. So we wanted to double up our contingencies because also things are just soaring so quickly. So it gives us more padding in our deal.
We use a construction calculator that we built internally that just really calculates per square foot install rates and allowances all the way through our project. So we know exactly what materials we have in our estimates. We know what people are installing them for. So because we have our core… That’s the beginning part of our budget. The budget’s set up right. Usually, we’re going to be within a couple percent of that out the gate, unless we miss something on our scope of work. So by adding that contingency, 10 to 20% on, it just pads in our numbers.
How we get the numbers is we interview contractors in our trades, and we just get the install rates directly from them. And then if we’re putting our own allowances on, we’re controlling what the materials are. So we just add the 10 to 20% on top of that.

Dave:
Okay, so that’s one rule of thumb that you’re following, which is just padding your construction and-

James:
Pad. Pad, pad, pad.

Dave:
Pad as much as you can. What about on the acquisition side? Have you changed anything about the kind of deals you’re looking for or the price point you’re looking at?

James:
We definitely are. We made major adjustments on what our expected returns are. So typically what we’ve been buying for the last 12 months is in really good neighborhoods of Seattle, or the east side. We’ve been buying at a 10% to 12% cash-on-cash return, not including leverage factored in that. That’s just on a cash basis. That typically turns into about a 30% to 35% cash-on-cash return with leverage. Maybe even a little bit higher.
We were kind of in that 30% range at that point. And that we were getting that kind of appreciation factor in there. I’ve never factored appreciation to any one of my deals on a fix and flip. I don’t think it’s a smart thing to do. You’re banking on the market. What I will do is go in with a slimmer walk-in margin. I like the area, so I’ll buy it if it’s a little bit riskier.
In sub-markets, we were buying them at 13% to 15%, which was going to be about a 35% to 42% cash-on-cash return. So what we’ve done is we’ve added about 4% to 5% to each one of those areas. So it’s a huge jump. So if we were buying at 12%, now we’re buying at 17, because it gives us a much bigger padding.
Because as you go through a transitional market, you just don’t know where it’s going to fall, so you have to pad things more. So we’re padding it with 5% on the buy. So we’re going from 12 to 17, roughly. And then we’re adding 20% to that contingency on the construction budget. So we’re just adding in buffers of time.
In addition to, we’ve been able to flip all these homes… What we’ve tracked, all of our clients flips, all of our flips, we average out about 6.9 months for a normal fix and flip for the last year. It would take our clients and ourselves on average 6.9 months to buy it, renovate it, sell it, close it. We’ve added three more months to that now.

Dave:
Wow.

James:
Because as we know, that was also in a market where we were only on market for five days and things were closing quick. So as we go into longer hold times, we’ve just got to account for it. So instead of running our flip calculations at a six month to seven month hold, we’re running them at a 7 to 10 month. So we’re adding more leverage costs, we’re adding more construction costs, and we’re adding a bigger margin, and that’s what protects us all the way through.

Dave:
Okay, I have a lot of questions. The first one is based on that additional time… You said you added three months, and you said that’s because you’re expecting days on market to go up, longer sale time. Are you also anticipating longer construction time with some of the supply chain issues? Or have you been mostly able to mitigate that?

James:
Well, how we’re mitigating that is we’re really staying on top of our budgets and just increasing them dramatically. The more money you have in the budget, the easier you can move. That’s actually why I’m doing a lot more luxury flips is because I can bring out trades that show up, they’re quality workmanship, and they’re more professional. It allows us to systemize it out a little bit more. So if you have the money in the budget, you can pay people a lot better, and they can move a lot faster.
But yes, delays are still happening in cities and permits. Things are starting to fall. I think that’s going to be an issue for another three to five months, kind of in that range. I do think as rates get up, the economy is going to slow down, and I have a feeling… Well, also, investors are getting out of the market a little bit. They’re sitting on the sidelines. There’s general contractors and tradesmen that are calling me right now that haven’t called me in a while.

Dave:
Really? That’s a big change based on where we’ve been the last couple years.

James:
It’s been a huge change. And to be honest, I kind of put them on the sideline right now. I said, “Hey, look, you kind of left working.” So we kind of ice them out a little bit longer too.

Dave:
We’ve got to play hard to get now. They’ve been ignoring you.

James:
The things I’ve had to do for these contractors for these last 12 months, I feel abused. It’s like you just have to be so… So I have a feeling as things slow down, the trades are going to show back up a little bit more. So I do see that… And that’s why I’m a buyer right now. Things are going to improve in certain segments. And as long as I have those big pad in, walk-in margins, and I think they’re going to improve, then it’s almost like I can pick it up on my construction cost and timing, and put that back in my pocket from the padding. So instead of getting appreciation, I could pick up extra costs based on efficiencies.

Dave:
Got it. That makes a lot of sense. But in general, so it sounds like over the last two years, you were targeting an unleveraged cash-on-cash return of, you said, about 12%.

James:
Correct.

Dave:
Which would net you a levered return of mid 30s. And now in order to protect yourself, be a little bit more conservative, you’re looking at 17% unlevered in… You said it was in the mid 40s on a levered return?

James:
Yeah, it’s, I would say, 38 to 45 on average.

Dave:
Okay. Just out of curiosity… So that’s super helpful for anyone listening to that, is that’s what you’re targeting. What were you getting on a leverage return basis over the last two years on some of your flips?

James:
Oh man. Some deals, we were making 100% to 150% returns. I mean, there’s that expensive flip we did where we pro forma-ed the deal at 3.95 mill as our exit. We sold it for 6.5.

Dave:
No.

James:
I’m sorry. 4.95. 4.75 to 4.95. We sold it for 6.5, and that was in a five month period.

Dave:
50% over what you pro forma-ed it.

James:
It was unreal. But we were seeing that. Our clients, we were getting offers 200, 300 grand over list. Bellevue appreciated 50%, 60%. So we saw these huge swings, and they’re unrealistic returns.

Dave:
So that’s exactly why I asked you this question, because one thing I hear continuously is the deals aren’t as good as what they were a year ago or two years ago or 10 years ago, whatever it is. But you’re still buying deals. So how mentally do you handle that? You were getting maybe 50% cash-on-cash, 100% cash-on-cash. Now you’re saying, “All right, I’m okay with 38%.” How do you rationalize that to yourself, and why are you doing that and why do you think listeners should consider sort of readjusting their expectations in the way that you’re doing that?

James:
The first thing that I would always tell people is if you were getting those kind of returns, that is not normal. Like for me, I’ve been doing this for a while and I’ve seen ups and downs. I’ve taken pretty major losses, and I’ve done very well. So I just know at the end of the day, it’s going to balance out. A great year could lead to a flat year the next one. And if I look at a two year basis, it usually kind of levels itself out.
What I like to do is I look at my pro forma and how well did I execute if I would’ve hit my pro forma numbers. How well did our construction do? What was our carry cost time? Because that tells me the efficiency of my business. And when I underwrote that deal, the numbers were probably right. The market dictated the return in the upside. So I have to remember that I am not… The most important factor in this is economic conditions and market conditions. And no matter what I do, I can’t beat the market. The market will always beat me. I have to plan accordingly for the market, but I also have to set my expectations that way. At no point did I ever think in my pro forma that I was going to hit a hundred percent return on any of those deals.

Dave:
You’d be insane to think that, right?

James:
I would never get a deal.

Dave:
Yeah, you can’t go in… Yeah, exactly. You would never do anything. But I think that’s sort of what happens to some people, at least, is it’s sort of paralyzing, because you hear these stories about these incredible returns or buying in 2010 and these amazing opportunities. But in some way, at least this is my opinion, a good deal in 2022 is anything that’s better than doing nothing, right? In the simplest way of looking at it, you have an option of losing money to inflation. You can invest in the stock market if you want. Or you can go and find what the market is giving you right now, which what you’re saying is maybe an 8% to 10% cash-on-cash return on a buy and hold, or a 40% levered cash-on-cash return on a flip. Both, to me, sound considerably better than doing nothing or any alternative asset classes.

James:
Yeah, and that’s the thing. People just need to remember what’s normal. I have to always remember that we did very well the last two years. All of our businesses did. But I think any business that was operating well was doing well. It wasn’t just because of what we were doing, it was the market and the economy helped us do that. But you have to always remember what’s normal.
That’s what I was telling my clients for the last two years. You guys, this isn’t normal. Just remember. They call me, they’re all excited because we just sold their home for a quarter million dollars more than we thought. And I’m like, “But remember, that’s not normal. What that should be is a reminder to stay as a consistent investor,” because those people were not making the same amount of money 24 months ago to 36 months ago. But if they would’ve never started in a market where they were making average returns, they would’ve never been in this position in the first place.
So the more you go in and out of the market, the less opportunities you’re going to have. That’s why I’m always consistently buying. Some years, it’s going to be better. Some years, it’s going to be worse. And some years, we’re going to absolutely crush it. But you have to consistently stay in the market. If you’re jumping in and out and trying to time everything, you’re going to miss all the opportunity. So you just have to be realistic.
And then one thing that I like to do too is I look at myself on a 24 to 36 month basis with all of our numbers. How did our flipping business do over a two year basis, not just the last six months? The historical numbers are going to really tell you what to forecast correctly, because that shows you different market conditions and cycles.

Dave:
Yeah. What you said, I think, is super important because there is a distinction between timing the market, which is what you’re cautioning against doing, which is like jumping in and jumping out and adjusting to the market and trying to make the most of what the market is giving you at this time. And as you said, you are making adjustments to the market, and that’s wise and you’re being conservative. Because I agree with you. No one knows what’s going to exactly happen to the housing market on a national basis, but there is a good deal of market risk right now, far more than I think we’ve seen in 15 years or whatever. So you’re being conservative, which makes sense. But that doesn’t mean you’re trying to time the market and saying, “I’m going to completely stop. And then once there’s a crash, I’m going to get back in.” You’re taking a much more consistent approach, similar to like dollar cost averaging in the stock market, right?

James:
Correct. Yeah, right now, we have a certain amount of inventory going. We could take a step back and go, “Well, if the market’s going to be flat, do we want to refi it and keep it?” No, we have a certain goal that… We know what we’re doing with that asset already. It’s going to sell for what it’s going to sell for, or it’s going to rent for what it’s going to rent for. It’s going to cash flow for what it’s going to cash flow. If it doesn’t meet my expectations after I’m all done, then I need to sell it off or move on to a next asset. But consistency is key. The more irrational I’m pulling in and out, the less money I’m going to make.
And just adjust and pad your numbers, and then you can… As long as you have that padding in there, you’re mitigating your risk and you’re still going to keep yourself at the returns that you want to be. And if you don’t get those numbers, then wait or ask more people. You’ll find it if you ask enough people.

Dave:
That’s great advice, James. Is there anything else that you think our audience should know about what constitutes a good deal in this type of market condition?

James:
I mean, the biggest thing is just padding the pro forma, making sure everything’s good. One thing I like to do too, and if people are really worried about risk or when I get worried about risk, I like to buy cheaper deals that can cash flow or flip.
When you have multiple exit plans that you can put on a specific house, that’s your safest investment. And that’s going to be tell me… When we were doing this in 2009, that’s what we were buying, because A, we just got our… It was not a fun 2008. We got smacked good. We had lost most of our liquidity. So we couldn’t just put it into the market, we had to kind of build it back up. So every deal that we were buying, because we were so shell-shocked from that, it was a very risky market where it was falling extremely fast, is we were targeting properties that we knew, no matter what, if it didn’t flip and we couldn’t make our minimum return, we could refi it and rent it out and put it into our portfolio. Some of those houses that we couldn’t flip turned into some of the biggest profit-makers that we’ve had over the last 15 years. So just having a multipurpose, multiple exit strategies on your deal, that would be another way you can mitigate risk.

Dave:
All right. Thank you, James, so much. This has been enlightening. I’ve had a lot of fun learning a little bit about flipping. I’ve never flipped a house, and so I’m very interested in learning from you. This is really helpful. We will be right back after this for our crowdsource segment.
Welcome back, everyone, to our last segment of the day, where we interact with our crowd. James, for today, I would love to hear from you about your clients and some of the people you’ve been working with, specifically about 1031s. There’s a lot of chatter about selling now when it’s high, and what do you trade into. So can you tell us a little bit about how you’re advising your clients and the people you work with?

James:
Yeah, it’s kind of confusing right now because a lot of our clients and ourselves, we’ve been buying properties for the last two years and we’re obtaining money at very low rates. So you buy these properties, you have very low debt on them. Typically on commercial, it’s going to be a 5 to 10 year note anyways. But they’ve got a lot of equity in them, they have good money on them, and they’re happy with their cash flow. But they have worked through some of the depreciation schedule, like the cost segregation. They’ve gotten a lot of the benefit out of it. They’re also worried that their rates might reset in three to four years at a higher rate at that point. In addition to, they might just want to move into a different asset class too.
So as markets transition, the question always is, “What do I do with my investment money and portfolio before it goes through that transition?” Because once you fully go into the transition, it’s harder to move things around. So a lot of the question right now is, “What is my current portfolio doing?” And then also what we’re telling everybody to look at is, “Is it beating the inflation rate?” If it’s not, you might want to look at trading some things around. Look at what your true equity position is. And then we can look at how to increase your cash flow to beat that inflation rate or to increase it naturally at that point.
Where people get hung up, or I even can get hung up on, is being so obsessed with their rate. They’re like, “Well, yeah, I have all this equity, but I’m only paying 3.5% on this rate,” and they don’t want to move. But they might only be making a 6% cash flow position, and they have all this equity in the building. What we’ve done is we’ve actually audited our whole portfolio. We saw what deals we’re looking at that were lower than the rates, and that’s what we do for our clients. Where is your cashflow dragging the most with the most amount of equity? And then trading it. And it doesn’t matter what the interest rate is down the road. It could be double. But our cash flow position is going to double up at that point.
So right now, a lot of the question is, “Do I make that trade, and what would I trade it for?” Now, for me, I will only make the trade if I can double up cash flow right now. I do have low rates. I’ve got good stabilized buildings. You’re going into kind of a more transitional market in general. But with the amount of equity that we’ve made, I can double my cash flow on almost every apartment building and house that I own if I 1031 them out correctly.

Dave:
Wow. So are you seeing clients do that right now? And if so, is there a limited window in which you can keep doing this before the market shifts even further?

James:
Yeah, to be honest, I do think the two to four units, you might have missed your window. Because those rates are 6.5%, and it dramatically affects the cash flow. So if you have all this equity in your property, or you might have lost some because of rates, when you run that true, true cash flow position, it’s going to naturally bring your price down.
What recommendation I would have is because rates are high, affordability is in high demand, is if you are going to sell your two to four unit, get one unit vacant, because the owner-occupied buyer is still out there, because they’re looking for a way to cut their expenses, especially with the inflation right now. So that’s the best way for you to trade it.

Dave:
That’s great advice. To basically make it appealing to someone who wants to house hack.

James:
Yes. And there’s so many people out there. I mean, BiggerPockets has done a really good job teaching people that that’s a very effective way to reduce your expenses and grow wealth. Investors are only looking at the cash-on-cash return and how that building’s going to perform. If your rate and your money’s really high, you’re not going to perform that well. But an owner-occupied owner, I mean, they can move in and they can go, “Hey, I can cut my mortgage cost by half by buying this unit instead.” So I would say leave one open.
There’s still a really good opportunity to trade your five units at above right now, because the money’s still cheap and it’s… Or it’s not cheap, but it’s four and a half. It’s cheaper than the alternative. It’s 4.5% to 5%. And I think there’s more qualified investors in that realm too. A lot of times, two to four is your mom-and-pops that are a little bit newer in the industry. Not always, by any means. I still own two and four unit buildings. But a lot of that’s what it trades.
The guys that are selling the bigger stuff have gone through more market conditions, and so they’ll sell and they’ll trade things around a lot better. But you can still trade those out. Right now, there’s still demand to buy those if it’s stabilizing good, because people do want to park their money, beat inflation. The rates are a little bit lower, so it’s not affecting that equity position as much. And then you can trade into more of a value-add.
So just you’ve got to be careful about what you’re trading in money. Just see how liquid can that product be traded around, and then make sure you’re maxing out. There’s certain properties that I’m looking at selling right now, but we have that bottom line number that if it goes below that, we’re keeping it for another five to 10 years. Because we’ve already done all the hard work. It’s not worth trading at that point. So we’re listing four of our buildings very shortly, and I know we’ve listed like six units for our clients recently as well.

Dave:
Because you believe you can double up your cash flow.

James:
Yeah, double up the cash flow, especially for our investors that are more passive. Their cash flow has been hit dramatically with inflation. Their cost of living, things that they’re living off of. So right now, it’s the perfect opportunity to realize the equity before it could possibly get reduced, and then go get more cash flow to offset your cost.

Dave:
All right. James, you have been dropping some knowledge on us today. Thank you so much. If our listeners want to hear more from you or interact with you, which I’m sure they do, where can they do that?

James:
You can do that… So on Instagram, check us out on jdainflips. We talk about all this stuff daily in the field. And then also on YouTube, at ProjectRE. We’re constantly putting out free education for everybody. So make sure you check us out.

Dave:
All right. And I’m Dave Meyer. You can find me on Instagram, @thedatadeli.
And just a reminder before we go, if you want to interact with James, myself, Kathy, Jamil, Henry, or any of the On the Market crew, you can do that on YouTube. James has been putting out some great videos there. We have a lot of really good YouTube videos that don’t make it to the podcast feeds. So if you want more information like that, check out YouTube, subscribe there.
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On the Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett. Editing by Joel Esparza and Onyx Media. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team.
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