June 2022

David:
This is the BiggerPockets Podcast show 618.
So how can you do both? Well, you can start off by house hacking. Put 3.5% down, 5% down on a single family home, that puts the seed in the ground for at least one property. And you can do that every single year. You can then put a lot of your time, attention, energy into growing the business and taking the money that comes from that business and reinvesting it until you don’t need to reinvest the money anymore, where you can then take it and reinvest it into real estate.
What’s up everyone? My name is David Greene and I’m your host of the BiggerPockets Real Estate Podcast. If you’re ever wondering why we say things like this and show, it’s because Josh Dorkin, the founder of BiggerPockets, started doing the podcast like that and I just can’t help myself but do it because I listened to Josh for so long. Josh, shout out to you if you happen to be listening to this. Hope you’re doing great out there in Hawaii, you’re getting plenty of sun and things are going well for you.
If this is your first time listening to the podcast, we at BiggerPockets are here to bring you as much information as we can about how you can build wealth through real estate. Today’s show is a slightly different format than what we normally do. It’s called Seeing Greene. That’s why the light behind me is green. In today’s format, people like you submit questions about their real estate careers, specific problems that they’re having, areas they’re getting stuck, or just overall wisdom that they feel like would help them in their journey, and I do my best to answer them.
If you guys would like to be featured on the show, I’d love that. Please go to biggerpockets.com/david and ask your question there for me to answer. And if you’re not listening to this on YouTube, I’m not paid by YouTube to say this, but I will say, I just got the YouTube premium thing where it plays in the background when you close the app. Game changer. Absolutely love it. No regrets about, I think, the $15 I have to pay every month. So consider doing that because you can leave comments about our show as well as subscribe and get notified when BiggerPockets has new shows coming out.
In today’s show, we cover topics like how much of a property you should be fixing up or how much money you should be dumping into a property where the return starts to become marginalized. We talk about how to prioritize owning a business and building your real estate portfolio. Which one should you be putting your money and your time into? We also get into how to evaluate the return on equity of a property. So at what point is your property not earning you enough cash flow for how much equity it has? And how you should move that money around and more. If you guys listen all the way till the end of the show, you’re going to hear the debate about if I should be wearing t-shirts or if I should be wearing collar shirts when I do these. So please chime in on that as well.
Today’s quick dip is, listen to Episode 620. It’s going to be coming at two episodes after this, where I interview Ed Mylett. We talk about this concept of collective psychology, which is a tendency that human beings have to want to follow the crowd and do what everybody else is doing. But the best investors and the best business people do the opposite. They zig when others zag. In this market with interest rates going up, with the Russia-Ukraine situation, with all these fears of inflation, many people make bad decisions out of fear and there’s a lot of fear going around.
Inflation, in my opinion, is a reason that you should be buying real estate. But as people are seeing inflation happening, many of them are thinking they want to get out of the market for some reason. You’re having a hard time finding deals, I’m sure. There’s not as much inventory out there. So right now is a time to look for sellers who are getting scared, who are nervous or who are following the collective psychology of the group that says you should sell because we don’t know what to do. You might be able to find yourself a great deal by focusing on the emotional state of the seller, not just the asset itself as you see it online.
Hopefully that works out for somebody. If you’re able to pick something up in this market that you think is a great deal, I want to know about it. Tell me in the comments what you got and how so everybody else can learn. All right, without any further ado, let’s get to today’s show.

Shane:
Hey David, I’m looking to begin investing with the goal of having enough wealth and cash flow built up to be able to support running other businesses. Specifically, I want to start a farming business sooner rather than later. I’m concerned that I won’t have enough capital to scale both my real estate and the farming business simultaneously. And I am afraid that picking one business over the other would delay the other one significantly. As somebody with multiple businesses and enterprises and looking to start more, I’m wondering how you decide where to dedicate your resources, your time, energy and capital next, going forward. And specifically wondering if you have any advice about how I specifically can build my bridges effectively and efficiently. Thanks.

David:
Hey Shane. Wow, that was a very good question. I could probably spend the entire episode just answering that. So I’m going to have to try to keep this short. You’re telling me that you want to invest in real estate, but you also want to invest in a business and you don’t think you have enough capital to do both and you want to make sure that you don’t delay either one. Here’s a few things to think about. Businesses tend to generate more cash flow and they tend to have more risk as well as more time and energy put into them, meaning they’re less passive. Real estate tends to generate wealth passively or more passively than a business does, but it doesn’t always do it from a cash flow perspective. And when I say that, I mean the money that that asset is putting into your bank account every single month is what we’re going to call cash flow.
It’s typical when you’re first getting started to buy a single family home, a small multi-family to make a couple hundred bucks a month of cash flow, which is frankly not very much money at all if what you’re looking to do is try to fund a lifestyle or a business. Now, real estate does very well over the long term when it appreciates and you pay down the loan. Cash flow, in my opinion, is best used to make sure you don’t lose a property. It’s a defensive metric. You’re meant to use the cash flow to make sure you can make the payment. And then holding it for a long time is what builds wealth. If you understand the strengths of both asset classes, real estate is very good long term. Business is going to be better short term.
So if you’re looking to create a business, you’re going to want to have to go out there and generate some revenue, put some contracts together, find some way for that business to make money. Then you’re going to hire people. You’re going to train them. You’re going to manage them. You’re going to oversee your clientele. You’re going to have to learn how to keep the books. You’re going to do a lot of work. But if you do it well, it should produce more income. Then real estate is going to be building you wealth sort of slowly and on the side. Think of it like planting a tree. You put the seed in the ground and it slowly starts growing. You don’t have to spend a lot of time worrying about that tree. In the very beginning when it first starts growing, you got to pay a lot of attention to it. Make sure that nothing goes wrong just like with real estate. But once it’s established, for the most part, you’re not thinking about it.
Business is more like crops. You’re putting a lot of effort into tilling the soil. You’re planting lots of seeds, knowing that many of them aren’t going to grow. You’re going to have to take weeds away and stop predators from coming in and ruining your crop. You’re going to have to make sure it gets fertilized. What I’m getting at is there’s a lot of work that goes into planning and harvesting a crop. It’s not passive income. So how can you do both? Well, you can start off by house hacking. Put 3.5% down, 5% down on a single family home, that puts the seed in the ground for at least one property. And you can do that every single year. You can then put a lot of your time, attention, energy into growing the business and taking the money that comes from that business and reinvesting it until you don’t need to reinvest the money anymore where you can then take it and reinvest it into real estate.
That’s really how my whole situation works. I have businesses that I run because I don’t want to depend on real estate to generate the cash flow to buy more real estate. It doesn’t work great for that. Does it generate cash flow? Sure. But I can set up a portfolio that might generate $40,000, $50,000, $60,000 a month in cash flow. Or I can set up a business that generates that month with way less effort. Way, way less effort. So I like to look at the strengths and weaknesses of both. And that’s what I think that you should be doing, especially if your business is somehow connected to real estate. You mentioned farming. Can you figure out a way to buy a property that has a structure and improvement on it that you can use a 30-year fixed rate to get that house and it comes with a lot of land that you can then work your business with? Now you’ve got synergy between the two things and there’s a lot less effort.
If you can’t do that, you still want to look at growing your business to set off a lot of cash flow, saving that cash flow, reinvesting it into real estate. As time passes, that real estate will appreciate in value. You can sell it or you can do a cash out refinance to pull money out of it to either buy more real estate or invest back into the business. And you want to just kind of create this system of going back and forth between the two. Hope that helps. Best of luck to you and make sure that you let us know how it goes.
All right, next question comes from Josh Heeb in Columbus, Indiana. “With the appreciation we have seen in real estate, return on equity has dropped significantly on a lot of properties. At what point does it make sense to consider selling and redeploying that capital? What other factors should it investor consider other than thoughts on return on equity?”
Josh, love the question. This is how smart business people think. You’re on the right path. For those that have never heard of this idea of return on equity, it’s very similar to return on investment. So when you’re calculating your ROI or your return on investment, you’re basically saying “How much money is this asset going to generate?” And then I divide that by how much money I have to put into the deal to make it work. So you have income divided by your expenses like down payment and maybe any other cost like closing costs, improvement, stuff like that, your rehab. And you get a number. That number that you come up with tells you what percentage of your initial investment you’re going to get back every year. So a 10% return on investment just means that every year I get back 10% of what I put into the deal.
Now, what Josh is referring to here is when a property appreciates very quickly, it can look like your ROI is going up because every year you’re making more money than you were making the year before. So you had a 10% return, then a 12% return, then a 14% return because your rents have steadily been going up every single year. But it’s very easy to assume that the money that you put into the deal is still how you should be looking at your investment. It’s not anymore. If you put $50,000 down on this house you bought, but it’s appreciated so now you have $300,000 of equity, it doesn’t make sense to look at the money that you put in the 50,000 five years ago or 10 years ago.
Now you have to say, “This asset is worth 300,000,” or “I have that much equity in it.” So if you take what the cash flow of that property is, and you divide it by 300,000, you’re going to get a way smaller number than if you just divide it by your initial investment. So what I recommend people do when they have an asset that’s appreciating is to look at how much cash flow am I getting for the equity that I have in the house, not for the initial investment that I made in the beginning. And Josh, when you’re asking me at what point does it make sense to redeploy the capital that you initially put into that property, it’s when you want more cash flow or you want to make sure your equity is working harder.
So let me give you an example. If you had $50,000 you put into this property and you’re getting a 10% return on that money, that’s $5,000 a year at a 10% ROI. If that has gone to 300,000 like I mentioned, you have six times as much money as the 50,000 that you put in. But if you’re still only making $5,000 a year, you could be making six times that if you could get a 10% return on the 300,000 that you’ve invested, which would be $30,000 a year instead of $5,000. So that’s when I think people should start looking. And when you have significant equity in a property, you need to be asking yourself, “Is this actually working hard for me, or is my return on equity very low?”
A few other factors to consider because it’s not only about cash flow. If you own an asset in an area that’s appreciating very rapidly and you believe it’s going to continue appreciating, yes, you could sell it and redeploy it to get a higher ROI somewhere else and you could make more cash flow, but you might lose money over the long term because you could be investing into a market with less appreciation. So one thing to consider is, do I think I can get the same appreciation or better if I move this equity from this property into a different one, or from this market into a different one?
I like to look for that. I’m okay to sell a property that’s appreciating to get more cash flow if where I’m going is going to be appreciating at the same rate or better. That’s one of the awesome parts about long distance investing, is you can find the market that you think is going to do better and you can buy assets there while selling them in markets that have sort of cooled off. You can sort of ride the train. Oh, there’s not as much people moving into this area. Let me take it out, put it over here and ride the next level up.
Another thing to consider is the headache factor. If you sell this property and you move the equity somewhere else, is that new property going to because you a lot more time and energy to manage than the one that you had? And the last thing I would say to consider is closing costs. Selling a property is not free. There’s going to be closing costs that are involved with the property. So when that’s the case, if you think, “Hey, I’d like to move the money or I’d like to get out the equity, but I want to keep the house,” consider a cash out refinance. That’s where you would take money out of the property by getting a new loan on it. Take that equity, go put in a new market.
That’s exactly what I just did. I had my first four California properties that I ever bought when I first started investing. They’ve appreciated a ton. My return on equity has become very, very small. But I don’t want to sell them because I believe that the area they’re in is going to continue to appreciate in both value and in rents. So instead, I did a cash out refinance, pulled out about a million bucks from those properties and then put that into two new properties and areas that I also think are going to grow where there’s a value add. If I thought that those California properties were not going to continue appreciating, I would’ve sold them instead of refinancing.
Thank you for that question. Let me know if there’s anything else I can answer by leaving something in the comments and I’ll see if there’s anything that I didn’t address that I can get to.

DJ:
How are you doing? My name is DJ Dubono and I am from the upstate New York market in the capital region. My partner and I just founded our first LLC for real estate investing. My question is, what is the best way to find potential JB Partners and what are some good screening questions to ask to kind of filter through those JB Partners?

David:
Thank you for that, DJ. All right. This is a very subjective question so different people can give you different advice when it comes to picking a partner. The first thing I’ll say is, ask yourself what your motives are. Do I want to partner because it brings emotional security? Or do I want to partner because it makes business sense? In general, I tend to shy away from partnering with somebody for the emotional security that it brings. It always sounds good in the beginning. It always gets complicated later as two people or two groups of people, or maybe several groups of people are all moving in different directions and it becomes very difficult to keep everybody happy with each other and meeting expectations.
So if I’m looking for a partner, I’m looking someone for a complimentary skill set to my own, something they’re bringing that I don’t have. So that could be a brain that works differently than my brain works. It could be resources they have access to that I don’t that I can use. It could be they have a team in place and I can use a team they already have. It could be connections that they have. It could be access to deal flow. There’s a lot of different things that somebody can bring to the table, but they’re typically going to be an experienced investor if that’s the case. So to answer your question of what questions should I be asking, if you’re looking for someone that has a complimentary skill set like I’m recommending, you should be asking how many deals they’ve already done.
And this is the rub. The people who want to partner are typically doing it because they’re afraid to do it on their own, meaning they haven’t already been doing it. They don’t have as much to offer because they’re new. The people you want to be partnering with are someone who are bringing something to the table, but they’re not emotionally scared because they’ve been doing it. And that’s why I say don’t do it for the emotional reasons. You end up getting a partner who doesn’t have a track record, isn’t bringing anything to the table, doesn’t have resources that you can use that would make your enterprise more successful. Instead, I really recommend that you focus on what do they have that would make this business better. And then you ask yourself the same question. What are you bringing to the table that would make it better for them? And look for a situation that’s a win-win for each of you from a practical perspective, not an emotional one.
All right. We’ve had some great questions so far. I love the people that are… You guys are submitting better and better questions every single time we do one of these. If you’d like to submit a question of your own, I’d love you to please go to biggerpockets.com/david where you can do just that. At this segment of this show, we answer comments from YouTube that people have left on previous shows. Sometimes they’re funny. Sometimes they’re insightful. Sometimes they point out something that I didn’t even realize that I missed. So I like to share those with you guys. And I want to highly encourage you if you’re listening to this right now, go to the YouTube and leave a comment for me about what you liked, what you didn’t like, what you thought was funny, what you wish I would’ve asked, whatever we can do to make this show better.
The first question comes from Jenny Lee. “Hey David, I love this show and format. Every morning that I’m able, I watch an episode on YouTube and feel my real estate brain getting smarter. I appreciate the content and how you talk through your thought process.”
Side note, thank you, Jenny. That is actually something I intentionally tried to do on the shows. I could just give people the answer when they say something like, earlier in this show somebody said, “What do you look for in a partner? Or should I buy real estate? Or should I buy a business?” And I could just give you the answer, but if I don’t explain the thought process, then you guys won’t know how I came to the conclusion. You won’t be able to trust it and you won’t be able to solve problems on your own. So I appreciate you noticing that.
“I’m currently reading your book Long-Distance Real Estate Investing, and it’s a well written GAME CHANGER. All caps.” Thank you. “The colored shirt look nice today. The T-shirts are awesome too though.” That’s because I’ve asked questions on previous episodes of how you guys think I should dress. “I’m a bay area local, and I know the East Bay’s weather is about to get real dry, winding and hot. So it’s a good thing you can totally get away with dressing California casual. One of my favorite parts about this podcast is how you always keep it real. It was awesome you even solicited feedback about your fit. My vote is that you keep on slaying in whatever you’re most comfortable wearing.”
Thank you, Jenny. You said a lot of nice things and a pretty lengthy response, but you avoided answering the question of, if you think that t-shirts are better or collared shirts. So the debate remains. Do you guys think that I should be doing these dressed in a more professional manner or a more laid back manner? What do you think is better for the podcast and what makes it easier for you to trust the advice?
Jenny, thank you. You’re a Bay Area local, make sure you reach out to me. I’m on Instagram and everywhere else, @davidgreene24. I want to get you connected to… Anyone else who is interested in attending a meetup or who lives in California, you can go to davidgeenemeetups.com and register to be notified there.
Next comment comes from Sandra. “T-shirt David” with a smiley face. “I really dig the question from Nicole. I’m also interested in the loan side of real estate learning policy and fine print and regulations. To set up efficient systems is my jam. Thank you, BP.” All right. So check one off for the t-shirt column.
And from Cynthia Ibarra. “Hi David, I loved your show. You guys are the best. I would like to see more about second home mortgages. Thank you.” Well, if you guys would like more information about loans, about mortgages, I’m happy to talk about it. I own The One Brokerage, and so I’ve learned a lot about it with my partner, Christian. Submit us questions asking us how this industry works, what happens with loans, what affects interest rates, what you should be looking for. I may bring Christian on the podcast in the future to talk about kind of some of the stuff that he buys, that we buy together, and how the loan game works. So if that’s what you’re interested in, let us know in the comments and leave me a question about it at biggerpockets.com/david.

Michael:
Hi David. Thanks for taking my question. I’m a new investor. I joined BiggerPockets at the beginning of October 2021 and took the 90-day challenge. I closed on my first rental just before new year’s. Besides getting over my own issues as a first time investor, a quick shout out to my rockstar agent, Nick Harris at FIRE team Realty. You can find them on BiggerPockets. I found financing to be my next biggest hurdle. I’m self-employed in the IT field. I make good money for my area, but on paper it looks like a different story. Because of that, my loan terms were less than favorable. So my question is, should I put more focus on improving my financeability? And yes, that is a word. I checked. And if so, what are some of the things that I should look at doing? Or should I simply factor having to pay a higher rate and deal with less favorable terms into my underwriting? Thanks, David. I really like the direction of the channel and I love seeing all of the new content.

David:
Thank you for that, Michael. I’ve got a couple different ways I’m going to address your question because I think it’s very good. First off, it sounds like what you’re describing is because you’re self-employed you can’t use the income that you’re making the same as a W2 person would. So the very best loans that a person can possibly get, which are typically Fannie Mae, Freddie Mac, what we call conventional financing, in the mortgage world are not available to you. If you had a W2 job, they would be. So you’re saying you’re getting less favorable financing terms. It’s important to know it is less favorable than the best terms anybody could ever get. But in our world, that tends to be where we set our baseline is these Fannie Mae, Freddie Mac government subsidized loans, which are the best that anyone could do becomes what we expect, and anything higher interest rate than that or more closing costs automatically is like, “Oh, that stings. I’m not able to do what I wanted to” or “I’m not able to get the rate other people would get.”
You’re probably being offered debt service loans or other loans that use your income that is being claimed on your taxes after several years to get qualified. And you can get qualified. You can still get 30-year fixed rate loans. You’re just usually taking a hit on your interest rate because they’re a little less safe for the lender who’s giving you the loan. The thought with the lender is that, “Hey, this person in a self-employed position is more likely to lose their job or not make the same income. They’re not getting the same security that comes from an employer.”
It’s not like they’re trying to punish people because they don’t have a W2 job. Just a W2 job is considered in that industry with all the data and the metrics they have of whose most likely to default to be the safest bet. It’s the same reason that when your credit score starts to get worse, your interest rate starts to go a little bit higher. It makes you slightly higher risk to the lender. And because the lender doesn’t know you personally, and they can’t know everybody personally that ever applies for the loan, they have to come up with metrics like this to make decisions.
Here’s something I’d think about if I was you. If you’re only looking at how to get a better rate, you’re going to change your entire life to fit that goal. And I’ve said this before, I’ve never heard a successful investor at the end of their career say, “You know, I made all my money by getting the very best interest rates.” It just isn’t as big of a thing when it comes to overall wealth building as it feels in the moment when we’re competitive and we’re trying to get the best rate that we possibly can. But you have to use your higher rate, so instead it’s only going to be $300 a month for you.
Will that $100 a month improve your quality of life more than keeping a job where you’re self-employed? Would you be happier to stop being self-employed, go work for somebody else, have to live under their rules, their regulations on their timetable, conform to company policy? All the reasons you don’t want to work in that industry because you like being self-employed. Would that $100 a month mean more to you than the freedom that you have and the job that you’re at? Because I think we have to remember the goal of investing in real estate is not to build up as much passive income as we can on a spreadsheet so we can tell everybody that we make more than they do.
The goal of real estate investing is not to get your net worth as high as you possibly can get it so you can tell people that you’re better than them. The goal of real estate investing is to fuel the life you want to live. And if the life that you want to live is one where you are self-employed, you own your own business, you can build your own business, you can run your own company, keep doing that and just lose the $100 a month on the property when you buy it. Inflation’s going to make rents go up and that’s not even going to be a thing you think about in the future.
Another thing you’re probably not considering. What if you just put more effort into the business you have so that you made more money? You probably have a lot more influence over making money at your job or at the business that you own than you do in real estate where you’re dependent on rents to go up. So I want to challenge you to look into, what if you hired someone new and leveraged off some of what you’re doing and you went and did more lead generating to get more business? In your business that made you more money. You could get a much higher return on your time than just fighting over an interest rate that might be a percent higher.
Keep in mind, real estate investing is meant to fuel the life that we want to have, not just our egos. And interest rates are typically something that our egos care about the most. Now I can also understand sometimes the deal doesn’t work if the interest rate is a little bit higher. But honestly, if the deal’s that tight, that a point higher on the interest rate makes it not work at all, probably not a deal you should buy. Realistically, it probably just means you cash flow a little bit less in year one or in year two, but in year 10, it’s not going to matter. Thank you very much for the question. I hope my answer gives you a little bit of insight into your situation. Appreciate you.
Next question comes from Arthur in Raleigh, North Carolina. “Dear David, thank you for sharing your expertise. I’m an investor from Raleigh. I have concerns that my property manager in South Carolina is possibly receiving rental income and not sending it to me. I own a triplex in a small town there which has been owned for some time and a second triplex which was purchased recently in Charleston. For the months of December and January, I received nothing from either property. On February 1st, I received a check which appears to be only from the Charleston triplex and I am guessing is for the month of January. As of mid-February, I have not received anything. South Carolina law seems to require that a property manager sent copies of leases, yet I have not received any lease for either. Since these are rental properties owned at a long distance, what could be done to verify that the rent in consent is correct and not understated? Also, how could I verify that a repair bill is not being inflated or entirely made up? Thank you.”
All right, Arthur, let’s dive into this. The first thing just from the vibe I’m getting from your message here is you may be non-confrontational and you don’t want to talk to your property manager about it. The reason I’m saying that is nothing was included in your message that says, “I talked to the property manager and they said this.” So what you’re going to have to do is get them on the phone and say, “Why am I not getting rent checks? What’s going on?” They have to have some kind of answer.
Now I have to give you some hypothetical scenarios about what it could be other than they’re just stealing from you, which may end up being the case as well. Maybe they’re going to tell you that they haven’t collected rent from the tenants. If that’s the case, there’s nothing to give you. That’s probably what the answer is going to be. The only way I can think of that you could verify that the tenants haven’t collected rent would be if you actually asked the tenants yourself, “Have you paid rent?” Now, if the tenants have not been paying rent, your property manager should be starting the process of an eviction.
Every state has different laws, but there’s typically like a three day notice or a 30 day notice that rent was not paid. That’s something that they’re legally required to do. They usually post that on the door. They tell the tenant, “Hey, if you don’t pay in full by this amount, you’re going to have the eviction process started.” That should be going on if they’re not collecting rent. So you should getting updates from them of what they’re doing to start that process and continue that process on your behalf.
As far as getting copies of leases, yeah, you definitely should have that. Did they give you an answer as to why they’re not giving them? That’s another thing that you need to tell them “I want copies of leases.” If this is a company that doesn’t have leases or isn’t setting them to you and they’re not responding to you and telling you why the tenant is not paying their rent, you need to do a little bit of research on this company and find out how reputable they are. Do they have other people whose properties they manage? Is this a real estate agent who is using their license to manage properties and has no idea what they’re doing? Is this a person that got super busy in life and just stopped paying attention and they’re just avoiding you?
Something’s fishy here. A reputable company would not… They wouldn’t be operating this way because their reputation’s going to take a huge hit and no one would use them. So we’re going to have to figure out, “Can you get them on the phone? Can you talk to them and find out what is happening here?” And then after that, you need to be sending emails to them so you have something documented in case you have to take a lawsuit to them for mismanaging your property and breaking their fiduciary duty to you. You have kind of like something evidence a judge can look at.
This is really good advice for everybody out there. When you’re dealing with something and you have a conversation with someone on the phone, I have to tell my real estate this all the time, is they will tell a client on the phone… This is the case with a property, they’ll disclose something but then there’s no email. And they’ll come to me later and say, “Hey, so and so is upset.” And I told them, this was the case and I’ll say, “Well, if you don’t have a paper trail or an electronic paper trail, you didn’t tell them anything. It doesn’t matter what you said. Text messages are okay, but those are still not as good as like something that’s written down or something that’s emailed.”
So send your concerns to them in an email. And if they reply to it, that’s even better for you because it’s evidence that you can show that they saw what you sent. If they just completely ghost you and you’re not hearing anything, you do need to reach out to a lawyer and share with them “This is what I’ve done. Here’s the agreement that I set up. Here’s what I signed with this company.” Maybe you wired them some money in the beginning or transferred it to them. And you’re going to have to start the legal process yourself. But I would advise you, don’t try to figure out what is going on with them if you haven’t just asked them. Be straight up, ask them what’s going on. They’re likely to tell you why you haven’t been getting those rent checks. And then give us an update on what you found out. That would be great if you could leave that in the comments. Thank you very much for this.

Garrette:
Hey David, my name is Garrett. Love your show. I am an investor in the Chicago land area. I have one triplex under my belt. My question for you is how you go about picking which repairs are the most important and finding which ones that you want to fix right away versus maybe holding off for a little while or just completely putting aside and not worrying about. I’m finding myself having a lot of the bills rack up, because I want to fix everything. The roof needs repair. The basement’s leaking so I’m getting it waterproofed. A lot of the windows aren’t sealed or they’re cracked and warped, so new windows. All this stuff is starting to rack up. I’m not sure if I really need to fix all of it. So before I get myself investing too much of my own money into this property, how do you go about picking those ones and knowing what’s going to pay you back later down the line when you decide to sell? Thank you.

David:
Garrette, good question here. Man, you gave me some juicy stuff to get into. I’m going to like this. I’m going to start off with a practical response to your question and then I’m going to get into some deeper, more emotional stuff. So let’s talk about, from a practical perspective, you kind of ended your question by saying, “What’s going to give me the highest return on my money back?” This might be controversial. I’m just going to say in my experience in general, no repairs get you money back. It’s more like if you want to sell your house, the buyer’s going to expect certain things to be done. And if they’re not done, they’re going to ask you for a credit to get it fixed. But I’ve never seen the credit that a buyer gets on a house to be more than what it would cost if you had done the repairs. It’s almost always better if you give a credit instead of make repairs that don’t have to be done.
Now we’re not talking about backed up plumbing, foundation issues. What I’m really getting at here is that every single house that you’ve ever seen driving in your car, walked inside, have been in, owned, someone else owned, every property that exists has something wrong with it. There is an inspector that can find not just one thing, but many things wrong with every single property. The mindset that I need to go in there and make it perfect isn’t actually practical. Many of these problems have existed, and I’m calling them problems because they’re pointed out in a report, for 25, 30, 50 years and things have been okay.
I want to just reframe this question I wanted to ask you. If you own a car, things start to break in the car, okay? The vents that control the airflow sometimes become kind of wobbly and they fall down, they don’t stay up. In my car, you have the little center console, it has little piece that you can pull up to put something in and then push back down to rest your hand on. Well, sometimes it doesn’t click in place when I put it down and I got to jiggle with a little bit to get in there, right? Does it affect my experience driving the car? Hardly nothing. However, if someone inspected my car, they would point that out and many other things. And if I thought it is my job to repair everything on that report, I’d be dumping tons of money into a car that isn’t giving me a better experience.
Real estate can work the same way. Do you need to replace the windows? Well, that depends. Is the dry rot so bad that the windows aren’t working or it’s becoming like a safety thing or a draft is coming in? Probably yes. Is it just like a seal that’s broken in the window? Because I see that a lot. Like anytime you notice that home windows are fogged up, typically that’s because it’s a dual pane window and in between the two panes, they put a gas that helps to keep… It’s like an insulation. Well, if one of the seals breaks on those two panes, the gas can leak out and condensation gets in and that’s what makes windows foggy. Does it mean that they don’t insulate as well as they were originally designed? Yes. Does it mean that you need to spend $40,000 to replace every single window in the entire house? No. It just means it’s a little less energy efficient than it was before.
Now, that’s different than when the framing of the window has been completely corrupted by dry rot and it’s falling apart. That’s what I’m really trying to get at here. Don’t look at it like “I need to fix everything.” Ask yourself, “Well, what’s the purpose of fixing it? Electrical issues that are safety hazards, a leaking roof? Absolutely. At some point, you’re going to have to fix those things, especially if it’s a safety issue. So please hear me say I’m not referring to that. I’m referring to the fact that if you get a roof inspection, there’s a guarantee they will find a broken tile, a piece of wood that could be replaced, something that they’re going to say “This could be a little bit better.” That does not mean those things actually have to be replaced.
Now that’s the practical answer that I’m going to give you. I want to dive deeper into this and ask you, is there a reason you think you have to fix everything because there’s a comfort you get from having a blank slate? Are you one of those people that likes to make a checklist and have every single thing done on it? Do you like to be at what we call email inbox zero where you don’t have any emails that are unread? Are you that person that if you have one notification on your phone, that little red dot, you have to clear it because it feels wrong? If that’s the case, this is probably why your feelings are telling you that you need to do every single thing in the inspection report and fix the house.
You don’t have to live like that. What would be better is if you ask yourself why you’re thinking that way. There’s probably some form of safety that you think you get when you make everything perfect. And that’s not how the world works. So if you can come and kind of reconcile with why you feel like you need to have every single thing done, your experience with real estate investing and ownership will get a lot better because a lot of the anxiety you’re feeling is what you’re putting on yourself thinking you have to fix everything.
So I’ll sum this up by saying safety, health and safety issues, hazards like that, absolutely need to be fixed. If it’s something where someone could be hurt or injured, yes, that needs to be done. If it’s something that just shows up on an inspection report, “Okay, I’ve seen lots of stuff, you have a five burner stove and one of the burners isn’t working,” well, how many tents are needing to use all four burners at exactly the same time? Okay? There are things that you say, “Hey, at some point I might want to replace that or fix that, but it doesn’t have to be done right now.” And know that when you do fix it, you’re probably not getting any of that money back. It’s just coming right out of your cash flow and you’re not going to be improving the value of the property by fixing the small appliance. In fact, you’re going to have to fix it again, because that’s what happens is things like this break.
So grout issues and tile, you’re going to see like sometimes baseboards. You get a report that says that they could be fixed or repaired. I like to pay a lot of attention to anything that’s near water. So stuff near a shower I want to repair, because if I don’t, water can get in between sealants that have become loose and then the floor boards underneath can start to get rot from water. That can be really expensive. But that’s different than just like a faucet somewhere that’s not working super great or a light bulb that could be changed. So look at the nature of what is being asked of you. And if you can look at the practical reason of why it would need to be fixed, I think you’ll get some clarity.
All right. Our next question comes from Derek Rankin. “Hey David, I’m registered for BPCON22 and I have a couple important questions. Number one, will there be open mats for rolling?” That’s a jujitsu question. And should I bring my Gi with me? Also a jujitsu question? I’m a newbie to Brazilian jujitsu and love to learn new techniques. I look forward to seeing you there.”
Well, Derek, I don’t know that BiggerPocket’s going to have a jujitsu area set up because quite frankly that sounds like an absolute legal nightmare with tons of people wanting to jump in there and throw themselves into the ring and getting hurt and then potentially suing BiggerPockets. So I wouldn’t be holding my breath for that. In general, jujitsu is something that you definitely want to do in a supervised manner with instructors in an environment that is being controlled. So at the gym that I go to where it’s called an Academy, they don’t even let you spar with somebody until you’ve got your first stripe, which typically comes after like three to six months or so of going to class learning techniques and learning how to not hurt people.
If anybody lives near me geographically and you like to come train where I do, reach out to me and let me know. I will be happy to get you set up. And if you don’t live near me geographically, go get your tickets to BiggerPockets Conference 2022. It’s going to be in San Diego, one of the best places around as far as weather amenities and beauty. We’re going to have a great time. Every year, BiggerPockets gets better and better with putting this conference together. I don’t see how anyone could possibly regret it. So if you don’t live near me, get your tickets. I’d love to see you there. But please don’t come tackle me or start a fight or do anything crazy like that. Let’s keep it all reasonably healthy. And then if you would like to get into that, go through the appropriate channels.
The next question comes from Preston Garcia in Rochester, New York. “Hey David, I’m looking to get several buy and hold rentals in Cleveland. My agent is investor-friendly and send me deals daily. I want to use private lenders for the down payments of the properties, and in exchange pay them back with interest. However, not many people want to lend out that money for three to seven years depending on the market to receive their money back. In other words, not many people want to private lend for long term. It seems like the best option going that route is if there’s already a decent amount of equity I could refinance after the six month seasonal phase. These are for debt service loans. And I’m mainly looking at the only other alternative that I can think of is to have them become equity partners. Should I keep looking around for private lenders that are okay with lending for three to seven years and use them as equity partners or something else?”
Okay. You’ve made a great observation here, Preston. Nobody wants to lend out money for three to seven years unless the interest rate is higher than you’re going to want to pay. This is one of the reasons that home ownership is made possible for most Americans because the government is giving you a 30 year period of time to pay things back and they’re doing everything they can to keep interest rates low. Now I know that the Fed has been raising rates, so rates have been going higher. But they would be much higher than whatever they are if this was open market capitalism. I just want you to think about that. If you had to lend your money to someone else for 30 years, would you do it for a 3% or 4% interest rate? Would you even do it for a 5% or 6% interest rate? There’s no way that I would. The only reason this happens is because our financing is subsidized by the government in this country.
So you’re probably making the mistake of looking to private people with an expectation similar to what you’d get from a lending institution that’s going to sell this as a mortgage backed security once the loan is originated. And you’ve already answered your own question. Your best bet, if you want someone’s money for that long, is to give them equity in the deal. They’re probably not just going to want interest. And the interest you’d have to pay them would make it so the deal isn’t going to cash flow for you.
So giving away equity would be a much better bet. Now you’re not going to do this for your whole career. You’re just going to do it until you get your own money. You don’t have to borrow it. If you buy a couple properties, if you do it wisely, if you hang onto them, they’re going to grow in equity. At a certain point, you can sell them, get the other person their money back plus whatever their share of the equity was. But now you’ve got capital that you can now use to get into the game without having to borrow money from somebody else. So you’re absolutely right. I would look at giving away equity in the deal, and then I would refinance it when I could to get your money back, or to get your capital to get started and get them their money back.
All right, that’s what we have for today. What a cool collection of questions that people were asking. I mean, we had a little bit of everything there from sort of, should I do a business or should I buy real estate, to how should I borrow money when it comes to real estate investing, to how can I get the best loan possible. I really appreciate your attention and the time that you’ve been able to spend with me and the fact that you are loyal to BiggerPockets and me to get your real estate investing information, because I know there’s a ton of stuff out there.
I also want to let you guys know, this show is only possible if you actually submit questions that I can answer. So all of you that want to DM me on Instagram to ask a specific question about real estate, probably not the best bet. I’m not going to get to it there. But if you go to biggerpockets.com/david and ask your question, you are much more likely to get the answer that you’d like. If you guys would like to follow me on social media, see what I’m up to, communicate with me that way, you could find me @davidgreene24 on Instagram, LinkedIn, Facebook, Twitter, pretty much everything. On Snapchat I am officialdavidgreene. There’s an E at the end of Greene. And then you can follow my YouTube, it’s David Greene Real Estate, so youtube.com/davidgreenerealestate. I’m making content over there as well.
Thank you guys. Make sure that you subscribe, like, and share this episode on YouTube if you’re not watching over there. It’s cool, because you get to see me. I do little things with my hand. You see the light that’s behind my head. It’s a different color when we’re doing Seeing Greene than when we’re doing the regular podcast. You can also see the people that are asking questions and see what they look like. It’s just more of an immersive experience so you feel like you’re involved in the conversation, not just listening from the outside. And why is that important? Because you’re only going to build wealth in this world if you can take action. You got to go do something. Learning about weightlifting doesn’t get you stronger. Learning about jujitsu doesn’t get you better. And learning about real estate doesn’t make you money. It’s taking what you learn and doing something with it.
So that being said, check out another one of our episodes or go to biggerpockets.com and kind of cruise around. Check out the forums. Check out the blog. Go to biggerpockets.com/store and see some of the books that we have for you there to get more information that you can put into action. Love you guys. I will see you on the next one.

Mindy:
Welcome to the BiggerPockets Money Podcast Show number 306 Finance Friday Edition, where we interview Chelsea and Wade and talk about budgeting with variable income.

Chelsea:
I own my own business because I want to have the flexibility and the autonomy and the freedom to do whatever I want. And that’s sort of my personality anyway, is I don’t really want people to tell me what to do. Having the flexibility to do that is really cool, because I can work three days a week and do the amount of number of sessions that I want versus somebody telling me, “I need you to do 35 sessions a week,” and then me just walking around as a burnt out zombie.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my Obi Wan Keknowitall host, Scott Trench/

Scott:
Ooh, the force is strong with our recommendations in this episode, Mindy.

Mindy:
That came from our Facebook group. Somebody suggested that and I love it. Okay, Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, or start and scale your own business, we’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
Scott, I am super excited to talk to Chelsea and Wade today because they have a problem that a lot of people have. They have variable income, widely variable income, and it can sometimes be difficult to budget when your income is up one month and down one month, or down two months in a row, or down even three months in a row. You can start to feel like, I’m not really doing it right. Today, we talk to them and give them some ideas for how to handle their variable income.

Scott:
Yep, love it. I think it was a great discussion. They’re doing a lot of things really right, and I hope that it’s an interesting perspective on what life is like in building wealth from a self-employed perspective with two spouses who are self-employed.

Mindy:
Yes. Before we bring them in, let me satisfy my attorney by saying the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal tax and financial implications of any financial decision you contemplate. I don’t think I would be a very good auctioneer, do you, Scott?

Scott:
No, but I think you satisfied our attorney.

Mindy:
I did. Chelsea and Wade are on the path to financial independence, but they have widely variable, monthly income, anywhere between $5,000 a month and $26,000 a month. Coupled with ever changing monthly expenses, they’ve been having difficulty creating a budget. And on top of that, they’re both self-employed making insurance another wrinkle to iron out. Wade and Chelsea, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you guys today.

Chelsea:
Thank you so much for having us. This is a dream come true.

Mindy:
Well, let’s get into this because we have a lot to unpack. What is your income and where does it go?

Chelsea:
Okay, so we are both self-employed, like you said, and I’m a professional counselor with a private practice. My income varies, but it’s more consistent than his. Last year I brought home $51,000 and that came out to about like 4,000 a month.

Scott:
And that’s net income after tax.

Chelsea:
Yes.

Scott:
Hitting your bank account.

Chelsea:
Mm-hmm (affirmative).

Scott:
Great.

Wade:
Yeah. My income varies a lot more, because I’m a filmmaker. I do projects where sometimes I’ll make like $26,000 in a month and sometimes I will make $0 in a month. It also gets a little more complicated on the business side because I have a really high gross income. Last year, my business gross was like $225,000, but that’s because I’m paying lots of contractors. It may look like I’m making a lot of money, but after expenses and contractors, my income for my net is much lower.

Scott:
Awesome. What does that kind of come out to annualized?

Wade:
My net income is $86,000 for my business.

Scott:
And that’s again after tax.

Wade:
After tax, yes.

Scott:
Awesome. Okay, great. That’s not bad. It’s about 137,000 in total annual income.

Wade:
Yep.

Scott:
Any other sources of income throughout the year?

Wade:
Nope. Nope. Not right now.

Scott:
Great. What about expenses? Where’s that money going?

Chelsea:
Okay. We’ll kind of go through everything. Our mortgage insurance taxes comes out to $1,684 a month. Utilities range from 250 to 350 a month. Groceries are 850. Eating out, 120. Household products like cleaning stuff, sometimes kids stuff is in there too, 300. Gym, 170. Gas, around 300. That varies too. Subscriptions like Netflix, 27. Health insurance, 488.

Chelsea:
Because we don’t have traditional health insurance, we pay for a lot of extra medical things out of pocket, so that can really vary from like zero to sometimes 700 or more a month. Car insurance is a hundred. Life insurance is 31. We budget for entertainment around 200 a month, miscellaneous, 200, kids stuff, 200. These vary a lot. Childcare, we aren’t currently paying for childcare, but we will be in the summer. That’s looking like it’ll be around 850 a month for the summer.

Chelsea:
But then both our kids will be in school, so we won’t pay during the school year for childcare. We give $500 a month. We save $300 a month for our kids’ college. Then we each have a spending money of $50 a month. And then we have a dog and she requires most of the time very little, but around $45 a month.

Wade:
Total, that is $6,000.

Chelsea:
Around 6,000, yeah.

Wade:
Yeah, around 6,000 is our monthly expenses.

Scott:
Awesome. That seems like a super reasonable budget from my seat, from that with maybe a little room, but not much from a cut perspective. Is that kind of how you’re feeling about it?

Chelsea:
Yeah, absolutely. I have been tracking our spending with Mindy’s recommendations since October-ish. We’ve always kind of had a budget or more. It’s been like an outline of like, this is what we’re kind of planning. But because our income is variable and there’s lots going on, it’s sort of like this is the best guess. We just kind of go for it.

Scott:
Well, let’s go through your assets and liabilities. Can you walk us through where you’re putting that money?

Wade:
Yeah. Chelsea has a Roth IRA. She’s got 10,000 in there. Her SEP IRA has 26,000. I have a Roth that’s five, and then a SEP that is 7,500. Total retirement savings right now is 48,000, and that is… That’s our retirement. And then you can go through the others.

Chelsea:
And then right now we have two kids. We have a four year old and a seven year old, and we have about 6,000 saved for college. It’s about 3,000 each right now. We have an emergency fund of 30,000. We have other cash savings in a savings account, just a general savings account, of 34,000. And then we have our current home equity at 140,000. We also have money in our separate business accounts, but that’s for like…

Chelsea:
Some of it’s going to go to pay us, but some of it’s going to go to the business. I don’t know how you want to do that.

Wade:
It’s mainly business savings, or it’s for cash flow for business.

Chelsea:
For paying ourselves.

Wade:
Our total net worth is around 300,000.

Scott:
Awesome. Essentially half of that’s in your home equity, another third is in cash, and the rest is in various retirement accounts is how to think about that.

Wade:
Yep.

Chelsea:
Yep.

Mindy:
Does that 300,000 include the business account money?

Chelsea:
Right now, yes.

Wade:
Yes, that does. Right now, Chelsea has about 11,000 in business savings, and then I have right now about 40,000 in business savings. That does kind of equal more to the 300,000.

Scott:
You said you had 225,000 in revenue for your business last year, and then you had like 130,000 in expenses between contractors and taxes?

Wade:
Mm-hmm (affirmative). Yep.

Scott:
Okay. Yeah, that seems super reasonable there. What are your goals and how can we help you?

Chelsea:
We just wanted to chat with you guys a little bit about if you had any suggestions on our variable income situation. We have come a long way with that, and we’ve actually gotten the opportunity to achieve a lot of goals while we have been on this journey, because Wade’s income has been variable for most of our marriage for the last 12 years. I’ve been in school for a lot of that. It’s really within the last five years that I finally started making money, which has helped us achieve paying off debt.

Chelsea:
We paid off $50,000 in student loans. We saved up a ton of money last year to put a down payment down on a house for us. We have like a lot of good momentum going, but we just want some help with kind of… If you have any suggestions on the variable income. And then we’re really long-term looking to be financially independent. We would like to start moving into real estate and specifically investing into short-term rental real estate so we can have some residual income.

Scott:
How long did you say you’ve been both generating income at this level?

Chelsea:
At this level, probably three years.

Scott:
Okay, great. You’re not going to have any problem from a debt perspective. You might have to talk to a couple of lenders who are going to be more comfortable with self-employed folks, but you’ll have enough income history with both of your professions to be able to qualify on that front. Well, just kind of like looking at this, great job. You’ve got a great situation. You’ve got a really strong financial foundation. You’ve got $300,000 in net worth.

Scott:
You have no consumer debt, it sounds like, aside from your mortgage on this. You’ve got a huge cash position and are beginning to invest. You have a very good start from an investment standpoint in these things. I love the fact that you have a lot of cash. You may have slightly too much cash. We can think about that from there, but it makes a lot of sense to do that when you’re self-employed and to have separate business and personal items there.

Scott:
You generate 50 or 60 or $70,000 per year, although it is lumpy, seasonal, or perhaps periodic, I’m not sure which is the right term to describe your income. But I mean, this is a great position here. Like the fundamentals, I think, are all super strong as an outside observer about what you’re currently doing right now.

Chelsea:
Thank you. I really appreciate that.

Scott:
Where would you like to start with the next steps here?

Mindy:
I want to start. I’m going to look at this as Chelsea brings in 4,000 a month and Wade is bringing in on average 7,000 a month. That’s $11,000 a month with approximately a $6,000 a month spend. That’s a $5,000 a month delta that you have. That’s great. We don’t spend enough time celebrating. Yay! That’s fantastic that you guys are spending so much less than what you are bringing in. But on those months when you’re only bringing in $5,000, it’s not going to feel like that.

Mindy:
If there’s several months like that in a row, it can feel like there’s this huge deficit when… Then Wade brings in the, boom, here’s 26,000. Yay! That’s great. I would suggest if I was in this situation, I would have a savings account or a bucket where I put extra money from these $26,000 months, where there’s extra funds over and above what you’re spending that you know you will need for the lead months and have money in there available for when there’s not enough.

Mindy:
Go back through your spending and your income statements and look and see is that three months a year that you have less income than what you’re spending, or is it more like six months and then you get this one giant month? That’s a research opportunity for you guys to look into where you’re going to feel comfortable having that extra bucket. You do have this $34,000 in other cash savings. Does that have an earmark, or is that just a random bucket for whatever comes up?

Wade:
That is the money that we’re saving for a short-term rental. Our goal is to basically put as much money into that as possible so that we can have a down payment for a short-term rental in the next year. That is our goal to be able to purchase some real estate in the next year. That is why that number is pretty high.

Mindy:
And then the emergency fund, like on a month where you’re coming in lower than you’re spending, where is that money coming from?

Wade:
It’s the emergency fund. I mean, typically that $30,000 savings account is our emergency fund. If we have a low month, we take money out of that 30,000 to pay for personal expenses. And then when we have a bigger month, we recoup it and then put it back so it stays at 30 as best as we can.

Mindy:
Does that feel mentally comfortable to have that emergency fund ebbing and flowing like that? Or would it feel better mentally to have this bucket where the emergency fund is $30,000 and then the light income this month fund is $10,000 because you know you’re going to put more in when you need it, but that’s not coming out of your specific emergency fund. A lot of this personal finance stuff is a mental game where you have to just kind of convince yourself that this is how it’s going to be.

Mindy:
Sometimes you can’t, so you have to allow it to be the way that your mind wants it best. I mean, that’s so like floofy to say, but if your mind is having a hard time wrapping around the fact that you can pull from your emergency fund, maybe having an income bucket will allow you to be okay with it. Does that make sense?

Chelsea:
Yeah, absolutely.

Mindy:
That’s something to consider. Take some out of the emergency fund and put it into your income bucket, or maybe you’ve got a $26,000 a month coming up and then you can fill up that little extra emergency bucket, because you’re not doing bad at all. You’re doing really great. Number one, you’ve got a great average income and you’re spending far less than that.

Mindy:
But again, three months in a row of less than average income is going to not make it feel like you’re doing all that great. That’s that mental game that your mind can’t like… Sometimes you can’t see the forest for the trees.

Scott:
I mean, look, there’s lots of right ways to do your cash. Yours is among the most right I’ve ever seen. I love this. You have a lot of variable expenses in your business account, Wade. You have 40,000 bucks. Chelsea, you have it sounds like probably much less. You have 11,000 bucks in that business account. Those seem like reasonable numbers. I’m sure you arrived at that through similar logic. You have 30,000 as your number for emergency reserve.

Scott:
You’re probably feeling really uncomfortable if that ever dips below like 15, and it probably never does is what would be my guess. You’re just like pull a little bit out, replenish it. That’s the point. That’s exactly how you do it. And then everything else goes into… You’ve already made your determination. Your prioritization is short-term mental. It’s not index funds. It’s not your 401(k)s. You’ve already determined that. That’s why everything else is going to the investment for that.

Scott:
I think it’s perfect, and I think your next step is you can fiddle with that if you need to, but it’s a great system. I love it. And now you’ve got the surplus going, ready to be invested into real estate in your short-term rental. Can we hear about what you’re thinking from the short-term side?

Chelsea:
Yeah. Something I wanted to say about that. Currently, I am also investing into retirement and so is Wade. I feel that we are in our early thirties and we are just starting our “traditional retirement savings.” This was something I wanted to ask you guys. We feel like we just started. I’m like, do we need to be… Right now I put in about $1,000 a month into either a Roth IRA or the SEP IRA. I don’t know. How much do you put in?

Wade:
It depends. Right now I’m putting most of my extra money towards the savings towards the short-term rental. But when we don’t have a big goal, I do about 20% of my net income will go towards my retirement accounts. That’s kind of what I’ve been doing for the last six months or I guess last year.

Wade:
What Chelsea’s saying is like we’re trying to figure out, do we try to come at this goal of a short-term rental in a more balanced perspective of still putting money towards our retirement accounts, our index funds essentially, and save up as best as we can for the short-term rental, or do we go like all in and put in all of our extra cash towards saving for the short-term rental so that we can buy it sooner than later?

Scott:
Well, I think that… As long as you get the money in, in the calendar year into your retirement vehicles, it shouldn’t… It’s kind of six of one, half a dozen of the other, as my mom used to say. It’s the same thing. I think it doesn’t quite matter there. I think it’s whatever you feel is the one that’s going to get you to your goals faster, which my instincts based on what we’ve talked about just this far is going to be the short-term rental. Let’s think about it.

Scott:
Over the course of 2022, if things go the same as last year, you’re going to generate 60,000 additional dollars or let’s call it 45, 40,000 additional dollars, because we’re now at the end of April with this, right? That’s going to be $74,000 that you can add to your other cash savings to buy the short-term rental. How much do you need from a down payment to buy that property?

Wade:
We’re still kind of in the research phase right now. We’ve thought about probably a property around 600 or 700,000. In order to get to like the 10%, we’re going to need 60 to $80,000 in cash. But with closing expenses and all there is with the short-term rental, maybe a little bit more, so maybe like 90 is probably more realistic of what we would really want.

Chelsea:
And just to clarify, we’re looking to buy a short-term rental in a traditional sort of short-term rental market, like Smoky Mountains or Florida, Joshua Tree. We’re kind of looking at some of these more traditional places and willing to put quite a bit down so that we can see more residual income every month from it.

Scott:
Okay. Well, you are in position to do that right now. Your cash position would allow for that if you were to pull that from these other places. You’re probably uncomfortable with doing that, which I think is great. It’s a great mentality to have with the way you manage your cash, but you have $110,000 in cash right now to buy that short-term rental.

Scott:
One way to reframe that would be to bucket all of your cash together into one lump and say, “What is the lump amount that would make me feel comfortable with my overall cash position to move towards that?” The other option is keep doing what you’re doing and pile on that amount. You know that you’ll get there within 12 months, you’ll be able to generate about $60,000 and be probably at the minimum threshold to comfortably buy that investment with your outside cash position. I see Mindy shaking her head here.

Mindy:
That gives me the heebie-jeebies to suggest that because that’s every single penny that they have thrown into one investment, and then there’s not really a buffer.

Scott:
I’m not saying they should do that. I’m saying that they could do that, right? It’s their conservative nature that is going to put them in there, probably appropriately to some degree. It doesn’t have to be a year from now. You could look at your situation and say it is reasonably responsible for you guys to have $50,000 in cash across all of your cash accounts based on the numbers you provided us instead of $110,000 in cash, right, across all of those different accounts.

Scott:
To run your life out of one big bucket, because there’s nothing preventing you at the end of the day from taking a distribution from your businesses or committing capital back into your business, right? You literally just move the money from one bank to the next if you want to do it in order to take care of that. That’s more what I’m saying is you can do that right away and you can probably still contribute something to your retirement accounts this year because of the surplus cash that you currently have and the cash flow that you’re going to generate.

Scott:
I think this is one of those cases where you have to prioritize to some degree. You can’t probably max out your contributions to I guess your SEP IRAs and your Roths this year, but you can do some good damage there and still probably accumulate… Put yourself in position to buy that short-term rental by the end of the year, I would think.

Chelsea:
Yeah. That’s what kind of we were thinking too is by the end of the year.

Wade:
I guess another question I have for you guys too is, do you think it’s like smart for us to try to purchase a home that’s a little bit more money, that has the potential to have higher earnings, or do we be more conservative and purchase a home maybe in the 400 range, but has way less earning potential? Is it worth that risk of spending more for more money?

Scott:
Well, I think you invest for ROI, right? And in your case, that’s just a matter of delaying by a few months if you think to stock up more cash, right? You save up 400 versus 600, that’s a third bigger, so you need to save a third more cash in order to put that down to generate that. As long as you’re not going to be crushed by the mortgage payment, which you have to underwrite too, but I like investing for ROI.

Scott:
I’d rather have one investment that produces a great return that’s a little bigger than a smaller investment that produces less net return, less ROI, less IRR.

Chelsea:
Yeah, that was kind of our thought too.

Mindy:
My thought with regards to demand is I have a really, really big family, like enormously big family, and there aren’t that many properties that we can all fit into comfortably. There’s like six in America that can fit us all and they’re always booked up because there’s only… I’m talking they sleep 60 people, where it’s a huge house that sleeps 60 people. Those are always booked up. Yes, it’s going to cost like a lot more than $600,000, but there’s a huge demand because there’s no supply.

Mindy:
That’s something to consider. I mean, obviously not a 60 sleeper, but maybe there’s people that are looking for 14 or 20 sleepers that you can… A little bit more initially may yield a lot more… A lot less vacancy because somebody is always looking for that. Oh, well, I’ll just reschedule my vacation for when this is available. I know that’s how we scheduled our vacation is when they actually had a weekend that was available for us.

Mindy:
I wouldn’t have thought that there were a lot of demand for big properties like that.

Scott:
I think it’ll 100% vary by market, right? If you’re interested in investing anywhere in the country, there’s no reason why you can’t find a similar ROI at 400,000 price point as 600,000 price point. If there are specific markets that you’re studying and know really well, that may well be the case and that may splay your decision there.

Scott:
For example, I wonder aloud right now like the best way to generate ROI in like Denver, Colorado would be to buy a million dollar property with an ADU and a single family house on it and live in the ADU and Airbnb at the single family house, because you can’t Airbnb property in Denver, unless you live in the property as your primary residence. Probably very few people who can actually purchase a million dollar single family residents are willing to do that.

Scott:
Therefore, there’s going to be very limited competition and lots of demand for that property. There may be something like that that gives you an advantage in whatever market you’re in. For Mindy’s point, bigger, better, nicer property, more amenities. I think you’re thinking about it great.

Mindy:
Another thing to think about is the taxes. You’re looking at Florida. Are the Smoky Mountains in Tennessee or Kentucky? I get those two…

Wade:
Tennessee is the area that we’re looking at. Tennessee, yeah.

Mindy:
I get those states confused. Florida, Tennessee, and California, not knowing anything about any of these, I know California’s going to have super high taxes. I know they’re going to have income taxes. I know they’re going to have, if you do an LLC in California, they’re going to have LLC taxes. Not doing any research at all, that’s going to be at the bottom of my list simply for the taxes. It doesn’t matter if you live there or not, I believe. Florida is very tax friendly. I think they have lower taxes.

Mindy:
I know that Smoky Mountains is the number one most visited national park in the country because it’s so close to like two-thirds of the population of the country or something like that. That’s a really great market. They had a fire a few years ago that like wiped out all of everything. They don’t have a ton of property. They’ve been rebuilding, but their rules are more relaxed I believe with regards to rental properties like this. I think it took out a lot of hotels too, but it’s been long enough that I can’t really remember now.

Mindy:
Of these three areas, I like the Smoky Mountains best. I would reach out to a real estate agent and just ask like, “What can I expect from a property in this area? What am I looking to pay? What is my vacancy rate going to be? And what are my taxes going to be?” If I can make the same amount of money in Florida as I can Smoky Mountains, but for half the price, then maybe Florida’s looking better.

Mindy:
If I have less occupancy in Florida, then maybe Smoky Mountains looks better. I’m sorry to throw California under the bus. I love it.

Scott:
Where do you live right now?

Chelsea:
We in Western, Colorado.

Scott:
We’re in Colorado.

Chelsea:
Oh, Grand Junction. Grand Junction.

Scott:
Grand Junction. Why not consider the areas local to Grand Junction like Palisade? Why go out of state?

Chelsea:
We’ve definitely thought about that. We’re just kind of doing… Kind of in the beginning of this journey too with even just reading general things about having a short-term rental. I just don’t know the market of short-term rental here very well, but I know that tons of people actually obviously come to Palisade for the wineries and tons of people come to Fruita for the mountain biking.

Chelsea:
There’s definitely need here, I think, but it would be a good, like Mindy says, research opportunity to look into, because that could be a really great route to go, especially maybe for our first property. Because it’s local, we maybe have that comfort that we could just zoom over if we needed to kind of thing.

Mindy:
Don’t they have world class fishing and elk hunting over near Fruita and Craig and like all that area? I was talking to somebody who was saying that there’s a need for that as well. That’s not my thing, so I don’t know. But somebody else…

Wade:
Definitely on the Colorado River there’s lots of fly fishing that’s hugely popular. More towards the mountainous areas, like the hunting lodges are super popular for sure. In Fruita, like in like the city like Grand Junction and then there’s Palisade and Fruita, there’s not a ton of like hunting tourists that come to the town. In Fruita, there’s the bike riders and then hikers, outdoorsy people, and then Palisade is the wine. There’s lots of wineries. There is definitely lots of potential where we live.

Wade:
The hard part is there’s not a whole lot of houses available. It’s just that the market’s super hot right now. Everybody wants to buy stuff. When we bought our house last year, we sold our old home and I think we had 10 offers in the matter of like 24 hours. We got like $30,000 over asking price. In Colorado, in general, it’s just a really hot market. I think that’s why we’re like, do we want to like try to buy in this crazy market right now. But in a sense, it’s kind of like that everywhere really.

Scott:
I think that’s how I would think about it. It’s going to be like the whole nation has got issues around those types of things. What it comes down to is I think in terms of ROI, right? The major advantage to investing 20 minutes, 30 minutes away from where you live is going to be the ability for you to self-manage the property in the early days and learn a bunch of those things instead of paying that fee to somebody else. And that’s not going to be a 10% management fee for a short-term rental.

Scott:
It’s going to be 18% or a significantly higher one. And that’s not including the cleaning fee, by the way. This is not saying you’re going to go and clean the prop… Although you can do that as well to save money, but that’s the… The management costs will be significant for a lot of these short-term rentals. If you can at least get started with that, you’re going to be able to…

Scott:
By the way, just trying to self-manage something in the Rocky Mountains, you don’t know if there’s like certain times of year that have actually really high tourist activity in the Rocky Mountains because of this event that happens at this point in the year or whatever. You do know that for Palisade, so you’re going to be able to put in place the right pricing at those times of the year. Oh, this is my heavy demand time where I need to make all my money, and this is the light demand time where I’m going to make less.

Scott:
I want to pounce on a long-term… Someone who wants to stay there for three months in this part of the year, or whatever that is. Those will be advantages that you’ll get, especially in the early years, I think from investing locally as a bias as opposed to somewhere you don’t know as well, because you don’t live in there. It all comes down to ROI. If it’s close, the tie goes, in my opinion, to something that’s highly local to you. If it’s not close, then you go out of state. That would be how I bias you to think.

Chelsea:
Yeah, we also have Moab like an hour away and a lot of people go to Moab. There’s a lot of opportunity.

Mindy:
Moab’s kind of expensive too.

Scott:
Who’d we talk to that wanted to build huts next to Moab?

Mindy:
Oh yeah, I can’t remember. We thought about that, like build a tiny house somewhere.

Scott:
I think there’s a lot of stuff in your back door that is maybe not your back door, but I think lots of people around the country are probably thinking like, “Well, Colorado is a great place for short-term rentals for a whole bunch of reasons,” even as you guys are thinking about going somewhere else. Something to think about. I would at least explore it. If it doesn’t work out, go somewhere else.

Scott:
What I am gathering at the strategic level is you’re still early into this journey and you probably have six more months of research and self-education to do before buying your first property. What that might do is you’re probably going to accumulate that cash that’s going to put you in position to buy that within the next six to 12 months, regardless of whether you max out your retirement accounts or not.

Scott:
If you’re not sure, and you’re still in the research phase, maybe you do bias more towards the retirement accounts and those types of things for this year or for the next couple of months, and then kind of get more aggressive about stockpiling the cash when you have much more clarity on what you want to do from a real estate investment standpoint. That’d be maybe one takeaway from this conversation that might be worth considering.

Wade:
Yeah, I think that’s good. Like you were saying, not quite at the point where we have all of our ducks in a row as far as our education. We’ve been researching the Smoky Mountains and like Destin, Florida, Emerald Coast area quite a bit. We know a lot about that, and we’ve looked at kind of just online, just looked at properties and what the ROI would be and that kind of stuff, but we have not really looked around us at all. I think that is a really good suggestion for sure.

Scott:
I think there will be… If you’re going to find an inefficiency or, another way of putting that, a good deal, it’s probably going to be local to you as well. There will be something that, “Oh, this is exactly what the market needs and I need to make these changes and that’s how I’ll do it.” That’s going to be a lot harder in Destin for you, unless you’re from there, for example. I know that market particularly well for some reason.

Chelsea:
Yeah, cool.

Scott:
All right. Are there any other areas that we want to explore here and talk about?

Chelsea:
Yeah. There was one more area of regarding our kids’ college fund. I haven’t really heard a lot of talk about this, so I think this would be a great conversation to have. I’m not sure that our kids will go to college. Times are changing. Things are changing. You can do so much now without going to college. Wade didn’t go to college. I went to a ridiculous amount of college.

Chelsea:
I think we need to kind of figure out a direction to go with this because we’ve kind of just been putting some money in a college savings thinking, okay, we want to save something for our kids, but we don’t really know what to do. I think ideally I would like to save in an account that’s more flexible than a college account, even if it doesn’t have the super, super tax benefits to it, just so that we can utilize that money how we need to at that point for them.

Chelsea:
I don’t know. Do you guys have any thoughts on this for saving for kids?

Wade:
And our kids are seven and four.

Mindy:
I have lots of thoughts on this. I have two kids. They are 15 and 12, so way closer to college age than yours are. You have saved $6,000 for your kids, and that is $6,000 more than I have saved for my kids for college. I do believe that my kids are going to go to college, at least the older one, but that’s not for sure, for sure because you never know what your kids are going to do.

Mindy:
I didn’t want to save in a 529 plan because if I put in $10,000 and then she doesn’t go to college, but it has grown to $29,000 over the course of her life, I only have $10,000 for me. If I want to pull it back out, all I get is what I put in. I don’t get all those gains. I don’t know where they go, but they don’t go to meet. They don’t go to her. I could reallocate that to her little sister if she was going to go. I could give it to a niece or a nephew, but I don’t get them back.

Mindy:
Whereas if I put that money into an investment account, all of that money is mine, or I can use it for her college, or I can put her through wedding planner school or film school or whatever she wants to do. I can use that money how I choose, or she can say, “I’m leaving the house that I’m never going to talk to you again, and then it’s still my money.” That’s a horrible situation to be in, but I don’t want to give that control to somebody else. Because you have $6,000 in there, I would just opt to leave it…

Mindy:
If I was in your position, I would opt to leave it, and I would open up an after tax brokerage account in my name, not in the child’s name, and put money into there for their college or just put money in there and use it for college when it comes up or use it however you want because it’s your money. Now, that is going to… Because it’s an after tax brokerage account, that’s going to count against your income or assets for FAFSA, but that’s a problem for 10 years down the road.

Scott:
I completely agree with Mindy I think at the highest level in principle there. I’ll add in that I speculate that college education costs are going to come down in real dollars relative to inflation over the next 10, 15, 20 years. The reasons why I think that will happen first have to do with the amount of student loan debt out there. Either one political party is going to come in and forgive a large amount of that debt.

Scott:
After that happens, you’d think that there will be new restrictions on new access to debt to fund college, which will reduce ease of which people can get loans and therefore bring costs down, demand down, right? Another party may not do that and there will be a reform of student loan debt at some point in the future regardless, if some of those events happen. I think there’s going to be a student loan restructuring at some point in the next decade or two that will impact college affordability.

Scott:
We are also becoming more and more, I think, cognizant as a society about the ROI of college and how it may not be necessary for a lot of things. I think it will be less of a you’re going to college and more of a calculated decision depending on your career field. I think for those reasons it may be a risk that folks are over saving for college, not in the short-term, not in three to five years, but maybe in 10 to 15 years perhaps. That’s a speculation.

Scott:
I don’t know if that’s right, but that’s what I’m going to speculate on personally for my family. And then second, I think that if you do want to pay for college, a better way to pay for college… Well, a way to do that in conjunction with what I just said is just build wealth in general in real estate or stock accounts or whatever it is that you’re investing in.

Scott:
And then use that wealth to provide benefits for your family like private school if your kid ever needs that for some reason, for a special reason, or a college, or a trip around the world, or tuba lessons if they’re superstar at that, whatever it is. That I think is a more beneficial way to just build general flexibility. The 529 plan does not offer that for the most part. I probably won’t contribute much at all to a 529 plan with a possible exception of I know my kid’s going to college.

Scott:
I’m two years away from college. I’ve got a pretty good, clear idea of what college is going to cost, and I’m going to take advantage of that plan in the short-term here to put that money in and take it right back out for college in a few years. I might do that at the ending stages if I’m getting really close to college. That would be how I think about the 529 plan and saving it for college at a high level.

Chelsea:
Yeah, I really like that.

Mindy:
And just a couple of weeks ago, we released an episode with Robert Farrington from thecollegeinvestor.com episode 297, where we talk about paying for college and saving for college in lots of different avenues. I think it was episode 41 or 44 with Zach Gautier where we talked about different ways to pay for college as well. Both of those are really great episodes to listen to.

Mindy:
And we had episode 251 with Preston Cooper, where he talked about the ROI of a college degree, something to consider before you put yourself or your children through college. He was just back last week on episode 293, or a few weeks ago on episode 293, talking about the ROI of a graduate degree. Things to consider as you’re getting closer to college age.

Mindy:
I mean, that’s not imminent for you, but those are just different ways to save. In both of those episodes, there’s longer term and shorter term ways to save for college.

Chelsea:
Cool. I like that.

Scott:
It would just be a shame to have a lot of money in the 529 plan and then not use it for that. That’s not the worst problem in the world. There’s other ways to deal with it. You can just be like, if I’m going to build a couple hundred thousand dollars in wealth over the next 10 years via investment vehicles, like short-term rentals, I’d rather just be able to use that for whatever the heck I want, including college, and take a little bit of a tax hit or less tax advantage situation than have it all kind of locked up in there and then have to get creative in terms of dealing with it once it’s in the plan.

Chelsea:
Yeah, I agree. Absolutely.

Mindy:
Is there anything else you wanted to talk about?

Chelsea:
Yeah. I was curious about if you guys had any thoughts on the health insurance situation. I know that that was something you mentioned in the intro, Mindy. Maybe you had some ideas about that. Currently we do not have health insurance and we have a medical sharing plan, as well as a membership to a general family doctor that we pay for monthly.

Chelsea:
We have had some health issues actually come up in our family within the last year, where it’s looking like we are going to need some sort of traditional ongoing insurance. We have some kids that need some speech therapy and occupational therapy and meds and regular therapy and all the things. It is looking like more of a traditional plan is going to be something we will be moving towards within the next year or two.

Mindy:
I was going to say, when I first saw this in your notes, I was reminded of a recent bankruptcy by Sharity Ministries, which was formerly known as Trinity Healthcare. They basically just said, “We can’t afford all of this, so we’re shutting down.” The healthcare system in America is broken and needs to be fixed, but the health sharing… I have friends who really love health shares, and I have friends who have been stuck with big bills because the health sharing decided not to pay it.

Mindy:
I don’t like traditional insurance, but I think that’s going to be the best way to go about it. I don’t know if a health savings account and a high deductible plan is going to be best for you. Somebody was listening to the show a few months ago and said that in almost every case, a health sharing plan is better than a traditional plan when you take into account the premiums and the premium deductible and the fact that the health sharing account can grow. That’s another reason-

Scott:
You mean HSA plan.

Mindy:
An HSA, yes. I’m sorry.

Scott:
Health savings, yeah.

Mindy:
Yeah, health savings plan. Yes. Thank you, Scott. That’s what I was thinking.

Scott:
I’d agree with that. You guys have a great cash position, so there’s no… You don’t want to get crushed by a huge medical bill with that, but you can have a high deductible, I think, given your cash position and probably will be able to arbitrage that, although that will depend on the specifics of your personal situation. Let me zoom back out for a second here though and say this why do you guys work in your own businesses instead of one of you taking a job that pays similar?

Scott:
What’s the rationale for that? There could be further reason. There’s a lot of advantages. I just want to hear you guys think through it.

Wade:
Yeah, I think that’s a great question. Yeah, for sure. I’ve run my own business for about 12 years, so I don’t really know what it’s like, honestly, to work for a staff position. I have a lot of benefits to running my own business where I can make my own schedule. I don’t have to answer to somebody. I don’t feel like I have a glass ceiling above me as far as my income goes. And just my personality. I like to work on various projects a lot.

Wade:
I feel like if I work on the same thing over and over again, I get bored and I don’t put a ton of my creative energy into it. I would say that for me, I just really like the benefits of having my own business more than having the security of a staff position. That’s for me.

Chelsea:
For me, I could easily go out and get a job with the degree that I have for an agency doing mental health counseling. That would be very easy to do. That’s a lot though. Working in mental health is a very hard job. I own my own business because I want to have the flexibility and the autonomy and the freedom to do whatever I want. That’s sort of my personality anyway, is I don’t really want people to tell me what to do.

Chelsea:
Having the flexibility to do that is really cool, because I can work three days a week and do the amount of number of sessions that I want versus somebody telling me, “I need you to do 35 sessions a week,” and then me just walking around as a burnt out zombie. It would be really hard. That’s kind of why.

Scott:
I think that’s great. I will just say that’s another one I would just challenge you to at least explore, right? Corporate life maybe isn’t so bad as what you’re making it out to be in some of these cases with it. You might be able to negotiate some flexibility, for example, or find a position that gives you some of those benefits and that would solve your healthcare problem to a large degree if one of you guys were to consider that.

Scott:
Not a deal breaker. You clearly are working around that right now with things, but you will have expensive options from a self-employed perspective, the same challenges that people who are just financially free or full-time real estate investors or full-time agents will face from an expense standpoint.

Chelsea:
Yeah, I think that’s a good point to really think about. Because with the even trying to go into real estate, it is harder for us to get a loan because we are self-employed. Even if we do have the years of income to back it up, it’s still a lengthier and more difficult process. At least it was when we were buying our two primary residences that we’ve bought before. So that.

Chelsea:
And then I think looking at the specifics of if I were to make… Because it would probably be me. If I were to make a certain amount of money working for somebody else, how much money that would be with the healthcare already taken care of in a sense. I know I’d have to pay some versus how much we’re going to have to pay out of pocket for healthcare.

Scott:
I think there will be a decision to make there. Absolutely, you will have to make your employer much more money than you cost, which is the deal with that. But it could be that it brings in more income, provides similar flexibility, and gives you healthcare options depending on how that goes. It may provide financing opportunities. If those trade-offs are unacceptable from a time perspective, you guys are going to get rich one way or the other.

Scott:
You spend a lot less than you earn and have a really strong position. But just something to think about as we’re doing that is maybe revisit that assumption and at least explore it because it would make a lot of these issues easier in the short run.

Chelsea:
Yeah, absolutely.

Wade:
Yeah, it makes sense.

Mindy:
That’s kind of what I was thinking too, Scott. I’m glad you brought it up because now you’re the bad guy.

Scott:
We’re supposed to tell you how to quit your job, right, on the show? Is that how that works?

Mindy:
Yeah, exactly.

Scott:
Instead of go get a job.

Mindy:
Yeah.

Chelsea:
But I wonder if there could be flexibility to that, because just because I work for somebody doesn’t mean I could also not own my own business on the side. The goal for me actually is to not be a therapist when our kids graduate from high school and to move into more of maybe like an online business or a coaching type position so that there’s even more flexibility, because I anticipate Wade probably traveling a lot more at that point once his career starts moving and he doesn’t have to be home all the time because we have kids.

Scott:
Something to think about, I will tell you at BiggerPockets, some of our team members work 32 hours a week or 30 hours a week or whatever with that. There will be some rules like, if you’re not full-time, we can’t give you the full benefits. There’s some legal things and all that stuff. You’ll probably have to meet some minimum cutoffs in order to qualify for certain benefits with that, but there may be plenty of flexibility and opportunities out there, depending on what you’re interested in.

Mindy:
This was a lot of fun. I had a great time talking to you guys. I think you’ve got a lot of opportunities available.

Scott:
We want to keep going until you’re you’re feeling good.

Chelsea:
Do you have questions?

Wade:
No.

Chelsea:
Do you guys have questions for us?

Scott:
No, I think we got a great snapshot of your position. It sounds like you had a great journey to get here. You’ve got a very disciplined budget, consistent income in spite of the being self-employed. That speaks to a lot of discipline and hustle over a long period of time. It appears to me that you’ve come into this like position of having this surplus and having some of the options to begin exploring more serious investments, I’ll call it, in a very recent past and really have all your ducks in a row at this point.

Scott:
And now it’s kind of a directional thing. Do I want to go into short terms? Do I want to go into long-term investing in my 401(k)? Those types of things. I think there’s an art to that. There’s not really a right answer. I think we got through a good amount of that. I think you’ve got big assumptions. The challenge is the self-employment always the right path. Certainly it’s working for you guys, but it could be reassessed to make it easier.

Scott:
If one of you were to get a job, that would solve some of your problems here, or at least go a long way towards that. And then I think that the college savings, we gave our opinion on that. We don’t really have a right answer. I love the way you manage your cash for the most part. I think it’s a really smart way given your current situation. If one of you were to get a job, that would change because you would not likely need to have quite as much cash either in your businesses or in your personal reserve.

Mindy:
Okay. Well, thank you so much for your time today, Wade and Chelsea, and we will talk to you soon.

Chelsea:
All right. Thank you.

Mindy:
That was Chelsea and Wade, and I think they have a lot of things going for them. First of all, we didn’t celebrate enough that they’re literally spending like 50% of their income. It just may not seem like it when they’re in the middle of the month or two or three in a row where they have less than what they’re thinking about spending.

Scott:
I mean, they’ve crushed it. This is something that we see now fairly frequently on the Money Show where we’ve got a couple who’s really mastered the basics of money, have a good framework in place, and are just kind of popping up after several years of having paid off debt and built this stable financial position. They’re like, “What do I do now?” That’s a great thing. It’s exciting because you’ve paid off that debt. You’ve got the cash position. You’re starting to do the retirement accounts.

Scott:
The surplus is there, and now the ocean of opportunities is exploding in front of you and it’s overwhelming. Do I go into real estate? Do I do this with my business? Do I invest in this avenue? Do I invest in this one? Because the path has opened up so much because of the good habits that you’ve put in place. I think that’s really fun, because it’s kind of hard to see that other side while you’re in the grind of paying off the debt, for example, which it seems like they popped up out of fairly recently the last couple years.

Scott:
That’s exciting and fun. And now it’s about kind of forming a plan and prioritizing that and being comfortable with the choices. Those choices can involve investing in 401(k)s or self-directed IRAs or SEP IRAs, depending on whether you’re self-employed or employed, investing in real estate, investing in stocks, yada, yada. It’s just about what you want and how you’re going to back into that.

Mindy:
I really liked your suggestion to look a little bit more local for their first property. I thought that was a great idea. I think that there’s going to be a lot of opportunity that maybe they don’t really… They hadn’t considered just because it’s so close and our market is expensive, but it’s also really desirable. There’s people that are coming here all the time to take advantage of what we’ve got here.

Mindy:
When your property is an hour away, you’re not necessarily going to drive to it all the time, but you could drive to it if you had to. It’s a lot easier to drive an hour than it is to hop on a plane to go to Florida to check out your property.

Scott:
Yeah. My wife and I vacation in Palisade, which is like right where they go, and we stay at an Airbnb. We spend lots of money there and think it’s a great experience. It’s just kind of funny to me. Oh, great. I’m going to go out of state to the Rocky Mountain. I’ve never been to the Rocky Mountain. What was it? The Smoky Mountains to vacation before. Maybe I’ll go there someday, but that’s like a… It’s just like, oh, this is in our back door. People come from all over to go hang out where you live at various times in the year.

Mindy:
Yeah, I like that idea. I hope they look into it a lot more. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
You know what? Before we do, I want to invite people to apply to be on the show. If you would like us to review your finances, please apply at biggerpockets.com/financereview. And if you would like to tell your money story, apply at biggerpockets.com/guest. Okay, now, from episode 306 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying grab your pillow, armadillo.

Ashley:
This is Real Estate Rookie, episode 188. My name is Ashley Kehr and I’m here with my co-host Tony Robinson.
I know, but honestly, I feel like we never even got to see each other that much, even though we were, yeah, confined into a hotel resort for three days and barely got to see each other, but we just attended the first ever Real Estate Rookie boot camp weekend in Denver, Colorado. And we got to meet over 300 rookie investors that maybe had one or two deals.
Some people actually had quite a few deals under their belt already, but a ton of newbies, rookie investors that haven’t done a deal yet. We were really excited that they took that step, took that action to come and learn and get that motivation to get that first deal done.

Tony:
Yeah. Many of you know BiggerPockets recently started launching these boot camps, which are essentially online courses. And I ran the short-term rental boot camp. Ashley ran the rookie bootcamp. And what Ashley did was she took the concept of her bootcamp and turned it into an in-person event. Like she said, it was really catered towards folks that were at the beginning of their journey and man, what an amazing event it was.
And as we were going through that, Ashley and I said, “Well, it might be cool to really talk about the power of networking and coming to some of these events and what benefit you get as a new investor.” Ashley, I know you talk about this a lot and you shared this story a little bit over the weekend, but I guess you talk about the impact that networking has had on you because you came. You’re an investor in New York, near Buffalo, you felt there weren’t a lot of investors around you. Just give that story that you shared from the bootcamp weekend.

Ashley:
Yeah, I was lonely. When I started investing, it was only because I worked for an investor. And so, I partnered with his son, who was basically like, “I don’t have time to do anything. You do it.” And I took care of everything and he just didn’t really care to engage much in conversation about real estate, 24/7, like I did.
And then, a couple years later I found my next partner. It was me and him talking about real estate. And I finally found BiggerPockets. And from there, just diving into the forums. And then, BiggerPockets had their first conference. Well, actually it was technically their second conference. I think they had one a long, long time ago and then didn’t have another one until 2019. And it was that conference where I met a ton of people.
And since then, they’ve become my best friends. My best friends are littered across the country. And it feels like we see each other every single month because we’re attending an event or just getting together for something special for someone in our group. But I don’t think that I would be where I am today without this network of people. I would lose motivation. I would lose inspiration. I wouldn’t have the tools and resources if I didn’t have the network of my friends to help me and guide me, give me advice.
And also, I’ve been able to get opportunities because of my friends and hopefully, I’ve provided them opportunities in return. When I was in 2019, I attended that first BiggerPockets conference. And then in 2021, I attended a Maui mastermind event. And since then, just meeting these group of people has really made an impact on my life and even more excited about real estate.

Tony:
And I think the networking piece, Ashley, is so important, especially at the beginning phases of your journey, because a lot of times you stumble into real estate and you stumble into it by yourself. And it’s not necessarily because your best friend is interested or because your siblings or your parents or whoever. It’s because you read some article, you had some idea and you start going down this rabbit hole.
And before you know it, you’ve consumed all these books and you’ve listened to these podcasts. And you’re all juiced up about becoming a real estate investor, but you have no one to talk to about it with. Your friends are driven crazy already. If you’re married, your spouse is overhearing you talk about real estate investing and you kind of need someone to connect with.
I think early in your journey, going to, whether events like the Rookie Bootcamp weekend, bigger events like BPCON, or even smaller events like in your local area, going to local meetups or REIA Meetings or whatever it is, just find a way to get with other people that are doing what it is you want to do, because you get so much value from having those kinds of conversations.
And I’ve shared this on the podcast before, but a really pivotal change in my life occurred at a meetup. I’ve talked about him before, but his name is Alex Sabio. And Alex and I met at a local meetup here in SoCal. And he was the person that eventually convinced me to buy my first short-term rental. And I think, man, had I not met Alex at that meetup, how different would my life be today? You never know where one relationship, one connection can take you.

Ashley:
Yeah. I completely agree with that. And I took my business partner, Darrell, with me to this rookie weekend. And it was his first ever conference of any kind, any type. And he is so pumped up, so jazzed up. Just in the airport on the way home, he’s looking up all this stuff he learned or people he talked to. And so, he’s like, “Man, I really did get so motivated by that.” And he’s like, “When’s the next one? Where do we go to the next one?”

Tony:
Totally.

Ashley:
I think that’s really awesome is if you get that opportunity to go to a networking event. Even if it is just a local meetup, then that’s even better because you’re meeting people that are directly in your market and get that market knowledge from them too, and share ideas.
Going to a networking event, just some tips I have. Along with meeting people is, if there’s somebody you want to talk to, so maybe it’s one of the speakers, something like that, have your questions prepared ahead of time. What do you want to get out of that conversation with that person? Because it’s very easy to go up and just be like, “Hey, how are you? I love your podcast or I listened to you on YouTube,” well, something like that. And then, “Okay, yep. Nice to meet you.” And then walk away. Or think of something, but prepare yourself, so that when you do go into that conversation and just be like, “No, I have a quick question for you, a couple quick questions.”
And then have them prepared so that you’re not just stumbling or frantic, because that’s something I always struggled with. Even Brandon Turner, the first couple times I met him. I’m like, “I don’t even know what to ask him. I feel like I can’t waste my conversation with him. What do I say to get value out of that conversation and take advantage of that opportunity?”
Steve Rosenberg had met with this person that does a lot of motivational speaking and a big coach and very successful person. And he was told, “You get five minutes with them.” He sat down with them and the guy’s like, “Five minutes, go ask me your questions, no small talk.” And Steve’s just like, “Blah, blah, blah.” And the guy at the end was like, “I say that to you because your time is just as valuable as mine. And I know you only got five minutes with me, so that’s why I wanted to cut right into the chase.”
I think having questions prepared and knowing what you want to get out of the networking too, and the conversations or even what are you looking for? Who do you want to talk to too? Planning that ahead of time too.

Tony:
That’s just such a good point, Ashley, because someone literally came up to me at the bootcamp weekend and said that, “Hey, Tony, big fan. Really enjoy everything you do on the podcast.” And then I was like, “Oh, thank you so much. And then he was just kind of smiling.” And I was like, “Can I answer anything for you?” He’s like, I don’t really know what to say. I just wanted to come talk to you.” And then 10 minutes later, he ended up coming back to me and said, “Hey, I actually do have a question for you.” I love the idea of come in prepared to maximize that time.
I think the other thing that I’d encourage folks to do when you’re going to some of these networking events, two big things. First is try and get out of your comfort zone. It’s really easy to go to these events. And especially if you’re going with someone that you know, to just stick with your click of people.
And it happens in most conferences, if it’s a multiple day conference, wherever you sit on day one, you’re probably going to end up sitting there on day two again. And you’re going to be sitting around the same people. Really try and mix up where you’re sitting or who you’re talking to because the goal of these events are to meet other people. If you’re going with a friend, try and separate every now and again, try and sit in different parts of the room throughout different parts of the day. That way, you’re exposing yourself to more people. That’s the first thing, is try and get outside of your comfort zone.
The second thing is, I know not everyone is really good at doing that. Just the idea of going to these networking events is scary enough, but having to actually talk to someone might be too terrifying. For me, whenever I go to some of these events and I don’t really know anyone in the room, if I’m walking in to a meetup and there’s already a group of people talking, I’ll just walk up and say, “Hey, do you mind if I join you guys?”
Not once has someone told me, “No.” I’ve never been told, “No, you can’t join us.” Everyone’s usually like, “Yeah, of course. Come on in.” And then I’ll just ask, “Hey, so where are you at in your investing journey?” And it’s an easy way to break the ice. And you guys can start talking, getting to know each other, but it’s that easy. “Hey, mind if I join you. Where are you at in your investing journey?” Those two questions are a great way to break the ice.

Ashley:
That’s a great point as to, okay, getting to somewhere. And, okay, where do I stand? Where do I go? Who do I talk to? But one thing that I used to do when I was going to local meetups or I was attending a conference, I would find somebody online that was going to that same event. And I would just message them, start a little conversation. Just like, “Oh, I saw you were going to this.” And then I had a face. I had somebody when I got there to look for and that I already kind of knew. And that was my strategy, I guess, so that I didn’t end up just awkwardly standing there.
I remember the worst was when a meetup was held at a bar in the city. And so I walk in. I’m like, I don’t know which group of people this is. I asked the hostess, I think. And she’s like, “Oh, I think that’s the real estate like meetup thing is upstairs.” I go upstairs and there’s all these people and dressed in corporate clothes, a suit and tie and girls in dresses and heels.
And I’m like, “There’s no way this is real estate investors.” And so, I look around and I realized the restaurant actually had two locations and I was at the wrong location. And so, I ended up going to their other location. But yeah, that was so uncomfortable for me that moment, not knowing who to go. If you can find somebody online who is attending.
BiggerPockets, you can add… Meetups are advertised on there all the time and you can actually see who’s going. People click the attend button. All I have to do is message a couple of those people and be, “Hey, I saw you were attending this meetup. I’m going to be there too.” And maybe give them a little bit about yourself. And just say, “I wanted to introduce myself before meeting and I look forward to seeing you at the event.”

Tony:
Yeah. Our friend Tyler Madden talked about that too, about making relationships online before getting there in person. And what an easy way, a low risk way to break the ice beforehand, say. I love, love, love that advice. But at the end of the day, for all the rookies that are listening, what’s most important is that you start building that network, whether online, whether in-person. Or however you want to do it, but just start surrounding yourself with people who have the same dreams, ambitions, and aspirations as you.

Ashley:
Yeah. Okay. Any other takeaway? Oh, one thing that I do want to add to this is when going to a live event is especially, if it’s like a couple day conference, or even if it’s just one meetup, take a break during the conference. Or even if it’s just every night. And write down the people you met, how they had an impact on you, what you learned, what you want to implement, what you want to take action on. Because the conference is such a whirlwind that, by the time you get home, it’s like, “Oh wait, what did I learn? What was I going to do? How do I implement these things?”

Tony:
Sure.

Ashley:
I think going back and recapping, because it’s going to be someone had to explain this to me. And so me remembering people’s names as a fire hose, just shooting at my face all day with people’s names. That’s the real estate contents that’s coming at you. And even if you’re just going to a local meetup, when you get into your car, write down, “Okay, these are the people I met. This is what they do. Here are my connections I made. And this is what I learned. This is what I want to research more,” or something like that to, taking those notes.

Tony:
Yeah. One thing, yeah, what I would do. And I haven’t been to a really big conference in a while where I didn’t know a lot of folks there. But one of the things that I would do when I go to some of these big meetups is when I would meet someone and I get their phone number, I take a selfie with him. That way… Because even if you save the name, sometimes you forget the faces of who’s who, but if you have a selfie with you and that person, next time you see him like, “Oh shoot. Yeah, I remember that face.” And so, it’s a little bit easier to make that connection on who’s who.

Ashley:
Yeah. There was also a guy that attended the event this weekend, who was an extremely successful real estate investor from the Denver area. And he just wanted to come and be around all the rookies and get inspiration and motivation from all the excitement.
And so, he said that one thing he noticed was that nobody has business cards. And he said, “I completely understand that because they don’t really have a business yet. They don’t have their first deal. They don’t have an investment property, they don’t have a business.”
And he said, but he’s like, “I would recommend that go and get them printed anyways. It doesn’t have to be a business card. It can just be your contact information.” And he said, “That would be so nice for them to give out when you attend these events.” And I thought that was a great tip is being able to give the cards out. And I know a lot of people today use the QR codes too. So that you just show someone your QR code and then it automatically imports into their phone, which is pretty convenient too.

Tony:
Yeah. Yeah. I love. I’m not much of a business card guy. Even people hand them to me, a lot of times, I end up just losing them. I like the idea of the QR code.

Ashley:
The QR code.

Tony:
So I can scan and it’s in there right away. Yeah.

Ashley:
Yeah. Okay. Well, thank you, guys, so much for listening. And for those of you that attended the rookie weekend, I hope you had a great time. I know, I sure did. And I got to talk to so many people and it really was inspirational and motivational to me.
One little exercise that we did do at the end was have everyone write a letter to themselves in three months, giving themselves encouragement support and also, talking about what they have accomplished in the next three months. Those letters are going to be sent back out to the people that attended the rookie conference.
I brought an extra suitcase, just to bring them all home with me, and then I’m going to mail them back to them at the end of August. If you want to participate in this exercise, just go ahead and write yourself a letter. We did it dated for August 1st. And write yourself a letter, giving yourself some encouragement and say, “Wow, in the past three months, you bought your first rental property. You paid off some debt.” Or whatever it is that you want to accomplish in the next three months, write yourself a letter like you did accomplish it. And then, you can just stick it in a drawer, set yourself a little calendar reminder to pull it back out and open it up in three months.
Okay. Well, thank you guys for listening. I’m Ashley at Wealth from Rentals and he’s Tony at Tony J. Robinson. Don’t forget to like and subscribe to our YouTube channel, Real Estate Rookie. And please leave us a five star review on your favorite podcast platform. We’ll see you guys next time.

Doug Bauer, Tri Pointe Homes CEO, joins ‘Squawk on the Street’ to discuss the state of housing, what Bauer is seeing in orders and backlogs and what this economic cycle and previous economic cycles are telling Bauer.

Rental properties have tremendous potential to generate revenue. However, the success of your investment rests heavily on the quality of your property management. Finding a quality property manager (PM) isn’t as cut and dry as one might think. Many factors must be considered when assessing a property’s needs.

This article will explain what a property manager is, why they are important, and how to find the right one to maximize your rental property’s earning potential. 

What is a Property Manager?

A property manager is defined as any person or firm that carries out the various tasks involved in operating a residential or commercial rental property in exchange for a fee. In short, you pay them to take care of the grunt work so that you can invest your time elsewhere. 

The tasks involved in managing property will vary depending on the type of property, size, location, and personal preferences. That being said, here are a few of the general responsibilities of a property manager:

• Listing and advertising 
• Scheduling showings 
• Screening potential tenants
• Leasing agreements/contracts
• Collecting deposits and rents
• Property maintenance 
• Responding to tenant requests and emergencies 
• Handling evictions

Not all property managers are the same. In many cases, a property manager or management firm will specialize in a specific area of expertise. Not all experienced property managers are suited for the same role. For example, a PM may have years of experience managing single-family residential properties but may fall short when managing a multi-family unit such as a residential apartment complex. 

PM responsibilities also depend on what role you’d like them to assume. You can appoint specific duties, such as responding to tenant emergencies, scheduling routine maintenance, and rent collection, while outsourcing other tasks like leasing, marketing, and legal matters. Or, you can choose to hire a management firm that can handle 100% of your property’s needs. 

Why Hire a Property Manager? 

If you have the time and resources to manage a property on your own, you can save yourself a little money. However, managing a property can be a full-time responsibility. Many investors don’t have the time or desire to manage a rental property’s nuances. Here are a few common reasons to hire a property manager.

Time

As I mentioned before, rental properties are time-consuming. Whether you have a full-time job or simply prefer to invest your time elsewhere, hiring a PM will free up your schedule. If you want to avoid 3:00 A.M. maintenance emergencies, requesting quotes from vendors, or trying to squeeze showings into your busy schedule, you’ll need a property manager. Delegating the property’s responsibilities to a PM will allow you the freedom to earn without the hassle. 

Stress

Managing a rental property means spending a great deal of time solving problems. Rental properties are not all fun and games. Sometimes you’ll find yourself in uncomfortable and challenging situations. You may face expensive repairs, storm damage, difficult tenants who don’t pay rent, or complicated evictions. It’s easier to make logical decisions when removed from a potentially emotional or stressful situation. A good PM can take some of the burdens off of your shoulders. 

Location

It is common for investors to purchase rental properties outside the state or town they reside in. Distance can make it challenging to respond to emergency maintenance requests or ensure that tenants honor lease agreements. Out-of-state investors prefer to choose a property manager that is local to the rental property. It is beneficial to hire a local PM because they know the area, can assess the property in person, have vetted lists of vendors, and can respond quickly if any issues arise.

Efficiency

A quality property manager can help to maximize your property’s earning potential. Many PMs have the expertise and reliable resources to work efficiently and prevent loss. Most PMs will know tenant/landlord laws and regulations and can handle legal disputes, leases, and money handling. They will have vetted vendors to handle maintenance and repairs efficiently. Most importantly, they will likely have established processes for vetting tenants to reduce turnover or vacancies. 

What to Look For in a Property Manager

Choosing a property manager to handle your investment property can be tricky. You’ll want to be sure that whoever takes on this vital role will meet your needs and expectations and do so efficiently. 

Here are some of the essential qualities to look for in a property manager.

Integrity 

Choosing a property manager with a reputation for trustworthiness and integrity is vital. You should feel confident that your PM will make decisions in your best interest and conduct themselves to reflect your values. Choose a property manager that you’re confident will treat your tenants with respect and fairness and make financial decisions to optimize your property’s success. A property manager who cuts corners to cut costs can negatively affect your revenue when tenants decide to take their money elsewhere. 

Expertise 

Too often, people confuse experience with expertise. Unfortunately, the amount of time a person has spent in an industry is not a reliable way to gauge their competency. 

Rather than focusing on the number of years they have under their belt, focus on these key indicators:

• What professional licenses and certifications do they possess?
• Do they have a good reputation?
• What are their vacancy rates?
• Do they have established policies and processes?
• What does their client base look like? Do they have properties similar to yours?
• Are their contracts transparent and accurate?
• Do they have insurance, and what does it cover?

Communication and compatibility

Communication style & compatibility are not qualities that you can screen for on a job application. This is something that can be easily overlooked during the hiring process. However, the quality of your communication and compatibility with your property manager is key to successful management.

Think about it, a vast majority of the conversations you will have with your PM will be regarding some sort of problem that needs to be solved. In my experience, communication and compatibility play a pretty substantial role in the ability to work with someone towards a solution. 

You may find someone that checks off all the qualities of a great property manager. Still, if you cannot effectively communicate or work together, it can become a burden or even a liability. 

How to Find the Best Property Manager

Now that you have a better idea of what qualities to look for in a property manager, you may be wondering where to start. Here are a few tips to get you started with your search.   

Consult with your broker

One of the best ways to build a trusted property management team is to establish a strong relationship with a local real estate broker. Brokers can provide valuable insights and referrals. 

Ask for referrals

It never hurts to ask trusted colleagues and other investors for referrals. Be sure to get specific details about why they recommend a particular property manager. 

Do your research 

When interviewing property managers, make sure to request references. Research the PM online, read reviews, and speak to their references. Have a list of specific questions to ensure the PM fits all your needs. 

Warning Signs to Watch Out For

Unfortunately, there are bad seeds in every industry. Things can go downhill quickly when property managers aren’t upholding their end of the deal. You’ll want to pay attention to avoid a property manager that isn’t up to snuff.

Here are a few red flags when searching for a property manager:

• Poor communication: If the PM you’re interviewing is slow to respond, late to appointments, or unwilling to meet in person, this behavior will likely be the norm.
• Spelling and grammar mistakes: If you’re receiving emails riddled with spelling and grammar mistakes—that’s a bad sign. It shows that the PM does not pay attention to details.
• Unprofessional behavior: Ensure that the PM you hire represents you in the highest light. Pay close attention to how they conduct themselves during meetings. Imagine how they will treat your tenants if they speak, dress, or act unprofessionally with you.
• Lack of references: If a potential PM does not have references or refuses to provide them due to “confidentiality,” it’s best to cross them off your list. A lack of references means they are inexperienced or don’t have any good references to provide. Either way, it’s not a good look.
• Services are not 24/7: Life happens. Water damage, burst pipes, and broken HVAC systems don’t wait for business hours to cause issues. If a PM does not have an emergency line with 24/7 assistance, move on down the line. Waiting to address maintenance emergencies can have serious consequences. Not only must tenants be provided a habitable living space, but your property can sustain severe and costly damages.

Conclusion

Hiring a property manager can help alleviate stress, free up your time, and keep your property in tip-top shape so that you can reap the appreciation benefits. However, every investor will have unique goals, preferences, and resources, and a PM might not be for everyone. Before deciding to take on landlord responsibilities or hand it off to a property manager, I recommend assessing your availability, resources, and industry knowledge.

Find financial freedom through rentals

If you’re considering using rental properties to build wealth, this book is a must-read. With nearly 400 pages of in-depth advice for building wealth through rental properties, The Book on Rental Property Investing imparts the practical and exciting strategies that investors use to build cash flow and wealth.

Andy Walden, Black Knight vp of enterprise research, joins ‘The Exchange’ to discuss the drop in mortgage demand and what it says about the housing market.

There’s a lot of uncertainty surrounding the economy, real estate market, and the role of inflation in the economic environment.

When it comes to inflation, it’s important to identify how we got here. By here, I mean on the verge of an economic downturn with near record high inflation.

The Cyclical Nature of the Economy

Our economy is cyclical. It goes up. It goes down. And repeats. If you’re familiar with historical economic cycles in the United States, it should be no surprise that after a nine-year bull run, things were poised to peak back in 2019 and 2020. That nine-year run was historically long and, in many ways, driven by the fact that inflation was low for most of the decade.

Typically, a cycle results in a downturn after economic growth leads to inflation, triggering the Federal Reserve to raise interest rates. A rise in interest rates makes it more costly to borrow and more beneficial to save, so people stop spending, start saving, and the economy slows down, which alleviates inflation.

But we weren’t seeing much inflation, so interest rates stayed relatively steady for much of the decade, and things kept chugging along. Who knows for how long they might have kept going. Then the pandemic happened.

The economy came to a screeching halt, and it looked like we were on the verge of an economic depression. So the Fed stepped in again.

The Fed controls interest rates and the money supply. They use these two things to manipulate the economy in an attempt to avoid large swings or catastrophic events. At least that’s the goal.

Unfortunately, when it comes to avoiding economic risk, the Fed historically over-corrects. They move too much or too quickly. That’s exactly what happened here. COVID-19 caused panic over what could become an economic catastrophe, and the Fed reacted by over-correcting.
They lowered rates excessively and quickly, released a bunch of new money into the system, loosened banking regulations, and more.

Those actions stimulated economic growth, which led to inflation, which drove the fed to raise interest rates, which is now (likely) leading us into the downturn.

A recession at this point should surprise nobody. I’m surprised we didn’t see it sooner. But again, we weren’t seeing huge inflation levels prior to last year, so the cycle got stretched out.

Why is Inflation as High as It is Now?

We came dangerously close to a severe economic catastrophe in 2008. Back then, the Fed also released a bunch of new money into the system and lowered interest rates, but we didn’t see sky-high inflation.
What’s the difference between then and now? Why was inflation at 2% for much of the decade after the Great Recession and now at 8% a year after this latest round of interest rate drops and money printing?

Inflation is all about supply and demand, so there are really two sides to inflation. The supply side—when supply is low, prices go up. And the demand side—when demand is high, prices go up.

This time around, we’re seeing inflationary pressure from both sides. On the supply side, thanks to global shutdowns, many small businesses going bankrupt, raw material and transportation pipelines getting sent into a tailspin, and a host of other things, supply chains have been a global mess for two years now.

You might be looking around and saying that the pandemic is over and things are back to normal, so there shouldn’t be any more supply chain issues. But, the U.S. is a very consumer-centric nation, not a producer-centric nation. We import stuff. We don’t produce stuff.

It doesn’t matter what you see when you look around the country regarding shutdowns and businesses operating. What matters is what you see in those countries where we get most of our products. There are still lockdowns, war, and political unrest in those countries.

Shipping logistics are upside down, energy prices are in the sky, chip manufacturing is slowed, there are global labor shortages, and while we don’t talk much about the trade war anymore, that 20-year-old battle is still an issue.

Long story short, supply is still constrained, which will naturally drive prices up.

The even bigger issue is on the demand side, though. Where’s the demand coming from? It’s coming from people, companies, and institutions spending the $9T that was created over the last several years.

Why is Inflation Higher Now Than It Was After the Great Recession?

In 2008, the Fed and the Treasury infused a lot of liquidity/money into the economy. But they did it indirectly. They mostly gave it to the banks, allowing them to open up their lending to businesses and consumers. That allowed all the extra money to trickle into the economy slowly.

This time around, after the pandemic began, we did things differently. Instead of putting money into the banking system and allowing it to trickle into the economy over time, the Fed decided that they needed to get the money out there much more quickly.

The Fed pumped a lot of that $9T into equities directly, companies through PPP loans, and sending checks to all Americans.
Injecting directly into the economy’s bloodstream was effective for its intended purpose. People had direct access to cash and didn’t have to work through banks. But, the aftershock is what we’re dealing with now. Off the rails inflation, making day-to-day life for the average American more and more difficult.

Long story short, the injection of cash directly into the economy served its purpose. It effectively stimulated everything to the point that there was no economic collapse. But, as usual, the Fed overcorrected, didn’t let off the gas soon enough, and here we are.

Of course, there is a solution, but it’s not pretty. We must manually contract the economy by raising interest rates, which has already begun. You can read more about that here.

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