July 2022

David:
This is the BiggerPockets podcast, show 636.

Amy:
We always want to end every relevant conversation with a request for a referral. So if somebody says they love what you’re doing and they’d love to support you, but they’re not in a position to invest, just say, “Hey, no problem, do you happen to know anyone else who is interested in getting double digit returns backed by real estate? Let me know.” So I ended every single conversation when I first got started 10 years ago with a request for a referral and I did that for 18 months consistently.

David:
What’s going on everyone. This is David Greene, your host of the BiggerPockets podcast here today with another Seeing Greene episode. In today’s show, I will be taking questions from different people that have submitted them. And Rob, is that you?

Rob:
I don’t know why you always make me sit through all the Seeing Greenes. You don’t ever let me talk. So I thought today would be the first Seeing Greene, where maybe we change it up a bit. Are you cool with that? I’ve got some questions and they all revolve around the idea of raising money.

David:
I call it Seeing Greene, because I want you to see me, not to actually speak and be heard. But I suppose since you’re here and you’ve already jumped in, it’s not much I can do about that. Is there?

Rob:
Nope, we’re here, we’re here. We got a really good episode for everybody at home. We are interviewing Amy Mahjoory, who is a master at raising private equity. And she’s got this very amazing framework that we get into very tangible steps on how you can go out into the world and raise money, not just from friends and family, but total strangers out in the wild.
I think this was a really impressive thing. She really broke down a lot of the objections that I had, which is, well, if you don’t go to friends and families, who can you actually raise money from? And she gives us a lot of stories that really opened my eyes a little bit.
So this is going to be something that we’re committed to teaching here on the podcast, because I know raising money is a very scary and very intangible thing to learn about because everybody tells you how to do it, but there aren’t necessarily tangible steps.
So we’re going to actually be making this into a four step I guess, or a four part series if you will and the first two episodes are going to air here. And today we’re going to be covering the foundation needed to go out and raise private money. So with that, can you kick us off with a quick tip and then we’ll jump right in.

David:
Yeah. Today’s quick tip, go to biggerpockets.com/reshow. This is for the various podcasts we have. And if you go there, you will find various free goodies, including a masterclass by Brandon Turner himself on building your personal brand and some information that will help you on your capital raising journey from today’s guest, Amy Mahjoory. So check that out. And in fact, I would even recommend to randomly check it out every once in a while and see what free stuff BiggerPockets might have put out there for you. A little bit of an Easter egg that you can go find even when it’s not Easter.

Rob:
Are we still giving away your signed head shots on there, do you know, or we discontinued that?

David:
Well, there’s been a lot of demand for the boy band style poster of me with my shirt off and some hearts floating over my head. I haven’t decided if I’m going to offer those on BiggerPockets or if I’m going to sell them as part of a charity type event because they’re worth so much money. So stay tuned for that.

Rob:
All right. Well you can find David in this month’s TigerBeat. What’s that? I don’t know. Do you know what that is? Okay, we’ll-

David:
Yeah, that’s one of those old magazines where that Hanson and the MMMBop crowd, that’s where they would feature them.

Rob:
Right. Okay. Well, you can find David in this month’s TigerBeat, but until then let’s jump in.

David:
The great green tiger. Amy Mahjoory, welcome to the BiggerPockets podcast. How are you today?

Amy:
I’m doing well. Thank you very much for having me.

David:
It is our pleasure. Now you have a fascinating take on how people can make money in real estate. And I suppose it’s something that everyone would be better off to learn, but especially new people don’t understand the power of it. So I’m excited to hear your platform, your framework, your story today, but can we start off by hearing what your portfolio looks like now, and then a little bit about your background?

Amy:
Yeah, absolutely. My background’s very traditional. My portfolio these days is very diverse. I’ve been investing in real estate over the last 10 years and during that time, because of my ability to raise capital, I’ve raised millions of dollars in private money, I now have the opportunity to pick and choose what deals I want to invest in.
So as a brand new real estate investor, 10 years ago, I started out heavily in fix and flips in downtown Chicago in the high end market, wholesaling like a lot of other investors. And then I started to slowly grow my passive income portfolio, made a couple of risky investments, lost it all, had to rebuild. And now the majority of my portfolio is investing passively into commercial syndications. And then I still fix and flip, but on a much larger scale here in Austin, Texas.

David:
Awesome. And how on earth did you get started to get to this point?

Amy:
I had no idea what I was doing 10 years ago. I was that person sitting at home watching HGTV and all the DIY channels. And I knew that real estate was something I wanted to do as a side hustle, that was it, while I pursued what I thought was my dream job at Nike. And I am a perfectionist, I’m very type A competitive personality, so I didn’t want to try to figure out on my own, I wanted that fast track to success, even though my goal was only two to three flips that year. So I invested in a coaching program and then the rest is really history.

Rob:
Was the coaching program focused on any one thing? Was it flipping and that’s why you started there?

Amy:
It was everything from A to Z in your real estate business. So building a team, interviewing general contractors, outsourcing, systematizing, contracts, analyzing deals, marketing for deals. So everything, I guess you would need to be a well-rounded real estate investor.

Rob:
So give us an idea of you do this, you get started, you start doing the flipping and you also said that you did high end as well in this Chicago market, I believe. Did you immediately start flipping high end homes or is it just a general progression to get to that point?

Amy:
That is such a good question because this comes up all the time. I never knew I was good at raising money. This is something that always came very easy to me. Earlier I said my goal was two to three flips just as a side hustle. And the reason I really fell into the luxury market was because what I had found is during my first six months of investing, I was much more calculated and low risk because I focused on the low dollar one bed, one bath condos in downtown Chicago. It’s always the same thing, kitchen, bathroom, flooring, paint, kitchen, bathroom, flooring, paint. We never had to worry about any of the other big ticket items.
Well, I started to talk to my acquisitions manager and we realized there was a huge market that hadn’t been tapped into in the north side of Chicago because of the high dollar price points. Everyone’s going to the middle income price points. So it was very saturated with, quote-unquote, “competitors.” And so I took a step back and I said, “Hey, I had raised all this money on accident, so fine. I’m not scared of the price points. I’m just going to jump right into the luxury market.” So that’s how it started. Nobody was going there and every property I put an offer in on, it kept getting accepted.

Rob:
That’s awesome. Okay, so you start … Well, actually I wanted to ask something really fast as a follow up. You said you had an acquisitions manager, generally a lot of people don’t particularly have that at the very beginning. That’s something that is added to a team. Describe that role. Is that someone that you actually hired? Was it someone that was hired on a per deal basis? How did that arrangement work?

Amy:
That is a phenomenal question. So I’m going to go right into coaching mode. So a lot of newbies will be like, “I don’t have a team, I can’t do this or I can’t do that,” and I take a step back and I say, “Everyone has a team, whether you know it or not.” So for me, when I refer to an acquisitions manager in year one, that’s just a fancy way of referring to my realtor.
The majority of my deals came through the MLS and they still do, and through networking. And I had a couple of different realtors that I worked with. My realtors also happened to be investors themselves. So they wore two hats, they would analyze the deals for me because they were investors before they even brought them to me, whether they were pocket listings or MLS listings.

Rob:
Oh, I love when that happens. At this point, I think David and I have talked about acquiring houses and luxury houses and I get realtors that send me deals all the time and they’ll even do the comps for me, they’ll show me the comps in the area and they’ll say, “Hey, here’s what I think it’s going to make. Here’s the cash on cash return.” And it’s always like, okay, there’s a significantly higher chance I’m going to work with someone who does the work before I even ask for it. So that’s always nice to hear.

Amy:
Totally. Yeah. And that’s something we don’t want to do right off the bat, we want to make sure our realtors or acquisitions managers or whatever, know that we have a vested interest. Do a couple deals with them. They will gladly fill out your deal analyzer. Just educate them on how it works and be like, “Look, I want to make our decision making process as easy as possible. If you can fill this out, it takes two minutes and then send it to me, I’ll let you know yes or no within 24 hours, whether or not it’s going to work.”

Rob:
Sure, sure. And you mentioned you, quote-unquote, “accidentally raised this money,” which most of the time we’re working, we’re working to raise money. And so I’m curious, when you were embarking on this whole journey of going the raising money route, how were you able to, I guess prove yourself? I don’t know, did you have a track record of success before you raised this money, or was it something specific that you were able to pitch to them that really got them on board?

Amy:
Yeah. It’s crazy, I didn’t have a track record. I mean, I started raising money on my second deal and we all have strengths and weaknesses, right? I am terrible at marketing, all aspects of marketing, but I’m just very good at building rapport and trust with people and that’s what raising capital is. You’re building relationships, you’re leveraging off existing relationships from your inner circle, you’re outer circle, but the way you get these individuals to ultimately invest with you is through confidence and that confidence comes through your education.
So you’re constantly educating them on who you are, what you’re doing, what’s in it for them, what’s in it for you, what are the risks, are there guarantees. I have 15 different credibility pieces that I’ll take my prospective lenders through. Sometimes after three, they commit to the deal. Sometimes after 15, they don’t commit to the deal. So it’s just educating them on your standard process.

David:
Amy, what do you say, how much weight would you give to someone’s ability to articulate themselves well or their strength in communication when it comes to raising money, as opposed to just being good at finding a deal and good at real estate investing?

Amy:
Yeah, that’s a phenomenal question. When you have the right people in your network, whether it’s coaches, mentors, or systems and scripts that, and I’ll give you guys some, but that you want to start to create yourselves, anybody can get out there and raise money. So sure, it came very easy for me.
People will always ask, “Well, it’s easy for you because you relied on your friends and family members.” And I didn’t because I’m stubborn, plus they weren’t supportive. And when they heard that, they would say, “Oh, it’s easy for you because you just bought a list.” I’ve never bought a list.
So having scripts and systems really gives you guys and even coaches and mentors, the confidence to get out there and raise money the right way from the right people, because you will turn people away, regardless of your experience, regardless of your liquidity. We’re always being told we got to have skin in the game, I’m actually going to squash that today, and then regardless of whether you’re doing it part-time or full-time.

David:
So before we get into your system, can you share some tips that you may have for people who are not as strong of a communicator, even if they have the information in their mind?

Amy:
Yeah, sure. It’s a step by step process. So whether you’re an introvert or an extrovert, the very first thing you want to do is make this mindset shift and we really want to believe that we are providing others with an opportunity to exist. I hear all too often, I feel bad asking this person for money. I don’t want them to think that they’re doing me a favor. Have you guys ever heard that?

David:
All the time.

Rob:
All the time, yep.

Amy:
Right? And so I just say, “Hey look, once you have a strict buying criteria, once you believe in what you’re doing, then you really are going to believe that you’re providing others with an opportunity.” That’s step one, making that mindset shift, because if you don’t believe in what you’re doing, you’re not going to have success raising capital.
And then what you want to do is just plant seeds. So I always say, “Hey, the minute you leave your house, anyone you encounter is a prospective private money lender.” So we can go through this now or later, but I have a four second power pitch and that’s going to be step one for every single person, whether they’re new or experienced to explain at a high level what they do to start to capture the interest of prospective private money lenders.

David:
Yeah, let’s start with that.

Rob:
Let’s do it. Yeah.

Amy:
Okay, cool. So keeping in mind that raising capital is rapport-based lending. So this four, second power pitch is something that I chose to implement 24/7, even when I was working my full-time J-O-B, which was a very demanding corporate job with Dell Computers. So I was working for them, I’m trying to figure out this real estate business/side hustle. And I made the decision to say, “Hey, if this four second power pitch risks me getting fired,” which it didn’t, “I’m okay with that.” So you guys decide what makes you comfortable.
So anytime I would encounter somebody new and they would ask me what I did for a living, or even if I came across an old friend or family member and they would ask me what I’d been up to, I would drop these 13 words on them, which is, “I show people how to earn double digit returns backed by real estate.” And then I would put it back on them, “It’s so great to meet you. What was it that you said that you do again?” Or, “It’s so good to see you again. It’s been a while.” So we’re purposely dangling that carrot so that they want to ask us for more information.

Rob:
So now did you find yourself using variation? Because it seems like a very powerful set of words here, but did you have to really accommodate for every specific, I guess conversation or did you always drive the conversation to that point and then drop those 13 words?

Amy:
That’s such a great question, and it’s the latter of the two. Very rarely would I take this specific script and tailor it. Now, there are times where investors have approached me and they’re very uncomfortable implementing this four second power pitch because they think to themselves, “Amy, what if somebody doesn’t even ask me what I’m doing? What am I supposed to do, go up in there and be like, Hey, this is what I do? That’s not going to flow smoothly.” And I’m like, “No, I know.”
So it’s all about the law of reciprocity. I use an example about my Uber driver, Larry, who was a retired physician, who I converted into a private money lender and he never asked me what I was doing. So eventually I asked him what he did outside of Uber, so that he would naturally ask me what I do, so I could drop the four second power pitch on them. But what about you guys? What have you found because I know you’ve raised capital before?

Rob:
At this point I have a platform myself and so does David and people typically reach out. I have an investment form at the bottom of every single one of my YouTube videos and it just asks questions like, what are you looking to invest in? What kind of project? Do you want a single family acquisition, new construction, tree house, wacky, everything in between, development? And I let people choose their own adventure because depending on how I’m feeling, because I pursue different types of real estate projects every single day. It’s not always the same thing. So if I’m feeling a tree house build, for example, that’ll be the investor that I reach out to first.
In conversation, it’s always a little tough to bring up. So I can see the benefit of this in general, having I guess a phrase that you can use to work into it because generally speaking, most people in my realm, in my day to day, they aren’t in real estate and so I typically try not to talk about real estate as to not bore them because I’m always the guy that talks about Airbnb too much and they’re always like, “We get it, you Airbnb.” And I’m like, “All right, all right, all right, I’ll bring it back.” Or my wife, “Hey, that’s enough. That’s enough.”

Amy:
Well, I guess for the both of you, I assume you have found that those individuals who have nothing to do with real estate may also serve as good private money lenders down the road, right? So we don’t have to always target other real estate professionals.

Rob:
Oh yeah, sure. For sure. I mean, look, this is my genuine belief here. I believe that you should put yourself out there in any capacity and talk about what you’re doing and that’s why I always I feel like I have to restrict talking about real estate because I do talk about it a lot. And I know in talking about it a lot, I’m going to be talking about my successes a lot and talking about the things that I do day to day. And by educating people on what I do and that I’m pretty good at it and that I’m pretty passionate at it, that’s when the conversation of investing with me will typically come up because they’re like, “Well, how do I get involved in this? I don’t know anything, but I do have money.” And that’s where you can really strike up the conversation.
So for me, when I’m working with a possible private money lender or anything like that, it’s all about just putting myself out there and educating them on who I am and why I like doing what I do and that typically opens the floodgates for me.

David:
I would say from my side, I rarely ever look for private money. That just isn’t something I do as much. I typically invest my own money more. So when I do borrow money from people, I make it super simple. I just pay them a straight interest rate for the time I have their money, and then when we pay it back, the payments stop.
So I don’t have to really look to initiate conversations in that direction. But what you said earlier is a hundred percent true where you can steer people into asking you the question that you want them to, by asking them that same question. The majority of human beings do not lead in most areas of life. They don’t lead in relationships. They don’t lead in business. They don’t lead in conversations. They wait for somebody else to set a tone and then they try to jump on board with what that person’s tone is.
So if you can be in that 5 to 10% of people that can say like what you said, so what do you do for work? Oh, I do this, very high chance are going to come back and say, what do you do? And that’s something I’ve learned if I want to bring real estate into a conversation, which as a real estate broker, as a mortgage broker, as a real estate investor, I always want the conversation to go that road if possible.
It’s very easy, you just ask them those questions, so what are some of your favorite ways to make money, or what are your plans for retirement? And if you just throw that out enough times, they’re going to come back and say, what’s your plan for retirement?

Amy:
No, absolutely. And the better we are at raising money, the more confident we will be, the more we can start to diversify these conversations and scripts, if you need a script, because you’ll be able to just really wing it because you’re so confident in who you are and what you do.
However, you guys both mentioned something that’s very, very powerful that I want to just touch on briefly. You both said that you don’t seek out your private money lenders, more than likely they’re the ones seeking you out and that’s very, very true.
There are a lot of people who will say, “Hey I got an email from this person. They want to deploy $500,000,” or, “Somebody’s telling me they want to be a private money lender.” We all get those messages on LinkedIn, right? Hey, I’m a private money lender, fill out this application. I’m going to lend you 70% of ARV at 7% annualized. So I just really want to reemphasize that yes, 95% of the time, we are the ones seeking out private money lenders.
So for the sake of this conversation to everyone listening, what we’re not talking about today is hard money because technically that’s private equity, that’s not what we’re talking about. We are not talking about somebody brokering a deal. Nothing’s wrong with that, I broker deals. And we’re not talking about banks, even the investor-friendly credit unions and community banks, right?
So we’re going to be seeking out everyone and anyone else, anyone and everyone who’s got cash or assets collecting dust, such as our Uber drivers, our neighbors, people at airports, people on airplanes, people, if you go to church, if you participate in sports, it’s literally anyone. So try to remember how to differentiate between what we are and are not targeting.

Rob:
Yeah. So let me clarify here, because if we’re talking about David’s method, which I know he does this a lot where he says, “Hey, you invest with me, I’ll give you a 10%, I guess interest on the money that you invest with me,” I think it’s just a straight, simple interest, would that not be hard money simply because of the technicality that there wasn’t an intermediary that was facilitating that deal, that works with the fund of hard money, I guess investors? What makes David’s style private money versus hard money, I guess since he is more in the 10% camp?

Amy:
Yeah. So really, what you’re offering, whether it’s 10% annualized or I offer 12% annualized and no points, I have found that that doesn’t matter. What differentiates us between hard money and private money is we are not a private financial institution. We may have an LLC that we’re doing these deals under, that doesn’t matter. But we are really targeting anyone and everyone else. I mean, you can even charge 12% annualized in two points and that’s still not going to make David for example, a hard money lender.
I can see how it can be argued both ways though, because he’s setting the standard, he’s dictating the terms. But for example, David, you’re not compliant or regulated by the SEC, I’m assuming. So that’s another big factor that differentiates us between us and hard money.

David:
Yeah. In general hard money is a blanket-

Rob:
Okay, so it’s really more the banking system that makes it-

David:
Also the fact hard money is a blanket term that is used to describe loans that are secured by a hard asset, so if you give someone a loan and their credit card collection secures it, or in a sense, a car note is a form of a hard money loan. When we use it in our vernacular of real estate investing, what we’re talking about is, like Amy said, an institution that is regulated, that is a official lender that will typically charge points on top of the interest that they pay and will have closing cost fees associated with the loan that they’re giving. Versus when we do private money, you don’t really have all of that red tape. There’s no title company that’s going to be involved in this.

Rob:
Got it, got it. Okay. One other thing I wanted to ask on the private money because David just talked about all the technicalities here with the hard money and it’s collateralized and all that stuff and we don’t really go through that whole process with private money. So when you’re going to an investor and you’re striking it up and then you agree on your terms, is it typically just solidified through a promissory note?

Amy:
Great question. Yes. So I use anywhere from three to five different contracts or term sheets. It’s always a promissory note summarizing the terms and conditions of our agreement. Amy promises to pay David $100,000 at a 10% annualized return backed by the property located at 123 Main Street within the next 12 months. I set up all my contracts on a 12 months month note, just for congruency purposes.
Number two, we’re always going to secure their investment, right? So we’re going to record a mortgage so that they have that tangible asset, so that we can’t sell the property without their written authorization. They can foreclose on us, if we decide to take off, which isn’t going to happen because that’s not what we do. And then number three is we’ll add them as the loss payee on the builder’s risk insurance policy.

Rob:
And you said you have five to six different contracts. Is that right? Did I did hear that correctly?

Amy:
Well, number four, sometimes I’ll throw in a personal guarantee. I don’t offer it up in the beginning as a part of my standard process. However, I have signed many personal guarantees and I will sign them if it comes up or if it’s a deal breaker, because at the end of the day, you guys, we shouldn’t be raising money if we don’t know what we’re doing, if we’re not confident in our ability to execute on the deal. And yeah, I’ve lost plenty of money and I have liquidated all of my assets to pay people back out of pocket because I think it’s the right thing to do. I’ve even had to put private money lenders on payment plans.
The opposite side of that is, hey, when you structure these deals the right way, there are no guarantees. So contractually they made an investment, I didn’t have to liquidate $1.4 million of real estate in 2017 and put people on payment plans, but for me, I couldn’t sleep at night until I knew that I had exhausted all efforts.

Rob:
Yeah, that makes sense. I think it’s our fiduciary responsibility to perform for our investors, so I think that’s the way to go. So I think as we talk about this and the promissory note and the protections and first time raisers and all that stuff, can we talk about some of the fears here that are floating around, especially in times like this?
I mean, if you’re a newbie investor, if you’re kind of green or you’re developing your portfolio, is there a lot of fear from the investor standpoint that you have to break down and work around? I mean, I suppose it depends on how adamant or how passionate an investor is to work with you, but what are common things that a newbie investor might hear from a fear standpoint from the investor?

Amy:
Yeah. There are so many fears and objections out there. I mean, it’s fear that holds all of us back from taking action and from raising capital, at least that’s what I found over the last 10 years.
So some very common ones are, I don’t have any experience. I’m brand new. No one’s going to lend me money. I’ve never done this before. So if you find yourself in that position, just remember, it doesn’t matter if you’ve done this before, because you have a team of experts who are supporting you. You have your general contractor, who’s been doing this for 20 years. You have your realtor, your designer, your real estate attorney. So for those of you who are new, just make sure you know how to hire a team, build a team, and then you highlight your team and even introduce your team. I’ve had private money lenders get on the phone with my general contractors during my first year to just build their confidence in me and my team. I’ve flown them out to Chicago. So that’s a common one. What about you guys?

Rob:
I think right now, I mean, obviously I think interest rates are something that are floating around. And especially in the Airbnb world right now, I mean, one thing that I’m hearing pretty often is a lot of people are stressing the whole idea of a slow down in bookings and this and that, but I think what we’re just seeing is a recalibration of normal seasonality. For example, in Joshua Tree, things were just last year, a phenomenal year across the board, but it isn’t always a popular place to be in the summer because, spoiler alert, deserts are very hot.
And so now I think things are evening out and going back to seasonality. And so I think I always have to educate people and remind them that we’ve been in this crazy run for a while and there’s been a lot of money to be made, but it’s not always normal and so you can’t always expect record number years every single year because that’s just not how it works.
So for me, I think it’s, there’s always that fear, especially with investors because I mean, we talk to investors several times a week, we always just have to remind them that it’s like, look, there’s seasonality to take into consideration, we have to budget accordingly. We have a padded bank account for emergencies and all that kind of stuff.
And so it’s like, we don’t typically pay our investors out monthly, which a lot of investors that I work with do want that, but especially, if you’re investing with us on the short term rental side, we like to have reserves. And so we really try to coach our investors to work with us on that and accept a quarterly payment or a biannual payment. That way we can actually account and budget for some of the down seasons. What about you, Dave?

David:
I think when I do raise money, I put an emphasis on approaching the person listening from the perspective of I’m educating them, because I think if they’re experienced with real estate investing, you’re not really having to sell them a lot, they’re going to be asking you the questions. They already know what to ask, they know what to look for. So if they’re hesitant or nervous, that means they don’t quite understand how this works and you have to make them feel safe before they even care about the return they’re going to get.
So I would take the approach of teaching them what does the BRRRR method mean. This is how they’re going to get their money back. The method is designed to recover capital so that they can be safe and they can get their money back, even if we don’t sell the house. If it’s a long distance thing, I would give them the Long-Distance Real Estate Investing book and I’d say, “This is a book that shows exactly what I’ll be doing. I’ll be putting a Core 4 together. That means I’ll have a lender, a contractor, an agent and a property manager that will be handling these components of the deal.” And I’d have a little diagram that showed property manager, this is what they do, and lender, this is what they do. I’d make it very simple.
And then I’d even probably leave them with some resources, if they wanted to learn more, hey, read this book. I’ll let you keep it, or something like that. No one’s going to read an entire book before they give you money, but the fact that they can see that this is a documented thing, this is not just you fly by night, throwing something around, will make most people feel better.
So I’m lazy in this sense and I’m always looking for how do I use resources that someone else has already made to support what I’m going to do, like an article out of BiggerPockets or a book from BiggerPockets or a podcast episode that talks about this. I’m much more likely to give it to them. And they’re going to hear the enthusiasm of the person talking, they’re going to realize, oh, this is not a rare thing everyone does, or a lot of people do this often so this isn’t a crazy, why is my nephew asking me this question, or why is this person I just met, this is something they always do. Rob?

Rob:
So selfishly, a lot of the videos on the Robuilt channel have come from these types of conversations where I get the same objections or the same questions over and over and over again and I’m like, “You know what? What if I made a 15 minute video that really goes in depth on the same question I get seven times a day?” That way, whenever people come to me worried, or they ask the question, I’m like, “Hey, you know what?”

David:
Send them a video link.

Rob:
“I made this video for you. Here you go. Please watch it, and then let’s chat.”

Amy:
Yeah. It’s funny because I will often tell the investors who have the element of fear, holding them back, “Hey, the number one reason why everyone in this country is not acting as a private money lender, assuming they’re in a position to do so is because to your point, they’re simply not educated on the process.” So let’s just get out there and educate them. That’s all it is, it’s a lack of education.
And in today’s market, especially, I’m sure everyone’s getting questioned about the economy, the market crashing. Well, none of us here can predict the future, right? Sure, we’re starting to see shifts. All that means is we don’t exit the real estate game, we just change our strategy and we shift with the evolving market.
And guess what, you guys? With inflation rates today, it’s even easier to raise money today for your real estate deals than it was in the past. Inflation’s north of 8%. Hey, private money lender. You have money sitting in the bank. Your bank is literally dying every day it’s sitting in your account. Or if somebody wants to take the time to Google, what does a bank do with my money, you’re going to see that they take the money that you put in the bank and they go invest it passively into real estate.

David:
Okay, so with your framework that you have that you teach people how to do this, where should they start?

Amy:
So I’ve created this four step unique methodology called my FACT framework. And step one of that FACT framework is building our foundation and the way we build our foundation, there are a few things that make it up such as being clear on who you are and what you’re doing, really knowing your role, having your business plans and goals in place, understanding why you’re doing this. But the key takeaway of step one, which is building our foundation is implementing that four second power pitch, 24/7.
So all we want to do as a part of building our foundation is we’re not asking for anything, we’re just announcing to the world who we are and what we do through that four second power pitch. Now we talked about the four second power pitch earlier and a very common follow up question that I’ll get is, “Hey Amy, what if somebody is into what I’m saying and they want to know more?”
Now, if you’re experienced, the conversation will naturally probably carry itself until you decide to end the conversation. For those of you who are greener investors, I have a 20 second follow up and I’ll rattle off the 20 second follow up, put it into your own words, fine tune it, make it your own, and then end it there. And if they want to know more, just say, “Hey, I’ll call you next week. We’ll hop on a quick call.” And if you’re not sure what to do, call up one of your coaches and mentors, and they’ll literally hold your hand every step of the way.
The 20 second power pitch is basically someone saying, “Hey, that sounds great. Can you tell me more?” I always respond with, “Yeah, I’m a developer based out of downtown Chicago and we’re currently on target to complete 10 transactions over the next 12 months. And our investors love it because they get to kick back and relax while we do all the work and they earn double digits backed by or with a protected, secured and insured asset. What was it that you said that you do again? It’s so nice to meet you.” And then that’s it.

Rob:
Well, what happens if, okay, so let’s say you get through your 13 or your intro, I teach people how to make double digits in real estate and then they say, “Oh cool,” and then maybe signaling that they don’t necessarily want to know more, do you just cap it off there or do you continue to drive that point?

Amy:
No. Look, I really believe I’m providing others with an opportunity. So if they want to end the conversation, I’m not going to push it on them because I really believe that’s their loss. Or maybe we haven’t done a good job of explaining to them who we are and what we’re doing later through my nurture sequence, my follow up sequence, I may choose to circle back with them.
But if they’re like, “Oh, that’s amazing, you want to go grab some dinner?” I’ll be like, “Yeah. Sounds great.” And then-

Rob:
Okay. Cool. Cool.

Amy:
Right? Depending on the relationship, I’ll try to weave it back in, in a very subtle and tactful manner.

Rob:
Good. Okay. And that’s what I’m wondering. I asked that for all the newbies that are listening to this that may not have raised money, when should one push or when should one pry or when should one go in for the … It’s like the one, two hook, right? When should they go in for I guess jab, jab hook, the second jab in it?

Amy:
Yeah. I mean what you can always do as well, if somebody is kind of like, “Oh, that sounds awesome. I wish I was in a position to invest or I’d love to invest eventually,” you can always say, because one of my strategies I think we’ll talk about later, which is step two of my FACT framework is, how do we take action?
We always want to end every relevant conversation with a request for a referral. So if somebody says they love what you’re doing and they’d love to support you, but they’re not in a position to invest, just say, “Hey, no problem. Do you happen to know anyone else who is interested in getting double digit returns backed by real estate? Let me know.” So I ended every single conversation when I first got started 10 years ago with a request for a referral and I did that for 18 months consistently.

Rob:
Okay. So I want to definitely drill down a little bit more on the foundation here, but just for reference so that we understand the different steps of your framework, can you just quickly take us through I guess the four sections of your framework?

Amy:
Yeah. So the foundation is step one of my FACT framework. So what does that look like? Do you have your scripts and systems in place? Do you understand your buying criteria? Do you have your target market identified? So being able to clearly and confidently articulate who you are and what you’re doing. And the main takeaway, the script is the four second power pitch. So that’s the foundation.
Once we’ve built our foundation, we’ve got the right mindset, we believe we’re providing others with an opportunity to invest, we’re consistently dropping that four second power pitch on people, then is step two of my FACT framework where we start to take action.
Step two is where we start to proactively connect with anyone and everyone, like coffee talks, in person meetings. If they live out of state, then we’ll schedule a Zoom session. But this is where we’re starting to educate people on who we are and what we do. We’re just, we’re booking appointments basically.
Step three of my FACT framework is the credibility piece. So step three is where as we’re taking action and we’re booking these 30 minute coffee talks, we want to make sure we have something to take to the coffee talks. We want to make sure we’ve got all of our credibility pieces created and customized before we start or as we’re starting to take action, because basically I use the credibility pieces as a part of our follow up system as well.
And then step four is the transactions. Hey guys, you consistently build your foundation, you take action, you’ve got your credibility pieces in place, then step four is the transactions will start to follow. And once you’ve converted a private money lender into investing, you want to focus on two things. What do you guys think those two things are?

Rob:
Okay. Let’s see.

David:
You’re saying once they’ve already committed to giving you money?

Amy:
Yeah. Once they’ve invested with you one time, what do we want to try to get them to do in the future?

David:
We want repeat business and we want referrals.

Amy:
Absolutely.

David:
What does the nurture system look like, you said?

Amy:
Oh no, I was just ending it with you’re absolutely right. So we want to make sure we take care of them, we stay in front of our audience, we keep them informed. Whether it’s good or bad, you guys we’re going to have change orders, we’re going to fall behind our project timelines. It is very, very critical to our success.

David:
Oh, that’s big.

Amy:
Yeah, proactively educate-

David:
Yeah, setting expectations.

Amy:
A hundred percent.

David:
So that’s an issue that we have in the different companies that I’m running with newer loan officers, newer real estate agents. Most people understand the idea of lead generation, going out and finding the next deal, finding the next person to let you borrow money, for us finding the next person that needs a loan or the next person that needs a real estate agent.
And we will work so hard to get a new customer, we’ll bend over backwards, we’ll do everything. Then you get them and maybe they’re having a bad day and they’re being pushy or rude, or something goes wrong and you have to take some time out of your day to explain it and for some reason, we resent having to do that. And then you lose the customer and you got to spend 10 times as much energy to go get the next one to start over again than if you’d put 10% of the energy into retaining the one that you had.
And that is a very good point, if you’re trying to build a sustainable business is yes, you will spend a lot of energy looking for clients, but spending more energy on retaining the clients you have and then getting organic referrals coming back is such a better and more sustainable model than giving elevator pitches for the next 50 years of your life and your business never grows past the point it’s at right now.

Rob:
Big time, big time. I mean, for us, I think we’re starting to realize that strategic partners are the best partners, right? All of my investors have been really great and when we really first started this whole private money raising thing, we were talking to everybody. If they had 50,000, if they had 100,000, it didn’t matter, we were just like, “Let’s talk to everybody. Let’s get on the phone.”
And I think as we started to realize, we really started being very selective with the investors that we worked with because we weren’t looking to just have a one and done transaction, we were hoping to do multiple transactions with the same investor. And fast forward to today, we have a lot of investors that are reaching out that that they have larger sums of money to invest.
And so we put a lot of energy into nurturing that relationship because if I could have three investors versus 30 on a single deal, not on syndication or anything like that, that to us is going to save so much more time because you’re right, David, we have to spend 10, 20, 30% more energy just making sure that relationship is great, but it’s still a lot less energy than talking to 50 people on Zoom every single week.

Amy:
Yeah, I agree with you. And for those of you wondering yes, you guys, when it comes to private money, you can absolutely get 100% funding from a private money lender, unlike the hard money guys. They’re not going to give us 100%. So with private money, because we set the standards, we can get 100% of our purchase price, our renovation costs and all of our carrying costs in the form of private money.
And in the beginning, sure, I would take investments from someone as little as $8,000, which I will never do again, but I did it in the beginning when I was building that list because for me it just wasn’t worth the time and energy. This investor happened to have ongoing questions.
So make it clear, if you would like, that as a private money lender, you are a silent stakeholder. You don’t have a say in the renovation, in the design, in my sales strategy. I will proactively keep you informed every month of what’s going on and then you’ll get paid back. I still tell them my standard process is I’ll pay you back principal plus interest at the end of the deal at the closing table.

Rob:
Yeah. So I want to dig back into foundation a little bit here because I’m really curious. I mean, I think if you’re interviewing for a job, for example, they say you as an interviewee should never bring up money first, if you do, you’ve already shown your hand. So I’m curious on your end, when you’re in the F stage of this, the foundation and you say, “Oh, I teach people how to make double digit returns,” are we now, even in this stage saying let’s get into the numbers, I need money, here’s how much I need, or is it truly just about really developing that relationship first?

Amy:
Yeah, it’s the latter of the two. It’s really just about raising awareness and developing that relationship. So we are not going to go through any numbers or quote-unquote, “ask for money” until step three, the credibility piece, where we take them through our deal analyzer, our org chart, our target market, all of our strategy, investment strategies, our contracts, our list of frequently asked questions, our private money presentations. So that comes as a part of step three.

Rob:
Got it, got it. So now let’s get into the 20 second follow up here, because this is where I’m curious if it stays within that F because you said, “Oh …” Can you remind us of the 20 second follow up really fast?

Amy:
The 20 second, it will stay as the tail end of the foundation. So the end of the foundation is the four second power pitch combined with the 20 second follow up. So I like to use them simultaneously, if somebody asks for more information.
So the 20 second power pitch again is assuming somebody likes your four second power pitch they want to know more, instead of going into a bunch of details and numbers, I just say, “Yeah, I’m a developer based out of downtown Chicago. And we currently are on target to renovate 10 properties over the next 12 months.” Or just tell people what your strategy is, we’re going to wholesale three properties. Or if you don’t have a strategy, just say, “We’re on target to complete two transactions.” That’s fine, just whatever your goals are. And our investors love it because they get to kick back and relax while we do all the work and they earn double digit returns with a protected, secured and insured asset. And then I end. That is the end of foundation.

Rob:
Right. So is there any amount of, just even from that follow up, because I’m sure you get a lot of people. I mean, you did say earlier in your example like, “Great, let’s go have dinner and talk about it.” Obviously that would lead to action, but I imagine that most of the time they’re like, “Wow, that’s really interesting. Let’s keep in touch.” So for those types of people, when you’re nurturing this foundation or building it up, what does that follow up look like outside of a person to person, in-person conversation?

Amy:
Well, if somebody wants to know more, then next week you begin step two of the FACT framework which is taking action. Step one of taking action is now we’re starting to preferably sit down in person or via Zoom and you’re going to start educating them on your business model. And that’s always, with a private money presentation, that’s going to be our very first credibility piece.

Rob:
Even with this presentation and everything that would still be in this foundation stage?

Amy:
No that’s step one of taking action. So foundation ends with the 20 second follow up. We’re done. Now, if they want to know more, we’re going to start taking action.

David:
So last question. If we know that we’re going into action, do you have any advice for transitions to make it easier to move from foundation into action?

Amy:
Yeah, because you want to have that level of confidence, especially for the newbies, oh my God, I just got a bunch of yeses, people want to know more. This just happened at a workshop I hosted the other day. So at a minimum, make sure that you have, let’s be a little proactive, at least one credibility piece ready to go.
And as you’re taking action and as you’re meeting with more people, as you’re getting creative and thinking outside the box and finding more people to meet with above and beyond your four second power pitch, you’ll have the confidence to know that you have that private money presentation ready to go, so you’re not going to refrain from scheduling that 30 minute coffee talk.

Rob:
I love it. Yeah. What I really like about this is I think a lot of people have … Not everyone is super social and it’s really tough to strike up a conversation with the stranger and everyone gets really nervous of small talk and what are we going to talk about? I don’t know this guy. Whatever.
And so I like that you get into every conversation with an intention like, hey, what do you do? Oh, what I do is this. And I’m just curious, in your experience, have you had a lot of surprise investors come out, in your whole life, just from random scenarios where you would never have expected it? Has your power pitch really been fruitful in some pretty unexpected situations I guess is what I’m asking.

Amy:
100% of the millions and millions, well above $20 million in private money that I’ve raised have come from complete strangers as a result of this four second power pitch, who I’ve developed a relationship with through my FACT framework. I did not target friends and family and I still don’t because I’m stubborn and that’s a whole nother story, but all of it came from random people.

Rob:
Oh wow, that’s cool. Because I think a lot of the advice out there is start in your network, start with your friends and family. You don’t, so can you give us what does that look like? I’m so curious because I think it sounds … I mean, you mentioned your Uber earlier, so I can understand that. But are you going out of your way on a day to day basis to meet people and talk to them?

Amy:
Yeah.

Rob:
Is that part of the game here, you have to be willing to just make new connections, whereas ordinarily you would probably ignore someone, not you personally, but a person?

Amy:
That is exactly right. And that is a hundred percent what step two of the FACT framework is all about. Amy, you’re telling me I don’t have to target my friends and family members? How in the world do I get everyone else in this world to invest with me? So where do we go to find people? What do we say? What environments do we put ourselves in? So that’s all we’re doing is we’re building our networking mind map under step two of my FACT framework. We’re taking action to network more creatively and to build more trust and rapport with people.
So another example, this is very, very calculated, and you guys, for those of you who are not comfortable doing this, the more you practice it, the easier it becomes and the less calculated it becomes. I’m on an airplane at least three times a month. Even still today, when I’m on an airplane, I will take out my laptop and purposely open it up at least one time and start scrolling through before and after photos, because what do you guys think that’s going to do?

Rob:
Ooh, what’s that?

Amy:
Oh my God, yes, this really is my project. No, I don’t work for somebody else. It’s my company. I’m also passive aggressive in case you can’t tell. But exactly, it’s capturing the interest of the people next to me, which allows me to go into that four second power pitch. So it’s the exact same system every single time. What’s the first thing you say to a stranger? The four second power pitch. How do you capture their attention? By getting creative and thinking outside the box. So that’s just one of literally 70 different strategies that I have.

Rob:
That’s awesome. David, I think you said that on airplanes, you’ll open up your laptop and just watch videos of yourself on BiggerPockets’ YouTube, right?

David:
That, various gym post-workout selfies, accolades and awards that I’ve received for various things. I like to max-

Rob:
You pull out all of your awards and put them on the little table?

David:
Yes, that’s exactly right.

Rob:
You know what? I have actually kind of done … I’ve edited my own videos on airplanes, but I always turn it away because I don’t want people to think that I’m just like watching videos of myself because I already do that. I mean, they just loop at home, but on an airplane, I’m nervous to show it.

David:
I want to get your thought, Amy, this is a good question, Rob. I swear airplanes have a different dynamic than everything else in the world, okay? I could go to Walmart, I could go to Home Depot, nobody knows who I am. I don’t get recognized ever. The second I’m in a airport, I get people recognizing me wanting to take pictures. If you’re on the plane, even more so. People will walk by and they’ll do that double take.
I haven’t quite figured out what it is that makes people recognize other people on airplanes, but I just flew back from Long Beach two days ago and I’m walking out of the bathroom, just basically zipped up and some guy goes, “David Greene.” And I just assumed, oh, you must have been at my meetup, right? You probably flew in for the same thing. Hey, talk to him for a little bit.
Then I sit down on the plane, he’s the guy I’m sitting next to, didn’t go to the meetup, had no idea that I was even there, just happened to be a person that likes BiggerPockets. Lo and behold, he’s actually working with one of our team members to buy a house in Sacramento. So shout out Derek, if you’re listening to this.
But I just thought that doesn’t happen anywhere else, but the minute I get in an airport, all of a sudden A, people recognize you or B, they’re open to conversations they don’t have at any other time. It’s like, you’re the guy I’m sitting next to on the plane, so I have to listen to you tell me all about your cryptocurrency dreams or your dog walking business that you want to start, or whatever it is, you just read Rich Dad Poor Dad and I’m going to hear about it for the next two and a half hours on the plane.
Can you share what you think makes it happen on an airplane, so we could possibly recreate that in other scenarios intentionally?

Amy:
That is so funny because that happens to me, but not on airplanes. So that has yet to happen to me on an airplane or at a airport, very seldom, but consistently people will recognize me because I did a four part series with HGTV. So I would actually, Rob, any insight? If you can crack that code, let us know, sir.

Rob:
It is always at the airport, isn’t it? It is David, that’s so true. You know what? I’m at this point now where it happens every so often and it’s always at an airport, but no one’s ever around. So I’ll go to my wife and I’ll be like, “Babe, someone recognized me from BiggerPockets.” And she’s like, “Sure.” And I’m like, “I swear. I swear.”
No, I don’t know. There’s two types of people on an airplane, the people that want to talk and the people that don’t want to talk. I used to be the former. I always love chatting with the person next to me and now airplanes are my sanctuary because I typically will fly with my kids and my wife. There’s two kids, they’re one and two and it gets very, very crazy. So when I get to travel on an airplane alone, I’m like, oh man, this is first class for me. It’s pure peace and quiet.
But I really like the advice here, honestly, just because I think whether you’re raising money from friends or family or not, there’s some pretty actionable steps here. I think there’s a lot of ways to get your yourself out there. For me, when I was first starting my short term rental journey, I was posting it on Facebook, on Instagram, just everything that I was doing and it’s cool. It’s a cool thing. I was really proud and people were like, “Tell me more about that.” And that’s how I was connected with people in my network.
You’re saying go out and meet people out in the wild and tell them what you do, put yourself out there, make chit chat, be uncomfortable and establish a connection there and it can be a very fruitful thing that leads to seven figures of fundraising.
And for me, I’m a content creator and I put myself out there on the internet every single day, every single week, and because I do that and because I teach people how to do it and because I love it and I educate them, the credibility, which I’m sure we’ll get into later is instantly set and people will email me and offer me money and they don’t even know me.
So that’s another form. You don’t have to even do either of these two things. You could just make content online and talk about what you do and love and show that you love this stuff and you’d be surprised at the amount of people that reach out.

Amy:
You’re stealing my thunder. That’s all a part of taking action. I love it.

Rob:
Oh, okay. All right, well, it’s a good preview for the next one. We got a couple more episodes of this.

David:
All right. That is fantastic. And I think that is a good point to wrap up part one of this segment on building a foundation with potential private money lenders. Amy, thank you very much for sharing what you did, this is really good. Everyone listening, if you continue listening, episode two will be airing next, as Amy gets into the next step in her process. I’m excited to see what you have to say here. This is David Greene for Rob delusions of aviation grandeur Abasolo signing off.

Ashley:
This is Real Estate Rookie Episode 200.

Scott:
I actually think that’s the best thing that BiggerPockets… We have so much more work to do to help rookies, but I think that we do pretty close to a world-class job at this point of helping people get started in this business with a realistic assessment about the risks and rewards of real estate. I don’t think we sugarcoat it, you know, “Ra, ra, this is always the right thing.” I think we’re very clear about the trade offs, and the time commitment, and the leverage risk that you take here from that. We always need to do I think a better job of serving those things, but I think we have a really… What is the investor journey is probably a good question, right? What does an investor look like when they come into this world?

Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week we bring you the inspiration, information and stories you need to hear to kickstart your investing career as a real estate rookie. So, before we dive in I just want to highlight a recent review that came in. This one came from Zise D, and Zise says, “Solid show, it’s very informative and fun to listen to. This is now one of my favorite BP podcasts, along with On The Market. Keep them coming.” So Zise D, we appreciate you. And for all those rookies that are listening, if you haven’t yet please leave an honest rating and review on whatever platform it is you’re listening to. The more ratings and reviews we get the more folks we can reach, and the more folks we can reach the more folks we can help.

Tony:
And that’s our job here, is to help some folks. So Ashley Kehr, I’m excited for today’s episode, episode 200. So crazy, when I first came on the show we were at episode 37 I think was my first episode, and now we’re 100 plus episodes beyond that. So man, it’s been a fun ride, huh?

Ashley:
You guys, I can’t believe it. Episode 200, it’s really exciting, and thank you to everyone who has listened to all 200 episodes, or maybe you’re making your way through them. We greatly appreciate it, and hope you guys are learning as much as we are by all of the fabulous guests that we have onto the show. And if you think that you would be a great guest on the show, that you are a rookie listener, you’ve done less than five deals, and you want to come on and tell us not only what you have done but how you’ve done it, you can apply at biggerpockets.com/guest, and select the Rookie Podcast, and we’d love to check out your application. So, Tony here, he is actually going off to Italy tomorrow-

Tony:
I am.

Ashley:
… and is going to be gone for two weeks, and I’m already having separation anxiety from not recording for the next two weeks. So, it’s getting pretty tense between us right now knowing this is going to be our last Zoom call for two weeks, so…

Tony:
Yeah, but I’ve got a nice Photoshop…

Ashley:
I’ll have to FaceTime you a bunch of times, yeah.

Tony:
Yeah, I’ve got a nice Photoshop image of Ashley’s face I’m just going to carry around with me on all of our Italian escapades, so that way she can feel like she’s there.

Ashley:
Yeah, yeah. That’s perfect, yeah.

Tony:
But the agreement is, is only you and your crutches. So, the photo that I’m carrying around is you on your crutches, that way you’re like, crutching, and-

Ashley:
Through Italy.

Tony:
… you’ve got your little scooter. Yeah, through Italy.

Ashley:
Well, when I did go to Tennessee to see one of Tony’s short-term rentals, I did crutch through Tennessee, so…

Tony:
Your crutch, you were on your crutch, yeah.

Ashley:
My crutches have made it pretty far across the country. Through a place in Seattle, Denver, so…

Tony:
Mine made it to Coachella. I took my cast, or not my cast, my boot and my crutches to Coachella. And I would not recommend that, if you guys ever have a decision… Like if you’re ever on crutches and you have to decide about going to Coachella or not going to Coachella, highly recommend not going, because it was like the biggest pain in the butt.

Ashley:
Yeah, there’s also an Instagram video. I don’t know if it’s on Tony’s or Sarah’s Instagram of how miserable Tony was on his crutches.

Tony:
But anyway, we’re not here to-

Ashley:
We’re digging through his Instagram feed to find that.

Tony:
Yeah, but we’re not here today to talk about Coachella or crutches, we’re here to talk about Scott Trench. So, many of you may know Scott is the CEO of BiggerPockets. So, he started off as an employee like so many others, and over the last eight years he worked his way up to CEO. He’s the head honcho and visionary at BiggerPockets, but he’s also the author of a tremendous book called Set For Life, which is essentially a guide for, as he describes it, middle income earners that are looking to kind of kickstart their investing career. And they’re launching a new version of Set For Life, and it’s going to be coming out here soon. So, we figured it would be a good call to bring Scott onto the show, and kind of get his insights on how rookie investors today can get started.

Ashley:
Yeah. And even if you’ve already started investing, or you know you’re set to go, you’re good to go, and you don’t think that you need his book, this book, Set For Life, is a great graduation gift. Any graduation party I go to, I give Scott’s book to the person graduating, because they just… Even though they may not have started their full-time job yet, whether they’re graduating from high school or college, I think it just puts that little reminder in their mind. Okay, like here are some things you can start doing now to set yourself up so that when you do start getting that W2 income, or whatever your job is, you can go ahead and start getting into real estate investing. So, he went through… The book first released five years ago, and he since then has grown older and wiser, and has kind of revamped it and just tweaked some things that he thought he could explain better into the book.

Ashley:
So, it might even be worth going back and re-reading, if you’ve already checked it out. So, that is the book, Set For Life, by Scott Trench, and then it’s available on the BiggerPockets bookstore. Scott, welcome to the show. Thank you so much for joining us. Can you start off telling everyone who you are and a little bit about yourself please?

Scott:
Sure. So, my name’s Scott, I’m the CEO here at BiggerPockets. Been here at BiggerPockets… I’m coming up to my eighth year anniversary here at BiggerPockets, joined in 2014, was a big fan of BiggerPockets before I ever joined. I co-host the BiggerPockets Money Podcast, and I am an author of two books for BiggerPockets, the Set For Life, which I’m sure we’ll talk about in a little bit. And then First-time Home Buyer, but I forget what that second book is actually about at this point in time.

Tony:
So Scott, obviously you’re super-successful today, right? CEO of BiggerPockets, obviously we all know what BP is. You’re the guy pulling the strings behind all the curtains. Author of multiple books, you’ve got a real estate portfolio so you’re doing well today. But I want to go back to Scott, maybe when he first started at BP. Tell us what the kind of picture for Scott looked like, and how things have changed since then.

Scott:
Yeah. So, I would say when I joined… Zooming back to 2013 when I started my career, I joined a company called Dish Network, and I was a financial analyst, and I did not want to be a financial analyst. I saw the career track ahead of me and I was like, “I do not want that, I want to become financially free and live my own life.” And so I actually stumbled across a blog called Mr. Money Mustache at first, which tells you how to become financially free through stock investing and frugality. And I was like, “That sounds great, I’m going to definitely do that.” I dove headfirst, but I wanted to invest more aggressively. And so I also… The idea of real estate allured to me, and I eventually stumbled across the BiggerPockets Podcast, became a member of BiggerPockets, joined the community.

Scott:
Actually met my agent on BiggerPockets, her name was Mickey, and she sent me a couple of duplexes back in 2014. And around that same time, I also met the founder of BiggerPockets, Josh Dorkin. I met him because the podcast had told me, “Go network with local real estate investors, and get to know them in your community.” And one of those local real estate investors I happened to be networking with shared the same co-working space as Josh. And so I saw the BiggerPockets logo, I’m like, “Oh my gosh, I listen to your podcast, you’ve changed my life, look at all these things you’re doing. Can I come work for you for free on the weekends or in some way help you?” Because I just knew BiggerPockets was this special thing at that point in time.

Scott:
And he remembers it differently, but I remember him saying something to the effect of, “Go away kid, what are you doing? You’re bothering me in the middle of my work day.” So I followed up six more times, and then he eventually offered me a job as the Director of Operations. So at that point the full-time employees were like himself, Brandon Turner, we had a couple… A contractor in an engineering role, and we had Dave Osia, who still works with the team in a contracting capacity, editing our podcasts. So, that was the team when I joined back in 2014.

Ashley:
Scott, do you think that joining BiggerPockets helped you build your real estate portfolio? For somebody who’s maybe looking to get into real estate, do you recommend that they apply for jobs at BiggerPockets, or other kind of… Even property management companies, or other places that are already involved in real estate to really help them get their foot in the door?

Scott:
So actually, I was looking for a different job in a general sense, because I knew that hey, becoming a financial analyst and getting a promotion to Financial Analyst too, and then Senior Financial Manager and so on and so forth, would be too slow from a career standpoint to get me to where I wanted to go. So I actually had two job offers at the time when I joined BiggerPockets, one was at BiggerPockets and the other was at a brokerage. I would have gotten my real estate license and been selling real estate. And so, I like to think that that… Because I have a peer who actually did that, took that job and did really well, and would have had a good career. And so I like to think that that would have been a good option as well.

Scott:
So I think yes, I would recommend that folks get into that career. But ironically, I think I would actually own a lot more real estate and be much more active as an investor if I hadn’t joined BiggerPockets as an employee. Because I’ve poured my heart and soul into building this business, like I obsess over the business. Obviously during the 40 hour regular week, and then again when I go home, and in the shower, and all that kind of stuff. So, I really haven’t taken on fix and flip projects, or BERs the way that I think I would have if I had gone into becoming an agent, paradoxically. So I do own 13 doors today, and have built a small portfolio. But not the size that I probably would have if I didn’t work here.

Ashley:
I think that you are in an interesting position, because you get to see kind of the whole picture of who the BiggerPockets members are. And that gives you the opportunity to see, “Okay, what do the members need?” So for us, everybody listening here is most likely a rookie, maybe doesn’t even have their first deal yet. What are some things that someone as a rookie investor that you have seen coming to the BiggerPockets community, what can BiggerPockets provide for them? What can we do for them to help them get started?

Scott:
Yeah, so I actually think that’s the best thing that BiggerPockets… We have so much more work to do to help rookies. But I think that we do pretty close to a world-class job at this point of helping people get started in this business, with a realistic assessment about the risks and rewards of real estate. I don’t think we sugarcoat it, you know, “Ra, ra, this is always the right thing.” I think we’re really clear about the trade offs, and the time commitment, and the leverage risk that you take here from that. We always need to do I think a better job of serving those things, but I think we have a really… What is the investor journey, is probably a good question, right? What does an investor look like when they come into this world? Well, I have this idea of real estate investing.

Scott:
I want to begin learning about it, I know it’s risky. I’m going to spend 500 hours learning about real estate prior to making my first investment, and I’m going to do that by immersing myself in this world of podcasts, or videos, or books, or forums, or Facebook groups, or whatever. And I think what BiggerPockets offers those folks is this ability to do that for free, right? And the way we’re able to do that is because we make money selling ads, or selling books, or very low-cost products. And then after 500 hours, maybe six months to a year and hundreds of hours of self-education, building up your financial position, getting good credit, those types of things, folks, decide, now’s the time to make that investment.

Scott:
I’m going to commit. And I haven’t actually bought my property, but I’ve decided to actually make that investment in the next 30, 60, 90 days, maybe 180 days. And that’s a big moment for us as well, because that’s when people start actually analyzing deals, meeting their agent, meeting their lender, meeting peers, maybe investing in tools that they can use to build that business, right? And then they get that first deal, and then guess what happens? They’re out of money. So, not everyone’s able to immediately scale up. So, a lot of folks will need a year or two or three to buy that next property, and save up to buy that next one. And so that’s kind of the investor journey, and what we’re trying to do here at BiggerPockets is serve people throughout that investor journey with a particular emphasis on helping people get started in the game.

Tony:
Scott, I think like so many investors my journey started the same way, where I was looking for a path of income, and I Googled how to get rich or something like that, and you land on real estate investing, and then you want to figure out all these different real estate investing strategies, you Google something. And then something from the BiggerPockets forum shows up in the Google search results, and then you spend the next, I don’t know how many hours of your life going down this rabbit hole that is the BiggerPockets forums. But I want to kind of go back to you at the beginning, Scott, right? So we know that right now you said you’ve got 13 doors, been investing for a while. But you know, obviously your book Set For Life is about I guess the framework, or like the operating system someone should implement into their own life to be able to set themselves up to eventually invest in real estate.

Tony:
So if we go back to Scott back in 2013, ’14, when you first started out, what did your kind of, I guess like financial discipline look like? What are some of the habits you had that you feel have kind of set you up for the life that you have today?

Scott:
Yeah, so when I graduated college and started my job in 2013 I didn’t have any financial habits, I didn’t have… I was naturally not going to spend a lot of money, but I was maybe… You know, I was making $48,000 a year, I was maybe spending $3,000, $3,300 a month, I paid 500 bucks for rent, had a brand-new 2014 Toyota Corolla, bought at the end of 2013 because you can do that. And then maybe spent… Bought most of my own groceries, ate whatever. But when I discovered Mr. Money Mustache, that’s when I became really frugal and was able to cut my expenses steadily down from that like $3,500 to probably $2,000 a month, even with my rent payments included in there. Because I was investing in basic things like cooking, literally that’s a big investment for somebody who’s getting started in their career, is not eating out every day.

Scott:
I’m going to actually learn how to cook, and buy reasonable food from reasonable grocery stores, and those types of things. And steadily I was able to cut those expenses bit by bit. And so, over the course of that first year on that $48,000 a year salary, I’d started with maybe $3,000 in cash left over. Actually I went on a little backpacking trip around Europe, where I was actually talking about this with Tony right before the recording here, with both you guys on this. So I had $3,000 after that backpacking trip, and that’s what I started with. And by the time I closed my property I had about $20,000 in total cash, and I used $12,000 of that to buy a $240,000 duplex here in northeast Denver. And that was kind of the game-changer, right?

Scott:
Because that duplex generated 1150 in rent from the other side, which is $1,100 plus two cats at $25 a month each. And then 550 in rent from my roommate, and the mortgage is 1550. So after utilities and those types of things I’m close to break even, and that’s really the kind of catalyst that really kind of began turbocharging things. I also switched from that job at Dish Network to BiggerPockets, and I went from making $48,000 to $50,000 a year, which was a big raise for me and helped me save another 800 to $1,200 a year on that front. So, that was my situation, kind of entering into the game.

Tony:
Yeah. And you touched on something that I want to draw down into a little bit, right? So, there are kind of two schools of thought when it comes to achieving financial success. You’ve got like, I’m going to choose two guys on the opposite ends of the spectrum. It’s the Dave [inaudible 00:16:28] approach, where he’s all about cutting expenses, and couponing, and beans and rice, and very strict budgeting. And then you’ve got like Grant Cardone on the other side that says, “You don’t need to budget, just make more money,” right? Where do you kind of fall on that spectrum? I guess, let me pose the question this way. Can someone build massive wealth quickly by only focusing on saving? How do you kind of strike that balance between the two?

Scott:
I think that having low expenses and having readily accessible cash in your life is directly correlated with the ability to earn more income. And so, here’s what I mean by that, right? I saved $20,000, $17,000 in that first 10 months after starting my career, right? And that meant that I was spending $2,000 a year, and had $17,000 saved up. So I had the option at that point in time to leave my high-paying, my moderately-paying job after college and take a job as an agent, for example, or at a startup called BiggerPockets, right? And that option does not exist for somebody who’s spending $45,000 and making $48,000 a year, right? It just does not compute. So, I think that they’re directly related. And I think that for the median income earner with no assets, the wealth creation journey begins by spending less.

Scott:
Because that enables you to have a lower floor for the expenses you need your business or endeavor to generate, and it allows you to amass some cash with which to begin playing a game. It’s just that much easier to get these partnership deals or these other types of things if you have a little cash to throw at the situation, strong credit and those types of things, and don’t need much, don’t need a lot of income right away, right? It’s very hard to convince people from a partnership perspective, I think, if you want to get paid a salary, and have these other expenses right away from that. It’s hard to think long-term without that fundamental in place. So, I think it’s directly related. There are four things you have to do to build wealth.

Scott:
You have to earn more, spend less, invest, or create assets. And so I was determined to do all of those things in as rapid succession as I could to get started on my journey. And I think that the beginning of that starts with frugality or spending less, because you can control that immediately. And it has such a powerful, freeing impact on the options you have to pursue with your career or business. It gives you cash to begin investing, and then absolutely it’s about using that strong financial foundation to pursue the highest, the best… A good income opportunity for you downstream. Which for me, I thought was BiggerPockets. I couldn’t explain why I thought BiggerPockets was a good bet at that point in time, I was just like, “This is a cool company, it’s going places,” right?

Scott:
I didn’t know I would become CEO at a future point, I just saw there’s something special about this company and what it’s doing, and I want to be a part of it. And I know income opportunities will follow that. In fact, I have never asked for a raise in my eight years here at BiggerPockets. But, I’m sure you can guess that I probably have gotten a few raises over my eight years here at BiggerPockets.

Ashley:
I would hope so.

Tony:
Yeah. So Scott, something you mentioned man, and I’ve heard this saying, I can’t remember who shared it with me initially but it’s always stuck with me. And it was a story about Jeff Bezos, and he was talking about the success of Amazon. And people said, “Was it your ability to hire the right people, was it your ability to create cool products, was it your ability to,” whatever it was. And he said that he boiled Amazon’s success down to one thing, and it was the fact that they had patient capital. And that stuck out to me so much, because it’s like yeah, if I can have the flexibility to get my return over 10 years then I’m going to be able to beat everybody that gets a return, or that needs a return in two years, or in five years.

Tony:
And what you said is like the exact epitome of that playing out in real life, where you have the financial flexibility, the financial cushion to take this risk that other people wouldn’t have been able to if they didn’t have the same kind of financial footing that you had. So, just a really, really great example, Scott, of playing that out in real life.

Scott:
I think that’s great, and let’s [inaudible 00:20:38] to the next level where you see all these folks becoming financially free. But they start their journey, and it takes them three years, or seven years to buy their first two properties, and then they’re off to the races. Why is that? Well now I’m financially free, or very close to it, lots of flexibility and I can afford to play longer, bigger, riskier games with this next pool of capital, and it just transports me to a whole another level because I’ve met this baseline of flexibility in my life. And I think that we see a lot of people achieving that, maybe that’s been true to some extent in your stories for you guys, I don’t know.

Ashley:
Scott, I want to talk a little bit about your book, Set For Life. So it’s been five years since you have written the book, and you have gone through and kind of updated it and revamped it now that you’re five years older. Still the same good-looking guy from five years ago, no physical appearance has age. But also you’re wiser, and you probably have learned some things over these five years, and also the economy has changed, the markets have changed, there’s been a lot of changes in the last five years. So, what are some of the things that you have put into your book that may be different than the first one? And actually before you answer that, who is the book Set For Life for? Who is the ideal reader of this book?

Scott:
Yeah, so Set For Life is for the median income learner who is starting with zero, essentially. So it assumes you have no debt and no assets, and you’re in a median income. How do you go from that position to financial freedom in as rapid a time period as possible, right? Or financial flexibility in as rapid a time period as possible. And I wrote the book in 2016, launched in 2017, because I thought that there was not a good answer to that question. I thought a lot of books had been written by folks who had already been there and done that, and were way past that point, and thought really big from, “Hey, I’ve got to invest,” or you know, “Raise…” All these different things that are inaccessible in a practical sense to many middle-class wage earners with no assets.

Scott:
And the reason I wrote it at that point in time was because I was in it, had just done it, and felt like… And I was dogmatic and obsessed about this world of financial freedom. And I thought that only somebody who was actively going through that can understand the intensity of this grind period of building wealth and getting to the other side of the rat race at that point in time. And so, what you get with Set For Life is this very clear, “Hey, I’m going to save my first $25,000 through frugality. Then I’m going to use that $25,000 in low based on expenses to build my next $100,000 in wealth, and I’m going to do that by changing jobs, combining that with a house hack, and now I have this opportunity to begin turning my housing into an asset and earn a lot more income at this new career field that has the potential to scale.

Scott:
“But, may come at the cost of a cushy base salary to some degree.” And then after that, once we have $100,000 liquid, now we can begin at making serious investments. All right, $100,000 liquid, and the ability to accumulate 40, 50, $60,000 liquid on an annual basis. Now I can begin a system of investing that will inevitably lead me to the wealth that I want and the passive cash flow. So that’s what I wrote, and that’s what I believed at the time. I still believe that, and I look back, and I read it, and I was like, “Oof, I am pretty critical of the middle class here.” I think I used… You know, I think the word moron was in the book, I think ridiculous was used 10 times to describe choices that folks… And there was a lot of tactical and nuance missing, right?

Scott:
I’m all, never use a retirement account from this in the early stages, right? And why shouldn’t you use a retirement account? Well, because you can accumulate this cash to use on that first house hack for example, and the house hack is such a better ROI than a retirement account could ever be, right? Or the ability to leave my job at Dish Network and join a startup like BiggerPockets, the ROI on that decision is incredible, and I don’t have that freedom if my cash is tied up in a 401(K). But I left out that after a few years, you should probably begin investing in that 401(K) when your cashflow picks back up, right? And you should use these tax-advantaged tools, and there’s a nuance to that, right? There’s this concept as well in the book where I’m like, all these rich people say hire out jobs instead of doing it yourself.

Scott:
And that’s good advice, right? If you’re a high income earner, you’re silly to fix your own toilet. But what I was trying to communicate, not so effective in the first version was this concept of, if you’re earning $50,000 a year your time is worth $25 an hour before tax, right? So if you’re hiring somebody out at $50 an hour, you’re negatively arbitraging the value of your time, right? Because you should be spending your time to fix that toilet in that situation, right? But what happens for real estate investors and investors in general over the course of your career is, your time is getting more valuable, right? You own a couple of properties, you’re reducing cashflow, you have a job. Now your time might be worth $50 an hour, now you have a hard choice.

Scott:
Do I hire somebody out at 50, or do I do it myself, right? Some jobs you may have to do yourself, some jobs you may hire out. And now as CEO my time is worth much more than that, so I hire everything out, right? And that concept was not something that I could fully have internalized, or been able to communicate at the point when I wrote Set For Life. So I went back and made a lot of changes to that effect that show the nuance of this, right? Another thing is, the goal in life is not to live to achieve financial freedom at $25,000 per year and then spend $25,000 for the rest of your life retired. That’s not what we want, right? But you have to get there, keep that frugality, be happy with it paradoxically, and then stockpile the wealth on top of that.

Scott:
And then that allows you to continue to enjoy the benefits of lifestyle inflation, which is what we want really. Is that we want the ability to inflate our lifestyles over time, by piling assets on over time. Not by spending earned income dollars, right? And so again, lots of these points I think were missing from the book because they missed the zoomed out perspective of what’s the journey like long after it’s been completed? But the dogma and intensity of, it is an all-out grind I think if you want to really get on the other side of the rat race in a short period of time, like a few years. And it’s going to be a mental grind, and it’s going to be something that involves your attention for on the expense side, on the income generation front, thinking deeply about investing, starting a business.

Scott:
That’s an all-out approach for a couple of years, and that intensity I think is what I wanted to preserve while bringing the perspective that I have of being five years removed from that inflection point in my journey. Long rant there, hopefully that was helpful though.

Tony:
No, that was awesome Scott. And I’ve got a couple comments that I want to pass over to Ashley after this. But the last point you mentioned about the grind, that is so incredibly true. And I think it’s a part that so many people underestimate when it comes to building your own real estate business. In my W2 job, I was a senior-level manager, I had a big team, spread across the nation. Very busy guy in my W2 life. I am exceptionally more busy now working for myself than I was working that W2 job, and it felt like… I was literally telling my wife the other day, I was like, “I think we might need to take like a sabbatical or something, because we’ve been going like 100 miles an hour every day since I left my job in December of 2020, and it’s exhausting.”

Tony:
But to your point Scott it’s like, if you can grind it out for that short period of time it can really… You can truly change your life in two years. So, I just wanted to comment on that piece. And then you also mentioned about the hiring it out, and I remember Scott being in college, I was a broke college kid and I had these little side businesses that I was running. And trying to hire someone out when you’re making like 15 bucks an hour, it’s like, “Who can I afford to hire this thing out to,” right? So yeah, I think at the beginning of your journey you are going to find yourself doing a lot of things on your own simply because you can’t afford to do it any other way. Then as your business starts to scale, and you do have some more cashflow coming in it does become a little bit easier to do that. But what I really wanted to-

Scott:
Oh, I was just going to chime in, it’s actually bad business in my opinion to hire things out, if you’re negatively arbitraging the value of your time, right? That’s the point that I think a lot of folks like, “I’ve got to hire, I’ve got to be like these guys, and hire a bunch of people out.” No, if your time is worth $15 an hour you should be doing it yourself, that’s good business. You’re arbitraging time that you have to pay somebody else $50 an hour for to do that job, and then you should be tracking it over time, just back of the napkin. “I’m going to make 100 grand this year. Okay, my time’s worth 50 bucks an hour, right? I’m going to make 160 this year. Time’s worth 80 bucks an hour, right?” And knowing that information will help you make good business decisions.

Ashley:
Scott, with our rookie listeners, I understand that you came prepared today with a rookie checklist to provide a lot of value to the listeners today. And this checklist is for somebody who does not have their first property yet, and a very common question to ask yourself is, should I even start investing in real estate right now? The position I am in in my life, my situation, is it a good time to start? So, not only with the market, with the economy, but also on your own financials, what you look like too financially. Are you ready to invest in real estate? And I know a very common one that I’m always asked is, “I have student loans. Should I pay off my student loans first, or should I invest in real estate?” So Scott, what do you have for us?

Scott:
Yeah. So, I think this is the question, right? And the reason it’s the question, it’s always a major question for investors. But the difference between 2022 and the last five years is that for the first time, most investors think that property prices are going to stay flat or go down with a slight leaning, rather than go up over the next year. That doesn’t mean that investors think that real estate’s a bad investment, they think it’s a great long-term alternative to stocks, cryptocurrency and other alternatives. But there’s a real skepticism about whether prices will stay flat or go down. And so that makes this question harder for folks, I think in an intuitive sense. So yeah, I wanted to prepare what I thought was a tough checklist.

Scott:
And if you can say yes to all the items on this, I thought that would be a helpful starting point. “Yes, I should invest in real estate.” So I’ll skip around a little. Actually, I’ll go through it literally and then I’ll get to your question about student loans as part of that, if that works. So you know, there’s 10 parts to it. The first one is, do I understand my endgame, and is real estate going to be a part of that portfolio I want in that future sense, right? So in three to five years, I want to have a million dollar portfolio. What does that portfolio look like? Do I want a completely passive stock portfolio, do I want bonds in there, do I want real estate, right? But don’t get started in real estate investing if you don’t have a clear picture of what a portfolio looks like in the financial freedom sense.

Scott:
And if you don’t think real estate will be an effective part of that portfolio. A very basic question, but something that I think people need to wrap their heads around, because very few people that I’ve talked to, even on The Money Show Podcast when we have people coming on and asking for advice with goals, they’re not clear on what they want from their life in a financial context, and they don’t know if real estate would be a good tool in that. There are trade offs, and work, and leverage that come with real estate investing, and risks that are not the same with stock or bond portfolios, or small businesses with them. So, that’s what the first question is, I understand my endgame and real estate’s going to be an effective part of that journey, right?

Scott:
Second one, I believe that real estate is a good long-term investment for me, compared to my alternatives like stocks, bonds, cryptocurrencies and private businesses. That’s the question, what are you going to put your dollars into in 2022 to make money over the next three, five, 10, 20 years, right? And this has been the problem all year. It was this way before the market started sliding in the last six months from January, we were asking it. It was like, “Do I put my money in stocks with valuations at all-time highs? Do I put my money in bonds with yields at all-time lows? Do I put my money in Bitcoin? That seems pretty scary and risky, that seems like a great way to make a million bucks right now is to start with two and put it in Bitcoin.

Scott:
“Do I invest in private businesses, do I invest in cash, right? With losing value to inflation. There’s no good answer to that question in this year, and so I like to reframe it as for me, the least bad option is real estate, right? Because I can take out long-term debt that is going to be worth less over time with inflation, and my rents should be indexed to inflation. And we know that the Federal Reserve is going to push for it, that 2% inflation over the long-term, so it’s a good long-term bet in my opinion relative to other asset classes. But you have to answer that question for yourself, if you think that’s the case, and you have to internalize it. And that may take you a few dozen hours of listening to stuff like this to feel confident and go explore those alternatives.

Scott:
Like what the Bitcoin people have to say, and what the Seeking Alpha or stock investing sites have to say, and make that decision for yourself as part of this journey, right? Okay, so the third point, and this answers your question here, would be the context of going all-in on your investment property. So, do I think you should invest in real estate if you have student loans? I don’t know, right? It’s a question of, am I going all in to buy this property, can this property bankrupt me if things go poorly? If that’s the case, you probably shouldn’t be investing in real estate. You should have a strong income and a strong savings rate, several thousand dollars per month ideally, and a cushion that allows you to put down a healthy amount of money and cashflow, any problems that come up in your business in the early years, right?

Scott:
If something goes wrong and that can derail your investment plan, you’re doing it wrong in real estate in my opinion. You’re not investing from a position of financial strength. And you don’t need to have that built out to get into this game, you can skip that step by finding a financial partner who has that strong position, right? You can bring in somebody who will guarantee that mortgage, bring the cash, and help you get started if you’re willing to do the work on that deal. But you should not be investing and putting all of your chips in on the table in something that can make or break you, because that’s not a formula for long-term success.

Ashley:
Yeah. The one thing I wanted to comment on is how you said that if you are going to be risking everything to invest in real estate, there’s definitely ways to get into real estate without putting your family’s finances at risk, or bankrupting yourself. When I first started I took on a partner, and he actually put in all the cash and held the mortgage on a property. So worst case scenario, we could not pay the mortgage on that property, it was him, my partner, that was not going to be paid. And he still had lots of cash reserves, and he would be okay not getting his mortgage payment for a couple months while we figured out, “Okay, what’s our next strategy, what’s our next plan, how are we going to exit this property?”

Ashley:
So I think looking at different scenarios like that can help you get into real estate too, and not just like, “Oh, here I go. I’m risking everything, I’m putting all my eggs into one basket.” It’s definitely something to be cautious of.

Scott:
How did you structure things with that partner to make sure that they got a fair return, and you were compensated for the work you were going to put in?

Ashley:
They definitely got a way better deal, but it’s how I got started in real estate. But we were 50-50 partners, we started an LLC together. So we got 50% of the cash flow, and then he was also the mortgage holder on the property. So he had a note payable to himself, where he earned a five and a half percent interest, and was amortized over 15 years, and he received monthly payments. So he was making five and a half percent on his money he put into the property, and then he was also getting 50% of the cashflow. And then I was doing the property management on the property, and I had found the deal, and did all the work. And he was completely passive, pretty much.

Tony:
Awesome.

Ashley:
So we did that for about three properties, and then we kind of restructured a little bit how our partnership worked.

Scott:
And there have to be so many people out there who would be absolutely thrilled with that type of situation. And more importantly now, you don’t have to go all-in in a way that if the market had slid 15% and you lost the property, that might have been it for your real estate investing journey at that point in time, I don’t know. But that, you can’t risk that, we want to be in this business for 30 years. You can’t go all in at any point in time, where a downturn can wipe you out. You have to play for consistency, we’re going to average, three, 4% appreciation long-term, with ups and downs in this business, at least that’s what I believe. And that’s going to be leveraged three, four to one, and that’s where our returns are going to come from over a long period of time as real estate investors.

Scott:
And that works really well, as long as you don’t go bankrupt.

Tony:
I want to add one other comment, Scott, to what you mentioned about stocks and crypto and all these other investment strategies, how they relate to real estate. The reason I love real estate investing is because I am almost 100% in control of how that asset is going to perform, right? I’d say like 95% in control. There are always some bigger macroeconomic things that are happening that are going to impact the economy, but for the most part you as the owner are in control of how that asset is going to perform. In my day job I worked at Tesla, and a big part of our compensation was company stock. And I literally remember, Elon could tweet something crazy and the stock would swing like 10% that day. Nothing else changed in the company, we didn’t produce more cars, we didn’t have a good day, we didn’t have a bad day.

Tony:
Simply because Elon tweeted something crazy, the stock would swing. And I would see this happening, and it would just play with my emotions, and it just made me fall even more in love with real estate. Because if I go out and I buy a property that’s old, beat up, needs some love, I put some money in it to rehab it, I furnish it up really nicely, I put it on Airbnb, I put it on Vrbo, I can say with a certain level of confidence that I know I’m going to get this kind of return on my money. So, I know a lot of people kind of go back and forth, and obviously there are benefits to both. But for me personally, what I love about real estate is the control aspect.

Scott:
Tony, how many hours of self-education did you put in prior to coming to that conclusion?

Tony:
Oh, I don’t know. It’s almost like unquantifiable, hard to even… No, I mean hundreds, probably, easily.

Tony:
250, 500, somewhere in that ball park? Maybe plus?

Tony:
Yeah, probably, yeah. Probably more than that, honestly.

Scott:
So, I think that’s another checklist item here, right? Like, you have to be willing to put it… That is absolutely true, I completely agree with what you said there, for the most part. I think there are market things that we have to be cognizant of. The long-term appreciation rate of our local market, three, 4% will be interrupted or accelerated based on things like Federal Reserve policy, market dynamics that we think we can anticipate, sometimes can’t. But the value of the property in terms of forced appreciation and the way that you operate your business and produce cash flow, most of that, the 80-20 of this is under our control as investors. But you’re only going to feel that way, or you should only feel that way if you’ve put in those several hundred hours of learning about this thing.

Scott:
Not just by consuming content like this, passively, but also by actively engaging with local people in your market, networking, meeting those professionals, that type of stuff. And then you can have the total swagger, well-deserved, that Tony has in terms of feeling like he’s completely in control of his investment, because that should be true at that point in time. I think that’s another item here you have to have, is that willingness to put in that time to figure this business out.

Tony:
Yeah. They say repetition is the mother of skill, right? And it’s like, the more you consume, the more you read, the more you do, I think the more confident you become in your own abilities. And what holds so many rookies back is that lack of confidence.

Scott:
Absolutely. And again, the only way to build that confidence, I think, is putting in the time. Well, a couple more things here on strong financial position, right? So we talked about the strong… I don’t have to go all in, but I think there’s two other parts to your financial position that are important as a rookie investor. And one is a foundational point which is a strong credit score, if you have a bad credit score I think that’s a really good thing to fix before getting into this business, right? Or to at least find a partner that can solve that problem for you while you’re getting into this business, because you’re going to miss out on the key advantage of small mom and pop residential real estate investors, which is probably most rookies that are listening to this.

Scott:
Which is the ability to get a 30-year, fixed rate, low-interest mortgage insured by Fanny Mae, like an FHA loan or a conventional loan to buy a property. That’s a massive advantage that you are missing out on if you have a bad credit score, because you’re paying so much penalty in the form of higher interest rates on that. So fix that problem first, again, very basic situation… Very basic financial thing, but something I think you should reflect on and think hard about before getting into real estate on your own.

Ashley:
Real quick, do you just have some quick tips as to how to even start fixing your credit score? If somebody is in that position, they’re like, “I’ve been paying on time, I had mistakes in the past.” But how do they… Are there any little tricks to build it up faster than-

Scott:
Yeah, well I think for the most part what I find with the really bad credit scores, it’s usually about a six month to a year-long process to get to above 700 in most cases, even if you’re starting from a really bad position. We just had my buddy Andrew come on the BiggerPockets Money Show Podcast, actually released on Monday, July 4th, the day before we’re recording this show. And he started out… He was a rugby buddy of mine, he started out with a 400 credit score. And we were at a social or something, and he just heard that I had bought my second property. He was like, “Okay, I’m going to figure this out.” So, we started working on his credit situation, and within like a year he was able to move that to 700 plus, or the high 600s.

Scott:
And it’s as simple as getting your credit card statements, tracking, understanding the problems. A lot of folks, if you have a really bad credit score, often that’s reflective of you not even knowing what accounts you owe on, having mistakes on there and not tracking that. Once you get the basics applied and you’re beginning to make the minimum payments on a regular basis on those core payments, you should be able to get north of 700. Then it’s a years-long journey to march up from 700 to the 800s, and get into that truly excellent range. But you should get into that good range I think within a year to 18 months in most cases, with a couple of exceptions with that. But it’s as simple as, pay attention, have a strong cash reserve, increase your credit card limits so that you’re using less of those credit card amounts on a general basis, and make sure that you’re on time with all your payments going forward.

Scott:
And it should begin to correct itself quicker than you think, within a year, and slower than you think in terms to go to good, and slower than you think to go from good to excellent, I think.

Tony:
Scott, what are your thoughts on like the credit repair services? You know, there’s the guys and girls on social media saying, “Hey, I’m the credit repair guru.” Like, is there some legitimacy to those types of services, or is it maybe a waste of people’s money?

Scott:
I think if you really want to move quickly, maybe some of those could be good. I would bias against it though, I think that you’re likely to get… I think a lot of this is just hard homework that you’re going to have to do bit by bit. If you’re totally financially illiterate, you first of all have no business getting into real estate investing and investing someone else’s money, like a partner’s money on that front. But maybe that would be helpful for you, to actually have a coach walking you through that. But if you’re going to try to get into the game of real estate investing, which involves learning about understanding cash flow analysis, what CapX is, how to manage contractors who are not going to show up on time, you need to be able to figure out what is affecting your credit score and begin fixing that.

Scott:
That’s time you need to invest, in my opinion frankly. I think that’s a DIY job, for the most part. Exceptions would be if you earn huge amounts of income and you had some catastrophic event like a divorce or something like that happen that wiped out your credit score, right? But if you’re a median income earner or a little bit higher, and you have that credit, that’s a… I think it’s a DIY fix, in my opinion.

Scott:
I don’t know. I’m not sure if I see any value for the most part in what those credit gurus are offering folks. Like, I’ve seen some of what they offer, and a lot of it seems to be that they’re just like, “Hey, I’m going to try and call and dispute this delinquency for you, I’m going to try and get this thing removed from your credit score.” And I don’t know, I’ve just seen a lot of bad actors in that space, so I just want to caution people against choosing the right person if you do go down that route.

Tony:
Yep, I think that…

Tony:
Yeah. So Scott, I know you had some more outside of credit scores as well. So, what else have you got for us?

Scott:
Let’s talk about cash. What do you need, what kind of cash do you need to buy real estate? And I think that there are four components to the way I would think about cash. One is the downpayment, you need to have the downpayment. The downpayment doesn’t have to be 25%, it could be 3%, it could be 0% if you’re using the VA loan. But you need to be able to bring that downpayment, I think in cash, either yours or somebody else’s to that deal. You need to have cash for anticipated closing costs that are not going to get wrapped into your mortgage, right? So you need to plan for that. So if I’m going to buy a house hack, and I’m going to bring 15,000 in cash for the downpayment, I need another five for the closing costs on top of that.

Scott:
I also need cash for my anticipated repair costs that I don’t have baked into my financing model, right? So if I’m going to bring $10,000 in known repairs, I need that in addition. So now I’m up to $25,000 in cash for this fictional duplex I’m inventing, right? And then I need a cushion on top of what I know I’m going to spend, right? And I think that should probably be in the ballpark of 10 to $15,000 minimum for the investor buying that first property. Again, this can be stuff that you get access via a partner, but Mindy Jensen, co-host of BP Money, likes to say, likes to joke that the amount of the expense… The unanticipated expenses you’re going to have, or the amount that you’re going to go over-budget by in your rehab project, is inversely correlated with the amount of reserves you have set after the known expense, right?

Scott:
So if you have your $15,000 in cash on top of the downpayment closing costs and rehab costs, you’re not going to have anything unexpected happen, and you’re going to be just fine, right? That’s obviously a joke, that will definitely have its problems. But if you don’t have that cash, that’s when you’re going to run into unknown problems and be scrambling for a long period of time, and this business is going to suck cash out of your life in a way that’s going to be really unhealthy and make you resent it, rather than put cash back into your life, which is the reason we get into this business in the first place. And so I think that’s really important, to think through the cash position here from a financial perspective.

Ashley:
That’s why it’s so important to go and get that pre-approval before you even start putting offers on properties, because I think it can be kind of sticker shock when you see what those closing costs actually add up to. You look at the 0% down VA loan, that doesn’t mean you’re going and buying a property with 0% down. You still have to pay those closing costs. There are some programs where you can get those paid for you, but you should expect to pay them, the fees to the bank, the appraisal fee, and then also paying your insurance and your property taxes a year in full. That’s a pretty good chunk of change there, especially if you’re in New York State where property taxes are through the roof.

Scott:
Yeah. I think you’re going to be in trouble if you don’t have five figures in liquidity in cash that you can access. Not in your HELOC, not in a line of credit, in cash. Because you’re going to need that cash when it’s going to be hardest to access the financing at a future point for you, right? That’s just how it’s going to go. I think that’s a really good thing. Buying your first property, I think that’s really important. And again, if you don’t have it, find a partner who can bring it to the table. All right, let’s move on from the finance side of things and think about… We talked about time, but let’s also talk about ability, right? I think that there’s a… For most real estate investors, you’re probably starting out in this business with a median income, 50 to $70,000 per year, right?

Scott:
Value your time, your time is valued at $25 an hour. I don’t mean value your time as in hire everything out, I mean value it accurately and make a decision based on that that is a good use of that time, right? So that means that for most people who are buying that first property, it’s going to be a good idea to DIY that property, especially if it’s at all practical in your local market for example, right? And you’re going to have the time and inclination to learn those skills, to do basic rehab, basic property management, those types of things, and get that property set up in the early days for that property, right? So, that’s an additional time investment on top of the time that you’re putting in to learning this business from an educational standpoint.

Scott:
And I think that having those skills is incredibly valuable. You better believe that I DIY repaired my first duplex, right? There’s certain projects that I hired out, I didn’t do a major plumbing overhaul, I paid three grand for that. But I’m staining my cabinets, I’m installing the blinds, I’m doing the painting, I’m fixing lots of different various problems around the place, poorly doing the landscaping, all that kind of stuff to get things started, because that’s a good use of my time. I’m self-managing that property at that point in time. And not until I had I think 10 units did I begin hiring out those jobs instead of doing it myself, because it would have been negative arbitrage for my time. I probably waited a little too long, actually, but…

Tony:
I probably could have hired it out a little bit sooner, but that concept I think is really important, so… What do you guys think about DIY as part of… A willingness to be able to do DIY, more specifically, in the early part of the hold period?

Ashley:
Well, I think that if you want to be a DIY landlord, you should check out the BiggerPockets Real Estate Rookie Boot Camp, new landlord one is coming out. So you can go to BiggerPockets.com/bootcamps, and we’re going to go through learning how to self-manage your very first investment property.

Scott:
Yeah, that’ll be awesome. And who’s that going to be led by?

Ashley:
Me.

Scott:
Awesome, great plug.

Tony:
That was a shameless plug there.

Ashley:
Yeah. And now we’re back from our commercial, Tony.

Tony:
Yeah. I’m going to, I think for me I started my investing journey, like I said, with a very busy W2 career. My initial investments were over 2,000 miles away from my home, so it wasn’t realistic for me to try and do any sort of DIY work myself. And I just, I don’t have the skillset. So based on my financial position and my time commitments outside of real estate investing, I had to find a way to make sure that I had a good handyman on-staff that was able to manage most of those maintenance concerns as they popped up.

Ashley:
And what would you say the value of your time was when you started investing in real estate?

Scott:
I don’t know. When I got that first job I was making like 100 grand a year, so I don’t know what that breaks down to like per hour. But whatever that was, you know?

Scott:
Yeah, that’d be about… You can just do some… You can usually divide those numbers by two, and then drop a couple of zeros. So that’d be $50 an hour, right? 2,000 hours in a work year, divided by 100,000… Or 100,000 divided by 2,000 hours, so that’d be $50. So, I would argue that you’re kind of in that upper range for a lot of folks. Like, compared to where I was at the start of my journey, right? I’m earning $25 an hour at that point in time, right? So it’s different math, depending on that situation. You also owned a lot of Tesla stock, which probably influenced the value of your time in spite of the volatility of it that you mentioned earlier.

Tony:
Yeah, most definitely. I mean, and it helps, you know? But that was the decision that we had to make, was like, “Hey, we’re only going to be able to do this if we can also afford to hire out the work when it needs to be done.”

Tony:
And Ashley, did you do a lot of the work yourself when you guys started?

Ashley:
Yeah, I mean I was only making $20 per an hour in my job as a property manager. So, I think it definitely helped and was a benefit that my day job was property management, and I was building a property management company for somebody else. So I just kind of rolled my properties into that, and that was beneficial. But even still today, I fired a contractor a couple of weeks ago, and I just couldn’t get anybody in there. So me and my kids went up one day, we did some painting, we got the ready for new flooring, and then the new contractors came in. But just us doing that one day of a little bit of work that we couldn’t really find anyone to fit into that space of tedious things, was just us going in and doing that to get…

Ashley:
These other contractors came in, just kept our project moving. So, even today I’m still super-DIY if I have to, if it keeps a project moving, and you know, stay on track, so…

Scott:
You know, I love that. I have a similar example, a few years ago there were some squirrels running around the attic of one of my rental properties, and the contractor quoted me like $2,000 to patch the hole and get the squirrel out of there. And I’m like, “This is going to cost me 60 bucks and take me an hour and a half.” So, even though I don’t like to do those types of things anymore, obviously my time is not worth $1,000 an hour at this point. So you know, I’m going to do that job myself. And so I think that’s another good use case for this, especially for folks who are starting out in that lower income range, below the $100,000 probably that Tony was making there. This is a really good thing to do, because it will…

Scott:
Throughout your career as an investor, you’ll have the ability to call BS on some of these situations when somebody’s not doing a good job and just say, “I’m going to roll up my sleeves and do this one myself,” because that… Those individual cases will be good arbitrage for your time, from a time perspective. Okay, we have two more points in the checklist here. One is, I have a strong economics foundation, so I have a basic ability… And this is where we can get into like a checklist of terms, right? I understand what IRR means, and how to calculate that. I understand what net present value, or NPV is, cash and cash return, ROI in a general sense, compound annual growth rate. And you understand those and have a preferred way to compare investment opportunities, right?

Scott:
You’re not just comparing, “I like this duplex better than that one.” No, I am going after IRR in my investment, and I’m going to choose the property that’s going to produce the best IRR for me. Or, I like cashflow and I’m going to go after cash and cash return, in a hold perspective and I’m going to use that to compare investment opportunities. If you’re not sophisticated enough to understand those terms and have a preferred mechanism for comparing investment opportunities, you’re going to be shooting randomly at the deals that can come into your… And you’re not going to get a quality target to go after in terms of your investment portfolio. And then last thing is understanding… Last in economics is understanding this concept of how macro factors like supply, demand and interest rates at a high level will impact your business, right?

Scott:
We’ve had 10 years of low or lowering interest rates, with a couple of blips over that time period. And for the first time in 10 years, 10, 12 years, we’re seeing interest rates steadily rise. That impacts real estate investing, and if you are not able to internalize that and understand how that will impact real estate investing, even with the puts and takes that supply and demand will have happen, you’re putting yourself at a major risk. And that’s why I think a lot of people are questioning real estate at a high level, it’s because they don’t understand that and don’t feel comfortable with explaining that to their friends and family. If you can explain that to your friends and family I think you’re going to be in a good position to talk about whether real estate’s a good bet for you.

Scott:
And then last, I promise this is the last one, is understanding your local market like an expert, right? You understand the rules and regulations, you understand that in Denver they just changed the rule where you can have three unrelated… Up to three unrelated parties living in a property together. They increased that to five, so now you can do rent by the room on five-bedroom single-family houses, where you could only do that on three-bedroom single-family houses economically a few years ago. You understand that in Wheatridge, which is a neighboring town for Denver, Airbnb is perfectly fine. But in Denver, you can only Airbnb if you’re an owner occupant, and you can only do it for a certain percentage of the year, right? And those rules impact the strategies that you’re going to employ.

Scott:
You understand where the investment is going, right? In Denver, Colorado, they’re trying to open up this area called Rhino as the gateway to Denver, they’re investing billions of dollars into parks and new infrastructure here to make this part of town look good. And why are they doing that, what’s their intent and how is that going to impact zoning, and what types of properties do I want to buy? If I buy here in five years, I’m going to be the edge of this park. What’s that going to do to values there and desirability? Understanding that path of progress is key, and you can do that by spending some time on your local city’s website, you can go to local meetups, you can ask investors in the forums about these types of things.

Scott:
But you should be able to speak like an expert to what’s going on in your local community and where the ins and outs are. And again, the hard way to do that is to do all that research yourself, the easy way to do it is to meet local mentors and get that cheat code from folks who know the market and know where to look all that stuff up.

Ashley:
We have in Buffalo Buffalo’s Business First Newspaper that comes out, and it’s actually pretty expensive to get it sent to your house. But it is a wealth of information about what is going on in real estate, new development, or what’s happening with city zoning, or things like that. Different projects that are happening, what people are trying to do in the city. So if your city or your market has anything like that, I highly recommend checking it out. Scott, also you kept mentioning your local market. But would the same apply to whatever market you’re trying to invest in, even if that was, for me, down in Florida or something like that.

Scott:
Yeah, I should rephrase. It’s a strong understanding of the market, the local market to where you’re investing, right? And so I imagine Tony for example, you know the markets that you’re investing in very well. But you may not know the place where you live quite as well as those areas, I could imagine.

Tony:
Actually not at all, yeah. I don’t know anything about investing in my own city.

Scott:
Yeah. But that’s the key, is you don’t have to… Who cares about your own city if you’re not investing there, right? It’s where you’re investing, yeah. But that’s great, local newspapers are great. Again, local investors, city council can be great. Those are all good resources for that. Now, I’ll caveat something here, I did not check all 10 of these boxes when I started investing. And I bet you most investors will not come back and say, “I checked all 10 of those boxes,” right? What I’m trying to provide here is a very strict list, where like, “Hey, are you ready to invest in real…” Well, you’re definitely past that hump, in my opinion, if you can say yes to all the 10 things I just listed there. Because you’re going to be ahead of the game for most…

Scott:
Every real estate investor I’ve talked to in terms of getting their first property, including myself, right? I was not an expert on my local market, I didn’t have… I was well-versed in some of those economics things, right? I had my strong financial position with that, but I couldn’t have articulated my long-term thesis about what I want my portfolio to look like in three to five years. But, if you want something to feel like you’ve totally checked the boxes as a rookie in terms of getting that mindset ready to invest, I think this is a really good starting point for that.

Tony:
Scott, I want to take us to our rookie example. Before I do, first just thank you so much for walking through those 10 steps. I think analysis paralysis is honestly one of the biggest obstacles for folks in our rookie audience in terms of what’s stopping them from getting started. And like you said, if you can check even the majority of these 10 boxes it means you’re in a pretty good position to start. But one thing I want to comment on before we move on is, you talked about interest rates. And I just want to share with everyone that’s listening, if you guys haven’t heard check out the website, or I don’t know what it is. But it’s FRED, Federal Reserve Economic Database, and I just found out about this website like, I don’t know, like a couple months ago.

Tony:
And the amount of information they have on that website about the housing market is insane. And just to your point, Scott, about interest rates, if you go onto the FRED website, look up interest rates in the ’80s. They were in the high teens, I think it peaked like 18.7% for an interest rate for an entire year, which is crazy. So yeah, even though rates have crept up we’re still in a really good place historically speaking. So, I wouldn’t freak out too much.

Scott:
Absolutely. And what does that mean, right? It means real estate prices are going to slow down relative to… If you hold the other supply and demand factors constant and interest rates rise, real estate prices are going to rise slower or go down relative to where they would have in a constant real estate interest rate environment. It doesn’t mean that they’ll go down, and there’s a question you have to ask from a long-term perspective, right? Even if real estate were to go down, I’m going to have a lower interest rate today, and a lower payment on that property, and more cashflow a year or two from now, even if the property value doesn’t go up by much because I’ve locked in my interest rate at a lower valuation at this point in time. So, lots of things to consider, this is not uncharted territory. It’s just the first time we’ve seen rising interest rates to this degree in a few decades.

Ashley:
Yeah, that website Tony was talking about is FRED.stlouisfed.org. And then also, all of the information that Scott talked about today, the checklist for rookie investors, whether they should get into real estate right now or not, Scott is actually giving that away as bonus content when you purchase his book, Set For Life, at Biggerpockets.com/setforlife. But, he is also being super-generous to his favorite rookie listeners, and you are going to get this book if you go to the Rookie Show page, Biggerpockets.com/rookieshow. And you don’t have to be a pro member to get this, free or paid you can get access to it just for listening, because we love you guys all so much. So Scott, are you ready for the rookie exam?

Scott:
Let’s do it.

Ashley:
So, for our first question, what is one actionable thing rookies should do after listening to this episode?

Scott:
I think you should download the free checklist, and I also have another 6,000 words that I’ve written that go into detail about what each of those mean as part of that as well, so there’s both the checklist… But you should download that on the Rookie show notes page.

Ashley:
Yeah you guys, it’s not just the bullet points Scott highlighted, it’s… I read it this morning, it’s about 12 pages long and it’s definitely going to be a great read and a wonderful resource. So, make sure you guys check that out.

Tony:
All right Scott, question number two. What is one tool, software, app or system that you use in your business today?

Scott:
Well, I use a lot of the BiggerPockets tools. I use the calculators to analyze deals, I use the forums to network with folks, and ask questions, and get some thoughts, especially on the broader economy and local market. And then one non-BiggerPockets tool I use is Buildium, my property manager uses Buildium to manage our properties.

Ashley:
Scott, what about something maybe that BiggerPockets uses just for maybe project management or communication through… Do you have a favorite kind of software, maybe for somebody who’s building out a team right now that would be valuable to them?

Scott:
For building out a team? Oh, I think the best thing, I think-

Ashley:
Or just somebody who’s building out a team right now and looking for different software that they can use for their business, I guess. What’s something that you enjoy using within BiggerPockets, that’s [inaudible 01:04:15]-

Scott:
Yeah. I think that the tool section of the website, you can just hover over the navigation bar and you can find things like our rent estimator software, property management software tools, our leases, our tenant screening tool. Those types of tools are all available at BiggerPockets.com, and you just hover over the tools part of the navigation section of the site.

Ashley:
And lastly, where do you plan on being in five years?

Scott:
Well if I’m lucky I’ll be right here at BiggerPockets, and BiggerPockets will… What we’re trying to do here is build this kind of one-stop shop that helps you get started as a real estate investor, buy that first property, manage it, buy three, five, 10 more, begin scaling up like Ashley and Tony here, or sell off those properties and become a passive investor in syndication funds with your millions that you’ve built. We want to help you build that entire journey, and have this kind of mission control center at BiggerPockets that allows you to tie into your property management, your accounting software, and those CRMs to build your team and manage your projects. So, that that’s all available to you in one place to help you across that journey. So, that’s where I hope to be in five years, is doing the same thing. But with much of what I just described there is that one-stop shop achieved.

Ashley:
Well, that’s exciting. I think we’re all really looking forward to that, because that will make all of our lives easier too.

Scott:
Well, thank you guys for all you do.

Ashley:
Though, I want to highlight today’s rookie rockstar. It is Scott Reynolds, and he just finished the remodel on his second investment property. This is his first BER, and it will be closing on the refinance in the next week. He is set to get 100% of his original investment back, and is going to go live with the property as an Airbnb. So, congratulations Scott, he said that he spent about $125,000 total on the remodel. It’s a four bed, two bath, 1,900 square feet, and he actually made it into a five-bed, three-bath with 2,500 square feet. So that’s awesome, added on a little square footage for another additional bedroom and bathroom.

Scott:
Wow, that’s awesome.

Ashley:
So if you want to be featured as this week’s rookie rockstar, make sure you guys check out the Real Estate Rookie Facebook group, join and post your in in there. Or, you can send Tony or I an message on Instagram @wealthfromrentals, or @tonyjrobinson. If you guys are loving the podcast, please leave us a review on your favorite podcast platform and tell us how the podcast has helped you. Well Scott, thank you so much for joining us. Can you tell everyone where they can learn some more information about you and reach out to you?

Scott:
Yeah. The best place is on BiggerPockets, you can find me by searching my name in the search bar, and I’m always posting to the forums and making new connections. So, love to meet people for coffee, whether that’s you flying through Denver for the weekend, or you live here or nearby, would love to meet you up and buy you a coffee or a beer, and hear about your story with BiggerPockets.

Ashley:
Well, me and Tony will be there August 15th, so I’m sure you can take us down [inaudible 01:07:25]-

Tony:
Yeah, we’re going to hold you to that.

Scott:
Sounds great, I’m sure. Yeah, we’ll definitely have some food and beverages for you guys, so it’ll be great to see you.

Ashley:
Oh, every time we come visit we hit the great snack bar at BiggerPockets headquarters there, so… Well, thank you so much for joining us. We appreciate you taking the time to come on and talk to the rookie listeners. Everyone, have a great week. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson. We hope you enjoyed this special Rookie Reply episode 200, and we will be back on Wednesday with another episode.

Undoubtedly, active real estate investors have heard about raising private money for real estate projects. Blogs, podcasts, books, and other media share tactics to successfully find this capital and have it fund your real estate investments using other people’s money (OPM). 

This magical pool of private capital is much like a secret society with no storefronts, no advertising, and no easy way to search for these lucrative sources of OPM to help you fund your next project. However, what isn’t discussed as often is how to “be the bank” as a private money lender, an often-overlooked source of passive income in real estate. You might be surprised by how easily private money lending can fit into your investing goals and lifestyle.

Most assume private money lending is a niche market reserved for retirement plans and older retired people with millions in loose change. However, private money lending—the act of being the “other” person in other people’s money—is actually a diversification strategy employed by experienced and novice real estate investors alike. There are a few scenarios we commonly see for active investors who are also private lenders, all of which fit nicely into an existing real estate portfolio.

Lend Private Money Instead of Flipping Yourself

The first scenario we will cover is flipping. This flashy HGTV style of investing often involves a lot of time and capital to acquire and renovate a property. As the market changes or possible life events require an active flipper to pause for a period of time, flippers often utilize private money lending to earn some interest income while they take a break between projects. 

This capital, which otherwise might sit in a low-interest savings account, is instead used to help fund another investor’s flip project. Flipping will always be an active income source, but why not take a break and earn some passive cash flow by becoming a lender on a project instead? Similarly, an active investor may use a retirement account to fund other investor projects since they cannot lend the money to themselves. Borrowers pay interest to your future self in that case!

As an active flipper grows, they may choose to “graduate” from such a time-consuming activity as flipping altogether and pursue more passive income routes. Private money lending can be one of those strategies! The lack of strict time commitments attracts these maturing active flippers as they search for more relaxed cashflow approaches. As an active flipper, you might be under very tight deadlines, dealing with contractors at the job site, difficulty getting materials, or even finding more problems with the project than initially thought. 

A phone call can come in anytime with a potential (and sometimes literal) fire to be put out. In private money lending, rarely is there an emergency moment that must be addressed immediately. This allows an active investor to regain the one asset no one can buy more of: time. When active investors start transitioning to private lending, they still underwrite the project the way they would if they were to purchase the flip themselves. The bonus this time is that they get to sit back and watch the interest income stream in monthly without the hassle of dealing with project budgets, sub-contractors, and supply chain issues. 

Lending Money Instead of Managing Rental Properties

Investors who typically use the BRRRR method to acquire and stabilize buy and hold investments are increasingly concerned about how rising interest rates might affect their ability to refinance and maintain cash flow, much less get most or all of their capital back out of the deal. Instead of rolling the dice in a fluctuating market, rental property owners may choose to lend out their capital to other active investors while they wait and see what interest rates will do in the long term. Rising interest rates are good for lenders, and private money lenders are no different!

Don’t think the benefits are just for the active and scaling investor. Landlords who aren’t interested in growing their portfolios can choose to unlock the equity in their investment properties. You can do this through cash-out refinances or a home equity line of credit (HELOC), arbitraging the funds into private money loans and earning a spread on the interest. In other words, if a HELOC is worth $100,000 at a variable interest rate of around 5%, and then you lend those funds out to an investor at 10%, you will earn the difference between these two rates. In this case, 5%.

Landlords approaching retirement age and making plans for their families may also turn to private lending to continue cash flow from real estate without having heirs take on the burden of rental units. If market conditions make selling these rentals attractive, landlords may choose to transition that capital into private money lending to keep the income stream they acquired through rental units. Some landlords may own properties in multiple states and want to downsize to make managing the portfolio easier with fewer vendors needed and less complication with income taxes. These opportunities to pivot make a great segway into private money lending!

Private Lending Can Be a Strong Starting Alternative to Wholesaling

While this is a more sophisticated approach to private money lending using “borrowed” capital, private lending isn’t just for experienced investors. In fact, private lending can be a preferred entry point into real estate for many investors gun shy on the idea of wholesaling. All too often, wholesaling is touted as the best and fastest way to get into real estate with little to no money. 

While that may be true for some of the brave souls out there willing to undertake all the actions needed in this multi-disciplined sector of real estate, the fact is that many newbies are often discouraged by how many skills and competencies they must learn to truly be successful in wholesaling. In addition, similar to active flipping, wholesaling requires a near-constant connection with your cell phone as motivated sellers don’t generally make appointments ahead of time to discuss a deal. 

Cold calling, door knocking, and negotiating with reluctant sellers can be overwhelming and lead some new investors to seek other entry points into real estate investing. Armed with a “small” amount of cash—perhaps not enough to truly start a flip on their own—investors act as the bank for other investors so they can earn interest income and learn how to underwrite deals along the way. 

The Benefits of Learning About Private Lending

Having covered who may consider private lending, there are also numerous benefits to learning more about private lending and incorporating this passive income opportunity into your real estate investment strategy. First, the lender gets to set the rules. The lender can choose how much to charge in interest rates (within state and federal regulations) and the terms and conditions of the loan. Private lenders can walk into any deal knowing ahead of time what they will be making, which likely isn’t possible with other methods of investing in real estate. Many private lenders choose short-term loans offering CD-like liquidity without the ultra-low interest rates currently offered on those types of depository investments. Each time the capital is turned over, it is another opportunity to earn origination points and any associated fees with the loan.

Additionally, the underwriting associated with being the creditor, or lender, on an investment project is similar to the due diligence of the active investor. For novice real estate investors, this is a relatively safe way to learn the ropes while a lot of the heavy lifting is done by your more experienced borrower. Experienced investors looking to get into more passive investing strategies are already familiar with underwriting projects, so the transition from flipper or landlord to lender is smooth. 

Private money lending is also a team sport. Active investors may be used to “going it alone,” often shouldering the responsibility entirely for the progression of the project. On the other hand, the lender has multiple professionals to help advise and protect the capital in the loan. 

Private money lenders have legal help in drawing up documents for the loan, a title representative to do a title search and assure clear title, a hazard insurance broker to help review insurance quotes from the borrower, and even other private lenders in their network to help balance out their risks and rewards in the loan. If a private lender builds a solid virtual team, many simply become the reviewer of information instead of the collector, which is even better.

Perhaps one of the best benefits of private money lending is that it can be done anywhere at any time. A business in a backpack, if you will. 

This isn’t just financial freedom but more of a lifestyle choice. Those seeking more time back in their busy lives but want to make their money work for them in real estate-backed private money lending while living their best life. Most people pursue real estate investing for financial freedom, but most of the time, what they are really seeking is time freedom or even geographical freedom. Their “why” often revolves around wanting to do what they want, where they want, not necessarily having $10,000 per month coming in as income. For those who value time freedom over anything else, building a private lending practice from anywhere in the world is easy! 

Conclusion

To learn more, check out our latest book coming out July 28, 2022, called Lend to Live: Earn Hassle-free Passive Income in Real Estate with Private Money Lending. 

Even if you don’t feel private money lending is a path you want to explore, learning more about how it’s done safely and securely, from the lender’s point of view, can help you raise private capital. Private lenders will want to work with borrowers concerned with and know how to mitigate the risks associated with being the creditor on the loan. The more acumen you can display to potential private debt partners and share how you can protect their investment through safe and secure lending practices, the more confident the lender will be in working with you. 

Armed with the knowledge of how to do private lending, you can share your real estate knowledge with others in your network, potentially making some your own private lender!

Dave:
Hey, everyone. Welcome to On The Market. I’m Dave Meyer. In today’s bonus episode, we are going to be talking about a topic that I’ve wanted to explore in depth for quite a while, which is the state of the short term rental market. If you know anything about this industry, you know that it has been absolutely booming over the last couple of years, but as we enter into uncertain economic times and face a potential recession, the question is, “Can short term rentals maintain this growth and what should you do as an investor to best capitalize on current market conditions?” Before we get into today’s topic, I do want to make a quick programming note. Hopefully you’ve been following On The Market since the beginning. We really appreciate it, but maybe if you’re new here, you might also have noticed that we usually only have one podcast per week, but recently we’ve actually started doing these bonus episodes like the one you’re listening to right now.
The reason we’re doing that is because when our producer Kaylin and I get together to meet about what topics we want to cover, there’s just too many topics. There’s so much going on in the economy and news and in the investing industry, that we want to be able to share more with you. So we decided to not limit ourselves and that when there is enough information, we are going to be putting out two episodes per week. We’re not going to be doing this every single week right now, but you should be checking back on your feed on Fridays to see when we do have bonus episodes. I do think we’re going to have them more often than not. So most weeks we are going to have two episodes now, one on Monday and one on Friday. Definitely make sure to keep an eye on your feed, because you don’t want to miss any of the great content that we’ll be putting out. Let’s get into our short term rental topic today, but first, let’s take a quick break.
All right. The short term rental industry. This is such a popular topic. I’m really excited to get into this today with all of you. This is something that keeps coming up over and over again. What’s going to happen in the short term rental market, particularly if there is a recession? If you follow this podcast or follow me on social media, you know I’ve been openly musing about what might happen, and rather than just talking about it, I decided to dive into the data and get to the bottom of what is happening in the short term rental market, and that’s what we’re going to talk about today. Before we get into the data, let’s just quickly remind everyone, if you’re not familiar, what a short term rental is.
It’s basically when you own an Airbnb or a Vrbo, you typically buy a single family residence. It can be a small multifamily. You furnish it and you rent it out. The reason people do this is because it has tremendous cash flow potential. As opposed to a traditional rental property, you can get way more revenue per night on a short term rental. Of course, you don’t necessarily have every single night booked. You can have occupancy problems, which we’ll talk about tonight, but the potential for revenue on a short term rental is typically way higher than if you rented the same home out as a traditional rental. That is why it has become an incredibly popular strategy over the last couple of years. I myself own one short term rental. I bought it in late 2018. It’s been doing really well for me. I’m not some super expert here. I’ve not done this five or 10 times. Rob Abasolo or Tony Robinson, way more experienced here than I am, but I do have experience running and managing and buying a short term rental.
I know a lot of people with short term rentals, so I do understand the industry and let’s be honest, first and foremost, I am a data analyst and I do understand the data that is coming out about the short term rental industry, so let’s just dive into that. As with most things economics, it sounds boring, but it boils down to supply and demand. I’m going to break down the data at first just by that. First let’s look at demand. As of May 2022, demand in the U.S. is extremely strong. The total nights that were stayed in any short term rentals in May 2022 was up 18% over 2021 and was up 26% over 2019. So we’re seeing a huge amount of demand for short term rentals, and I think it’s worth mentioning that I am getting this data from AirDNA. They’re a great data provider. I’ve used them for years. I have no affiliation with them, but they put out great data. You can go on their website and check that out.
So demand looking strong in terms of total nights. It’s also looking good in terms of new bookings. The difference here is… The first thing I said is total nights. That’s again, how many nights are stayed in all STRs and then the next stat is new bookings, which is how many new vacations essentially were booked in May, and that was up 2.6% over last year. I know 2.6% doesn’t sound like a ton, especially when total nights were up 18%, but it’s important to note that in normal times, that’s what things grow like. We’ve gotten accustom over the last few years to things growing up double digits year over year, all the time. That’s not really that normal. So 2.6% is not amazing. It’s not what we’re seeing in the rest of the industry, but it’s still up, and it’s notable because it’s a reversal of where we were in March and April.
I’ve been following this data a bit and in March and April, I was a bit concerned to see that new bookings were down in March and April over 2021 levels. Demand was falling a little bit. We weren’t seeing as many new bookings, but in May that reversed, and now we are seeing positive year over year demand. So that is all of this. All of the demand data is really strong for short term rentals right now. That is great news for anyone who’s currently an investor, or if you’re thinking about getting into this industry, you can rest assured that right now, May 2022, demand super strong for short term rentals.
The story to me though is more on the supply side, because as of May, there was 1.3 million available listings, and that is up 25% year over year, which is massive, massive growth. Take note of that. 25% year over year. That means that supply is growing faster than demand, and that has negative revenue implications. If you understand supply and demand, you know that if supply is going up faster than demand, that means that the demand is going to get spread out across supply. There were 84,000 new listings on Airbnb and Vrbo in May, and so even though demand was up, that demand was spread out amongst more properties. 84,000 more properties. That has led to the single most notable data point that I want you to remember from this episode, and that is that occupancy was down 8.6%.
This makes sense. Demand is up, which is great, but supply is also up even more than demand to the point where occupancy is starting to fall. I don’t want to be alarmist, but I do think this is a really notable shift in market dynamics that everyone who’s interested in this industry should be paying attention to. If you own a short term rental, there are basically two variables that dictate your revenue. One is your average daily rate. That’s the amount you charge. Like if you go to a hotel, you pay 200 bucks a night, that’s their average daily rate. Every short term rental also has an average daily rate. That is super important to short term rental investors. The second thing is occupancy, because you need to… If there are 30 days in a month and you get 50% of them filled, then you have 15 nights. You multiply that by your average daily rate, and that is how much revenue you have.
So, if occupancy is going down, that means that your revenue is probably going down. Now that’s important, and that’s why I want you to pay attention to this, but on the other side, it is worth mentioning that the other part of the equation, the average daily rate, which I just mentioned is up 4.6%. That is good, but it’s not up enough to counteract that occupancy in my opinion. 4.6% for an average daily rate in normal times would be great. Don’t get me wrong. In normal times that would be an excellent increase year over year, but remember inflation is 8.6%. So, the average daily rate is not keeping pace with inflation, and it is notable that this 4.6% increase year over year is the slowest rate of increase since April 2020.
So basically since pre pandemic levels, we are starting to see the pace of increase for ADR start to go down and occupancy is going down. Now don’t panic. Demand is up. Things are still looking really good, but I just want to… My job here, and what I’m trying to do here, is to tell you the whole state of the industry, and this is what’s happening. Demand is up. Supply is growing faster and occupancy is starting to fall. Again, this is a snapshot in time. This is just May 2022, but something you should keep an eye on.
The next thing I want to talk about with regard to the short term rental industry is tourism and hotels in general. Because while we’re mostly here talking about real estate investing, you really can’t compare short term rental market to the flipping market, or even some ways you can’t really even compare it to the traditional rental market, because demand is really more measured against the traditional tourism market. It’s measured against hotels. Let’s just quickly… I found some data. Let’s just talk about what’s going on in the tourism industry as whole to help contextualize what’s going on in the short term rental industry. In May, according to Hospitality Net, hotel occupancy went up 4.1% year over year. We just talked about short term rentals going down 8.6% in May. Hotels had occupancy go up 4.1%. CoStar, which is a big data firm, and they track this, they said that hotels have passed the very important benchmark of 60% occupancy. Record number of hotels are going above 60% occupancy rate in June. That means hotels are doing really well, but remember they got absolutely crushed over the last couple of years.
In my opinion, this is notable. We should be paying attention to the fact that hotel occupancy is growing when short term rentals are going down, but I also think that this is sort of natural and this is just my opinion. This isn’t really supported by data, but I just believe that over the last couple of years, it has been especially poised for short term rentals, because no one wanted to go to hotels. People were trapped in their house. They were afraid. The bars were closed. The restaurants were closed. There was no gyms, there was no pools, so people I think naturally went to short term rentals because it offered a better situation for pandemic era traveling. Now, as we see the world opening back up, I think it’s natural to see a reversion. More people are going to start going to hotels, because amenities are open. They’re back. Short term rentals have gotten more expensive and maybe there’s just a rebalancing here.
But again, something to keep an eye on, is is this a trend that’s going to continue? Is short term rental demand going to keep declining and hotels, are they going to start to keep seeing a higher percentage of travel nights as compared to short term rentals? That is just… I wanted to take a quick look at tourism, because I do think if you’re in this industry, you should be paying attention to hotels, because that… You are competing against other short term rentals, but you’re also competing against hotels, so you need to pay attention to the data and information that’s coming out in the hospitality industry, because that is one of your main competitors. The thing here is though, if demand for travel is going up across the board, then it’s not a zero sum game. You can have hotel occupancy rise and you can have short term rental occupancy and revenue rise at the same time as long as overall demand is increasing, which brings up a point, “Is that going to happen?”
Let’s transition now over the… The first couple minutes of the show, we’ve been talking about what is happening, what we know has happened with data. And now let’s look forward and see what might happen in the short term rental industry, especially with what might happen in a recession. Again, I want to break this down into supply and demand. Let’s look at what might happen with demand. Super hard to forecast far into the future, but I wanted to just see what’s happening this summer. This comes out in July, but we only have data back until May as of this recording. I want to see what’s going to happen this summer.
The information is overwhelmingly positive for the entire tourism industry. 73% of Americans have summer plans to travel, and that is up from 53% last year. That is a huge increase. That is almost a 50% increase. The other really notable thing is, almost 50% more people plan to travel this summer and they plan to spend $300 more on that vacation. That’s about a 10% increase. Even though inflation is about 8.6%, they’re planning to spend 10% more. That means even in inflation adjusted dollars, people are planning to spend more on their vacation and more people are going to spend. So total dollars going into the tourism industry and into the lodging industry, so short term rentals and hotels, looking real, real good for the summer right now. On the other side, I do want to just point out that there is some pullback here and that… Of the people who aren’t traveling, a lot of them are saying they’re not going to travel because they can’t afford it.
Last year, 43% said they’re not going to travel, because they can’t afford it. This year it’s 57% say that the reason they’re not going on a summer vacation, is because they cannot afford it. To me, this is probably the very unfortunate impact of all of this inflation. People’s discretionary income is being eaten up by increases in gas costs or food prices or whatever else they need to spend money on, and they have less money to go on vacation, and just the cost of lodging and vacation is a lot more expensive. That is unfortunate, and it is something to note that more and more people are not traveling because it’s more expensive, but generally speaking, demand looks very good, at least for the next couple of months. What happens beyond that is really hard to say, because honestly we don’t know if we’re going to go into a recession.
Personally, this is just speculation, it’s my guess. I do think we’re going to go into a recession. I’ve seen that a lot of forecasters say that we are about 75, 80% chance that we go into a recession. I’m going to do a whole episode about what that even means, because I know people panic when they hear recession and think housing crisis, they think back to 2008 and financial crisis. That’s not necessarily what happens in a recession. In fact, that’s not what usually happens, but I just want to say that I do think we are probably going to see a recession, at least in the traditional definition, which is two consecutive quarters of GDP declines. Now, if we go into a recession, it is hard to know what will happen, but Tony Robinson, who is the host of the BiggerPockets Rookie show did some research and found that… He looked back at the great recession and he saw that in 2008, vacation spending actually dropped 3%, which is way less than I thought it was going to be.
I thought it was going to be 10 or 15%, but there’s only 3% in 2008. 2009, we were still in a recession. It did drop 9%, which is a considerable amount. If you are a short term rental owner and your revenue dropped nine or 10%, you would feel that probably. Given that the great recession was the worst economic climate since the great depression, that’s not all that bad. To me, the worst case scenario is not that travel spending will go down all that much. Of course, it could be different this time around, but just want to provide some historical context. Thank you to Tony for providing that information. That’s where I see demand going at least for the next couple months, which is really the only thing we can forecast. Everything’s so murky, looking past three months out is really difficult.
Three months out things look really good, past that it’s hard to tell. It depends what the economy as a whole does, but Tony provides some great data that showed that worst case scenario is probably not that bad. The other side is, will supply keep increasing. Remember the thing that drove down occupancy in May, was that supply was going up so quickly. I think there is a chance supply could keep growing, but I think it’s going to slow down and I think it’s going to slow down a lot. I think that’s because of the reason the whole housing market is slowing down. Less homes are selling right now. Less homes are trading, which means fewer are probably going to get converted from either a traditional rental or a primary residence into a short term rental. I just think people have less risk appetite right now. Unless you’re a professional investor, some of you probably are, less people are likely going to be doing it.
I think there’s going to be less amateurs getting into the business. One thing… I don’t have a lot of data about supply. It’s hard to know. This is just speculations based on the larger housing market. One thing I do just want to call out and something for everyone to think about, is in a recession will some short term rental owners convert back to long-term rentals, because as I said, the reason people love short term rentals right now is the cash flow potential is great, but it’s riskier. You have no guarantee that you’re going to get a certain amount of bookings on any given month at any given night. With a long term rental, you get less revenue, but it’s pretty guaranteed if you get good tenants. I’m curious if some short term rentals are going to convert back to long term rentals, which could be good for them. Depending on your financial situation, you’d have to make that decision.
But I think it’s really interesting because if that happens, that could lower supply and that would help out all the people who stay in the short term rental industry. That is just a dynamic I’ve been thinking about. I don’t know what’s going to happen there, but again, I just want to raise that and talk about that. That’s where I think it’s going to go. Demand is really strong right now. I think the market looks really good for short term rentals at least for the next three months. Things to keep an eye on, will supply keep increasing and will occupancy keep going down? That’s where I would focus if I was interested. I am interested in short term rental market, but if I were you, thinking about what to do with your own portfolio, whether or not to jump into this market, those are the two metrics I would really be following.
Before we move on, or before we end this episode, I do want to talk about one other thing, which is about vacation home demand. I know this isn’t exactly the same as short term rentals, but I think that… You’ll see what I’m getting at, but basically second home demand… This is more like not investors. Normal people, wealthy people, who have enough money to afford their primary residence and a second home. The demand for second homes absolutely went wild at the beginning of the pandemic. It actually shot up to about 90% over pre pandemic levels in March 2021. Almost double the amount of people were looking for second homes and this makes sense, right? I mean, I think this was fueled by a bunch of things, but just to name a few, super low interest rates that fueled the whole housing market.
Then we had the stock market and crypto markets going crazy, so people had a lot of cash with which to do whatever they wanted and some people just wanted to buy a second home. Next was work from home. If you could afford a lake house and you could work from your lake house, don’t you think you would want to do that? I certainly would. People were probably doing that and if you could afford it, people were thinking about a second home. And the last thing, this is hard to quantify, but people couldn’t go on traditional vacations, so there was people who wanted to travel and couldn’t travel internationally. Maybe you go buy a lake house, you buy a beach house, buy a mountain house because you want to be able to get out of your home, get out of the city, whatever and travel.
People really, really wanted second homes. Now, fast forward a year to May 2022 and demand for second homes has gone back down so far that it’s now below pre pandemic levels. Not by a lot, 4% below pre pandemic levels, but for obvious reasons. I mean, stock and crypto markets have tanked. Interest rates and affordability… Interest rates are going up. Affordability is going down. These are dynamics we’re seeing across the whole housing market, obviously going to hit second home demand first in my opinion, because when it gets less affordable, people are going to focus on the things they actually need. You don’t need a second home. And so demand to me makes sense that it’s going to go down. I also think it’s worth mentioning and it’s often really overlooked, that during the pandemic, some regulations came out from the government that added fees to mortgages for second homes, and it makes them actually even more expensive.
Mortgages are getting more expensive, because interest rates are going up, but second home mortgages are also getting more expensive, because the government added fees and for a $400,000 property, those fees can be about 13 grand. That’s 3% of the purchase price. That’s considerable amount of money, right? It’s getting less and less affordable, less and less attractive to buy that second home. Guys, I don’t think this means that the whole market is going to crash. I think actually at this point in the economic cycle, we are at peak economic activity right now. In my opinion, we are probably going to go into a recession over the next couple of months. I think that’s the most probable thing. Again, I don’t know, but that’s what I think is most likely, and at this point in the economic cycle, demand for second homes being down makes total sense to me.
I don’t think that is an indicator that the broader housing market is going to crash, but I do think that this means that in some markets we are going to start to see declines. The reason I’m bringing this up, is because we’ve been talking about short term rentals. Now I’m talking about second homes. The markets where a lot of second homes are, are also the markets where a lot of short term rentals are. These are vacation hotspots. The places people want to buy second homes are the same places that people want to go on vacation and therefore good places for investors to buy short term rentals. If I had to guess, and I am speculating here, but I think that there is a good chance we see vacation hotspots, particularly high price vacation hotspots, start to see prices retract over the next couple of months.
I don’t think there’s going to be a crash, again, but I do think in some beach towns, maybe in some lake properties, maybe in some mountain towns, we start to see these prices come down. I think that means there could be buying opportunities. If prices start to come down and there is less competition, there’s less demand for people who are in real estate for the long term, which you should be. Real estate is not a get rich quick scheme, it is a long term investment strategy. This could be a good time to consider buying if you can find a deal that pencils out and makes good cash flow and all of that. My particular short term rental is in a ski town in Colorado. It does extremely well on a cash flow basis, but I believe that the valuation… It’s gone up almost 90%, the value, in four years.
I think it’s going to come back down and that’s okay to me. I’m not planning to sell it, so it’s just a paper loss. I know that it’s still generating good cash flow, but I think that if you are holding it or thinking about selling it, there is a good chance that these prices come down, three, five, maybe even up to 10% in certain markets, but I don’t think it’s going to be crazy. That’s just my read of the situation. I could be completely wrong about that, but that’s how I’m personally thinking about it and just encourage people to keep an eye on it. If you want to get into the short term rental industry and demand remains strong, but prices start to come down, that could be a great time to look for buying opportunities.
All right, everyone. That is what I got for you today. Just to summarize what we have talked about here. Current state of the short term rental market is strong. Demand is doing really well, but supply is starting to increase faster than demand and we’re seeing occupancy go down. That’s the number one thing you should keep an eye on. Tourism, overall, looking really good for the summer, but unclear what happens after that. We need to see if we go into a recession and if people start losing their jobs, if the unemployment rate goes up, I do expect demand to drop off, but not in some crazy way. As Tony’s research showed us, it’s not going to be some disaster, but it could decline five, 10% at worst in a recession. Lastly, I do think that there is buying opportunities in some high priced vacation hotspots, because I do expect that prices could come down in some really popular beach areas or mountain areas.
It’s all going to depend on the market. The Smokies have a huge amount of demand. I don’t expect it to go down there, but there are places maybe in Florida or the Northwest or on the beach that might start to see some declines, and that can mean good buying opportunities. Overall, as a short term rental investor, I think the long term prospects are still really good, but you should keep an eye on the things that we mentioned today. If you all have any questions about this data or anything else, you can reach out to me on Instagram. My handle is @thedatadeli. I would love to hear what you think about this information and what you think about these bonus episodes, because this is something new that we’re doing, and I would love your feedback about what you like. If there’s something we could do better, that would be a super big help to us. Another big help, is if you do like this episode, to give us a five star review on either Spotify or Apple. Thank you all so much for listening. We will be back on Monday with our regularly scheduled episode.
On the Market is created by me, Dave Meyer and Kaylin Bennett. Produced by Kaylin Bennett. Editing by Joel Esparza and Onyx Media. Copywriting by Nate Weintraub and a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

For months, I, along with many prominent housing market analysts, have been forecasting a big shift in the housing market at some point in 2022. 

For most of the last two years, we’ve been in an unbalanced housing market that strongly favors sellers. Bidding wars, offers over asking, and waived contingencies have become the norm. But as interest rates rise, affordability declines, and fears of a recession loom, buyers are gaining back some power in the housing market. 

As the dynamics of the market change, appreciation rates should cool dramatically and become flat or even negative. But real estate is local, and I believe the most likely scenario over the coming months is that some markets will decline while others will continue to grow, albeit at a far more modest pace than over the last several years. 

The question then becomes, which markets are at risk of decline, and which will see prices stay steady or even grow? In this article, I will explore data to determine the short-term strength of individual housing markets in the U.S. to help you identify opportunities and make informed investing decisions.

Below you’ll find a complete analysis and a downloadable city-level spreadsheet. 

The Big Picture 

Before we get into the localized data, let’s look at June’s housing market data on the national level as it helps provide context for the regional differences. 

First and foremost, things haven’t changed too much in terms of prices and appreciation rates just yet. The median home price for the week ending July 3 was still up about 12.5% year-over-year. That’s down from last summer’s peak when appreciation rates were around 20%, but this level of growth would be unprecedented in any pre-pandemic period. 

Although prices haven’t come down on a national level just yet, it is worth noting that price drops are up almost 4% YoY and are much higher than at any point since at least 2019. 

A quick note on price drops: They’re worth tracking, but I don’t put much weight on this data point. Price drops often reflect the behavior of overzealous sellers rather than a lack of demand. Following two years of unprecedented seller power, I’d expect an increase in price drops in almost every market—even the strong ones. Huge increases in price drops worry me (Austin, TX has seen a nearly 500% increase in price drops YoY), but seeing double-digit increases doesn’t concern me as much. 

That being said, price drops can be a lead indicator for shifts in the market but should be considered alongside other indicators. 

As I’ve written before, the main trend shifts that need to occur for housing prices to moderate or decline is that both active listings and days on market (DOM) need to increase. You can read all about why I believe this here, but in short, active listings and days on market are good measurements of the balance between supply and demand in the housing market. When inventory and DOM are low, it’s a seller’s market, and prices generally rise. When inventory and DOM rise, buyers gain power, and prices flatten or decline. 

As you can see in this chart provided by Realtor.com, active listings are starting to tick up nationally and are up about 19% over June 2021. To be clear, active listings are still dramatically below where they were pre-pandemic. Still, we’re no longer in the declining inventory (on a year-over-year basis) era that lasted from April 2020 to May 2022. 

June 2022 was the first month we’ve seen year-over-year gains in active listings for more than two years. 

On the other hand, days on market (DOM) is still near all-time lows and is about half of what it was in 2019. This means at a national level, there is still strong demand for housing. If demand had evaporated, listings would be sitting on the market longer, but they’re not. 

Note that in both of these charts, some of the recent increases are due to seasonality. You’ll notice that active listings and DOM typically rise over the summer and decline in the winter, and you need to account for that. We’re looking for when DOM sees year-over-year gains, which hasn’t happened yet. 

All told, on the national level, the housing market seems like it’s starting to shift, but modestly. DOM is still low, signaling sufficient demand, leading to prices remaining up a whopping 12.5% year-over-year. For prices to moderate or decline, DOM and active listings need to get much closer to pre-pandemic levels, and we’re not even close to that yet. 

So, why then do I believe the housing correction has started? When you look at the data for individual housing markets, it tells a much more nuanced story. 

Regional Housing Markets 

As is often said in this industry, real estate is local. Recent housing market data makes that very apparent. 

To showcase the differences, let’s look at a few of the recent boom’s biggest winners: Boise, ID, and Asheville, NC. 

Boise was perhaps the hottest housing market over the last several years, with prices increasing 59% from June 2019 to June 2022. Those are incredible gains, but to me, Boise is at risk of losing a small amount of those gains. 

Remember, my hypothesis is that markets where active listings and days on market are near pre-pandemic levels are at the greatest risk of a correction. For Boise, not only have active listings risen 130% year-over-year, they are actually 8% above pre-pandemic levels (which I measure as June 2019 compared to June 2022)! There are only a handful of markets where this is true, and Boise is the most notable. 

DOM is up 4% year-over-year but is still down 13% from before the pandemic. But if you combine those two data points with a big increase in new listings and huge increases in price drops, this looks like a housing market in transition to me. 

Does this mean that Boise will see a crash in prices? No. That could happen, but I think the more likely scenario is a balanced market where buyers actually have some power. This is just an informed guess, but I do expect we’ll see price declines in Boise at some point in the coming year or so, but probably only single-digit declines. What’s more certain to me is that buyers will be able to negotiate, and better deals will emerge in markets like Boise. 

To contrast Boise, let’s look at another recent boom town, Asheville, North Carolina. 

Asheville’s appreciation since 2019 was 41% (more modest than Boise but still enormous) and has been up nearly 20% in just the past year. 

But looking at the lead indicators for Asheville, the story is different from Boise. Rather than skyrocketing, active listings are down 11% year-over-year! Days on market are also down 8% year-over-year, and price drops are up only 18% YoY. To me, this shows a housing market that is very strong and is unlikely to see a big change in prices. Sellers still have the power here. 

As you can see from these two examples, different housing markets point in different directions. I picked two well-known hot markets for this example, but you can see these discrepancies across the board. Reno, Austin, and Phoenix look like they’re transitioning, while Miami, Richmond, and Tallahassee still look like strong seller’s markets. 

You need to look at data for each individual market. Lucky for you, I’ve put together a spreadsheet with data from Realtor.com’s Residential Listings Database to help you see what is happening in your market. You can download that below.

Conclusion

On a national level, the housing market is still doing very well. Prices are up double-digits year-over-year, inventory is starting to tick up, but days on market remain extremely low. 

But when you read between the lines and examine some reliable lead indicators for the housing market, you can see that it’s in transition. Sellers are losing their iron grip on the market, and buyers are gaining power. Homebuyers and investors are better positioned to negotiate and find deals. 

On a localized basis, these shifts in trends are even more pronounced. Some markets seem very strong and will likely keep growing (but more modestly), while other markets seem like they could be heading for price corrections in the coming months. To be an informed investor, you must understand your local market. To me, the most important things to look at are active listings (or other inventory measurements) and days on market. You can Google those in your local area or download my spreadsheet that compares June 2022 numbers to both June 2021 and June 2019 for hundreds of markets. 

Remember, the metrics I am covering here are lead indicators for the short-term prospects of the city in question. To look at the long-term potential, you should look at macroeconomic data like population growth, income growth, and construction. 

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What are you seeing in your local market? Is the dynamic between buyer and seller starting to change? Let me know in the comments below. 

Most landlords and rental property owners say that collecting rent is their biggest pain point. A missed rent payment can disrupt your cash flow and even make you miss crucial payments. Therefore, any tool that helps renters pay rent on time every month will benefit your rental business. 

One way to stabilize rental income is by promoting recurring rent payments. This payment method can help ensure tenants are never late with the rent and you get paid on time. However, getting your tenant to set up an automatic payment can be challenging. 

Typically, recurring payments are impossible if tenants pay rent in cash or send a paper check. Of course, some landlords collect postdated rent checks in advance as a sort of recurring payment. However, this doesn’t guarantee the tenant will have funds to cover the check when cashed several months later. 

Using an online payment method for rent payments is the best way to promote recurring payments. Usually, there are two choices—tenants can set up a direct deposit with their bank or use a rent payment app. 

What Does a Recurring Payment Mean?

A recurring payment is defined as a service to withdraw funds from a bank account, debit card, or credit card regularly. Also called recurring billing, this automatic payment method helps pay regular bills like rent, subscriptions, or utilities. Recurring payments are a feature of many property management apps.

The Benefits of Recurring Payments for Rent Payment

Recurring billing has several benefits for tenants. For example, regular automatic payments save tenants a lot of time. All they must do to pay rent every month is enter the payment information once and forget about it. The rent money is then withdrawn on the specified day each month. 

Recurring rent payments eliminate the need to write and mail a rent check or remember to complete an online transaction. As a result, they are hands-down the most convenient way for tenants to pay rent on time.

How Recurring Rent Payments Can Increase Rental Income

Landlords get a significant benefit from consistent rental payments. But how does getting tenants to set up automatic rent payments increase rental income if you’re not charging more for rent? Here are a few ways.

Fewer late or missed payments

Recurring rent payments are excellent for your cash flow as there are fewer missed payments. This, in turn, saves you time and money from having to chase late payments. Additionally, you cut down on administrative tasks of calculating and charging late rent.

Minimize payment processing times

Automated regular rent payments eliminate the time and effort associated with manual billing and processing rent checks. All you need to do is provide tenants with a suitable app for rent payments to set up recurring billings. Then, the rent money arrives in your bank account regularly each month. 

Reduce the risk of fraud

Because recurring payments all happen online, you reduce the risk of fraud. For example, paying rent by cash or check is relatively risky, even though it’s still a popular rent payment method. But online payment systems that use the Payment Card Industry Data Security Standard (PCI DSS) are the most secure forms of payment.

Digital Payment Apps for Rent and Recurring Payments

So, the all-important question is — which is the best way for tenants to pay rent using recurring payments? First, let’s look at several ways to collect rent online using peer-to-peer payment and rent collection apps. 

Venmo recurring payments

Venmo is a popular app for sending money to friends and paying bills online. However, you cannot set up recurring payments with the digital wallet. The closest tenants get to making a regular payment is to add their landlord to the list of trusted sellers. However, they still must remember to make the payment every month.

Recurring payments on PayPal to collect rent

PayPal has a recurring payment service that landlords can provide tenants. However, this requires setting up a button on a website for tenants to set up automatic payments. Although this seems like a great idea, it’s good to remember that using PayPal to collect rent can incur hefty fees for landlords.  

Recurring rent payments with Zelle

Zelle works like a banking app and is helpful for bank-to-bank transfers. However, Zelle doesn’t offer recurring payments because the option depends on the tenant’s bank or credit union. Additionally, not all banks support Zelle for business payments.

Rent payment apps that support recurring rent payments

The most efficient way to boost rental income by promoting recurring payments is to use a dedicated rent payment app. Many apps for landlords give tenants control over automatic payments or provide them with the choice of making a one-time payment. They also give tenants options to pay rent by various methods—credit card, debit card, or ACH bank transfer. 

It’s also worth noting that the best online rent payment systems come at no cost to the landlord or tenant. So, unlike popular money transfer apps, landlords don’t incur transaction fees for incoming payments. 

Using a trusted property management app has additional benefits than just recurring payments. For example, rent collection apps for landlords have payment controls that allow landlords to block a partial rent payment. This vital feature is crucial when trying to evict a tenant for non-payment of rent. Also, rent collection apps typically let roommates split the rent, calculate late fees automatically, and report rent payments to credit bureaus.

Conclusion

Recurring rent payments make it easier for your tenants to pay rent every month. However, landlords who promote regular automatic payments find their rental income increases. This is because they have fewer missed payments, spend less time processing rent checks, and have better customer relationships.

Build a stable financial foundation

Are you tied to a nine-to-five workweek? Would you like to “retire” from wage-paying work within ten years? Are you in your 20s or 30s and would like to be financially free?The sort of free that ensures you spend the best part of your day and week, and the best years of your life, doing what you want?