July 2022

One of the most valuable tools rental property investors have in the U.S. is the 30-year fixed-rate mortgage. Surprisingly, this style of mortgage is very much an outlier compared to what’s typically offered in other countries. Most countries tend to offer adjustable, variable, flexible, or renegotiable rate mortgages, all of which pose an inherent risk with the potential of an unexpected interest rate hike during ownership of the property.

Not only are fixed-rate mortgages excellent for letting investors skip those unexpected rate hikes down the road, but there have been notable periods where the interest rates on these mortgages have been remarkably low, making the cost of borrowing money almost trivial. 

But what happens when those interest rates increase, potentially to levels we aren’t used to seeing? Suddenly monthly mortgage payments are noticeably higher, which hits our cash flow returns. Does it mean it’s time to slow down or stop investing in rental properties? How do you counter higher interest rates on your mortgage to stay profitable with your rental property?

The best way to decide this is by understanding how rental properties make money, the factors you can control in a rental property and its profits, and knowing what to look for in a prospective rental property to help set you up for the greatest chance of successful returns, despite a higher mortgage payment.

Rental Properties are Long-Term Investments

One of the biggest things you should remember with rental properties is that they are, in fact, long-term investments. Sure, some people may see a quick equity profit through improvements or value-adds, and some may land deals with significant cash flow from the start. Still, as a general rule, you must remember that rental properties see the most profit over the long haul.

Often when we analyze a rental property’s finances, we only see the cash flow number that’s right in front of us. It’s easy to forget that the projected cash flow is simply what’s projected today. That number doesn’t account for rent increases over time (while keeping a fixed mortgage payment), appreciation, demand, and inflation. All of those factors will continuously change, hopefully for the better. 

How a Rental Property Makes Money

Before learning about real estate investing, you may have known that rental properties can be very profitable but not necessarily understand exactly how they can be so profitable.

The five ways that rental properties can make money are:

1. Cash flow
2. Appreciation
3. Tax benefits
4. Equity built via mortgage paydown
5. Hedging against inflation

When you understand the details of each of these profit centers, you will not only become savvier about the power of holding a rental property for the long-term instead of the short-term, but you’ll also begin to realize that the expense of an interest rate that’s a couple of points higher than what you’re used to likely doesn’t hold a candle to the profit potential over the lifetime of the rental property.

You may already be saying, “But those other profit centers are speculative, and cash flow is still important, and the higher mortgage expense increases my risk by lowering my cash flow.” Yes, and that can very well be true. But what you want to do in this situation is two things:

1. Learn to balance the profit centers. If cash flow is down, which happens with a higher interest rate, look for other profit centers with potential. Maybe you’re buying in a gentrifying high-demand area, so you could speculate that appreciation potential is very high. Or perhaps you’re investing during a time of extremely high inflation. What could you do in that situation? Think of it like a bar graph with a bar for each profit center. If one is down, are any of the others up? If they’re all down, that’s a problem. If some are higher than usual, do those balance them? All of it depends on your unique situation.
2. Put a big focus on location and demand. Just as with that example, one of the keys is investing in properties that will lend their hand to the appreciation bar especially, as well as inflation and rent demand. As long as people desire the property they own, the greater the profit potential from the profit centers will be, and the more they will continue to increase over time.

When you understand how rental properties make money, you can begin to wear the investor hat rather than the consumer hat. It’s the consumer hat that causes people to think that increased interest rates are deal-breakers, whereas people who truly understand how rental properties profit will not only learn to see how to look past the interest rates but also give them perspectives on how to compensate for it.

Rent Increases

As already pointed out, a rental property’s projected cash flow is based on today’s rents, not tomorrow’s. Rents increase for two reasons: appreciation and inflation. 

Guess what doesn’t increase over time and is not affected by appreciation or inflation? Your mortgage payment when you have a fixed-rate mortgage. 

This means your cash flow spread will continue to grow over the life of your rental property as you continue to increase rents.

Your expenses, such as property tax and insurance, may increase over time, but they’re unlikely to increase at a rate anywhere near what rents will increase. Overall, you’ll see that rents will continue to pull farther and farther away from your fixed-rate mortgage expense, and your profits should continue to grow exponentially.

Forcing Profit Increases and Lowering Expenses

While I’ve been emphasizing the long-term, there are proactive things you can do to create more equity faster. Let’s go over them.

Improving the property

The more desirable your property, the more value it will generate and the more demand it will drive. While many profit centers will kick in on their own over time and increase the property’s value and rents, you can also do things to your property to increase desirability and force those profit increases more quickly. 

The most basic way of improving a property is by rehabbing it. When you upgrade a property, making it nicer and more attractive, you not only increase the overall value of that property, but you can also ask for higher rents. You’re merely speeding along those profits past what the higher interest rate is costing you.

Refinancing your mortgage

Don’t forget that you may not be tied to that higher interest rate forever. Mortgage interest rates fluctuate, just as property and rents do. If the interest rate drops lower than what you originally signed up for, you can refinance the property at that lower interest rate. Of course, it’s not a guarantee the rates will drop, but if they ever do, you can make that move and increase your cash flow.

Picking the right location

If you’ll notice, this isn’t the first time the location of a rental property has been brought up. As mentioned before about buying in a path of demand to ensure appreciation potential, you can also make even more strategic moves when you learn how to analyze neighborhoods and identify areas with an extremely high chance of appreciation. Forces like gentrification, population growth, and job growth can increase values.

Of course, banking specifically on gentrification, as with any appreciation, is speculation. You not only want to learn how to identify areas that may experience gentrification, but you also should have a contingency plan in case gentrification doesn’t occur. You wouldn’t want all your eggs in one profit center basket if that basket were to tip over. But if you buy at the right time (which often means you have to move quickly and not spend forever hesitating, or you may lose the deal), gentrification can certainly force more profits.

Going Up Against Inflation

While inflation impacts most areas of our lives negatively, the one place it can help is with rental properties. Your fixed-rate mortgage expense stays the same for the loan term, despite what happens to the dollar’s value. You pay back the loan in yesterday’s dollars, not tomorrow’s.

Look at inflation as compared to the interest rate of the mortgage. Many experts argue that the mortgage interest you pay over the term of a 30-year fixed mortgage is less than the expense of paying for the same property in cash with today’s dollars because of inflation. 

When the inflation rate is higher than the interest rate on your mortgage, your profits will continue to outrun the expense of that mortgage.

Keys to Remember

It would be easy to read this article and believe that if you hang onto a rental property for a long time, it will be very profitable because no matter what your expenses are today, everything will catch up and shift into a profit. 

That isn’t going to be true for all properties. Not all rental properties will be profitable, and many factors can challenge the various profit centers. It’s especially important to remember that speculation doesn’t always pan out, and you should avoid speculation more often than not. 

The intention of this article isn’t to mislead you into thinking that any property will make for a profitable property, but it’s instead to show you how to look at and analyze potential rental properties with the understanding that a higher interest rate won’t eat as much of your income up as you think.

It’s also important to be educated. For instance, what you believe is a high-interest rate may be “normal.” We’ve gotten used to seeing historically low-interest rates. We’ve been spoiled, and it misleads us into thinking that we can only be profitable if we have stupidly low-interest rates on our mortgages.

Lastly, if the interest rate continues to stress you, consider putting more money down on the loan so your payment will be decreased. Plus, you may even land a slightly lower interest rate as you increase your down payment.

If you’ve invested during periods of higher interest rates, what’s the most creative financing structure you’ve used on your rental properties with those rates, and how did it turn out 10 or 20 years down the road of owning your property? Let us know in the comments!

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?

David:
This is the BiggerPockets Podcast show 633. Look, if you love real estate and you don’t like your job, you don’t have to quit your job to invest full time in real estate. You can, but you can also quit your job to take a job in real estate. And then you can be investing more often with better resources and more support. Take a job that supplements your investing and makes it easier for you to do. You don’t just have to quit your job and go full time into real estate investing. I’d love to see more people like you, your partner, and your family in the BiggerPockets community who are helping others build wealth through real estate and building their own at the same time.
What’s going on everyone. This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Greene edition. In today’s show, you the audience of BiggerPockets will submit questions, and I will do my best to answer them for everybody to hear. Today’s show we get into some really cool stuff, including questions about how much reserve should someone have for their first property, when they should focus on building a business versus investing in real estate to grow wealth.
And if low cash flow on a BRRRR deal is a good thing or a bad thing. All that and more in today’s show. If you would like to be featured on the BiggerPockets Podcast, here’s all you have to do. Go to biggerpockets.com/david and submit your video question for me to answer on the show. I’ve actually met people that I hired from this format. The girl that I have that is now my asset manager of my rental portfolio was found on this show. And I was so impressed with her that I reached out and ended up hiring her. And that can lead to today’s quick tip. If you would like to work for BiggerPockets, you can, a lot of people don’t realize this, go to biggerpockets.com/careers, and you can actually apply to work there. Our show’s producer got his job that way.
And the dude is a godsend. I wouldn’t be able to make shows like this if he didn’t make this whole thing happen. A lot of people think this is David Greene’s show. Absolutely not. I’m the face you see, and the voice you hear, but they’re the ones that make everything happen. And you can get more involved in real estate, as we also talk about on today’s podcast, one of the ways to ramp up your investing career is to make your money through something that is involved in real estate so you stay around it and develop a competitive advantage. I’m also going to be hiring more people, specifically someone that can manage short term rentals from a remote location in the country. So I’m buying them all across the country and I need someone with a lot of experience that can manage them for me, that is looking for a job that I can pay to run my portfolio.
If you’d like to work for me in that capacity, join The David Greene Team, join The One Brokerage, just go to davidgreene24.com/careers, and you can apply there as well. Look, we’re living in a world where everything is shifting and changing very fast. It’s very likely that jobs are going to be laying people off if we continue down the path we are into a recession. It’s also very likely that more opportunities to build wealth are going to be making themselves known than we’ve seen in a very long time. Don’t let fear paralyze you and get worried about losing your job. Be proactive and start looking for the next thing where you can take your skills, help somebody else grow their business and make yourself more money, and get in the right environment where you can hit your investing goals. I hope that everybody strongly considers what I’m saying here. Because if you’re listening to this podcast, you probably love real estate and you’d be much happier if you could be around it more. I know that’s the way it is for me. All right. Without any more ado, let’s get to today’s show.

Jennifer:
Hi David. This is Jennifer Sokalski from New Jersey. My partner and I, he’s walking around over here, we are both real estate agents and we have been for a little over three years now and we are just now really starting to up our game. We are building a huge business. We’re growing very fast. We are currently obsessed with this More Money, Less Hustle by Jess Lenouvel. We actually have a whole bunch of them because I’m giving them out to my mastermind group.
So my question is, our focus right now is very heavily on our real estate business and growing that, and making that so that it can really become a team, like a team that grows with us. And my question is, when do we really get into investing? Because we’ve been looking at it and researching it for a couple of years now, but it never seems to be the right time because we have to build our business and we’re afraid of splitting ourselves in two directions. So is there a time sometimes when people should not invest and maybe wait to get that started if they’re working on something else that they’re really into? Thank you.

David:
Thank you Jennifer. This is a great question. I’m probably going to take a little bit longer to answer this one, because there’s a lot to cover and it’s good stuff. First off, to the question of, are there times where it’s okay not to focus on investing and build your business? Well, of course the obvious answer is yes, nobody has to focus on investing. But I think what you’re really getting at is, from a financial perspective, does it make sense to not focus on investing? And on this podcast, we talk mostly about how to build wealth through owning real estate. So from that perspective, I can understand the questionable, is there ever a time where that’s not okay? Because I keep hearing all the experts say, you got to buy real estate to build wealth. So let me share with you a little bit of story in my own journey.
I have had several periods of my life where I bought a lot of rental properties and then other periods of time in my life where I didn’t buy any rental properties. Now, when people hear this, they’re always trying to figure out what the secret sauce is. Why has David stopped buying? Does he know something we don’t know? Is the market going to crash? Is there something coming down the pipe that he’s not telling us? It’s not that at all. It’s almost always because of what’s going on in my personal life. So sometimes I will get so busy with businesses, particularly when you’re trying to scale, you’ve got a bunch of new hires. You’re trying to teach them. You’ve got a bunch of clients that came to you and say, we need to buy houses. This happened to me early in my career when I was starting The David Greene Team. I had just hired my first assistant Krista.
I had left being a cop. I went full time into real estate sales and my clients were flooding me. I had tons of people coming that wanted to buy houses and sell homes, and they were relying on me to get this done. So I was doing the BRRRR method at that time, I’d been buying a lot of properties in Jacksonville, Florida. I was up to five a month at one point, but on a slow month I was still buying two properties. Then I got to manage the rehabs and I got to get all the utilities turned on, and all the work that goes into it. Well, I had to stop when I got more clients on The David Greene Team. So it made sense for me personally to stop investing so I could get the business going. Well, I started to do a lot of business. I became a top producing real estate agent.
I hired more agents. I grew the team. Then I had to train all those people. Years went by and I didn’t buy real estate. And in fact, it was in some of the best time ever to buy it that I didn’t buy real estate. This is when the market was climbing and climbing, and climbing. Now, do I look back and regret that I didn’t buy more real estate? Of course. But if I’m honest with myself, I don’t think I could have bought real estate, at least not in a responsible way, and ran the business that was growing at an exponential rate. And when I look at the money that I made by helping clients buying and sell houses, and the residual income that now comes from the work I did before, it’s much more than I would’ve made simply from having equity growth and cash flow investing in real estate.
You see, business is one of the few things that I know of that you can make more money than in real estate. It just takes more time. Real estate is more passive than business is. So let’s tie this all together to your question. If your business is going well, there are times where I would say, yes, it’s okay not to focus on growing a real estate portfolio. And I’ve actually thought about this a lot. So some people will come and they’ll say, hey, I’m a full-time investor. I’m buying this many properties. And I’ll sit down with them and I’ll talk with them and I’ll see, well, how much equity growth did they have that year? How much cash flow did they make that year? Adjust that for the tax benefits that come to the real estate. And I come up with a number that I see that they added to their net worth by being a full-time investor. In every scenario that I’ve come across so far, that’s less money than I made in the businesses that I’m running.
Now, we’re both full-time workers. So I’m running full-time businesses, they’re doing full-time real estate, but in those cases I still came out on top. So if you’re in a situation like that, yes, building your business will usually be more profitable if it’s going well than investing in real estate. But you don’t want to miss out completely on the passive benefits of real estate ownership. So here’s my advice to you. Under the assumption that your business is doing very well, that you are growing, you’re making good money. There’s good cash flow coming in and you are saving that money to invest in real estate at some point. You need to be buying a primary residence at least for yourself, at least once a year. That means that you should be putting a low down payment on a house, in a good neighborhood, that you think is a good deal, that has a value add opportunity.
Something that you can fix it up while you’re living there. Something that has a garage that can be converted. Something that can be functioning in some way to benefit you, that you’re not held to a timeline of getting it fixed up and ready to go right away, that you can work around your schedule. Now, you didn’t say it in the video, but I did see in the notes here, you’ve done this before. You just did a live and flip. Do a live and flip every year, but you don’t necessarily have to sell it, buy it, move into it, fix it up while you’re there. Get your next one, move into that one, fix it up while you’re there. I call this the sneaky rental tactic. Because when you move out of the house you bought with a primary residence loan, you turn it into a rental property.
You ended up with a rental that you put 5% down or 10% down, or 3.5% Down. So if you work this method, you’ll keep making money, but you won’t miss out completely on real estate opportunities. The other piece of advice I’ll give you, because you said specifically that you’re a real estate agent. There’s some agent on your team that can function as a form of a project manager or a property manager. So as you’re training your team, you’re selling your houses, you’re hiring new agents. You’re getting deals closed. You’re keeping clients happy. You’re putting out fires. Identify who you have on your team that if you put something in contract and gave them a list of what needs to be done, they could make sure the deal closed. They could make sure you knew when the money needed to be wired.
They could order your home inspection. They could represent you as the agent in the deal. And then once it closes, they could get it set up as a rental property. So you’ve got some synergy here. You’ve got your real estate team and then real estate investing. And these worlds can be combined pretty easy. That’s kind of what I’ve done. I’ve taken the real estate agents and the loan officers, and the home insurers, and my own investing, and our clients, and I brought it all into the same ecosystem. So that 80% of the work is the same. It’s only the last 20% that changes a little bit. And I think you can do the same thing. Now, what you’re going to be focused on is 80/90% business, 10/20% investing, but you have some investing still going on. At a certain point, the business will start to take care of itself and you’ll shift from 80% business, 20% real estate to 70/30 to 60/40, to 50/50, and then 40/60.
And that’s the way that the business cycle tends to work out. So you don’t want to ever stop buying real estate, but you just don’t do it as often. And that principle is true for everybody listening to this. I don’t think it’s healthy to say, is this a market to buy or is this a market to sell? Because it’s rarely ever that simple. I buy in every market and I would sell in any market. I just do more buying in some markets and more selling in other markets, or more holding in other markets. And that’s kind of what we’re entering into now. So I bought properties last year. I bought properties the year before, but I didn’t buy a ton. Now that we’re seeing the market softening, I’ve put 11, no 12 properties now, because I just got a text right before I started recording that another one went into contract, in the last 30 days.
So in this market, I’m seeing it as a great buying opportunity. Now, I’m not paying asking price, of course. I’m getting stuff under market value because I know that the market may continue to dip. But my point is, I ramp up my buying in certain seasons in life and I just sold a bunch of properties so that I could buy these ones. Same principle goes to you. So thank you for submitting this question. I love that you’re asking it. I would love for more people listening to this podcast to start or join a real estate related business. Look, if you love real estate and you don’t like your job, you don’t have to quit your job to invest full time in real estate. You can, but you can also quit your job to take a job in real estate and then you can be investing more often with better resources and more support.
Take a job that supplements your investing and makes it easier for you to do. You don’t just have to quit your job and go full time into real estate investing. I’d love to see more people like you, your partner and your family in the BiggerPockets community who are helping others build wealth through real estate and building their own at the same time. The next question comes from Rob Foley in the Four Corners area. Rob says, I have successfully BRRRRd about 10 different single family homes. After the refi on several of my houses, using the BRRRR calculator, I’m seeing that the cash flow is not that great. Maybe $100 to $200 a month max, but they were great deals where I pulled 30 to 40K of forced appreciation out at refinance. How should I view these properties now? As a very successful tool that grew my business or as a poor use of my capital that should be sold?
Portfolio snapshot. I have 12 single family homes, one mobile home park with seven pads and a duplex, five acres to be developed into mobile home park pads and I’m in the middle of my first 1031. Okay Rob. If I understand you correctly, you’re saying that after you pulled 30 to $50,000 out of the deal, more than you put in, it still cash flowed $100 to $200 a month. And you’re asking me, was this bad. This is not just good. This is astronomically good. Would you buy a home if you put zero money down and it cash flowed $100 a month, and it was going to go up in value while you paid off the loan? Just about everybody would say yes. So if it makes sense at zero money down, why would it not make sense if someone was going to give you 30 to $50,000 to get cash flow?
Now, the only reason that I could think that this is even a question in your mind is because the cash flow seems small as it’s only $100 to $200 a month. And I want to address that idea first. This is a symptom of what happens when people become cash flow obsessed. In 2010, a lot of homes went into foreclosure that were bought in 2001 through 2008. These homes went into foreclosure because the people buying them did not cash flow. That started this trend of saying, cash flow, cash flow, cash flow, because that was the right ingredient in the recipe to keep people healthy. This was the medicine that our market needed. Stop buying homes based on speculation and start buying homes based on numbers. And I agreed. I was one of those people that was constantly talking about cash flow and I still talk about cash flow.
I still buy properties that cash flow. I still run numbers to make sure they cash flow. But what I don’t do is zoom in only on cash flow and ignore all the rest of real estate. And I think because this is going around in our industry, it’s causing you to have second guesses about your decisions. The cash flow is only $100 to 200 a month. That’s not a huge number. Pulling 30 to $50,000 more capital out of the deal that you put in, and this does not include the equity that stayed in the house. So on top of that 30 to 50K, let’s call it 40K to make it average, you also have 20% to 25% equity in the house you didn’t have before. Your net worth is probably going up on every deal by most people’s salary that they make in a year.
And you’re not being taxed on this. And then on top of that, to sprinkle a little bit of sugar on top, you’re getting $100 to $200 a month. Rob, you are absolutely crushing it and there’s no other adjective to describe how good these deals are. You should keep doing this over and over, and over. It’s the cash flow thing that’s throwing you off. Let me bring an outside perspective. Let’s say you do this on four deals and you pull an average of 40 grand out per deal. That’s $160,000 in cash that you’ve taken out that you didn’t have before. And we’re not even talking about the equity in the properties. And you take that 160,000 in cash and you go buy another one of these homes in cash. Well, that one may cash flow $1200 to $1,400 a month. You let those first four homes that only made $100 to 200 a month buy you a home that cash flows $1,200 a month.
Does this still seem like a bad deal? The reason it doesn’t jump out is when we only look at one element of real estate investing. When you look at all the components put together, the appreciation, the forced equity, the market equity, the loan pay down, the money that you’re pulling out, the capital that you’re bringing in that you can now go buy new houses with, the cash flow, the tax benefits. That’s where you can see clearly what the right moves to make in your portfolio are. And with the portfolio that you have, these mobile home park pads you have, the property to be developed, you have to start thinking big picture. So my advice to you Rob is to stop talking about your deals to newbies. This is where this comes from, because they’re all going to ask the same question. What’s the cash flow?
What’s the cash flow? And that’s normal. Most newbies ask that question because that’s how they don’t lose money in real estate. And it’s also how you get out of the job you probably don’t like, which is where most newbies start. They don’t love working a job and they think real estate’s going to be their savior to get them out of it. Start talking about these deals to more sophisticated investors, people that have a more balanced portfolio. And then you start to make the connections that I don’t look at cash flow and they don’t look at cash flow as being attached to a property.
It is the overall cash flow of your entire portfolio. It is the overall equity of the entire portfolio. And you can start seeing where you can move pieces around to maximize efficiency and minimize risk. I just want to tell you, Rob, you’re absolutely crushing it. Don’t stop. Keep doing this as much as you can. If you’re getting cash flow and you’re pulling that money out, keep a healthy amount in reserves to prepare for a downturn. But man, if you’re pulling 40 grand out of every single property, that’s reserves that’s going to last you for a long time on every one of these deals. So congratulations.

Matthew:
David, great deals aren’t found, great deals are made green. I appreciate you taking my question. David, my question is, how can I prove to a hard money lender the ARV of a home that I’m going to convert to a short term rental? I have it under contract for 257,000. It’s only appraising at 220,000 because appraisers here of course don’t give any value to my short term rental business. And they also haven’t even caught up with normal market values. So they’re only given 220 on the appraisal, even though I feel that this home is worth at least $350,000 as a short term rental. With furnishings, management, decoration, I projected that it will yield $4,500 a month in net operating income. And so I plan to buy it and hold it. The cash flows will be amazing, but I’m having to bring a ton of cash to the closing table if I go with a conventional lender, because I need to bring 20% down plus cover the appraisal gap, and this is going to be before I furnish the home.
So I’m looking to go with a hard money lender instead to improve my cash on cash. I’ll pay extra interest, that’s okay. I just would rather bring more like $14,000 to the closing table instead of 85,000. So I want to convince this hard money lender that the ARV of this home will be $350,000. Get them to fund 75% of that ARV. So I’m bringing much, much, much less to the closing table. But back to the heart of the matter, how can ARVs for STRs be determined?

David:
All right. Matthew, thank you for your question. I see exactly what you’re getting at. You’re trying to get the appraiser to see it from your perspective and your perspective is based on the revenue that this property would produce as a short term rental. There’s a few issues with the way you’re going about it that are just going to make your job harder and I want to clarify those, because you’re always going to be in an uphill battle in real estate if you take this approach. First off, when we’re talking about what a property is worth, that is actually a subjective phrase. There’s a lot of ways of evaluating what something is worth. What you’re saying here is that it’s worth $350,000 because it will bring in $4,500 a month when I use it as a short-term rental. To you, it is worth that. The appraiser is operating under a different objective set of circumstances.
The appraiser is looking at this thing saying, I don’t really care what it brings in as a short-term rental. I’m not allowed to care. What I want to know is, how does it compare to the other houses around it? And the comps I’m seeing of previously sold properties are selling for 220,000. So that’s the value he’s going to give the property or she’s going to give the property. The issue is that you’re using a commercial standard to evaluate this property and they’re using a residential standard to evaluate the property. But because they’re the one working for the hard money lender, you actually have to go by their criteria. Now, if you can convince the hard money lender to understand that the property’s going to bring in more cash so that you can make the debt service, you have a shot here, but that isn’t going to help your down payment scenario.
They’re still going to say the property’s worth 220,000. Because to an appraiser, it’s worth 220,000, to a person who’s going to buy that house to live in, it’s worth 220,000. To you, it’s worth 350,000. Now, this is a problem investors often fall into because we always do our underwriting assuming that we’re going to be taking a loan on a property. If you were paying cash for this thing, I would agree. It is worth 350,000 if that’s what it can make and no one would stop you for paying cash for it for 350. But what would you say if a seller came to you and said, hey, the comp showed 220, but I want you to pay 350 because you could use it as a short term rental? You’re probably going to turn around and say, well, it’s worth that to me, but on the market, it’s only worth 220.
So I’m going to buy your house for 220 even though it’s worth 350. The seller may want you to see it from their perspective, but when you’re the buyer, you want to get it at the price that is better for you. The same is going on with the appraiser. The same is going on with the hard money lender. My advice would be, stop fighting this uphill battle. They’re not going to see it the way that you’re seeing it. That hard money lender is going to give it the lowest value possible because that’s how they minimize their risk when they’re giving the loan. The appraiser is going to give it the value that the comp show because that’s how they minimize their risk when they’re trying to keep their job and not get sued. And you’re going to give it the highest value possible because that’s how you’re going to maximize your profit.
The problem here is that all of your interests are not aligned. So I would look for a different hard money lender, give them the pitch and see if they actually bite on it. And if you can’t make that work, you’re going to have to borrow the money from someone else. So someone that you can sway in this situation is a private money lender who will be open to hearing your logic that this property is worth $350,000 because of what it will cash flow. That private money lender is not an appraiser that’s held to a certain code of ethics and not a hard money lender that’s held to a certain set of criteria for approving loans. You can sway that person to see what you’re trying to say. You can get the extra money for the house from them to buy it, and then you can refinance out.
Now, when you refinance out, you can use a loan like I’m using. I get approved based on the income that the property is bringing in so I don’t have to go through the headache of showing all the different businesses I have and all the different income for those businesses. So I’m buying properties right now. I think I mentioned earlier in the show, I’ve got 12 in a contract. All of those are getting approved based off of the short term rental they’re going to bring in because my brokerage is able to do that. So when you get to that point that you’re ready to refinance, that’s what you want to look for, is a lender that will let you use the short-term rental income to approve you for the refinance loan. And then maybe you get approved for up to $350,000. All right. We’ve had some great questions so far, and I want to thank everybody for submitting them.
Make sure to like, comment and subscribe on our YouTube channel because we love these comments and we read them daily. At this segment of the show, I like to pick out a couple of the comments from our YouTubers and see what they’re saying and read them to you on the show. The first question comes from Jenny Lee. I love this new format of David’s tax, marriage and legal advice brokerage. That’s funny. In all seriousness, I love the long form in-depth explanations to these brilliant video questions. Keep up the great work. Well, thank you for saying that Jenny, but to be fair, I’m only able to give a brilliant answer if I get a brilliant question. So I need all of you to continue submitting really good questions to me here for the show. You can do that by going to biggerpockets.com/david and feel free to put in something funny, something quirky, something entertaining, not just the pure question, because that makes the, I think the pastor of my church once said that if you put a little bit of sugar on it, it makes the medicine go down easier.
That was also probably Mary Poppins’ quote. Now, that I think about it, my pastor was quoting Mary Poppins. That’s slightly less cool than I was thinking. Next comment is from Kyle Kotecha. David, this was excellent. In regards to a mentor, you’re exactly correct. People ask me what I would do if everything was taken from me. I always say that I would find what industry I want to be in and have a business in. I would find the best person for that and go provide massive value to them. Thank you for that Kyle. This is in regards to one of the shows where someone was asking how to find a mentor and I gave some advice on the best way to go about doing that. Next question or comment is from Misha Henderson. I love these shows. David, thank you for the great and consistent information you provide on every show.
I’ve learned so much over the last year since I started listening to your show. I’m a pro member and I hope to gather the nerves to ask a video question one day soon. Misha, you’re way overthinking this. Go ahead and submit your question. I will give you a little piece of advice though. If you all listening are thinking about submitting a question because I want you to. I got this comment on my Instagram from Watershed Property Services. They said, in all caps, please, on the Seeing Greene episodes, if the person cannot articulate a question in under three rambling minutes, don’t include it on the show. It’s so painful to listen to their stream of consciousness struggle session. But what if this, and also maybe that, but don’t want to forget about the other … Thank you. First off, I said dot, dot, dot, and I believe the technical term is ellipsis.
I think that’s what those three dots are called. Not positive on that. Maybe one of you can leave a comment in the question. So let me know if I’m right. Second, I thought that comment was really funny because what they’re getting at is when somebody submits a video that they didn’t think through what they were going to say before they started recording. Look, I want you to send me your comments and your questions, and I like your videos, but if you make one and you stumble through it, just rerecord it again. Here’s a little bit of advice. Whenever I’m going to record something, I take bullet notes of what I want to say, then as I’m recording it, I look down at those bullet notes if I get lost, and I say, oh yeah, this is what I wanted to get out. Little bit of advice to make a better video when you send it in.
And then for those of you that still end up with a lengthier video, we do have a new video editor who’s going to be editing these down. I just thought that that comment was funny and I appreciate you guys submitting that. Our last comment comes from Phil. Phil says, I really do like this format. It could be even better if you can find experts in different areas of the country or different facets of real estate to tag team with every couple of weeks. Phil, listen, next week, I think I’m going to take you up on that idea. So stay tuned and make sure you subscribe to this podcast so you get notified when it comes out.
If you’re listening on your podcast app, take a little bit of time to give us a rating and an honest review in the Apple Podcast. Those help a ton. We’re action oriented, and we want your constructive feedback. We want to get better and stay relevant. So drop us a line and let us know what you think, what we could do to improve the show, just like Phil said, or what you love. Please continue to comment and subscribe on YouTube also, and then leave us your rating or review wherever you’re listening. All right, let’s take another video question.

Logan:
Hey David, my name’s Logan. I live here in Columbus, Ohio area. The house that we are in currently, my wife and I, we owe about $60,000 in the mortgage. And the house is probably worth right now as is 110,000. But I’m pretty confident, I have a little bit of construction background so I’m pretty confident that if we put $30,000 into the house to fix it up, comparable homes in the area are selling for around 200,000 on the low end. So I guess my question is, should we try to take the aggressive route and get hard money or private money, or whatever we can to fix up the house now to get that $200,000 appraisal for what it’s worth? Or should we take the conservative route, which is what we’re doing right now and just trying to save up money slowly until we can use our own money to do it?
If we used our own money it would probably take us another year to get that $30,000 that we’re going to need. So I’m just a little bit worried that with inflation and I’ve heard you talk about the price of things, everything going up, that by the time it would take us to raise that $30,000, maybe a contractor is then trying to charge more because materials are going up and stuff like that. And then we’d be kind of out of luck. Our long term goal is to fix up this house that we’re living in, refinance out of it once it’s all fixed up. And then move into a house hack, maybe a duplex, or maybe a house where we can turn into a duplex or something like that, and then rent out the current house that we’re in, because it’s in a great area. It’s a three bedroom, two baths, very desirable town. So thank you so much.

David:
All right. Thank you for that question Logan. I’m going to go into real estate agent mode and treat you as if you are my client. And I’m going to tell you exactly what I think you should do. First off, you said you owe 60, you think it’s worth 110. It might be worth a little bit more than that. Get a HELOC on that property. You could reach out to me. I can have my brokerage do it for you. Or you could find a local bank credit union or a mortgage broker in your area. But get a HELOC, you have more than enough equity to pull out the $30,000 you’re saying that you need. Tell them that the purpose of the HELOC is to do a home improvement and they’re more likely to approve you. Take that $30,000 and do the work yourself since you have a construction background or get your buddies to do it for you at a possibly discounted rate.
If you have advantages that you can take advantage of, do it. Get your house fixed up. Now it’s worth $200,000. You can refinance it into a new loan or you can pay the HELOC off slowly over time. Depending on where rates are, we should cross that bridge when we come to it. I don’t want to see you do a cash out refi to pay off your HELOC if you’re going to lose the great rate you have on the first 60,000 to get a much higher rate. But if rates are only a little bit more, it’ll be cheaper for you to refinance it and pay off that HELOC. Then you mentioned that your goal is to move out and house hack. Well, the good news is you can then get preapproved for another loan and go buy your next property. Do a duplex, do a triplex, do a fourplex, do a house with a floor plan that could be functioning that way.
Do a house that you can add an ADU, maybe convert the garage. You’ve got a construction background, so you’ve got to a edge over your competitors in making that happen. Move into the new house, putting a very low down payment on that house. If you can get an FHA loan or a five or 10% down loan, if we can help you with that, that’s what I’d have you do. Rent out the one that you just left. Also consider making a conversion out of your garage if you live in an area where people want to live. If it doesn’t have a high rental demand, don’t do that. But if it does, you can sort of make your first house that we’re talking about here, function as a duplex, because you can convert the garage into an ADU or maybe another part of the property into an ADU. Now, with the new house, do the same thing with that one that you did on the first one. Buy something that needs some work, buy something that you could add value to. Buy something that you can live in and rent out the other parts of it.
Move out of that house once you do it, doing exactly the same thing that you did on the first one and do this again. Look, real estate investing does not need to be complicated. I know we get to talk about these cool, fancy, shiny bells and whistles, subject to mortgages and wrap around mortgages, and wholesaling, and off market opportunities. It doesn’t have to work that way. Use the skills that you’ve got. I was pretty good at numbers and I was pretty good at seeing opportunities. So I was able to build houses and help people as a real estate agent. You’re good at construction. Use that to your advantage. Buy a house every year doing what we’re talking about. In 10 years, you will have 10 homes. And this first house that we were talking about will probably be significantly paid down on the loan side.
Odds are, after year three, four or five, you’re not just going to buy one house every year. You’re going to have more cash than what you had before. You’re going to have equity in these properties that you can access and you’ll be able to do one house every year to live in and one or two investment properties. So at the end of the 10 years, you probably have more like 18 to 20 homes. If you take this long term turtle versus the hare, slow and steady approach, it’s almost impossible to lose with real estate. The people that lose money in it are the ones that come shooting out of the gate, like the rabbit, and try to do too much too fast before their experience. It’s like giving the keys to a Ferrari to a 16 year old that hasn’t learned how to drive. They’re going to run it off the cliff.
What you want to do is start very slow until you get comfortable with the car, the mechanics, the principles, how things work and then progressively increase your speed. You’re in a great position Logan. I really appreciate the question that you’re asking. I’m excited for you. I hope that you are excited and I hope that getting this featured on the BiggerPockets Podcast made your day. All right. The next question comes from Kaya in Atlanta, the ATL. First, I want to thank you for all the knowledge that you share. I’ve recently upgraded to the BiggerPockets pro membership, and I’ve purchased a couple of your books to continue to expand my knowledge in real estate investment. Side note Kaya, I would recommend reading them before bed because I’m told they’re super boring and will help you go to sleep. I have two questions for you today that I’d love your advice on and or next steps.
Number one, I recently purchased a single family home in East Point, Georgia that has a detached garage that was never fully finished on the inside. The structure is in place. It even looks like at one point it had electricity and was potentially used as a workshop and it has a new roof with wood beams. I wanted to convert it into an ADU and then rent that out as a short term rental because the structure’s already in place and I’d rather use it to generate income and hopefully add to my property value than to park my car there. I was given a quote from my contractor of around 20K to convert it into a 600 square foot studio apartment. Wow. I’m just going to interrupt here. That seems like an incredibly low quote. Either this contractor is really helping you out or this studio that you’re talking about, the garage, is more converted than what you think and they only have some finishing touches.
I don’t currently have any savings. However, my mom agreed to invest 10K and the rest I plan to fund using my business credit cards. My question is, is this a good move? It seems like a lowish cost for the conversion. I would agree. And was told by an Airbnb expert that it could probably bring in over 3K because it’s 10 minutes from the airport, close to a lot of movie production studios, et cetera. Is there anything I should keep in mind throughout this process? All right. Let’s start with part one and then we’ll get to part two. I really like the idea of converting it if you can do so for only 20K. I don’t love the idea of you using $10,000 of credit card money to make this happen as a newer investor that’s not that experienced.
You got to find some other way to fund this deal than just that. Do you have equity in your current home that you could take out and use as cash to pay this contractor? Could you sell a piece of your equity to another investor and get their cash to use for the garage conversion and then pay them back? Could you borrow money from an experienced investor that could step in if you make mistakes and fix you, pay them interest on that money and let them act as a sort of project manager to make sure everything gets done well? I say this because that 20 grand to convert a garage, it almost feels too good to be true and I want to make sure you’re not being taken advantage of. And if you don’t have any cash, that means you don’t have any reserves. You’re already in a bad spot.
I want to see you saving money Kaya. I don’t want to see you making it worse by taking on debt through high interest rate means like a credit card to then go put this thing together with the hopes that you’re going to make $3,000 a month when you’re inexperience and haven’t done this before. You need to get another person who’s in that space that is familiar with rehabs, that understands short term rentals to work with you on this. But if you’ve got a potential $3,000 a month and you could get a mentor to come in and you split that with them and they get $1,500 a month for a couple years to walk you through how to do this, or they can earn some interest on their money to help you. I don’t think it’s going to be too hard to find somebody.
All right. In the second part of her question, Kaya here explains that she originally wanted to live in a condo or a town home for safety reasons, because she wanted to be around other people, but she bought this house because she felt it was a stronger investment. While it is a stronger investment and has some really good upside, Kaya doesn’t feel as comfortable living in the house as her primary residence.
So she’s curious if she can move out of this house because she hasn’t lived there for a year and the best way to go about doing it. All right, Kaya. Here’s my understanding. No one can force you to stay in the property. If you don’t feel safe there and you want to move out, you can absolutely rent it out to somebody else. You could also buy another home that you intend to live in as your primary residence with the low down payment loan options, because you don’t have a lot of money. So if you can figure out a way to get enough cash for a 3.5% down payment and you don’t already have an FHA loan, you can go buy another property that you live safe in. Move into that, put a renter in the house you have now.
Assuming is going to cash flow. Start saving money and maybe use some of that money to do the garage conversion. You’ve got some options here. It sounds like you’re a little afraid and kind of tied down and very nervous. I don’t think you need to be. You can move out of the house you’re in. You can buy another house with a low down payment option. You might have to wait the year before they’re going to be eligible for that. So that’s something to talk to your mortgage broker about. Can I get another primary residence loan? Can I get an exception to get another one because I don’t feel safe in my house? You can use it as a rental. So make sure you run the numbers to know that’s going to cash flow if you move out.
You can move out and then you could convert the garage into an ADU later. You may convert the garage into an ADU and move into that one where you live and then rent out the main house for even more money on Airbnb. Or we could go back to what we said before, where you buy another property, you house hack it, you save on your mortgage and then you use the money you save to convert the garage. Either way, you’ve got a lot of options. The cool thing is, you bought a house close to the airport where there’s a lot of rental demand. You just have to figure out how you’re going to get access to capital. All right. We have time for one more question. This comes from Tyler.

Tyler:
Hey David. My name is Tyler and I live in Broomfield, Colorado. I’m looking to purchase my first house hack and I’ve reached a point where I can afford to get into a property and use half of it as an Airbnb. But if I do, I would be starting off with less than three months of reserves for the house, plus three months of reserves for personal expenses, assuming the house is pretty turnkey. My question for you is this. What is a healthy target for reserves for a first time house hacker? If I don’t purchase a property soon, my alternative is to resign my lease at my apartment until I can save up enough cash to launch with more reserves. Thank you.

David:
All right, Tyler, keeping it short and sweet. There is no right answer for how much reserves you need. As I’ve said before in different shows, it depends how much money’s coming in. So if you’re someone who makes a lot of money and saves a lot of money, you can dip down to lower reserves relatively safely, because you’ll replenish your money. If you’re someone on a fixed income who doesn’t make a lot of money or has a hard time saving, you need to keep more in reserves to be safe. The general number that we start with is six months of reserves to make your mortgage payment as well as enough to make payments for yourself in case you ever lose your job or ran out of income. From there, adjust up or down, depending on how much disposable income that you have every single month. But I would also consider if you want to buy a house and you know you don’t have as much reserves as you like.
Can you talk to a family member and say, if I ran into a jam and needed 10 or 20 grand, do you have that money in savings I could access and pay you back? It doesn’t necessarily have to be reserves you’re holding in your bank. If your mom, your dad, your aunt, your uncle, someone that you trust, a grandparent, does have the money, and you said, look, in the case of a perfect storm, if something terrible happened, would I be able to borrow money from you? If that’s a yes, it’s not as important that you have the money in reserves for yourself. Now, you don’t want to make that sort of the rule that you go to every time. You want to use this sparingly and you want to be able to build up your own reserve. So you seem like a young guy, I would highly encourage you to start working overtime, start working a second job, start doing something else to work hard to build up those reserves.
That’s what I did and that’s what gave me the confidence to be investing in real estate when everybody told me not to. I knew that I had enough money saved up and I could go make more money if I needed. That in the worst case scenario, I would be okay. It’s one of the reasons that I still work today. I want to keep buying real estate and I don’t want to worry about what if something goes wrong. So I still have money coming in from the work I do and the businesses that I run. There’s also not a ton of urgency for you to buy a house right now, because at the time of this recording, the market is softening a little bit. We’re not seeing a market crash, but we are seeing that home prices are coming down. Their homes are not selling as fast. Sellers are finally getting some concessions.
They’re getting some closing cost credits, they’re able to buy down their rate. They’re able to keep more money in the bank and they’re offering at less than asking on many, many homes. This is something that The David Greene Team is doing really well. We’re getting under asking price and concessions for a lot of our clients that we haven’t been able to do in years. And on the homes that I’m buying, I’m buying them far below market value because sellers don’t really have an option when buyers aren’t buying as much. So instead of signing a year long lease at the current place you’re at, which is going to sort of lock you in there, talk to your landlord and ask them, hey, can I sign a three month lease, a six month lease? Can I go month to month? Even if you got to pay 100 bucks a month more, something like that, you’re better off to have flexibility.
So when the right deal comes across you, you can move on it rather than thinking, I’m stuck here for the next 12 months because I just signed a lease. If for some reason your landlord won’t work with you at all, see if there’s someone else you can move in with. Can you put your stuff in storage and stay with someone else while you take your time to see what the market does? I’d hate to see you miss out on a really good time to buy that could be getting even better as more time passes because you locked yourself into a lease that shuts you down and makes you think you can’t buy more real estate. Thank you for your question Tyler. Really appreciate it and good luck. Let me know how it turns out. All right. That was our show for today. Thanks again for taking the time to send me your questions.
I love it. If you would like to send me your question, maybe you were inspired by what you heard. Please go to biggerpockets.com/david and you could submit it there. We have had a great response from our audience and I encourage you to keep sending me these questions. I love doing this. So please submit more. If you enjoyed this episode, please be sure to like and subscribe to our YouTube channel so we can get this video in front of more eyes to help out our community.
And if you haven’t already done so, go to biggerpockets.com, which is actually a website where this podcast comes from, where we have tons of tools, resources, and people that will help you on your investing journey. If for some reason you were too shy to ask me a question on the show, you could find me on social media @davidgreene24, or you can message me through the biggerpockets.com messaging system and I will get to that whenever I can. Thank you guys for your time, for your attention and for your love. I love you right back and watch another one of these videos if you’ve got a second.

Ashley:
This is Real Estate Rookie Episode 198.

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 answers to your questions to help you kickstart your real estate investing journey. And today we’ve got a really cool question coming in from the Real Estate Rookie Facebook group, and if you guys are not in the Real estate Rookie Facebook group, make sure you join. It is honestly one of the most active, the most engaged Facebook groups that I’ve seen for real estate investing.

Tony:
Today’s question comes from Montes Receivus, so Montes, hopefully I said your last name the right way, but Monte’s question is, “So my friend just encountered this situation I’ve never heard of before. My buddy placed an offer substantially above asking price, and the seller, before accepting the offer, asked my friend if he would be willing to pay the difference if the appraisal came in lower than the offer price. Very ballsy question. Has anyone encountered the situation before, and what would be the best response, if any?” So Ash, what are your thoughts on this?

Ashley:
Yeah, so an appraisal, it’s so tricky, and Tony, I’ve heard you mention this before about how it’s more of an art than a science, and I think that’s such a great advice because you can’t say for sure exactly what a property is going to appraise for even if you look at the comps or you look at what income it is bringing in. So this buddy, what they’re saying could happen, it definitely could happen where there could be a difference in the appraisal. So a couple things I do are do as much research as you can ahead of time as to try your best to estimate what the actual appraisal is going to be. So one thing I do is pull up the comps. I use Prop Stream. You can go to your county GIS mapping system and look at properties. You can also just go to a MLS listing website like Realtor or Zillow and pull up the comps from there. And then go ahead and look at what are some differences between those comps, too. Maybe one property has a garage, one doesn’t, kind of take those into your measurements there.

Ashley:
Then when you meet the appraiser, bring all the information you have. So if there was a new roof put on, there was upgrades done to the property, bring that with you. Maybe if you own property down the road, or you know somebody who does, and they had an appraisal done, and it works in your favor, bring a copy of that appraisal. So it goes both ways. Some appraisers will take as much information as you can give them and say, “Oh wow, thank you. This is going to make my job so much easier.” Some will be like, “Nope. No thanks. I don’t want to even look at it.” But might as well be prepared if it’s somebody that’s going to take the information that you want. As far as the appraisal coming back lower than you want it to, I don’t personally have any experience, and that’s why I’m going to turn it over to Tony. So my little tips were just to help you get prepared for the appraisal, and now Tony’s going to actually help you with what happens when the appraisal does not come back how you want it.

Tony:
Yeah. And Ashley, all fantastic points. I appreciate you sharing that with the listeners, and Montes, to kind of go back to your initial question as well, it actually isn’t that crazy for a seller to ask that of a buyer. So it is common that if there’s kind of this bidding war situation going on, that the purchase price exceeds what the property will appraise for, and there’s a name for that. It’s called the appraisal gap. And we saw a lot of this happening over the last 12 months as the market went bonkers, and there was multiple offers, multiple bidding, people bidding on the same property. You saw a lot where the properties were getting placed under contract for a price that was potentially significantly higher than what the property would appraise for. So in a market like this, Montes, it is common. It’s not that crazy the seller to ask that from the seller.

Tony:
And a lot of buyers, when they’re submitting offers in a competitive market, they’ll even include in their initial offer what appraisal gap they feel that they’d be willing to, they’d be willing to go up to, but say that you feel that the appraisal just came in low, right? Not necessarily that you went way over what it was valued at. If you feel that it came in low, you can challenge an appraisal. Okay? We have you successfully challenged a few appraisals, and what we were able to point out was some discrepancies in the report that the appraiser put together. So for example, one that we just did, the appraiser had the square footage off by, I think, almost 200 square feet, right? And that makes a difference in what the value of the property is. The comps that the appraiser chose, we found other more similar properties, better comps, and the same mile radius that the appraiser used that he just overlooked for whatever reason.

Tony:
So find holes in the appraiser’s report that you can point to say, “Hey, here’s an inconsistency here. Or here’s an inconsistency here. Or here’s a better appraisal comp here, or here is some information that was incorrect.” And if you can push back, sometimes the appraiser will admit and make those changes, other times I’ve had it to where you can actually get a second appraisal ordered, and then if all else fails, maybe it’s just about finding a different lender, right? If the lender isn’t willing to jump through those hoops to help you fight that appraisal, you can always go out, find a different lender, they’ll be able to reorder another appraiser. They’ll be able to order another appraisal from another appraiser which will help you hopefully get a better opinion of the value of the property. So that’s what we’ve done in the past to help us get around some of these appraisal gaps that we’ve seen. But all else fails, you might, Montes, your friend might just have to come out of pocket to actually cover the difference between the purchase price and the appraisal price.

Ashley:
Yeah. And I think the thing to take away from this episode is to at least try to dispute that appraisal if that does happen, where there is that gap, the difference. Do what you can to try to get a new appraisal or have the appraiser re-look at his configuration and what he computed as the appraised value.

Ashley:
Well, thank you guys so much for joining us for this episode of Real Estate Rookie. You guys can send us a DM on Instagram or leave a message in the Real Estate Rookie Facebook group. And if you guys are enjoying the show, please leave us a five star review on your favorite podcast platform.

Ashley:
I’m Ashley at Wealth from Rentals and he’s Tony at Tony J. Robinson. Thank you guys so much for listening.

Mindy Jensen:
Welcome to the Bigger Pockets Money podcast, show number 316, Finance Friday edition, where Carl and I recap our big June spending. I have started to notice inflation at the grocery store. I don’t really notice inflation for clothing and shoes because I shop at the thrift store mainly. And I don’t really notice inflation for a lot of other things. I just don’t buy a lot of things.

Mindy Jensen:
But for food, I’m starting to notice that at the grocery store and I’d like to think I have a pretty good handle on our food budget and on food prices in general. And it seems like they are going up and up. And that can be scary if you’re paycheck to paycheck. Hello, hello. Hello. My name is Mindy Jensen and joining me today is my co-host, Carl. You might know him from 1500days.com or the Mile High Five podcast, but I’ve known him as Mr. Mindy Jensen for the last 20 plus years.

Carl Jensen:
This is the first time I’ve ever heard you refer to me as Mr. Mindy Jensen.

Mindy Jensen:
Oh, I say that all the time.

Carl Jensen:
Really? Oh, I’m okay with it. I mean, you bring home most of the bacon so you can call me whatever you want.

Mindy Jensen:
Oh good.

Carl Jensen:
Just no bad words, at least not in front of the kids.

Mindy Jensen:
Oh, I would never.

Carl Jensen:
Okay. Thanks.

Mindy Jensen:
In front of the kids. Carl and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

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

Mindy Jensen:
Wow. That was smooth as silk.

Carl Jensen:
Yeah.

Mindy Jensen:
Usually Scott reads those words and he has been doing it for 300 episodes. So he has that memorized now, but that’s okay. You did a great job. Thank you, sweetheart. So Carl and I are here to talk about our June spending, which was the most expensive month that we have ever had. We spent, let’s open up our spending tracker, which you can follow along with every single month, every single day, if you’re really all that interested, at biggerpockets.com/mindysbudget. And I say Mindy’s budget, because I work at Bigger Pockets and you don’t. So we spent a whopping $11,995.70 this month, all in one month, which is a lot for us.

Carl Jensen:
Yeah. That hurts a little bit. But let’s flip over and say where most of that spending came from. Let’s see, we go …

Mindy Jensen:
It’s right here.

Carl Jensen:
Oh, okay.

Mindy Jensen:
Mindy highlighted it for you.

Carl Jensen:
Oh geez. Yeah. I can’t do anything.

Mindy Jensen:
Are you new?

Carl Jensen:
I need glasses. Yeah. I pretty much am new.

Mindy Jensen:
Get your classes then.

Carl Jensen:
$8,437.15 cents were travel expenses, which is quite shocking. And we had a slippery slope situation where our child decided to go on this school trip to Germany. We said, “Fine, if you want to go on this, we’ll pay for half. You have to cover the other half.” And then I started thinking, I’ve never been there. I’d really love to go to Germany. So let’s go over there and meet her, which is fine. We can shop for flights and get all that stuff and try to find budget accommodations and do all that stuff ahead of time.

Carl Jensen:
But it turns out, this tour company who will go unnamed, but they’re a big tour company, doesn’t book the tickets until like weeks before the actual trip. Keep in mind, this is an international flight and they booked it less than a month before the trip. So we were forced to book our stuff a month before the trip. So I think we paid a premium. Most of that 8,000.

Mindy Jensen:
You think we paid a premium? Let me confirm that for you.

Carl Jensen:
Yeah. I don’t know. I don’t frequently price flights to Frankfurt. It sounds like a tongue twister. Say flights to Frankfurt 10 times fast. What’s another German F-word? [foreign language], that’s a Volkswagen thing. Yeah. Yeah. So anyway, the flights were like, for the three of us. And then we had to buy another one for the daughter because of this other debacle with the store company. So we had to buy three round ship flights and a single flight home back from her. And that was weird, it was cheaper to buy her a round trip flight to go from Frankfurt to Denver and then back to Frankfurt and then to just ditch the second half than it was to buy one flight. So yeah, we ended up buying three and a half flights and I think that was close to $6,000, right?

Mindy Jensen:
That was over $6,000.

Carl Jensen:
Painful.

Mindy Jensen:
And what makes it so painful is that we couldn’t even fly or we couldn’t even shop for airlines. They didn’t tell us if they were going to fly Luftansa or if they were going to fly United or American or any number of other airlines. We couldn’t even start accumulating flight points. They just said, we will get to you when we get to you basically. So we weren’t able to really accumulate any points anywhere that would have worked out. I suppose we could have, going back now, we probably could have gotten those Chase Ultimate Rewards points and done a one-to-one transfer. That actually might have been a really good choice.

Mindy Jensen:
If anybody knows about the Chase Ultimate Rewards points, would that have been good? Because we did end up flying Lufthansa, which is a lovely airline. Everything worked out really, really well with the airline once we were there. We flew during some pretty awful domestic flight cancellation weekends. So we’re really thankful that we didn’t have any of those. We did go direct Denver to Frankfurt, without any sort of layovers or stops at all, which was my favorite way to travel. All in all, we had a good time.

Carl Jensen:
Wait, is it Frankfurt or Frankfurt, how I’ve been saying it?

Mindy Jensen:
Well, I’m American, so I say Frankfurt, because that’s how we roll.

Carl Jensen:
You’re mostly German though.

Mindy Jensen:
I’ve actually only been in Germany like 10 whole days, which occurred in June 2020.

Carl Jensen:
Okay.

Mindy Jensen:
It’s the first time I’ve ever set foot in the motherland.

Carl Jensen:
I do know, we have multiple German listeners and they will correct you because I think I’m right.

Mindy Jensen:
Okay. Well, if you want to correct me, you can send it to Carl, [email protected]

Carl Jensen:
Okay. So something we have never talked about, I’m going to ask you this right now, do you regret the trip?

Mindy Jensen:
I do not regret the trip. I wish we had more time to plan. And I say that like, we didn’t have a year and a half to plan the stupid trip. I wish I would have planned it a little bit better and maybe got a bunch of airline miles on Luftansa and United and American. And I mean, you can always use them someplace else or maybe you can’t, maybe we’ll just go back there. I wish we would’ve done it a little differently, but I’m glad that we went. It was a lot of fun.

Carl Jensen:
Yeah. I regret nothing. It was such a good trip … We saw-

Mindy Jensen:
Oh, thanks for setting me up like that, and then you, “I regret nothing.”

Carl Jensen:
No, no. I think there’s a lesson in here. We’ll tell you real quick what we did and why I don’t think we should regret it. We went to Berlin, that was four days. Then we rented a car. We drove as fast as our little Skoda could go. If you want to haul butt down the autobahn, a Skoda is not a good choice. We had that thing [inaudible] at like, what, 160 or 180 kilometers an hour, I think 110 miles per hour, which is not fast on the fast parts of the Autobahn.

Mindy Jensen:
No.

Carl Jensen:
So we took that thing to Munich after that for another like three nights. And then we came back, we stopped in Rothenburg on the way back and that’s it. I wish we would’ve had more time at both places, but especially in Munich. So back to my original question, I asked if you regretted spending that kind of money and you said no, and I don’t say no-

Mindy Jensen:
Oh, you didn’t ask if I regretted spending that money, you asked if I had any regrets.

Carl Jensen:
Okay. I guess that was my question then. Let’s go back to it then. Do you regret?

Mindy Jensen:
And that makes sense, this is a money podcast.

Carl Jensen:
It’s kind of the same thing. Do you regret the trip because we spent that much money on it or do you regret the money part of it?

Mindy Jensen:
I don’t regret the money. I wish we would’ve been able to save some money. I mean, how many times do we sit here and talk, both of us collectively, on our blog, on our podcasts, on our respective podcasts, we talk about money and saving money and saving money where you can. And we didn’t really have that opportunity. Although I think we could have saved more money if we would’ve tried a little bit harder.

Carl Jensen:
Yeah.

Mindy Jensen:
There’s a lot of information out there about how to earn miles and points and sitting down here talking to you about this was the first time it popped into my head, those Chase Ultimate Rewards, which are really fabulous rewards points. And we have the ability to get new Chase cards fairly frequently. I don’t think we’ve opened up a new one in the last 24 months. They have this five out of 24 rule. You could only open up five Chase credit cards in the last 24 months, I think. I’m pretty sure that’s still the same rule, but I don’t know, maybe it’s not. If you know for sure that, that’s changed, feel free to send us a note or comment in the Facebook group at facebook.com/groups/bpmoney. Would love to hear the updated.

Mindy Jensen:
If you have any tips for travel, saving money for travel, last minute tips when you have a specific deadline, a specific location that you’re going, a specific date like we had, if you have any off the wall tips, that’d be great too. But no, I don’t regret our trip and spending that much money. I mean $8,437 in one category that is not car is a lot, but let’s talk about what exactly that 8437 is.

Mindy Jensen:
That is the airfare, the hotels that weren’t booked on miles, which we do have boatloads of. That was all of our food, all of the restaurants, all of everything that would normally go into different categories. We put that all in travel. And the reason we did that and we did it consciously is because we would not have had those expenses at that level, if we had been at home. So groceries are more expensive because we’re not going to a real grocery store.

Mindy Jensen:
We’re going to a tiny little grocery store because we don’t speak the language, which is another, that’s a regret. We should have learned some German. We don’t speak the language and we don’t know where these other grocery stores are, so we just go to the little convenience stores and convenience stores always have higher prices. We went to restaurants, we went to, what’s the big brew house, brow house?

Carl Jensen:
Hofbrauhaus.

Mindy Jensen:
Hofbrauhaus, thank you. I always forget that. We went to the Hofbrauhaus and we got a great big beer. Well, did you post that picture of me holding two giant beers? I looked like such a lush.

Carl Jensen:
I did.

Mindy Jensen:
Yeah. Thank you. That’s great. You’re awesome.

Carl Jensen:
They’re light beers.

Mindy Jensen:
We drank a lot of beer in Germany. It was delicious. And I didn’t categorize that into different spending categories because we wouldn’t have been going out so much. We wouldn’t have been spending that much money if we had been at home. So we lumped it all into travel. And again, the reason we have so many different categories in our spending tracker is because if we had to, we could cut out travel altogether. Let’s say the stock market takes a big dump, like a 25% dip. Theoretically, of course, that would never happen the first quarter, the first half of 2022. Is it down 25% or just 22%?

Carl Jensen:
I think it’s like 22.

Mindy Jensen:
Yeah.

Carl Jensen:
It’s definitely a bear market.

Mindy Jensen:
Yeah.

Carl Jensen:
Over 20%.

Mindy Jensen:
Don’t get crazy. Don’t say 25. It’s only 22 and we’re recording this on July 4. I don’t know what the market’s going to do by the time this releases on July 7. However, the market has taken a big dump and there are a lot of categories we could cut out and get back into our normal spending threshold. So let’s look at some of, we did some math before we started this. Oops, let’s scroll down.

Mindy Jensen:
So we are in, this is the end of June that we are sharing numbers for. And the total spending that we have done thus far in 2022 is $46,484.79. Now, when we first extrapolated our FI number, what did we say that was going to be?

Carl Jensen:
40,000.

Mindy Jensen:
$40,000 for the whole year. And here is us going $6,000 over in six months, so that’s a lot. We looked at some of our expense lines and the biggest one that we could very easily cut out is travel. We have spent $17,000 in travel this year, and this is the first year after a pandemic, so we want to get out and see things. And yes, I’m not saying the pandemic is over. The pandemic is still going on, but we have been able to travel more this year than we have in the last two years. That’s a very easy cut, but that’s $17,000.

Mindy Jensen:
So without the travel expense, we’ve spent $29,424. Okay, well, we planned on 40,000, so that’s still at six months, we should be at $20,000, but we planned on $40,000 with no mortgage payments. How much have we paid in mortgage? Well, lucky you should ask that question. I anticipated that and I did the math and we have done $7,938 in mortgage payments. So without travel and without mortgage payments, the amount that we have spent this year in six months is $21,486.71.

Mindy Jensen:
So now we’re only $1,400 or actually you round that up to 1500, that number comes up all the time. It’s crazy how frequently the number 1500 pops up in our lives. We are $1,500 over our anticipated spending over the course of six months, which feels pretty good because we haven’t had to tighten our belts. We go out to dinner frequently. We go out to tap rooms with friends. We spend way too much on groceries and we live a pretty good life, without feeling like we are restricting ourselves. I mean, that’s what I think, what do you think?

Carl Jensen:
Yeah. I think that’s-

Mindy Jensen:
[inaudible] plant words in your mind.

Carl Jensen:
Yeah. I think that’s absolutely true. And this is something I say, I think every time I record. Every time we record, I say this. Sorry, I sound like a broken record, but we’re frugal for the things we don’t care about so we can spend on the stuff we do care about. The travels important to us. When we went to Munich and Berlin, we stayed close to the city center so we never had to get into a car. We walked everywhere or took bicycles and we paid a little bit extra for that convenience, but it was well worth it, because I don’t like to get in a car if I don’t have to. So it was great, but we’re pretty frugal. I’m about to order 20 tons of rocks to put in our yard and I’m going to move all of those myself, because I think it’s great exercise.

Mindy Jensen:
You heard it here. I don’t have to move any of those rocks. He’s going to move them all himself. I love that.

Carl Jensen:
Well, did I say me?

Mindy Jensen:
Yes.

Carl Jensen:
We, we, we.

Mindy Jensen:
No, no, no. They’re not going to cut that out. They said, you said you were going to do that all by yourself.

Carl Jensen:
There’s no I in rock.

Mindy Jensen:
There’s no I in team.

Carl Jensen:
I guess there’s no we in rock either, but yeah. But I don’t mind because I get a bunch of exercise from it. What are some other things we take care of our own lawn. I know some people absolutely hate mowing their lawn, but I really hate blowing their line button. I don’t mind it so much. I could put on my noise canceling headphones and catch up on the Bigger Pockets Money podcast.

Mindy Jensen:
Yeah. What is this episode? 316. So what do you have? 313 episodes to go.

Carl Jensen:
Yeah, I think so. I’ve listened to a couple. It’s pretty good. I like it. It’s too close. Yeah. What else? We do our own car maintenance. I don’t really like that, that much, but it’s faster to change the oil than it is to go to one of those places and sometimes, they screw it up. I cut my own hair, which looks so, so great.

Mindy Jensen:
Yeah.

Carl Jensen:
So I’ve paid like zero for haircuts for the past 10 years, at least. Right.

Mindy Jensen:
So, oh, it’s been longer than that. We’ve been cutting your hair. I, we, that’s a team effort.

Carl Jensen:
Yeah. So if you think of that, 100 times 20 bucks, that’s $2,000.

Mindy Jensen:
100 times 20, what are you 100 times 20 for?

Carl Jensen:
100 haircuts times 20 bucks with a tip and all that. At least 100 haircuts probably. No, a lot more.

Mindy Jensen:
Over what time period?

Carl Jensen:
Like one haircut a month for 10 years. That’s actually 120 haircuts.

Mindy Jensen:
You’ve been cutting your hair for like 20 years.

Carl Jensen:
Okay. So bump that up. That’s all our airfare. My haircuts bought us our airfare or most of it to Germany. But yeah, I think there’s something in that. I think you need to, at least our models to carefully consider where we spend so we can not spend on the things that we … I just totally messed it up. So we can spend on the things we really care about, but then save money on things that we don’t care so much about.

Mindy Jensen:
Well, let’s look at the things that we don’t care so much about. Oh, I don’t really want to because we haven’t really done this line at all. We need to work on that a little bit more.

Carl Jensen:
No, we have done. Here’s one entry right there. We’re looking at charitable-

Mindy Jensen:
And one over here, charitable contributions needs to be increased significantly.

Carl Jensen:
Yeah. We do, do some. I think we gave some money to Ukraine. We forgot to put that on there. Yeah. And we’ll certainly do more. I think our goal in life is probably to give in much bigger amounts. This is a whole other conversation, but I always think right now it’s the most spendy part of our lives. We have two children, but in like 10 years, they’ll be out of the house, I hope. They’ll be out of school, I hope. And then we can live super cheap and then we can give more of our money away.

Carl Jensen:
Now I still feel, we’ve done well, but still a little bit of shakiness and unease due to financial insecurity. So we’ll give and we’ll give big, but it’s probably a little bit further down the road. I’m not going to wait till I die, like Warren Buffet though. It’d be cool to see your money in action while you live, but we’ve gotten way off topic.

Mindy Jensen:
We have, but that’s something that we need to start discussing. We don’t need to discuss that right now and hash that out as people listen to us awkwardly discuss this. We’re going to stop that. But we will discuss this after the lights go down. Let’s look at our spending. If you look at our June spending, we only hit four red categories. And one of them was utilities by a dollar, which doesn’t even count. One of them was school. I don’t remember what I bought for $27, but it was a school expense that I had allocated zero to because it’s June and I didn’t think we’d actually be spending any money on school. So I think I just need to have $100 in the budget for school for every month. And then sometimes we hit it and sometimes we don’t.

Mindy Jensen:
Gifts, what gifts did we buy this past? We bought a lot of gifts in June. I can’t remember why, but we went $173 over the gift giving budget. And oh goodness, last month we went, we really need to up our gift giving budget because we have really gone over.

Carl Jensen:
In May, we had a family member graduate from school and we took the family out to dinner. So I put that in the gift category. That’s where that came from.

Mindy Jensen:
That’s right and I didn’t think of that when I was making my budget. That’s a learning opportunity and a research opportunity for everybody who is listening, who wants to make their own budget. Think ahead. I don’t know if you know this, but my projected is just a guess for a while. Because we haven’t been tracking our spending for so long, I don’t really have a good guess, a good gauge as to where my money is, where my money will be going this month. So I am now guessing based on, or estimating, let’s call it an estimation and not a guess.

Mindy Jensen:
I’m estimating based on the previous month. And that’s right, May was expensive. June was expensive. I think that maybe for gift giving, we need to bump that up to about $150 a month and see what happens, except for Christmas, which will be more.

Carl Jensen:
Yeah, it’s it feels good to be generous. I don’t mind spending money in that category at all. I think one of the gifts was we sent something to J. Money, Budgets Are Sexy. Congratulations, J. on buying it back.

Mindy Jensen:
Oh yeah. Budgets Are Sexy is now re-owned by J. Money.

Carl Jensen:
Yeah.

Mindy Jensen:
What else do we have? That’s right, I did send that. Our household budget, I think $200 a month in random household expenses is going to be our sweet spot. It feels like we have finally figured that out. Although I’m looking back, $1000, $2,000, we bought a couch. What did we buy in May? I don’t even remember. That’s kind of sad. What did I buy? I don’t even remember. And yet, I blew my budget way out of the water by $1000. Now I have to go back and research that.

Mindy Jensen:
We didn’t have any entertainment last month, but we were in Germany, so that was all entertainment. And again, that went into the travel expenses. So a lot of these numbers, the category numbers in June are artificially low because we were in Germany for 10 days. What else do we have? Healthcare is going to be ongoing until we figure that out. We are going to have that about $400 and I’m happy to come in a little bit lower. But overall, we had pegged it at 13,600 and we came in at 12,000-ish, just under 12,000. So we’re $1,600 below budget this month and it feels good to have a green month instead of a red month.

Carl Jensen:
Yeah.

Mindy Jensen:
Next month, I have us pegged at 9,200. I think I’m going to bump that up to 9,500.

Carl Jensen:
And it looks like a lot of this is coming from travel. We have one more big trip plan. We’re just going crazy. We’re going to be on an Oregon for some time.

Mindy Jensen:
We?

Carl Jensen:
Yeah, we.

Mindy Jensen:
We? I’m going to be here in Colorado.

Carl Jensen:
Yeah. After this, well, you’re coming out to California for a little bit.

Mindy Jensen:
Yes. Yes.

Carl Jensen:
So there is that, but then after that, we’re going to calm down. We’re not going anywhere for Thanksgiving. We’ll probably stay here for the rest of the holidays. We’re going to travel out to you for the Bigger BP Con. Is that what you all call it?

Mindy Jensen:
San Diego, BP Con, October 2 through 4. You can find more information about the Bigger Pockets Conference at biggerpockets.com/events.

Carl Jensen:
So I think we should talk about what goals we have for the second half of the year. What have we learned the first half?

Mindy Jensen:
We have learned that we don’t know how to make a budget.

Carl Jensen:
Yeah, but I think, for me at least, I think the keeping track is more important than the budget. The keeping track and especially the reflection part, like what we do now, this is probably our money date. I know certain couples do money dates where they’ll meet on a weekly or maybe monthly basis to review their numbers. And that’s exactly what we’re doing here. We’re just doing it in front of everyone. I don’t actually like budgets because that puts constrictions on your spending. You should spend thoughtfully, but that’s where what we’re doing comes in. We can review and consider if all our spending was thoughtful spending.

Mindy Jensen:
Ooh, I’m going to disagree with you and say, I like a budget because I open up this spending tracker frequently. I have this open on my computer all the time. So you can follow along at biggerpockets.com/mindysbudget. I am speaking specifically of the second tab, the 2022 budget. I keep this opened every day and I will look at it. I’ll just check in to see how we’re doing. And I will see that in the month of July, I have already spent $40 on groceries. Okay, that’s no big deal. I have $709 left or I will see that I have already spent, oh that’s fitness, $250 of our $300 fitness budget was on a bicycle for our daughter. We’ve spent a lot of money on our travel budget.

Mindy Jensen:
We have two trips to take and we only have $1,200 left on that budget. I’d like to be a little more conscious about our spending on food when we are on those trips. So instead of going out to dinner every single night, maybe we go out to dinner every other night and we make sure we have breakfast and lunch in the Airbnb or hotel, wherever we’re staying.

Carl Jensen:
Yeah, I agree. Can I go to a Taco Time when I go on my road trip?

Mindy Jensen:
Okay. What’s Taco Time?

Carl Jensen:
It’s a taco restaurant. They’ve got a deep fried taco or a deep fried burrito. I think we call those chimichangas but they call it something else. I’m not going to have that one.

Mindy Jensen:
[inaudible] heart attack.

Carl Jensen:
I value my cardiovascular system, so I don’t abuse it too much.

Mindy Jensen:
What else do we have? Oh, parties. Well, that party number’s going to go way up because we’re having a 4th of July party today and I didn’t put that expense in yet.

Carl Jensen:
Yeah. Going to be crazy.

Mindy Jensen:
So I like to keep track of this. We’ve already spent almost half of our clothing and shoe budget this month. So I want to make sure that we keep that under the 250 mark, which means that maybe I don’t go to the thrift store with the girls whenever they ask.

Carl Jensen:
Yeah.

Mindy Jensen:
Even though it’s the thrift store, we’re still going. In fact, I think I didn’t put the Kohl’s charge from yesterday in there, which means that there’s more money that we’ve already spent. So it’s very helpful for me to see this. When I don’t see this, I don’t think about it. When I see this, I think about it and I think to myself, oh, maybe I don’t need to charge that item. Maybe I don’t need another pair of shoes. Maybe I can wait another month for a new pair of workout pants.

Mindy Jensen:
I would like to know what about these monthly money budget dates are helpful to you and what you would like to hear from us in the next recap, because we’ve just been doing what we want to talk about, but we want to make sure that you’re hearing what you want to hear. Do you have any questions about our budget or how we come up with any of the things that we’re doing or any other questions that you would like to know about making a budget, making a spreadsheet?

Carl Jensen:
Yeah, I agree. I think it’d be super fun to answer a reader question or two.

Mindy Jensen:
Yeah. Any questions you have about our finances? You think we’re missing a category? I think we’re pretty good on categories, although we don’t have the umbrella insurance category in here. That’s going to add another $100 a month, $75 a month.

Carl Jensen:
Wait, how much is it?

Mindy Jensen:
It was like, was that $900 a year?

Carl Jensen:
No, I don’t think it was that much. I thought it was pretty small. We should go back.

Mindy Jensen:
I should look that up.

Carl Jensen:
Yeah. It wasn’t that.

Mindy Jensen:
Was it $900 for all of it?

Carl Jensen:
Yeah. For all of it.

Mindy Jensen:
For all of it, yeah, so, that’s okay.

Carl Jensen:
Yeah. We have a cheap old cars. Our auto insurance is like 800 a year or something like that. Right?

Mindy Jensen:
No. Auto insurance is like $300 a year. Homeowner’s insurance is $600 a year.

Carl Jensen:
That’s it? Wow.

Mindy Jensen:
Well, and the umbrella’s in there somewhere. I can’t remember what it was.

Carl Jensen:
Okay. Wow. Yay to crappy cars.

Mindy Jensen:
Or maybe homeowners is 900. I don’t know. I should look this up. Maybe it was $600 every six months before and now it’s 900 for the year.

Carl Jensen:
Okay. Anyway, shout out to the Mazda people. That thing will not die.

Mindy Jensen:
Yeah. Mazda five.

Carl Jensen:
Yeah, it’s a Mazda five, which is like, it’s a mini minivan or as Mindy likes it call it, the Mindy van.

Mindy Jensen:
It’s the Mindy van. Yes. If your name is Mindy and you drive a minivan, you should change the name to a Mindy van.

Carl Jensen:
It’s pretty awesome.

Mindy Jensen:
It is great. Is there anything else you want to talk about?

Carl Jensen:
I don’t think so. For the second half of the year, I would just like to keep watching things. It’s become a little bit, I don’t say scary, but yeah, this is the first time since I quit by job, since we started our journey. We started talking about financial independence, October 2012 and we had a little bit of a correction when COVID happened, but that one was very short. The feds jumped right into prop things up. V shaped recovery, hit the bottom, bounced back up like a rubber ball.

Carl Jensen:
This one has already gone on longer. And I think it will go on for a little bit longer as well. We might be in for some more, I don’t even want to say pain. I hope it’s not painful for y’all. But do you have any thoughts on that? Does that change the way we think about things? I’ve been noticing inflation too. I always notice gas prices. Everyone notices that, but I went to the store to buy some other stuff and the diet Mountain Dew was way more, so I’ve cut way back.

Mindy Jensen:
You should cut way back because it’s Mountain Dew.

Carl Jensen:
I know, it sucks. It is the diet, but it’s still bad for you.

Mindy Jensen:
I have started to notice inflation at the grocery store. I don’t really notice inflation for clothing and shoes because I shop at the thrift store mainly. And I don’t really notice inflation for a lot of other things. I just don’t buy a lot of things. But for food, I’m starting to notice that at the grocery store and I’d like to think I have a pretty good handle on our food budget and on food prices in general. And it seems like they are going up and up. And that can be scary if you’re paycheck to paycheck.

Mindy Jensen:
Having a meatless Monday, meatless Tuesday, meatless Wednesday to try and combat that, so you’re not spending so much money on the big expensive things. Go to budgetbYtes.com, B-U-D-G-E-T-B-Y-T-E-S and get all sorts of really inexpensive meals there, inexpensive recipes. We had Beth on the podcast just a few months ago or just a few weeks ago. And she had some really great tips. Cheese and nuts are really expensive sources of protein, but eggs are an inexpensive source of protein.

Carl Jensen:
We could buy our own chicken.

Mindy Jensen:
You could buy our own chickens and eat the eggs. And then when the chickens don’t make any more eggs, then you eat the chicken.

Carl Jensen:
Whoa. I don’t want to be involved in that part.

Mindy Jensen:
I don’t want to either. Plus our HOA doesn’t allow us to have chickens.

Carl Jensen:
Yeah. The kids would probably need the chicken. It would become a family pet. And then yeah, the chicken-

Mindy Jensen:
Can you imagine the hassle they would give us if … So, yeah. I’m starting to notice it, but I keep hearing that things are going to change. So we’ll see.

Carl Jensen:
Yeah. Yeah.

Mindy Jensen:
I’m not really concerned. And I really hope that this doesn’t come back to bite me in the butt. I have a job. We have saved. We hit our FI number and then you didn’t want to quit, so you worked another couple of years, we doubled our FI number and it has continued to grow even after you left your job. And according to the 4% rule, we have far more than we need. The 4% rule failed for 4% of the time, which is interesting. And that’s not why it’s called the 4% rule. But the 4% at the time that it failed was when the person, the retiree retired into a period of extreme inflation.

Mindy Jensen:
So if you were planning on retiring now, if you did retire and all of a sudden we are hitting inflation, keep track of your spending. Use my spending tracker copy and paste and change my numbers to whatever you want and keep track of your funds. You’re not going to go from perfectly fine to absolutely destitute overnight. You should have some warning, but you will have the warning if you’re paying attention.

Carl Jensen:
Yeah. And right now is the best time ever to be looking for a job too, super low unemployment.

Mindy Jensen:
Are you going to go get a job?

Carl Jensen:
I don’t think so. Is Bigger Pockets hiring?

Mindy Jensen:
Yes. Bigger Pockets is hiring. Go to biggerpockets.com/careers and you can see all the current job openings that we have.

Carl Jensen:
Are they paying me for my keynote at BP Con? I think they’re going to call it the Carl note, instead of keynote.

Mindy Jensen:
No, you’re not speaking at BP Con. Sorry.

Carl Jensen:
It’s okay.

Mindy Jensen:
Speaker submissions are closed.

Carl Jensen:
Ah, okay. I’ll try next year.

Mindy Jensen:
Okay. Good luck. Okay. Do you have anything else you want to talk about?

Carl Jensen:
That’s all.

Mindy Jensen:
Okay. Should we get out of here?

Carl Jensen:
Let’s go.

Mindy Jensen:
From episode 316 of the Bigger Pockets Money podcast, he is Carl Jensen and I am Mindy Jensen, saying, see you later, alligator, right back to the basics.

Carl Jensen:
Thank you.

Don Fandetti, Wells Fargo, joins ‘The Exchange’ to discuss Wells upgrading Rocket Companies to overweight and the impact on mortgage lending from Fed tightening.

Dave:
Hey, everyone. This is Dave coming at you with another bonus episode. Just a few weeks ago, we released our first bonus episode and it got such great feedback, we decided to do it again. In this episode, I got together with Henry, Jamil, Kathy, and James to talk about whether or not you should still be considering investing in real estate even with today’s crazy market. We were actually just intending to make this as a YouTube video, but it was so good we had so much fun and there was so much value created, we decided to throw it up on the podcast feed so you could all hear it here. That said, if you haven’t already subscribed to our YouTube channel, you should definitely check it out because we are putting out a lot of content really regularly that doesn’t make it here to the podcast channel. We can’t get everything out on a podcast, so there’s a lot more content there on YouTube, and it’s a great opportunity for you to learn more from me and the rest of the crew.
But for now, please enjoy this bonus episode and as always, we’d love to hear what you think. This is On the Market, a BiggerPockets podcast presented by Fundrise. Hey, what’s going on, everyone? This is Dave Meyer and I am here today to talk about a super important topic, whether or not 2022 is a good time to invest in real estate. Believe me, I know there is so much conflicting and confusing economic information, so I brought my friends from the On the Market podcast. We got Henry Washington, Jamil Damji, and James Dainard joining me today to talk about what they are doing to invest in real estate and how you can jump into this market. Yes, you can do it even in this crazy market. In addition to all the insights, the panelists are about to share with you, we also have a ton of Easter eggs and free giveaways because we just felt like it honestly, and we have some amazing things to give away to you.
You can go to biggerpockets.com/datadrop and download all of the rent data that I have amassed for the top markets in 2022. In the episode, we giveaway Jamil’s Tricks to Underwriting. I built a house hacking calculator that you’re getting for free. All of the links are below. You can download them all 100% for free, commitment-free on biggerpockets.com, so absolutely go do that. There’s no reason not to. With that, let’s jump into our question of the day, whether or not you should invest in 2022. What’s going on, everyone? This is Dave Meyer, your host for today’s panel conversation about whether or not right now in this crazy hectic market we see in 2022, if it is still a good time to invest and to have this conversation. I have brought my friends from the On the Market podcast.
We have Jamil Damji, master flipper, and wholesale coming to you from Phoenix, Arizona. Then we have Henry Washington, buy-and-hold and short-term rental investor from Northwest Arkansas, and James Dainard, the certified deal junkie from Seattle, Washington. Thank you all so much for being here. Before we get your takes on whether or not you are investing right now, and whether you think the rest of our audience should be investing right now, I want to just give a summary of what’s going on. We are recording this in pretty much the middle of 2022, and since the beginning of the year, the housing market has changed pretty fundamentally, at least in my mind.
When we started the beginning of this year, we had interest rates that were about 3.1%, which is close to the lowest it’s ever been. Now, as of this recording, it’s above 6%, so they’ve nearly doubled. At the same time, we are seeing that housing prices are still going up. They’re up about 15% year-over-year as of May, which is not as high as it was last year, but is still ridiculous by historical standards. Inflation is running hot at about 8.4%. Inventory is still extremely low, but starting to tick up, and of course, many are calling for a recession. So I think it’s reasonable that a lot of people are wondering is now a good time to invest in real estate? Just quickly, yes or no. Jamil, is this a good time to invest in real estate, and why do you think so?

Jamil:
Absolutely. I think it’s a great time, because you can actually get out there and get some deals. So if you stick to the fundamentals of understanding your numbers, sellers are having conversations they were not having months ago. They are ready to deal. They are ready to take haircuts on their numbers. You can get out there and snag up some amazing opportunities, get at it.

Dave:
I love that, because that is super contradictory to what we hear a lot in the overall narrative about investing right now, but it sounds like you’re finding good deals. We’ll jump into that in a little bit, but Henry, what do you think? Yes or no, good time to invest?

Henry:
Yes, absolutely. Real estate’s cyclical. It’s either going to be hard to find deals and easy to get money, or hard to get money and easy to find deals. That’s how the market works, so jump in either one of those scenarios. There’s always going to be a challenge, no matter what the market’s doing. It’s about figuring out how to overcome that challenge and the best way that fits your financial situation.

Dave:
I love that. All right, James, are you going to be a contrarian here, or you also think it’s a good time to invest?

James:
Yeah, it’s always a good time to invest. Scared money doesn’t make money.

Henry:
Amen, brother.

James:
At any time you need to be ready, or at least for me, I’m always buying. It’s just about adjusting my numbers and changing things, but I am always a buyer in any type of market. It’s just a matter of what kind of deals are coming in my way. Like Jamil said, they are coming. We are seeing them rapidly coming our way.

Dave:
All right. Let’s jump into that idea that there are more deals. Jamil, you mentioned that sellers are now having conversations that they weren’t just a few months ago. Can you tell us a little more about that?

Jamil:
Absolutely. In Phoenix, Arizona, for instance, in the last say six months, if I was trying to buy something at even 70% of ARV, I was having a really difficult time. I’d been adjusting my numbers up and up and the fix-and-flip rehabbers had been doing the same thing over here as well. We were buying speculatively. It was starting to get pretty scary, to be honest with you and we were looking at our projects and we’d done great on them, but we thought, “Man, when we bought this deal, we really were underwater. The day we closed.” Now we’re back to the fundamentals. I’ve been having conversations with real estate agents who are representing sellers right now, who haven’t been able to move their property. I’m getting discounts of 150,000 or more from what their original asking price was just because they didn’t time the market right, so these conversations are happening. They’re happening every single day. My team is cleaning up.

Dave:
That’s really encouraging to hear. I want to just reiterate for everyone listening and watching this that Jamil is not saying he’s going on the MLS and just buying something that is at list price. He’s able to negotiate with sellers because the dynamics of the market have shifted. Six months ago, a year ago, it was probably the strongest sellers market ever, probably. I think sellers are starting to see that the scales are tipping a little bit more in buyer’s favor. In these transitionary periods, it can be an opportunity to buy. James, I know that’s something you always talk about is looking for opportunities in these transitionary periods. You are a buy-and-hold investor. I know Jamil, we might have convinced him to do his first buy-and-hold the other day, but-

Jamil:
Closing July 11th.

Dave:
… are you seeing the same kind of dynamics in the buy-and-hold market as well as in the flipping and wholesaling market?

James:
Yeah. We’re seeing things across the board. It’s kind of amazing, because everyone keeps talking about, “Hey, rates are so high, you can’t make anything pencil,” and that is just not true. We looked at four deals on market on Monday that all cash flow above 10% cash-on-cash returns at 30% discounts and really good BRRR opportunities. We’re definitely seeing that things are balancing out now to where you can look at a property and go, “Okay, does the math work or not?” Then you get the time to evaluate it correctly, and then you can write your opera accordingly. But the market is definitely balancing out and it is making for great opportunities, and that’s why we’re just changing numbers around. We have lots of people reaching out to us on a daily basis right now like, “Hey, what will you pay?” We’re giving them the numbers. They might not be happy with them, but people are definitely starting to play ball.

Dave:
That’s really interesting. I hadn’t even thought about the fact that lower competition in the market right now means that you have more time to underwrite your deals and you can actually sit and think about something probably for the first time in two straight years. Everything was going in four or five days before, so now you can actually have some time.

James:
Yeah. Before you start throwing out hundreds of thousands of dollars, you actually can think about it for a second. The last 12 months was like, “Okay, cool. I’ll buy it. Here’s a half million dollars.” It’s like, what is going on?

Dave:
It is. It is a benefit to investors to be able to have some time to think about this. Now, I’m sure there are people watching this thinking, “These are three successful investors with sophisticated marketing apparatus, great deal flow, and they’re biased,” because you all like real estate investing. That’s your business. Henry, what do you say to that? Do you think there is some validity to the fact that we are all biased, and how do you respond to something like that?

Henry:
I think the bias comes from the success and not just success, but life- changing success that we’ve seen and how this vehicle has not only provided us a return on our investment, but provided us the ability to be good stewards of other people. We spent the first half-hour before we started recording talking about something really kind, James was able to do with some money that he made. So the bias comes from us understanding how powerful of a tool this is to change people’s, not just their lives, but their family tree.
It’s a generational wealth building tool, so I say that if we are biased, that should excite you, because we are biased because it’s such an amazing vehicle. You look at the stock market and you think about you’re building wealth, you’re generating some income. It’s more just like thinking about individually, what that can do real estate gives you that and the ability to be a blessing beyond just yo because of the abundance it can provide. So if we sound biased, we probably are, but that should be super exciting to you, because we just want you to be able to experience some of the amazing things that this tool provides.

Dave:
A lot of people ask me and they say you’re biased or people feel that there’s fear. Basically, they’re thinking that there is going to be a market correction seems to be the idea that people in the real estate space are either deliberately or are blindly ignoring the fact that there is going to be a market correction. The only true answer is, no one really knows what’s going to happen. I certainly have my opinion. I think I know you all have your opinions about what’s going to happen, but there is a genuine fear that people don’t want to buy at the top of the market. I think even people who want to invest in real estate and are bought into the idea long term of investing in real estate say, “Why would I buy right now? Interest rates are high and the market could correct.” So Jamil, I’m curious, how do you handle that fear and how do counsel other real estate investors to managing that?

Jamil:
Well, that fear always exists. I’ve been hearing people tell me that the market was at its peak so many times on the ride up. Look, I can absolutely say that we’ve hit a threshold. We’ve hit a threshold of affordability. We’ve hit a threshold of interest rates. We’re in an interesting spot. At the same time, I believe that when you’re looking at real estate and you’re looking at it over time, we’ve gone up. We always go up, and even though you get these little blips where values can decrease, you got to look at the use case. Like, what are you doing with the property?
My friend, Pace Morby, has a saying, and I love it. It rhymes. He says, “The equity comes, equity goes, but the cash will always flow.” So if you’re looking at a deal and if you’re looking at it from a short-term perspective and you might lose a little bit of money in equity, well, are you still making money in cash flow? You’re really only losing anything if you sell at this time. So I’m about to make a purchase for $12.5 million on a multi-family building. I was talking to James before we started the show today, and does it make me nervous? Absolutely, guys. It, for sure, makes me nervous, but I have a plan and I know the fundamentals of what I’m doing. I love the location of the property.
There’s an absolute opportunity for me to increase rents. I’m going to depreciate a lot of my income, so I’m going to save money on taxes. This makes financial sense. I’m using the fundamentals of real estate to increase my wealth. In a hot market, in a not-so-hot market, I’m still making money. One more thing, yesterday, I was able to trade a $25,000 assignment fee. In this crazy market where all this fear is everybody’s talking about, “Oh my God, this and that,” well, what about the $25,000 that I made yesterday? Is that biased or is that actual money?” That’s money, so if you understand how to do this and how to make proper moves, and if you’ve got the liquidity partners, you’ve got the buyers ready, you’ve got sellers ready to have conversations with you, you can always make money.

Dave:
That’s great advice. Obviously, it really just depends on the strategy, and there’s so many different ways you have to operate differently in each type of market. You said something, Jamil, that you use Pace’s rhyme. You said that the cash will always flow. James, you often hear, and there are fears of recession. I saw something recently where Bloomberg said that the risk of recession is about 75% right now. In my experience, I haven’t seen rent go down, even in recessions. I haven’t lived through as many as other investors have, but you can look at the data for this and see that it hasn’t. Are you afraid that rent is going to go down if there is a recession? If so, how do you mitigate that possibility in your own investing?

James:
I think it depends on the market that you’re in. Some markets are definitely really elevated. People living in secondary home areas that moved out for pandemic reasons, I do think those rents are going to come down. Those are pretty juiced up right now. How we do it is, we focus on where the money is and the jobs are, and we’ve always had good success. Even back in 2008, when the market crashed, I didn’t see a lot of rent drop. They actually stayed very stable. The big difference was it took 60 to 90 days to fill rather than a week or two, and it was just a longer time to fill up your units, but we didn’t see a lot of rent drop. Things that we’re looking at is, like right now, we just wrote an offer on a 90-unit building up in Everett, Washington, but it’s downtown. It’s next to the jobs. It’s still very affordable.
Our average rent or unit per rent or, it’s a 1.75, a foot that we’re performing and out, and so we’re staying where the affordability are. Then, we’re also looking at staying away from different types. I wouldn’t go buy luxury apartment buildings right now, because I don’t want to go chase those really, really high rents. When those rents went from 3,000 to 4,000 in Washington, that’s a huge jump and that can come back pretty aggressively. But the affordable stuff, if you’re around that median home price and you are staying in that median price range, that stuff doesn’t really flex much.
Then, the other thing that we do is we make sure we get good tenants in and we don’t slum board. Everything gets renovated to a high caliber because our quality of tenant that’s coming in is good. They appreciate living in a good spot, so they’ll actually rent quicker and they don’t mind paying more money for a good unit. So everything that we look at right now, we have full stabilization numbers in. We have big budgets, and that deal has to work with all of this in there, or we won’t buy it because we want it turnkey. We want low maintenance. Then also, with inflation going up, we also don’t want this building to bleed us out for two to four years. So by stabilizing these correctly, you get better tenants, rent don’t fall, less money out of your pocket.

Dave:
Love the idea of just producing a great product that attracts a great tenant or a great customer. It’s a surefire way to continue to generate the same kind of income that you are expecting or that you underwrite your deal with. Just for reference, James is right. Just to provide some data here, back in 2008, housing prices dropped nearly 20% nationally and rents, they stayed pretty flat. Of course, it depends market to market, but just on a national basis that is pretty dramatic, because if people do stop buying as many homes, maybe they need to rent. Just for some further context, right now, vacancy, as James is saying, it could start to go up in a recession. It is at its near all time low.
Vacancy is extremely low for the same reasons, or one of the same reasons we’ve seen housing prices go up so much is because there’s just not enough homes. Some of what, basically, what I’ve heard all three of you talking about so far is that we need to adapt. You can’t just go out and buy anything in this kind of market. You have to be smart. That’s always true. I guess maybe the last two years you could have just shot from the hip and done okay, but we’re getting back to the area where we need to be smart and considerate. Henry, what’s one strategy or one niche within the whole realm of real estate investing that you think makes sense in this type of economic climate?

Henry:
Oh man, absolutely. I’m always going to be a big proponent of house hacking, because when you’re looking at a tough economic climate, one of the things you want to be able to do is create more income, or reduce expenses and then be able to invest the difference, some sort of hedge against the economic factors that are pushing against you right now. So when you look at something like house hacking, it is fairly low ceiling to get into it. You can find a deal that works from a house hacking perspective, pretty much on the market and almost any market because you are also going to factor in that you are going to be eliminating a mortgage or reducing it substantially by creating income from that property that you’re living in. It’s also low barrier to entry as far as cost to get into the property, because you can utilize a convention or an FHA owner-occupied loan and get in with 5% down, sometimes even three-and-a-half percent down if you can qualify for an FHA; sometimes even less, if you can qualify for a VA loan.
There’s no down payment, or there’s assistance programs like NACA, Neighborhood Assistance Corporations of America, where you can get into it without having to pay a down payment and they will pay your closing costs. So there’s all these types of programs that you can leverage to get into a multi-family asset or even if it is a single-family home and you rent out rooms, there’s multiple options, and that’s what I like about it is, you can take the place that you live, use it to create income and decrease expenses, which gives you this surplus, if you will, of money that you didn’t have before, which now you can use to either make your ends meet if you’re in that position, or set it aside so that you can invest in something that potentially you’re not living in, but it’s one of the easiest ways to do all of the things, which I think you need to do when economic constraints are tight, which is, save money and figure out a way to make more money.

Dave:
That’s awesome. I think house hacking is just such a no brainer for people, especially if you’re just trying to get started. Rent is so expensive right now, you’re probably not saving that much money renting. Even if you’re fearful of the market, you can probably reduce the amount you’re spending. We actually mentioned this on the On the Market podcast in a recent episode, but I did create a tool. It is a calculator where you don’t just look at whether you buy or own, there’s plenty of things out there in the media where you can do a buyer or a rent calculator, but this is a buy, rent or house hack calculator that can show you if and how much money you can actually save. We will put a link to that in the description below. You can download that completely for free on BiggerPockets. Jamil, what about you? What would your one niche or strategy advice be for people who are looking to jump into real estate investing right now?

Jamil:
Well, I think if you’ve got fear of holding a property and worrying about the equity potentially disappearing, really understanding the fundamentals of wholesaler. I don’t just say that because I’m a wholesaler, I’m saying that because if you are fearful, then trading is the way to go. I was fearful coming out of the last recession because I got burnt in 2008. I lost millions of dollars. This is my second go around, so I learned what not to do last time, and that was collect a ton of leverage and get overextended. I’m not in that position, but I can tell you this, that I traded property on the way down. I traded property at the bottom and I traded property all the way up, and I made money being able to do that. I sustained my life because I was able to understand how to wholesale contracts.
So I’m telling anybody who’s out there right now, if you’ve got fear, if you think, “Hey, I don’t want to buy a property and hold it right now, because I’m worried I might lose 10 or 20% in equity if a correction happens,” understand the fundamentals of wholesale, get yourself involved. You can wholesale a transaction. You can wholesale a house with an earnest deposit and just understanding the values and understanding the fundamentals of what a property is worth. Guys like myself, Henry, James, we’ll buy those deals from you, so you can actually make tons of money understanding how to wholesale properly. I think right now, especially if you have any fear, that’s the way to go.

Dave:
That’s great advice, because it’s relatively low-risk compared to a lot of other real estate investing strategies. Jamil, you previously on our podcast gave away some underwriting advice and a spreadsheet that we were giving away on BiggerPockets. Now that I just talked about giving away my calculator, would it be okay if we linked to that in the show notes as well to that people can go download?

Jamil:
Absolutely. Absolutely. They’re called the Appraisal Rules, guys, and you can follow them to understand how to really hone in on how much a property is worth and what its potential is.

Dave:
Awesome. Well, thank you. You can download that for free, again, in the description below. We’ll have the link there. All right, James, what about you? What strategy would you bank on here in 2022?

James:
All of them, because [inaudible 00:24:16] at the end of the day, a deal’s a deal. It can be a great wholesale deal. It can be a great flip deal. It can be a great buy-and-hold and not all those are the same, but the biggest thing that I have had to do in the last 90 days is really establish my buy box. I see a lot of people, the people with fear are the ones that go, “I don’t know what’s going to happen and I don’t know what I want to do.” So the first thing you want to do is narrow down what you want to do. So for each sector that we work in for wholesaling, we have a buy box like, “Are we going to keep that deal or sell it?” We know what deals we’re keeping, what deals we’re going to wholesale off.
We know if we’re looking at a buy-and-hold, whether it’s a two to four unit or 20, 40, 50 units or above, we’d have our buy box and our process set in play. If it hits this return and we can get this kind of debt, we will buy the deal. Then with fix-and-flip, it’s the same thing, because fix-and- flip, I keep hearing that it’s very risky. It is. It’s always been very risky. It’s been very lucky the last 12 to 24 months. If you flipped a house and you made a lot of money in the last 24 months, half of it was luck. I’ve flipped a lot of homes, and I know that I got lucky the last 24, but you can flip in any kind of market. 2008, we were crushing the market flipping and that market was dropping, like you said, 20% in a year and we still made margins.
So you just have to buy your right plan behind your buy box. We don’t go and buy a house, design the whole thing before we have architect plans back. We want to know where our window schedule is. We want to know how it’s laid out. What’s the actual theme of the house. If we went and designed that down the road, we’re going to have a disaster. So you don’t want to just go buy without really putting together that core fundamental, which is, “This is what we’re doing. This is what I’m trying to accomplish, shrink my numbers down. If I still want to flip, I’m just going with bigger margins now. I want 20 to 25% returns and I want to have 10 to 20% on my construction budgets, and then I’m padded all the way through.” The more people walk away from flipping, the harder I’m looking at it because that’s my biggest opportunity area.

Dave:
This isn’t theoretical, you’re actually doing this. You’re finding these deals right now.

James:
Oh, yeah. The margins we’ve seen have been at least 2X what we’ve been seeing the last 12 months. I got a call yesterday from a seller that we actually gave an offer to nine months ago, a builder beat us out. They beat us out by 50 grand, but they had a very long close and they were supposed to close actually today. The builder just walked away from their earnest money, $40,000, and they’re out that deal. These people have already packed their house up and moved, and they just got notified two days before. So they call us panicked and they say, “Hey, can you buy this?” Then, for us, we’re not going, “Hey, well, how do we get this just for nothing?”
We’re going, “Okay, well, we have to reevaluate this property. Here’s our new margin.” We educated them on what’s going on in the market and they know, but then we educated a little bit more about the impact of rates and the math behind it. Now, they just took an offer, we gave them an offer 150 grand less than we gave them nine months ago. It’s in a great neighborhood, and they’re going to take it because it’s very logical at that point. So for us, by not getting that deal nine months ago, I just made $150,000 more in value. So as things get scarier margins increase. The last 12 to 24 months were not normal.

Dave:
Is the same true for you, Henry? Are you seeing pretty good deal flow? Can you share with our audience, I’m assuming you’re getting pretty good deal flow, but assuming that you are, where are you finding those deals?

Henry:
Yeah. Yeah. Real quick, to piggyback on what James and Jamil both said, the best insulation for risk is to buy great deals. I know that that sounds generic, but in essence, what that means is, you have to figure out how to go find people who have motivation to sell and equity. We’re buying situations. You heard James just explain a situation that caused him to get a good deal. We’re not buying houses, we’re buying situations. So if you can get good at finding those situations, and they need James, they don’t have another option, and so when you create those win-win scenarios by providing people who need to sell with a solution, then you can get good deals.
The better margins you have, the better deal you buy, the more you insulate yourself from problems. So if the market shifts, James can either reduce his asking price and still make a profit. He can potentially put a tenant in there and keep it as a rental. When you have the margins of buying a good deal, then you can have multiple exit strategies and multiple exit strategies is what helps you reduce the risk. If he goes over on his renovation budget, he’s got cushion. It eats up some profit, but if you’re making 80 grand instead of 92 grand because you went over 12K, you’ve given yourself some cushion.
So being able to figure out how to find and purchase good deals or put them under contract, in Jamil’s case, is how you’re going to be able to insulate yourself from the things that most people are scared of when it comes to real estate investing. For me, Dave, we’re absolutely still finding good deals. I am getting more leads coming to me now than before when I was having to go out and push for leads. So now people are trying to come find me, because again, it doesn’t matter what the market is doing, if the market’s high or the market’s low, it doesn’t dictate if a person’s going to be in a tough situation. People get in tough situations, no matter what the market’s doing.
In fact, there’s more tough situations when economic conditions are the way they are now, it creates more difficult situations where people are going to struggle to sell. It also thins the pool. It thins the pool of investors and buyers to the ones that are the most serious and the most prepared. So if you are consistently trying to align yourself with the people who are moving and shaking in the industry with the people who are getting deals done, then you won’t have a problem making money in those environments because whereas, a year or so ago, maybe even six months ago, if you put a house under contract, there was a million hands going up to buy that deal.
There’s less hands going up to buy that deal now, and so the people like Jamil and James and myself who are connected with the people who are ready to jump and do those deals are the ones who are going to make the money. So right now, there’s more deal flow coming. Access to money is what’s getting a little more difficult, traditional money that is. So it’s always going to be a two-pronged approach. You’re going to have to figure out how to solve your deal flow problem and solve your money flow problem so that you can buy those deals. So if you can solve both of those problems, I think you’ll be able to make money in any market, but man, we’re getting great deal flow right now, Dave. Mostly I do direct mail and cold calling, but as of, I would say, the past two weeks, people have been calling me.

Dave:
That’s amazing. For people out there who want to get started, maybe they are listening to this, hopefully they’re inspired by all of you and your wise advice. Jamil, what advice do you think, what would you give people in the next 30 days? If they just want to start and take action and jump in on these opportunities you’re describing, what is one or two steps that they can take right now to move towards that first deal?

Jamil:
Well, direct mail can take some time and cold calling can obviously take some resources and time, but there is nothing that costs less money than going to the MLS. Guys, listen to this. You can go to the MLS right now and look at anything that’s been on the market 30, 60, 90 days. Believe me, realtors right now are more sensitive to this situation than sellers are. You can pick up the phone, you can have a conversation with a realtor right now and ask them, “I see this property isn’t selling, and the world has changed. Is your seller ready to have a real conversation about where this property’s going to trade at?”
Use that listing agent as your buyer’s agent and incentivize them with a double commission and go offer on that property at a number that’s going to make sense for somebody. Come to me and I’ll be your buyer. I’ll tell you what to lock it up at and make a profit. That’s the first step. You can get a deal done right now in a matter of weeks by having that one hack. Go right directly to the MLS, go get some agents, build some rapport with them, have them represent you as well so they’re double incentivized to work with you. Bring me the opportunity and go make a check.

Dave:
All right. That is great advice. I do think, James, you told me the other day that you’re getting a lot of on market deals right now, but do you have any other tips, anything, not just deal flow, anything that you think could help someone achieve that first deal in the next couple of weeks here?

James:
Yeah. Just the first step is to find what you think is a good deal. That is the most important thing. If I don’t know what a good deal is, I can’t go out and go find it at that point. But yes, we are getting a ton of properties on the MLS. Honestly, the deals are really good because it is the market is telling them what the activity is. When someone lists a property on the market and they get zero showings in the first week, they are concerned, especially after what they saw from 90 days ago. So the market really tells them where it’s at, but where we’ve been getting most of our deal flow is, is we’re defining what it is, and we’re looking on the MLS. We’re using call rooms now to get mass coverage.
There’s a company call Magic we just used because we want to be able to hit more people, because as there’s more fear out there and people are wanting to make that next decision, I want to touch more people. So we’re able to hit five times as many more people. We ramp that up, so we’re doubling down on all of our marketing efforts, because as people stop contacting, I’m going to increase my contacts. Then the other thing is, like Jamil said, is talk to real estate brokers. Real estate brokers are the best avenues out there. They’re talking to tons of people.
They have tons of clients that have been thinking about selling for 12 months and now their clients are having FOMO and they’re going, “I missed it,” and they’re rushing to get to the market and they want to rack in whatever equity they still have in that property. So reach out to all your brokers and let people know what you’re looking for. Don’t just say, “I’m out buying deals,” tell them what kind of deals you’re looking for, what returns you want to be at, set the tone and then start talking to everybody and expanding your marketing network, and you will get more opportunities.

Dave:
It just seems like what’s holding so many people back is just the fear without any actual action. The things that you’re talking about, just going and actually calling someone, going and running numbers on a deal, even if you know that’s a bad deal, just teaching yourself the skill to be able to run the deal, know what a good deal looks like, these are the actions that you can take for free. It doesn’t cost anything. There is zero risk in doing research and learning whether you can actually find a deal, and I think a lot of people think, “Oh,” they come up with these ideas or these scenarios in their head, “There’s no good deals,” or, “It’s too risky,” but you don’t actually know that until you go out there and actually do something and actually look at a deal, talk to a broker.
For everyone watching this right now, there are so many free resources we have on BiggerPockets. If you want to find a investor-friendly agent, you can do that for free. If you want to download the stuff I was talking about, you could do that for free. You want to learn how to analyze deals, you could do that for free all on BiggerPockets. If you want to start taking action on real estate, if you agree like James, Henry, Jamil that this is a good time to invest in real estate, definitely head over to biggerpockets.com. It is entirely free. There’s a community of more than 2.5 million real estate investors who have found success in real estate through the same thing that these guys are talking about, and you can do it absolutely too, so go check that out.
James, Jamil, Henry, thank you all so much for being here. This is a super important conversation. If everyone watching this likes this kind of conversation about what’s new, what’s happening in the world of real estate investing, you should check out our podcast, we have one. It’s called On the Market, there will be a link below. We have our own YouTube channel. You can see all of their beautiful faces regularly there making some great content for all of you, and so hopefully check that out. Go take some action. Thank you all for being here. We’ll see you all again real soon. On the Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett. Editing by Joel Esparza and Onyx Media, copywriting by Nate [inaudible 00:37:36] 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.

Andrew Bresee never wanted to work for someone else. “I don’t want to build somebody else’s dream,” he says. “I want to build mine.” And that was his motivation for putting in the work it would take to become financially free just two years after buying his first investment property. 

In an episode of the BiggerPockets Rookie Podcast, Bresee explains the obstacles that could have easily led him to give up on his dream and how you can cultivate perseverance even when your luck seems to run dry. He lets us in on the lessons he learned while developing his investment strategy and even provides the “cure” for analysis paralysis, giving real estate rookies hope that financial freedom is in no way out of reach. “Whether it’s two years, five years, 10 years, it will be much quicker than you think,” he says. 

Starting Small

As a 15 or 16-year-old teen, Bresee was checked out. “All the Ritalin in the world couldn’t get me to focus at school,” he says. But when someone gave him a copy of Rich Dad, Poor Dad, it sparked an instant passion for real estate investing. “I knew from then on I wanted to be a real estate investor, and I didn’t want to work for somebody else for the rest of my life.”

Of course, saving the money he needed to realize his dream would require working several jobs and a lot of sweat equity. Even before Bresee and his wife were ready to purchase their first property with the income they saved, they got some experience rehabbing his parents’ basement, laying the groundwork for the hard work to come. 

“My parents were super generous with us, let us move into the basement, and we took six years off and on, building a full apartment in the basement. So we put in every Sunday for eight hours and then whenever we could during the week we built a full bathroom, a full kitchen, put in a laundry room, put a bedroom, we put a window below grade.” So when they viewed a property with four units that needed love, Bresee had the confidence to move forward. 

Putting in the Time and Rolling with the Punches

Bresee and his wife used all their savings to buy two duplexes, one with an FHA loan and one with a conventional loan. When the transaction was complete, they had only $2,000 left in the bank. But Bresee had the ingenuity to recognize the right strategy that would get all four units in rentable condition. “And [the] first thing we did was say, ‘Okay, which of these four units is in [the] best shape that we can get on the market?’”

Over six months, they moved from one unit to the next, making the most urgent improvements first. “It was just all hands on deck every moment we could possibly put in before work, after work, whatever we could do.”

They made it work by putting in the time and rolling with the punches. For example, when they couldn’t permit one of the one-bedrooms for a short-term rental, they used the monthly or medium-term rental strategy. “I turn over the unit every two, three, or four months and I still get almost as much as I would get as a short-term rental,” says Bresee. And this strategy has lifestyle benefits for the couple as well. Longer-term tenants tend to be more respectful of the landlord next door. 

Bresee says he’s clear in the Airbnb description and title that the unit is ideal for extended stays to encourage bookings for the unit. With all repairs and expenses covered, including his personal internet access, he says, “We’re on pace to make about $1,200 a month.” 

There’s a Time to Hustle and a Time to Delegate

Putting the labor into the first four units left Bresee with a faulty mindset. “I thought I could do more or better than others. So we bought another duplex, and I ended up, when I quit my job, rehabbing that for an entire year.” He was stuck in the mindset that he needed to protect his cash, preventing him from seeing the opportunity cost of finishing the work himself. “And so I should have farmed things out sooner.”

Now, Bresee has put his tools in storage (literally) and resolved to get help from contractors who can finish the work quicker. This allows him to earn more money by getting units ready for rent sooner. Still, there’s a time to hustle, he admits. “If you don’t have a W-2, if you don’t have a ton of extra money,” sometimes putting in the work with your own hands is the only way to get started. 

“We put $40,000 into those four units together [over] six months, and we worked our tails off. That was a good use of my time [back then] because my ability to get another deal was contingent on me getting those units up and going, spending the least amount of money possible because I didn’t have any money left. But later on, it was the exact opposite. I was still in the frame of mind that I was going to do what I did before, and I was not treating it like a business when it should have been.”

That’s where a flexible mindset is important. Evaluate your strategy based on your current financial situation rather than trying to pinch every penny in repair and remodeling costs. “Don’t bite off more than you can chew, but also don’t be stuck like I was in a mindset that held me back.” 

Bresee says if you know what you’re doing and feel confident in the outcome, you can even take the risk of buying your materials with a 0% introductory APR credit card. “And then all you need is cash to pay your contractor,” he says. 

Accelerating Your Success

Bresee says he has the cure for analysis paralysis or overthinking a problem to the point of avoiding action. We’ve already seen that his success was partly due to the extra time he put into work—but he says how and when you make time for your goals is also essential. 

“If every day you just got up 30 minutes earlier, instead of giving your time to a boss,” if you gave “the best moments and brain power of your day” to accomplishing your goals, you’d accelerate your success. “I got financial freedom long before I thought I would. And I believe it’s that consistent daily action. 30 minutes is plenty to make tons of progress.” 

On the other hand, if you don’t make a concerted effort, you’re probably not going to have the life you want. “It’s a snowball, but if you don’t start it now, you’ll wake up at [50 years old] building someone else’s dream.” 

Whatever your motivation for financial freedom, keep it at the forefront of your mind and allow yourself the time to take steps towards your goals. It may require you to sacrifice screen time for the first 30 minutes of each day. In fact, it will probably require a lot of sacrifice throughout the process. But if Bresee’s story is any indication, you can realize your dreams faster than you think. So pour everything you’ve got into the next few years of your life. We dare you to try it and see what happens.