October 2022

Ashley:
This is Real Estate Rookie, episode 226.

Tony:
I already had a W2 job, but I had accepted another offer with a new company and they had offered me a pretty significant raise above what my current job was. So with my current job, I didn’t have the debt to income ratio to hold that second property, but with the new job, I did have the debt to income ratio. So they approved me just by presenting my job offer letter. That was enough of a guarantee for them to say, “Hey, Tony’s a bankable guy. He doesn’t have the income, but we know the income’s coming, so we feel comfortable giving him that loan.”

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

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. And we usually like to kick things off with a little shout out to the folks in the rookie audience that are leaving us some reviews on Apple Podcasts so this week’s review comes from Hillary Rose Huffman. And Hillary says, “As someone who quit prematurely with no structure or support, I absolutely loved episode 216. I’ve listened to just about every episode BP has ever put out, but as a newbie real estate investor with only 12 flips and one short term rental under my belt, I thoroughly enjoy learning from Real Estate Rookie. Ashley and Tony, thanks for all the time and energy you put into what is now my favorite BiggerPockets podcast.” I love that. I appreciate that Hillary Rose. Thank you so much for giving us some love. And if you haven’t yet, give us an honest rating and review on whatever podcast platform it is that you’re listening to.

Ashley:
Hillary, thank you so much for that review. You guys, we appreciate it. I appreciate it even more when it is a five star review. If for some reason you don’t think that we deserve five stars, please slide into Tony’s DMs and tell him how he can improve because I could not handle it if you guys tell me. I was actually at the Verizon store today and they gave their spiel of, “Sign here. Also, you’re going to get a survey. Please leave a five star review. Anything less than a five star review is me failing so please let me know if I have failed you in any way so that I can make up for it.” And all I could think about was the podcast when we read out these reviews and I expect you guys to leave a five star review.

Tony:
There you go. Cracking the whip. Five stars only.

Ashley:
So Tony … As you guys are listening to this, BiggerPockets conference has already happened, but Tony and I are getting ready. We head off to BP Con in just four or five days here.

Tony:
Four days. Yeah.

Ashley:
Yeah.

Tony:
It’s super exciting. I think this is honestly going to be the biggest BP Con ever. They actually sold out of tickets. They literally couldn’t fit any more people into this venue. So I think we’re going to have 2,000 investors all getting together for three days in beautiful Southern California so I’m excited. Ash and I are giving a joint presentation together on partnerships, so that’s going to be fun. We’re also moderating a panel on-

Ashley:
Rookie investors. Yeah. Rookie investors.

Tony:
Rookie investors. Yeah. So it’s going to be a fun weekend for sure.

Ashley:
Yeah. I’m really excited to network and to meet with a lot of you guys. And for everyone that we did meet at BP Con, it was wonderful to meet you guys.

Tony:
We appreciate you guys. We love you guys. Cheers to next year.

Ashley:
Yeah. So headed down this weekend and going to spend quite a while there. And yeah, like you said, there’s going to be … They sold over 2,000 tickets. And also with vendors and the BP staff, it’s going to be close to 3,000 people that are actually at the event. So super exciting. And it’s awesome to see it grow so much to the conference because I think the first conference they had had a little under a thousand people maybe in 2019. There was another conference they had maybe 2015 or ’16 or something, and then it was a while before they had another one. But yeah. So if you guys did not go to this year’s BP Con, make sure when they announce it, you guys get your tickets because it sold out so fast and there are people that were scrambling for tickets. So you need a side hustle idea, do what I’m doing. Buy a bulk load of tickets, and then sell them to your friends for an upcharge when they procrastinate. I’m in three group texts with 20 people in each, all scrambling trying to find tickets. And I heard in the BP forums, people who can’t go are transferring them and things like that, but just wild.

Tony:
Yeah, we need a Ticketmaster exchange for BP Con.

Ashley:
Yeah. Okay. So you guys, we have a bit of a change with our rookie reply. Tony and I have felt that the five to 10 minutes to just go over one question wasn’t enough because we love your guys’ questions and we wanted to tackle more questions. So we are going to start adding on some more questions to the rookie reply so it’s going to be a longer episode. So longer time that you have to listen to our boring banter, hear my laugh, and Tony’s monotone voice.

Tony:
All the things you guys love about us.

Ashley:
So this week, in this episode, we are going to be doing three questions.

Tony:
Yeah. The first question is going to be how to determine how much cash you need for your first investment. The second one is going to be some sneaky ways to get a loan when you may not otherwise be able to get approved. And the third question is about ways to protect yourself as a landlord when you have tenants staying at your property.

Ashley:
Yeah. All great questions. And we have lots of time to actually go into detail on these questions. A lease agreement, we literally break down as much information as we can about a lease agreement and what should be included and how you can get a copy of a lease agreement. So make sure you guys listen to the full episode because at the end Tony and I give a little bonus content on boring banter over the interest rates in today’s market. Let’s get to question number one.
The first question we have today is from Naeem Malik. And the question is, how much money should you have on hand to invest in your first property? What a great question, but also a loaded question. And the answer we have to give you, it depends. I would start by looking at, in the market that you’re going to invest in, how much does a house cost? What are the expenses going to be? Somebody who’s investing in my area, you could have $50,000 saved up and that could pretty much be able to pay a house off in cash if something were to happen. If you’re in a market like Tony is in Joshua Tree, $50,000 may pay a year’s of expenses maybe. I’m not sure. So I think it really depends on the market that you are investing in and what the range of expenses you are going to have for the property, such as your mortgage payment, any utilities you’re paying, your property taxes, your insurance.
So I think a good rule of thumb is having three to six months reserves after you’ve purchased the property still on hand. So that means you have enough cash to put down your down payment, you have enough to pay closing costs. If you are doing this as a no money down deal and you are not putting any of your own money in, that’s awesome. That’s great. You don’t need to save for that down payment and closing costs. But when you close on that property, no matter how you purchase it, I recommend having three to six months of reserves. For the reserves, how I calculate them is your principal and interest payment for your mortgage, your insurance on the property, and then also your property taxes for the property. And I encourage you to go six months instead of just three months. So that would mean you could cover your property for six months if the property was vacant or your flip wasn’t selling, things like that.

Tony:
Yeah. You hit on a lot of great points, Ashley, already. And I do think it is a loaded question. We probably need some more information from Naeem to give a really thorough response. But yeah, your point on reserves and having that set aside when you close is important. The fact that the market that they’re operating in makes a big difference. But I think also that the type of investing that they’re doing makes a big difference as well. If you’re house hacking, you can get into a property for three and a half percent down. If you’re flipping, maybe you’re going to need 20% of your total project costs to get into a flip. So depending on what type of real estate investing you’re doing, the startup costs are going to vary. And even within those niches, the way that you do it can make a big difference. Obviously we do Airbnb investing and we buy all of our properties, but I know other investors that do rental arbitrage and they’re able to get a short term rental for a fraction of the cost.
So I think that the type of investment that you’re going to do will make a big difference in how much money you’ll need to put up, Naeem. But I think something that’s important for us to talk about is that real estate investing definitely needs capital to get started, but it doesn’t necessarily have to be your capital, Naeem. So say that you have a partner who maybe is bringing the majority or all of the money to the closing table and you’re just going to do the work, and that’s how you earn your keep in that deal. Then maybe you don’t need any money and maybe that person’s covering all of the acquisition costs and they have the reserves cost so now you don’t need to worry about that. So your strategy and the kind of partners you bring in, all of those will play a factor in how much money you should have.

Ashley:
Tony, let’s break down an example. So let’s say that somebody is looking in a market where the average cost of the home is $100,000. So if they’re going to go and purchase that, how do they find out what those expenses are going to be before they actually go and start pursuing purchasing a property? I think to start off-

Tony:
[inaudible 00:10:13].

Ashley:
Yeah. With the principal and interest payment, the mortgage payment. Just Google amortization calculator. Mortgage calculator. There’s also an app that I use. I think it’s just called calculators. If you search that. And it has all these different mortgage calculators. Got calculators for different types of loans included in that. So that’s a quick, easy way to calculate what your mortgage payment would be for a property. As far as knowing what the interest rate is right now, you can also Google that, or if you are working for the bank already, just get an idea. They won’t be able to tell you exactly what your interest rate is going to be, but it can give you an idea. Tony, have you gotten any loans lately, like a 30 year fixed rate?

Tony:
Yeah. We’re getting quoted high sixes, low sevens on some of the stuff that we’re buying right now.

Ashley:
Yeah. And then, as Tony had mentioned too, if it’s going to be your primary residence or your house hacking three and a half percent down, your interest rate will probably be a little bit lower than that right now, just because it is your primary. But you guys can go ahead and use that as a range, that six to 7% and see what the outcome is. What is your monthly payment amortized over 30 years and that will give you your payment. So you know okay, I need to have $532 a month to make the mortgage payment, so I want to save that times six. Then we can look at the cost of the property insurance. I think property insurance is really hard to estimate when purchasing your first property and you have no idea what that could cost. Once you start purchasing properties, you get a better idea of it.
But there’s Policygenius, which has been an ad sponsor for us before, and I’ve used them. Actually, you can go on and you can input information about a property and they can give you a general estimate too of what your insurance rate would be or talk to another investor or even another homeowner in that area. It’s not going to be the same because a homeowner is covering the contents in the building, where as the landlord, you’re just covering the building itself, the structure, and then a tenant would come in and do their own insurance on that. Or if you’re rehabbing the property, if you’re doing it as a flip, your insurance may be way more because the property is considered vacant and it’s under construction. More of a risk. So if you work with an insurance agent right now who does your home and auto, give them a call, send them an email and just say, “Hey, this is what I’m looking at, this type of property. Have you written insurance on any type of property like this in our area where you could give me a general idea of what you think it would be?” Or maybe they’ll even just quote it out real quick to you for a couple companies and just get a general estimate.
And then for property taxes, you can search those online as to what the property taxes are for properties like that. You’ll want to look at what the assessed value is of the property. So if you’re looking at a property that is listed at 100,000 and it says the assessed value is 20,000 because maybe somebody went in, fixed it all up and there hasn’t been a reassessment yet by the town. So when that reassessment does come up, most likely that assessed value is going to increase and your property taxes will increase also too. So I always like to overestimate that amount. Then when you take the property taxes … So in my area we have town and county taxes. If you live in the town in a village, we call it, that’s another set of taxes and then school taxes that come around for your property.

Tony:
Yeah. Honestly, I don’t even know what’s built into our taxes. We just pay them. But I like your point about trying to add some buffer because we have made that mistake in the past. And what we’ll do now is a lot of the counties by us, or at least where we’re investing, sometimes you can call them. The cities or the counties. And they’ll tell you, “Hey, here’s the formula that you need to use to understand what your new tax amount will be.” So they’ll tell you at this purchase price, multiply by this number, add this percentage, or whatever it is, and you can get a pretty fairly close estimate of what your new taxes will be. So we’ve tried to do that moving forward.

Ashley:
That’s a great tip there. I think in our county too, they have on the county website is an actual Excel spreadsheet where it gives you an example if each town, what the tax rate is. So if you bought a $100,000 house in each of those towns, what your property taxes would end up being. And it’s super cool because you can see the large difference in some of the towns as to the property taxes where, oh wow, this is the great school district, this is the town everyone wants to be in. But if I buy right on the border, the next town over is actually the cheapest in property taxes. So being able to look at that too is definitely an advantage.
So property taxes, insurance, and then your mortgage and interest payment. Figure out what those are going to be monthly. So your insurance premium, you’ll probably get a quote for a year. Your property taxes. Add up the two to three bills that you get per the year, and what’s that total? And then just divide them by 12, and that would be the monthly amount that you’d be paying. And then you want to times set by six to save up that six month reserves before you go and invest. And I think Tony, you gave great points about if you don’t have that and that’s going to take you a long time, taking on that money partner or different ways to get creative.

Tony:
Ashley, you mentioned a lot of good things that folks should be including when they’re trying to estimate what those costs are. And I know for me, when I was first getting started, I would forget things. Oh shoot, I forgot about this, or, oh shoot, I forgot about that. And just a quick plug for the BP calculator. So if you go to biggerpockets.com/calculators, BiggerPockets has these resources that have already built out all of the things that you should be including when you’re analyzing a deal. So that way if you, “Oh, I forgot about insurance.”, insurance is a line item on that calculator. So just one plug for the BP calculators.
And I guess the last thing I’ll add is that you’ll probably get it wrong. You won’t be perfect the first couple of times that you do this. When we first started trying to figure out how much money we needed for our Airbnbs, we were way off. The deal that we were doing together right? It was five grand is what we thought we were going to spend. Now we budget $30,000, right?

Ashley:
Oh my god. That’s a big difference. Yeah.

Tony:
It’s a tremendous difference. Tremendous difference. And obviously we’ve changed what we do and we’ve added some more stuff to the property, but the first couple of times you do this, you’re probably going to get it wrong. So give yourself some cushion. Whatever number you think, maybe add another 20, 30% on top of that, just that way you’re not shocked if you end up going over. Because your first time doing anything, you’re not going to do it perfectly so the same thing comes when it comes to trying to understand how much money you need for that first investment.

Ashley:
Yeah, that’s a great point. Even today, my first property that I purchased, I forgot to add in snowplowing. Come on, it’s Buffalo. You need to cover snow plowing. Well thank you so much, Naeem, for that question and let’s move on to another one.

Tony:
All right. Rolling in into question number two and this question comes from Zach Rubin. So Zach’s question is, “Does anyone have recommendations for getting financing without a W2 job? I have a W2 starting this summer, and I have heard I can still get traditional financing just by presenting my job offer letter. I would love to hear if anyone has experience with this.” Well, Zach, you came to the right place because this exact same thing happened to me when I got my very first investment property. I already had a W2 job, but I had accepted another offer with a new company and they had offered me a pretty significant raise above what my current job was. So with my current job, I didn’t have the debt to income ratio to hold that second property, but with the new job, I did have the debt to income ratio.
So they approved me just by presenting my job offer letter. That was enough of a guarantee for them to say, “Hey, Tony’s a bankable guy. He just doesn’t have the income, but we know the income’s coming, so we feel comfortable giving him that loan.” Now, I will say that it wasn’t that I didn’t have a W2. I had a W2, my income just wasn’t there enough. So I can’t say for sure how banks will view someone that doesn’t have a W2 at all. But if you can maybe show some way of proving that you have consistent income or other things like that, it might be beneficial.
And then the last thing I’ll say, Zach, is that it might be beneficial to try and go with a smaller local regional bank credit union. They tend to have a little bit more flexibility than a Bank of America or Wells Fargo or something like that. The bank I was working with was a very small credit union in the city that had their branches in the city that I was investing in. So they knew the area, they knew the properties, they had a little bit more flexibility in terms of what they had to offer. So that was my experience. Ash, I don’t know. What have you seen on your side?

Ashley:
Yeah. I think that’s a great tip going with a small local bank. And we really don’t talk about this a lot, but also mortgage brokers. So where you actually come to them with your property, what you want to do, and then they actually shop it out for you as to what loan product would be best for you, what bank to go with for the loan. So finding a mortgage broker too and explaining, I don’t have a job now, but here’s my job letter and then them going out and trying to find a bank that will finance that deal. That’s what my sister did. I think it was 2019 she bought her duplex. Maybe even 2018. And she had just graduated college. She didn’t have a job yet, but she had a letter stating that she had a job accepted and it wouldn’t start for I think three more months and it was actually just part-time. But it did show that she would be making enough income if she worked those part-time hours to qualify for the loan. And they did accept that even though she hadn’t actually started the job yet.
And I do remember the mortgage company wanting to do some verification just like they were if you were employed. She showed her job offer letter, but also they contacted the HR department of that job too and asked for a verification. Something signed from them that yes, she was intending to start working there and things like that. So I don’t know for sure today if you can do that, but it definitely has happened. But the mortgage industry is always changing. The different options that were available are no longer available. But I think the best way is to talk to small local banks and then also go into a mortgage broker who can help shop those out for you.
I think the one my sister used worked with the company First Priority Mortgage, I think. So maybe you could give them a try. I have used them for one loan before too, and it was a nice easy process to go about that. Also, another thing you could do if they won’t accept the letter is think about getting someone to co-sign for you too. And then after you have purchased the property and you do start that job, you could go and request for the person to be removed off the loan and no longer need the co-signer.

Tony:
That’s a great point on the co-sign. Actually, it makes me think of maybe another strategy. So if you were to purchase maybe a small multi-family property where you lived in one of the units and say you rented out the other two or three, assuming that there’s stable rent history at that property, a lot of times you can use the projected income from that property to help offset whatever debt to income limitations that you’re having. So say that you’re short by, I don’t know, 200 bucks to be able to clear this mortgage and you go out and you buy a property that has three additional units and those bring in a net profit of $800 a month. Now you’ve got a difference there to offset your own debt to income limitations. So there’s been a lot of folks that I’ve met who maybe wouldn’t have qualified for a traditional single family house, but lo and behold, they qualify for a small multi-family because of that additional rental revenue.

Ashley:
Yeah. I think using it as a house hack is definitely … You’re going to be able to get that rental income to show as proven. That was my sister too is that she showed that the other unit was currently rented out at this X amount and she just showed the lease agreement that was already in place. And having that extra income count towards it was great. I have heard people talk about sometimes where they’ll only take a percentage of the rental income though. They won’t calculate the full amount. So do ask the lenders about that too, if they do take into account the full amount or if they only take in a percentage of that. And I don’t know why that is done. Maybe to account for some vacancy or things like that in case there is a period of time where that rental income isn’t coming out. But yeah, that’s something to ask about too is if they take the full 100% or only a percentage of it too.

Tony:
Cool. I think that’s everything I got for that one.

Ashley:
Yeah. Well thank you so much for asking that question, Zach, and let’s go on to our third one. Question number three is from Travis Bokhold and this is from the Real Estate Rookie Facebook group. So if you guys are not a member, make sure you check that out. And Travis’ question is, “Hey, how do you guys build leases?” So this question I love because we have an amazing resource for you guys. If you are a BiggerPockets Pro member, you actually have access to full lease agreements plus addendums and other supporting documents that are state specific. So these were actually created by attorneys in each state, and they’re available on biggerpockets.com where you can go and you can actually download it and it becomes … You can download it as a PDF and fill in the blanks, or you can download it as a Word doc and change it and add things to it too.
What I do advise is if you are going to use these documents, or maybe you’re going to create your own, is that if you do make changes to these ones that are provided to you, that you do have your own attorney review them. But do you want to just break down some of the options that are in a lease agreement? Like things that you should have in there?

Tony:
Yeah. I’ve actually never made my own lease agreement. So all of my long-term rentals I had my property manager create for me. And I’m sure I’ll probably look at them at some point, but honestly don’t even remember what he had in there Ashley. So you might be a better resource for folks in this one than I am.

Ashley:
Okay. So as far as doing a standard residential lease agreement, you want to put in the owner’s information. So who owns the property? The landlord. A mailing address for them, and then also the name of the tenant and contact information for them. Then you want to put in the terms of the lease agreement. So when does the lease start? When does the lease end? You want to put in the amount of the rent that is going to be included in there along with any other fees. And also how the rent is paid I think is very important too. So if you just put in there the rent is $1,000 per month, you want to specify how that rent is to be paid so that tenant isn’t calling you like, “Hey, I put the thousand dollars cash in an envelope in my mailbox today. Come get it.” So I think being specific about how they are to pay. And the best place to do that is to set up some kind of online payment system where it’s no longer considered mailbox money. It’s basically direct deposit money where it’s direct deposited into your account. Then you don’t have to worry about getting it from the mail, depositing it, and your tenant just pays right online.
There’s lots of free or really cheap software, property management software or rent collection software that you can use. And I would put that right into your lease. So BiggerPockets actually recently partnered with RentRedi, so if you’re a pro member, I think you get it for a dollar a year, or it might even be free. But with RentRedi, you can go ahead and you can have them make their payments online and set that up and it just goes directly into your bank account each month, which makes it pretty easy. So specifying that in the lease. And then you can also put a clause in there, or as changes are made to be determined and notified by landlord. Something in there in case you do switch software that it’s not just you’re stuck with RentRedi, but saying the software provided by the landlord through the tenant portal. Something like that.
So after that, along with the rent, when we state the additional fees or charges in there. So this could be for a pet fee, garage fee. You want to state in there what those fees are for. So if they are renting a garage, what the garage number is. Do they have a remote? Do they have to return the remote? Things like that I would include in. So just talk about what the additional fees are. The pet fees. So if they decide they no longer want a pet, they have to notify you in writing, letting you know they no longer have the pet on the property. Or if they want to add on an additional pet, they have to notify you and the rent would increase an additional amount.
And then the security deposit. Also super important to include in there. If you are including a security deposit, put it as a certain amount, what that’s going to be. In New York State, the law is that you can only have one month’s rent for your security deposit. So whatever your monthly rent is, you cannot charge over and above that for the security deposit. So that had changed a couple years ago where someone had bad credit, a landlord would say, “You know what, I’ll go ahead and rent to you, but you’re going to put down a $2,000 deposit even though your rent is only $575 a month.” Then you’re going to put into the lease agreement how the security deposit is held and how the tenant can receive the security deposit back.
Next we go through utilities. Who’s responsible for what utilities? Who’s paying the electric? who’s paying the gas? Specify this as much as possible because you don’t want to get into a situation where all of a sudden you are paying a utility that you didn’t account for because you forgot to include it in your lease that it’s their responsibility. Things like common areas, lawn care, snow plowing, things like that. How those are taken care of too. So if there is a common area, make sure and put note in there that it will be cleaned by somebody or it’s actually the tenant’s responsibility to take care of it and you can’t leave any debris or garbage in the common areas. And then just if you’re including any appliances, what those appliances are. Maybe what’s the maintenance protocol for appliances if they need to be fixed. I’ve seen it be a lot more common that appliances are not included unless you’re in a super high end or luxury area that landlords don’t want to deal with having to fix or replace appliances. So that’s up to you as the landlord if you want to include them. Then after that you got … That’s a lot of-

Tony:
The meaty stuff.

Ashley:
The meaty stuff. Yeah, that’s the word I was thinking of. Then after that, go through general rules. What happens if they don’t pay? What’s the eviction process? The use of the premises. So if they’re renting this house, they can’t operate a auto repair shop out of the attached garage, things like that. And then go through the lease. But take a look at the BiggerPockets leases or even just Google a lease to see the meat of it. But don’t recreate the wheel. Find a lease and start from there. Don’t start typing out a lease from scratch. So the BiggerPockets ones, they’re about 10, 11 pages long. You don’t want to waste your time going through and sitting down and writing out this full lease agreement. Start from somewhere else and then read the whole way through and highlight it, mark it up because there will be stuff that’s not applicable to your property or maybe things you know want to add in there that you’ve heard other landlords talk about or you know is maybe market specific to you too.

Tony:
Yeah. You named so many great things, Ashley. I love that. I love that breakdown. And as you were talking a few other things came to mind for me as well. So renter’s insurance. Do you require your tenants to have renter’s insurance?

Ashley:
Yeah. My property management company does. Yeah.

Tony:
Yeah. I know that that was something we required for ours as well. What’s the process for non-renewal? So what does a tenant have to do? Or if they do these XYZ things, what are those things that would allow you to not renew their lease? And then you mentioned this already, but the eviction process. I worked for a property management company after college briefly, and I think their process was you got your notice of late payment on the fifth and then the evictions were always filed on the 15th. So it was a pretty quick process in California to try and get that ball rolling.
And then last thing, me just being an Airbnb guy, is sub-leasing. Are you okay if this tenant takes this unit they’ve rented from you and then turns around and rents that unit out to somebody else making some additional profit? So just some additional things to think about. But just like we talked about in the other question about using the calculator to make sure you’re not forgetting anything when you’re analyzing a deal, use the lease to make sure you’re not for forgetting anything when you’re putting your own lease together because BiggerPockets has already done the work of making it easier for you guys.

Ashley:
Yeah. That’s such a great point. If someone was to tell me to rattle off all the things, there’s no way I would remember everything that you needed.

Tony:
Everything.

Ashley:
But it’s a lease agreement. You don’t have to. Don’t waste your brain space with that information. There’s way better things that you could be memorizing than stuff that’s literally put together for you. And even if you’re not a pro member, using the BiggerPockets ones, there’s tons of other lease agreements out there that you can look at and use and use it as a starting point at least. And then just addendums that go with your lease too. These are easier to build out because if you’re charging them a pet fee, you may have a separate addendum stating information about the pet that they have in there. So the dog that they’re paying $25 an extra a month for, his name is this, type of breed and he has his rabies vaccination. Things like that. And the tenant signs it along with the rules of owning a dog. They’ll clean up after the dog. Things like that. They’re responsible for wear and tear caused by the dog. Things like that.
Okay. Well also if you guys want to learn more about being a landlord and leases, I do host a landlord bootcamp through BiggerPockets. You can go to biggerpockets.com/classes and we currently have the bootcamp going on, but you can check back there for more information when a new class is released.
Tony and I are going to give you guys a little bonus content today. And this is just because I’ve wanted to talk to Tony about this and pick his brain and just see what’s going on. So as you guys know … You’ve probably all been watching the news and watching the market that interest rates have significantly increased, especially in the last nine months or so. Tony, how is this affecting your investing strategy? I hosted my bootcamp call last night for rookie investors and we were overloaded with questions about how do you still find a deal with high interest rates? I think the answer I came up with is, well you have to make lower offers. You have to get that purchase price down to make it worthwhile. But I’m very curious to hear how that has changed your investing strategy or maybe it hasn’t.

Tony:
Yeah. No. I think you hit the nail on the head, Ashley, around making sure that the deals still make sense. So I think everyone automatically assumes that just because interest rates are high that it means you should stop buying real estate. And I don’t think that’s true at all. But I do think it means that maybe deals that you were buying six months to nine months or definitely 12 months ago that weren’t as meaty, you probably are going to have to skip out on those ones moving forward. But for me, I’m indifferent to the actual interest rate. What’s more important to me is the projected cash on cash return. And if I’m able to hit my cash on cash return targets at a 6% interest rate, then that’s a good sign because it means if in the future I’m able to refinance and get that even lower now I’ve got a smoking hot deal.
So for us, the things that we’ve changed honestly isn’t a whole heck of a lot. I think the only thing that we’re probably a little bit more flexible on is the cash on cash return that we’re targeting. It was pretty crazy when we first started.

Ashley:
Infinite.

Tony:
Yeah. It was pretty crazy when we first started. But I still think that, at least in the space that we’re in, going out and getting a 30% cash on cash return for your money is still very, very, very doable. So we’re opening ourselves up to some of those deals. And then we’re also looking to markets that maybe we weren’t before. I think a lot of maybe the primary markets that everyone knows and everyone loves and everyone talks about, those are probably going to become a little bit more competitive, a little bit more difficult to find good deals. So now we’re starting to look at more secondary and tertiary markets that maybe offer less money on the revenue side, but the cash on cash returns are still super strong because the prices haven’t been pushed up as much as some of these other more popular markets.
So yeah. Market selection and I think just a little bit more discipline in our underwriting is probably the biggest changes that we’ve made. But just to give you guys some concepts before I pass it off. We’re closing on deals now. I think I mentioned this already. High sixes, low sevens. Our best deal from an interest rate perspective is at 2.6. So that’s an astronomical difference in a really, really short period of time. But we were buying a 2.6, we’re still buying at six and we’re going to continue to buy as long as these deals make sense for us.

Ashley:
Well, I remember even too when interest rates were super low and people would say, “Well, why use hard money? Oh my gosh, you’re paying 8% for hard money?” And it’s like, well the deal still works. It works in paying that 8% to get into the deal, then rehab it, go refinance. And the same applies right now. The deal can still work if the interest rate is that percentage. And yeah, it stinks that if you would’ve done this a year ago, you could’ve gotten that. But also if you look back, people who were buying last year were looking back like, “Ugh, if I would’ve bought this property three years ago, it was so much cheaper.” So people were doing the same thing with housing prices last year as we’re doing now with interest rates.

Tony:
I was writing that down. I literally wrote that down right now.

Ashley:
So it’s just goes to show there’s never any … Okay, yeah, maybe the perfect time to time the market was last December, January, maybe even a little into February where if you were selling a property that was a perfect time to sell for that high purchase price from a seller. Don’t try and time the market. Don’t wait for a perfect opportunity to come up because getting that first property done, that’s what’s going to propel you to find those better and better deals. And we talked about that a little bit in one of the questions today is that you’re going to make mistakes so you might as well make mistakes on these okay deals than on the perfect home run deals that you’re going to get later on as you build up experience and knowledge. So yeah, thanks for sharing that, Tony. Super interesting to hear.
We had a situation where badly timing the market, I guess because I don’t try and time the market. I just buy when it’s a good deal. And so we got a property under contract in June. So interest rates had started to come up a little bit. The market was slowing down a little bit. But we still haven’t closed on that property because, hello, New York State. And we’re expecting to close within the next two weeks and the interest rate that we’re getting now compared to June is going to be a lot higher. We’re using hard money, so we didn’t lock in a rate with a bank for a 30 year fixed rate loan, but that does change our numbers significantly with the different interest rate that we are now closing on the deal. Luckily it still makes sense and still works very well because I do run my numbers so conservative.
But I was talking to another investor at an event and they put in an offer two months ago and they’re in their due diligence period and the interest rate has changed so much that they have to … They went to the sellers and said, “You know what? We need to talk about this because I’m not going to be able to get that interest rate I was two months ago.” And the seller said, “Nope. We’re not even going to talk to you. Your due diligence period is up. Your down payment is going hard. You can back out, take your down payment or can we continue on.” And I actually don’t know what he ended up deciding on doing. But I think that’s going to be more and more common coming up.
People that got properties under contract doing their due diligence stuff and then coming time and the in interest rate has increased that it completely changes their numbers. This was a really big deal and it would make a $3 million difference a year in the interest rate increasing. So that’s a huge amount of money to change the numbers on a deal and the sellers wouldn’t even talk to him. So the guy said that if they were to go and sell the property at the cap rate they got it under contract, they were going to go sell to somebody else, it would be $40 million less they would be able to sell it for because of this increase in interest rates. So I’m interested to talk to them at BP Con and find out what actually ended up happening with this deal.

Tony:
How’s things ended up.

Ashley:
Yeah.

Tony:
I had one other thing to add, but I got so blown away shocked by the $3 million that I can’t even remember what it was so I don’t know. I think we said enough. That was all good stuff.

Ashley:
Yeah. Well thank you guys so much for listening to this week’s rookie reply. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson, and we will see you guys on Wednesday with a guest.
(singing)

Anne-Marie Gulde, deputy director of Asia and Pacific department at the International Monetary Fund, explains why it cut China’s growth forecast to 3.2% for this year, and to 4.4% for 2023.

Dave:
Hey, what’s going on everyone? Welcome to On the Market. I’m your host, Dave Meyer. Today, I am going to be doing a semi deep dive into a topic that has really been interesting me recently. And yes, it is nerdy, it’s a little wonky, but it is demographics. And I know that probably doesn’t sound like the most exciting topic, but I’m going to try and make this fun. We have a great interview for you and I want to also just make sure you know that demographics are actually a really important part of investing, particularly with real estate investing because it makes up a lot of demand, right? On this show, we talk a lot about supply and demand and how that really impacts the price of assets.
It impacts where rent is going to grow, where vacancy is going to be, and demand is in large part, comprised of demographics like how many people are there in the entire generation or how many renters are there total. And today we’re going to focus in on a subsection of those demographics, which is Gen Z. They are the cool kids, the youngest generation starting to enter the workforce right now. And we’re going to just talk about what they’re doing and how that impacts the housing market. So this is important. One, if you’re in Gen Z, this could really help you figure out where you’re going to live, how you’re going to maximize your financial position, how you can get started investing in real estate. But also if you’re not in Gen Z, and most of us are not going to be, this episode is still designed for you because it’s going to help you understand where demand. And I think this is critical because we’ll get into this demand not just for houses, but where demand for rent is going over the next couple of years.
Because millennials, I am one of them, sadly, we are all getting older and soon it’s going to be Gen Z that’s pushing some of the trends in the housing market a few years out. So you’re going to want to pay attention to this because as investors we want to plan several years into the future. And if you understand some of the trends that are going on with this younger generation, it could help you make more informed investing decision. So that’s what we’re going to look at today. I’m going to do 15, 20 minutes just talking, giving you a background. And then we have an excellent guest coming on to join us. Her name is Soli Cayetano.
She is the personality behind a really popular Instagram account called Lattes and Leases. She is an excellent investor. She’s only 24 years old, has something like 20 or 30 units, it’s really cool, very impressive to hear how she got started. She’s investing out of state. So I think people who are young and maybe can’t afford in their market or if you’re just like me interested in investing in out of state, she has some really good tips for you. So that’s what we’re going to get into today and hopefully this will help you understand what’s going on in the younger generation and how that’s impacting the housing market. But before we get into that, we are going to take a very quick break.
If you listen to the show or any economics, you know that millennials have really been the drivers of demand and economics over the last couple of years. And that is because household formation, basically a lot of economic activity starts when someone forms a household. And that basically means when you move out and start your own house. So that might mean maybe you’re moving out from your parents and you’re renting something for the first time or maybe two people have been living together as roommates and then they both go on and form their own household. That is this really important thing in economics because it drives demand, right? When there’s more households, that’s more demand for rental units, it’s more demand for owner occupied houses. And so millennials have been driving a huge amount of household formation over the last couple of years and that’s just based off simple things like birth rate.
So for the last couple of years, for generations we’ve always talked about the baby boomers, how they are the biggest generation and what they did had these cascading effects throughout the economy. And that was true for quite some time, but recently millennials, which are largely the children of baby boomers, so it makes sense that they are now the biggest generation. Millennials are now the biggest generation in the United States and that means that what they do economically is going to impact the rest of the country. And what’s been happening that has impacted the housing market in particular is that they’re reaching family formation years. So people who are millennials are generally now starting to reach at the high end or around 40 years old, at the low end are like 25 years old. And the peak age where people start to form families, like what I’m talking about, is 30.
So you can imagine that if we have the biggest generation of people in the United States entering this household formation years, that’s going to have a big impact. And this is one of the reasons why over the last few years when we’ve seen an increase in housing prices, and of course that’s been fueled by inflation and low interest rates, but one of the really strong foundational things that have pushed up housing prices and rent prices is that household formation has really started to take off. It was really low in the early 2000s and even in the early half of the 2010s. But over the last five to 10 years, we’ve had this huge boom of people who want to start households. And that is a powerful force because as investors we’re often trying to time the market and saying like, “Oh it’s a great time to buy interest rates, I’m going to wait for this and that.”
But if you are ready to start a family, if you want to have a child, maybe you’re even having children, that is a pretty strong motivator and people tend to form households whether regardless of financial conditions. Of course not everyone can do that, but people try and find a way to make it work. And so we’ve seen millennials driving a lot of this over the last couple of years and this is likely to continue for at least another four or five years because as I said, millennials, biggest generation, peak family formation around 30, the youngest millennials are around 25 right now. And so we still have a few more years of millennials and it does start to tail off a little bit, but I think it’s safe to say three to five years we still have a lot of millennial demand for housing in the United States.
This of course for anyone who invests long term as most of us do, begs the question what is going to happen next? What happens when Gen Z comes? Because it’s the driving force in the economy because Gen Z is smaller than the millennial generation, but at the same time it still makes up currently 20% of the US population that’s pretty sizeable. And more notably by the end of next year, by the end of 2023, Gen Z is forecasted to make up 30% of the labor force in the US. So if you’re talking about who’s earning money, who’s spending a lot of money, Gen Z is sort of the up and coming player. And even though they might not be leading household formation, they will be leading the demand for housing and a lot of economic activity over the next couple of years.
I actually found this chart that is really helpful by a company called Yardeni Research, we’ll put a link in the bio, and it basically shows that people under 35 have a home ownership rate of about 39%. And that sounds pretty good and that’s probably mostly millennials. But if you look at the next generation people who are 35 to 44, that home ownership rate jumps up to 62%. So that’s pretty serious. That means that millennials and Gen Z combine could increase their home ownership rate by 50% just to get to where the next generation is because millennials and Gen Z generally speaking have faced a lot of economic challenges that weren’t there in previous generations. Just speaking for myself, I graduated in 2009, which was right into the great recession. We all know that it took years and years for wages to come back after that.
Just as wages were starting to rebound, we’ve faced this whole COVID fiasco over the last couple of years, which has created further economic difficulty. And so even though we see data that shows that these two generations, millennial and Gen Z, both want to buy homes, their home ownership rates are much lower than they are for previous generations were at the same age. So that is a good sign for housing demand in my mind because that means people still want to buy homes, they expect to buy homes but they haven’t been able to yet. And so that means that they still want to and hopefully if affordability improves over the next couple of years, they will be able to. So that just shows that this is an important demographic to pay attention to because this generation could be fueling demand. When you look at Gen Z, a staggering amount of them want to buy homes.
And I think there’s this media narrative that says, “Millennials, they don’t want to buy home. Gen Z, they’re renters forever, they don’t want to own anything.” Honestly, I think that’s nonsense. I think that just is a reflection that they can’t afford to buy homes right now, but everyone wants to buy homes. There’s been data that shows that 86% of people in Gen Z want to purchase a home. They want to, and 45% of Gen Z wants to purchase a home in the next five years. So that is encouraging for the housing market demand. This idea that people don’t want to buy homes and are content being renters, I think is really honestly pretty dumb. And that is just not necessarily true. And which is why I wanted to get into this episode again is because what Gen Z prefers, what they like, where they’re moving, what they’re doing does really matter.
That said, I think it’s going to be tough for Gen Z to start becoming a force in the housing market over the next couple of years because of affordability. It’s just so low. When you look at that same survey I was talking about, it shows that 66% of people who want to buy home say that they will face significant financial obstacles in buying that home with over 20% saying that they don’t have enough savings for a down payment, 18% saying that they won’t be able to find a home in their price range. So those are the same thing. Honestly, I don’t know if that was just a bad survey question. 16% said they don’t have a good enough credit, which could be a huge problem with rising interest rates. And lastly, 11% saying they have too much student loan debt. I do think this was taken before the debt forgiveness thing, so I don’t know how that was impacted.
But again, I can see why Gen Z, even though they want to buy home, are facing some of these affordability issues. If you look at Gen Z’s just medium income, it’s lower. And of course that makes sense because they’re less experienced and they’re in entry level jobs. The oldest Gen Z I think is 24 right now. So they’re still in entry level jobs, but just to contextualize this, the median income for someone in Gen Z is about $46,000. Whereas if you jump up to millennials, just one generation above, it’s $76,000. So that’s a lot more, right? You’re talking not double but 60, 70% more income. And so that means in this era of super high home rates, we’re probably going to see difficulty for Gen Z in buying a home. Furthermore, so just you guys could say basically what I’m trying to say is they’re going to have a hard time and I think that really matters for the housing market and for these people because it could fuel rent demand, which we’ll talk about in a minute.
But according to Rocket Homes, I don’t know if you’re heard of Rocket Mortgage, but they’re one of these big mortgage companies, they did the survey, and they show that 81% of Gen Z underestimates how much it costs to purchase a home. So not only are they already forecasting problems and earning less, but they’re also underestimating how much it costs at the same time. And this company who did this survey, Rocket Homes, estimated that it will take them on average six years longer than it would given what they think it’s going to take. So it could take six years longer than it would. So to me that’s really interesting because I said millennial demand will probably keep up for four to five years. But if Gen Z demand starts to lag, that could put downward pressure on asset prices and home appreciation in that lag period.
And that is a very broad generalization because what we’re talking about here specifically is only entry level homes. As millennials age, the demand for move up homes, more luxurious, bigger homes is going to still increase, right? They’re going to keep making waves throughout the economy as they age. I’m just talking about entry level homes here when I’m talking about Gen Z. But it’s something to note and I don’t think we’re already going to see this glut and crash in those prices because there aren’t enough entry level homes right now. But I think it is just important to know that demand in that area could slow down over the next couple of years and would have some impact. That is a long way away. I think it’s hard to really forecast the exact impact of that, but it’s just something to take note of because basically 45% of the people who of Gen Z say they’re going to buy home in the next five years.
But the same time that Rocket Homes thing is saying that on average it’s going to take them six years longer than they’re expecting. And so that might actually just push all this Gen Z home buying activity. So that is really interesting because basically Gen Z, again, they want to buy homes but they face these large affordability issues already. And I think where we are in the economic climate is going to make it even harder because wages have been going up a lot over the last couple of years, not compared to inflation, they are not keeping up with inflation. But just in absolute terms, they have been going up. Now with the Fed raising interest rates and probably a recession that we’re either in currently or coming pretty soon, we are probably going to see wages peak because the labor market is starting to soften a little. The most recent jobs data is actually quite good given where we’re at.
But I do think we will start to see wage growth come down. The same time, the Fed is saying that they’re going to keep interest rates high, and housing prices, they’re probably going to come down but I think it’s unlikely that they’re going to come down on a national level more than 10%. In certain markets, people are forecasting 20%, 25% in some of the hottest markets. And that could come true, but I think generally speaking, 10% with high interest rates, 10% decline in prices with elevated interest rates isn’t going to make it way easier for Gen Z to start buying homes. So I think this is something to keep an eye on is can our newest generation of workers afford homes? Because that’s important for society and for the housing market in general. So that’s just something to watch. Generally speaking, you are seeing Gen Z react to this by buying houses but only in less expensive cities.
So according to this data that I just found, it was an article from a site called moveBuddha. They did this analysis of some data that showed where Gen Z is buying homes and the top five markets that I’ve seen are pretty small cities. They’re not the names that you hear a lot about. Number one is Madison, Wisconsin, and that’s been a trendy city, but it’s a lot less expensive. Fargo, North Dakota, that one came out of left field for me. Columbus, Ohio, that’s been a hot market recently because of that affordability. Lincoln, Nebraska and Missoula, Montana. So again, smaller cities, some of these have gotten really expensive as everything has, but relatively to the Seattles, the New Yorks, the Austins, that is not as expensive. After you get out of the top five, you do see some of the bigger, more expensive cities. So San Francisco’s six, Denver is seven, Minneapolis, which is expensive, is nine, and Washington D.C. is 10.
But you have Burlington, Vermont, another small city there in there at eight. And then in the top 15, you see cities like Pittsburgh and Cincinnati. Pittsburgh, if you listen to our recent show about affordability, is the most affordable city in the entire world according to some analysis. So I think if you’re looking for where Gen Z and some of the demand for entry level homes might be over the next five to 10 years, I would look at these affordable cities because you look at this combination of economic factors where you’re seeing work from home, low affordability, but people can work from anywhere. They might start moving to these cities where they can actually afford a home and start gaining some of the benefits of either investing in real estate or home ownership. If you are a Gen Z investor, these are some markets that you should consider house hacking or buying in.
Our guest, Soli Cayetano, who’s going to be coming on in just a minute, invests in Cincinnati but lives and grew up in the Bay Area. So she found a place where she could buy and research something more affordable. And I think this is of one of these generational trends that is likely to continue that for many years, people primarily invest in where they live and through resources, like this show and BiggerPockets in general, and because of this work remote trend and the internet just in general, people can invest anywhere.
And so I think we’re going to start seeing Gen Z investors as well as Gen Z home buyers gravitate towards these cities that are a lot more at affordable because they are facing pretty stiff challenges in the more expensive cities. Now the second point before we bring Soli on I want to make is this trend that makes home ownership more difficult for Gen Z will likely bolster demand for rent for longer because people have to live somewhere and they’re becoming a larger and larger part of the workforce in the US and if they can’t afford homes, unfortunately, they’re going to have to rent.
And when you look at rent, I wanted to find some of the cities where Gen Z was moving so you can see some of these demographic shifts and I was surprised because if you listen to the show that a lot of the demographic trends, a lot of the migration has been out of big cities and towards the Southeast, sometimes towards the Midwest, these more affordable cities, especially since COVID. So you see places like Florida and Texas, Alabama, Tennessee has been the hotspots for demographics and growing population. But when you look at Gen Z, that is not necessarily the case. And this is cool and interesting because as an investor you should pay attention. I’m going to share two surveys with you. New York Times partnered with a company called CommercialCafe.
It’s a commercial real estate company that provided the data, New York Times published it. And basically they took the top 20 cities where Gen Z renters are best for Gen Z renters. And this is based on affordability, recreational opportunity, unemployment rate, commuting options, the Gen Z population and other metrics. The number one city is Atlanta. That has definitely been a boom city over the next couple of years. But number two is Minneapolis, which I was surprised by. Definitely not the profile of some of the other cities that have seen big population growth followed by Boston. Again, not really one that’s been up there. Then you have Tucson, Raleigh, and Columbus, all big popular destinations. Then you see Seattle, a very expensive city. Austin, a very expensive city. New York is up there. So you really see different trends with rent demand and it’s really the theme that I would say is economic growth.
This isn’t based what we see, this is based off affordability and everything, but the trend I see across these cities is places where there are a lot of jobs. Atlanta, Minneapolis, I think Minneapolis has more Dow 500, top hundred, whatever, companies than anywhere else in the [inaudible 00:20:40], Fortune 500, something like that. Minneapolis has more headquarters there. That’s a huge economic powerhouse. Boston has a huge biotech, it has a lot of banking. Seattle with tech. Austin, all these tech companies are moving to Austin. New York’s still the center of finance for the entire globe. Houston with oil and gas. These are the cities Gen Z appears still to be attracted to and moving towards the cities where economic growth is the biggest, at least in rental terms. Remember, I’m not talking about home demand because when we looked at home demand, we saw smaller cities that were more affordable.
But when we look at rent demand, we’re seeing bigger cities that are less affordable but have the biggest economic growth and I guess that makes sense. If you’re young, you’re ambitious, you’re trying to make more money, get your career started, you want to go to one of these big cities where the job opportunities are the best. I also looked at this other survey that showed the trending cities for Gen Z renters and the number one was San Francisco, number two, Jersey City, which is right outside New York City. Number three is New York City, Manhattan. Then we have Philadelphia, Boston, Arlington, Virginia. So six cities leading the way in the northeast. I mean I guess Virginia’s not northeast, but whatever. It’s on the East Coast. So that’s really interesting because we’ve had this talk about how a lot of people have been moving to the southeast and I think this is more like millennial Gen X.
People are a little bit older maybe of families, but the younger generation, rental wise, are moving to the places that the other are being left. So after those top six, we have San Jose, California, that’s where Google and Silicon Valley. Then we have Seattle, Minneapolis, LA, Peoria, I don’t even know where that is, Arizona, Long Beach, San Diego. Some of these big more expensive cities are still attracting young people. Maybe they’re attracted to the nightlife. But I think that really makes a lot of sense because people want to start their career in a place where they can have fun and where they can also have some of the highest paying jobs in the entire country. So that is something just to pay attention to as an investor. If you’re thinking everyone’s moving to affordable places, that might be true for Gen Z when it comes to home prices.
But when it comes to rent demand, so low vacancy, higher rent growth, it’s still the big cities that the youngest people who will drive rental demand over the next decade are moving to the big cities. So I think that is a different narrative than we’ve been hearing about other migration patterns and one of the things I wanted to make sure that we talked about on today’s episode. So with that, let’s just summarize what I just said. Basically, Gen Z, just like every generation, they want to buy homes but they’re facing really difficult economic conditions. And so I don’t expect that they’re going to be fueling a lot of demand in some of the more expensive cities. For home buying, they probably will be active but in some of the less expensive cities. But they are fueling rental demand in big population centers, big economic centers.
And that’s going to probably play out over the next 10 years and bode well for the rental markets probably, if I had to guess, best for multifamily rental markets over the next couple of years in some of those bigger cities like Seattle, New York, Austin, Minneapolis, keep showing up on those lists. So it’s super cool, really interesting thing to pay attention to. But in addition to just talking about data and numbers, I do want to get some context from a member of Gen Z who is investing and has a pulse on what’s going on with her peers. So let’s bring in Soli Cayetano from Lattes and Leases to talk about what it’s like to be a Gen Z member in today’s housing market. Soli Cayetano, welcome to On the Market.

Soli:
Thanks for having me.

Dave:
Well, thanks for being here. I have to say, I think this is the most intimidated I’ve been for an interview. Gen Z people, I’m scared of them generally.

Soli:
Why?

Dave:
I don’t know. You’re cooler than me. I know you’re just cooler than me. I don’t know any of the trends or don’t know how to talk to Gen Z people. So hopefully I can pull this off.

Soli:
We’ll teach you some. I’m like the oldest Gen Z-er you can get. So we might have to bring a younger person on the show.

Dave:
Oh God, that’ll make me just feel terrible. I’m already feeling old.

Soli:
18 years old. 18 is usually free.

Dave:
So people listening to this might know Soli from her great Instagram account, Lattes and Leases. But, Soli, could you tell our audience just a little bit about yourself and how you’re involved in real estate investing?

Soli:
Sure. So I am 24, the oldest Gen Z-er you can be. And I’m located in the Bay Area, California right now. I got started investing just over two years ago and obviously it’s very expensive to invest in the Bay Area. So I built my portfolio in Cincinnati, Ohio. So right now I have about 29 units between Cincinnati and a small town in Georgia into combination of long term, midterm, and short term rentals.

Dave:
That is incredibly impressive. How did you get started with this at such a young age? What inspired you to get into real estate investing?

Soli:
So I was always surrounded by real estate. So I was in the real estate association in college. When I was 19, I was a sophomore in college, I needed a job really badly because I had no money and ended up getting a job at a commercial brokerage firm. So I worked pretty much full time in an office leasing position through college as well as eventually leading the real estate association. So those are my two touch points. I listened to BiggerPockets, had some friends who bought some out of state rentals, but I was always so busy between working full time and going to school that I never really considered investing until the pandemic hit.
So pandemic, wiped out office leasing, obviously no one wanted to lease office spaces at the time and also school shut down, I was a senior in college. And when everything shut down I rediscovered real estate investing and decided it was now or never that I’d have the chance to really focus on investing and that’s when I committed to buy my first property. So from that commitment day, I believe it was 12 weeks till I closed on my first property in Cincinnati.

Dave:
Wow, good for you. That’s unbelievable. That is super fast. How did you pick Cincinnati?

Soli:
I went for work actually. So the year before, I was moving a client over to Cincinnati and I had the best time. We were wined and dined. The food was incredible, a lot of young people. It was super lively, beautiful waterfront. And then I looked on Zillow and the houses were a hundred thousand dollars and I was shocked. So I met an investor while I was out there who had a couple single families and I didn’t really have any, I guess, what I like to call competitive advantage in any other markets and I didn’t know how to research markets. It’s really, I guess, just ignorance that I chose the market but ended up working out really well.

Dave:
Yeah, you’re a prophet. I think Cincinnati has some of the highest appreciation rates right now, even in, we’re recording this, in late September 2022. Even as a lot of markets are starting to come off their highs, we’re seeing that Cincinnati’s doing really well and has some of the strongest rent growth in the entire country. So you picked well.

Soli:
It kept floating. Yeah, no, I mean I learned this later, but they spent over a billion dollars I think in the last 10 years really revitalizing their downtown because they were having trouble retaining students and so they reinvested, made it an amazing place to live, and that’s why a bunch of people are sticking around.

Dave:
I feel like everyone I know who is from Cincinnati just passionately love Cincinnati. I’ve never been, but it’s one of those places that if you’ve been there or you’re from there, you absolutely love it.

Soli:
Have you tried their chili?

Dave:
No. That’s a thing?

Soli:
Also passionately love their chili. I personally think it’s gross, but it’s like cinnamon chocolate chili. You’ll have to try it sometime.

Dave:
Oh wow. Kailyn, our producer, knows my dream in life is to somehow merge real estate investing and being Anthony Bourdain and travel around and invest in real estate and eat so that maybe I’ll get to do that one day. So we do want to talk about being in Gen Z and being able to invest. So do you have peers who are also investing or are you one of the only people in your age group you know that are investing in real estate right now?

Soli:
So I’d say that it’s a little bit regional. So in the Bay Area, I honestly don’t know that many people who invest in real estate because I think that a lot of people have the perception that you have to invest where you live. And so here it’s million dollars, 2 million properties, it’s really difficult for young people to invest. But I actually lived in Cincinnati for about four months this year and there are tons of young real estate investors. I would go to young real estate meetups, there was a ton of house hackers, a lot of people who own maybe two properties. It was a lot more common over there because the houses are a lot more affordable.

Dave:
That’s encouraging to hear. I got started relatively early out of necessity, not a great job market when I graduated college. And you hear in the media that Gen Z is not as interested in home ownership or investing. It sounds like that’s not what you’re seeing in your experience.

Soli:
I think it depends. I think that Gen Z-ers love to consume content. They’re content consumers from TikTok, from Instagram, usually from social media, from YouTube. And so the algorithms have gotten so good at showing you more of what you’re interested in. And so if you are interested in investing they will continue to feed you content. That’s how it happened for me. So I started following couple, I created at my real estate Instagram, I was following investors and so what did they do? They showed me more people who were interested in investing. They kept feeding me more real estate investing content. And so I think that made me think, oh, this is normal. Everybody’s investing in real estate. I’m the weird one. And that what really propelled me to keep buying real estate. If someone were to curate their feed to be about shopping or about news or about other things, I think the algorithms and what you feed yourself with content tends to take you in a different direction and then that becomes your world. Does that make sense?

Dave:
Yeah, yeah, absolutely. It’s great when it feeds you helpful content, but it’s terrifying that you could get in this spiral of either negative or unproductive content and you get consumed by it.

Soli:
It’s choose your own adventure. So I think that before when Instagram had a chronological feed, you could follow one person who was interested in finance and you could follow one person interested in clothes, you could follow your friends too. Now it’s not really no longer the case. It is based off of your likes and your views and how long you spend looking at things. And so they can really curate based off of just one thing. It’s hard to get more diversity.

Dave:
Yeah, yeah, that’s definitely true. It’s very interesting new frontier and I’m sure it will shape your generation for the next couple years or for the rest of your lives around how you interact with these social media platforms. It’s pretty crazy. In terms of your peers, you said you’re from the Bay Area, do most of your friends, peers still rent or are people trying to buy homes? Because one of the things I’m really interested in is, I don’t know if you’ve heard this, but millennials are now the driving force behind demand in the housing market and there’s always media that says, “Gen Z, they don’t want to buy houses, they’re going to be renters forever, they don’t want to be tied down.” We have some data around that, but I’m just wondering anecdotally, do you see any truth in that?

Soli:
Again, I think it’s a little bit regional. So I think in the Bay Area, a lot of people stay renters for a really long time, if not forever. My parents are still renting because they can’t afford to purchase a house. And so I was doing some calculations. Right now, I’m in Sausalito where the average home is $2 million. And so if you want to purchase a house, you can’t use an FHA, you can’t use a first home buyer’s loan, you got to put down half a million dollars. And for me as an investor even I feel like if I had half a million dollars, I’d probably invest in real estate then put it into a $2 million primary residence.
And so I think locally where a lot of my friends are, it is people will be renters for a long time as well as a lot of the digital nomad. I guess everyone during the pandemic wanted to travel more, they wanted more experiences, they wanted to not be tied down like you said. And so I think for the short term, there might be a lot more traveling, less home ownership, especially with people very discouraged about the housing market and how difficult it was to actually win an offer. So I think it’s mixed. Again, the country is so diverse. I think the Bay Area is in a bubble. We live in a bubble and the rest of the country is not like us, most of the country. But locally I would say primarily renters especially because it’s just unaffordable to live here.

Dave:
That makes a lot of sense. I actually pulled some data that showed where Gen Z people are buying homes. And this isn’t investors necessarily, this is home buyers as well, but it’s a lot of these smaller cities and less expensive cities that you’re talking about. So the number one was Salt Lake City, which has a higher average price, but then after that it’s Louisville, Kentucky, Oklahoma, Cincinnati, where you invest, Indianapolis, Phoenix and Minneapolis, which are both expensive, but Birmingham, St. Louis, and Virginia Beach. And it just makes me wonder, this is just speculation if we’re going to start to see those places start to grow faster because this is where Gen Z, not just as investors but as home buyers in general are going to be more attracted to these they’re almost like tertiary cities because they’re just more affordable and everything else is so expensive right now.

Soli:
And you can also work remotely a lot now. And so I know a lot of people in Cincinnati who have remote jobs getting paid Bay Area salaries to live in a place where you could buy a home for one year’s worth of your salary. So I think that that has really changed the playing field as well with a lot of companies being okay with you working wherever you want to work or living wherever you want to live.

Dave:
Totally, yeah, I mean it’s really going to be interesting to see, because we’ve talked about on this show and like Soli just said the amount you can earn is no longer tied to your proximity to these economic hubs anymore. We’ll see what happens, because I know a lot of companies are starting to call people back to the office so it’ll be interesting to see what happens there but I generally think you’re right.

Soli:
I actually worked in office leasing and so that was a question that we talked about all the time is, are company is going to force people back into the office? And what we saw a lot of the time is that if they tried to force people back into the office, people would just quit and try to find remote work. And so I don’t know where the future of the office holds. I think that there’s a lot of community to be built in offices, but I think people value flexibility a little bit more. And so I’m not really sure people will come back.

Dave:
Yeah, it’s interesting. I saw some data that showed that 30%… The amount of days total across the country that are worked remote have leveled off at 30%. But not to name the companies or people, but two people I’m close with both work for these large publicly traded companies that both said they’re never going to call people back and have both been called back to work in the last six weeks. So it’s interesting, I’m just curious what will happen. But I agree. I mean I’m all for the flexibility, so I personally like it, but I also sometimes really miss being in an office. So I think the hybrid solution is going to be popular and can support moving to some of these other cities. So on your Instagram, I know you often give advice to other Gen Z potential investors. What are some of the main pieces of advice you give to people who are your age and younger who are looking to get into real estate investing?

Soli:
Yeah, I think that house hacking is a very good place to start. So if you can buy a home with three and a half percent down, I think oftentimes Gen Z-ers don’t have that much money to start investing. And so it’s like how can I invest with not that much time and not that much money and house hacking is an easy way to start. So put three and a half percent down, honestly not very much money if you live in a lower cost area and then rent out the other rooms or the other units. So I think that’s a great way. If you do live in a really expensive market like me and maybe doesn’t make sense to house hacked, look at a state. So I would say those are the two options I give people is either looking at more cost effective market that cash flows or house hack.

Dave:
That’s very, very good advice in both things that work pretty well, even in down market conditions or confusing market conditions like the one we’re in today or the ones we’re in today. So you have, what did you say, 29 units now. What’s next for you? What are you planning? What are your ambitions in real estate investing?

Soli:
Honestly, I haven’t bought very many this year, so I think I’ve only bought maybe five units because I’ve been really busy stabilizing my portfolio. And now that it’s almost completely stabilized it, I feel like it is on the verge of re-exploding, which I’m really excited about. And so I’ve been looking making tons of offers on right now portfolios of single families and small mall ties. So not single families but portfolios of them as well as dipping my toes into office buildings, which is what I used to work in. So have put offers in on offices, warehouses and actually should hear back on one today, so cross [inaudible 00:39:21].

Dave:
Oh, awesome. Well, good luck. Is that in Cincinnati as well?

Soli:
Those ones are in Augusta, Georgia. So Augusta’s another, I guess, tertiary market where the Masters tournament is held and two hours outside of Atlanta. Same kind of landscape as Cincinnati. Very cash flowing, but good amount of appreciation as well.

Dave:
Nice. That’s great. Well good luck. Well, thank you for joining us. Is there anything else you think our listeners should know either about investing as a Gen Z investor or about your peers and how their preferences about the economy or their living preferences might come to shape the housing market in the coming years?

Soli:
Yeah, I mean I think there are a lot of Gen Z-ers who are probably interested but feel alone because they don’t have peers who are interested in investing locally or friends that they talk to often, which was my case. And so I had to really build my community online, but then I found hundreds of thousands of people who also shared the same interests and thousands of people who are my age or even younger. And so I would say that if Gen Z-ers are interested and they do feel a little bit alone or lost, that there’s a giant community online of people who are excited for you and there to support you.

Dave:
All right, great. Well, thank you. I mentioned it at the top of the show, but where should people who want to connect with you do that?

Soli:
Yeah, Instagram is probably the best place. So my Instagram name is @lattes.and.leases.

Dave:
All right, great. Soli Cayetano, thank you so much for joining us today.

Soli:
Yeah, thanks for having me, Dave.

Dave:
All right, big thanks to Soli. She is a really, honestly, an inspiration. If you’re 24, if you’re young, it’s incredible what she’s doing. I think it’s really interesting to see and just prove that out of state rental investing is possible. A lot of people are intimidated by it. I have been in the past, but it shows like if you build systems, you find a great agent, which you can do on BiggerPockets. There’s a great agent finder tool. If you can build a team, you can find markets that are growing where there is Gen Z demand, where there’s millennial demand, but it is more affordable and it’s more reasonable, more practical for you to get involved. And as a non Gen Z member, someone who’s an investor, I think it’s really important to listen to what Soli is talking about how location dependent this demand is going to be.
I think we talked about that in the beginning where we saw certain markets are going to capture Gen Z demand for home purchases while other markets are going to capture demand for Gen Z rent. And so this is just something you should consider in your investing strategy is what’s coming down the pipe of the next couple of years. Are you buying multifamily? Because buying multifamily in a place where home sales are going up is great, but if rent prices aren’t going up, that’s how commercial properties are valued. So you want to find the place where rent demand is going to be really strong, not just where there’s population growth all by itself. So that is something to pay attention to and I think Soli did a great job explaining that to us. Thank you, guys. Hopefully this was helpful to us. If you have any questions about this episode, please hit me up on Instagram where I am @thedatadeli. If you want to connect with me at all, you can do that there.
Ask me questions, give me feedback. If not, I welcome you to check out my brand new book. I’ve been talking about it a lot, but I’m pretty excited about it. It’s called Real Estate by the Numbers, helps you understand how to be an analytical real estate investor. I think that’s the only way to be a real estate investor, but of course I’m biased, so you can check that out. I wrote it with J Scott. It’s available on biggerpockets.com/store. Thank you all so much for listening. I will see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Andy Walden, Black Knight vice president of enterprise research, joins ‘The Exchange” to discuss how Walden would summarize the mortgage market right now, what happens if rates stay where they are for the rest of the year, and insights into home-seller activity.

The housing market is in an unfamiliar place. After several years of appreciation and a few years of massive booms across the U.S., the train is finally losing steam.

With affordability maxing out, prices are on the decline, along with increasing inventory, median days on market, and migration patterns that are disproportionately affecting the way markets rise and fall.

Here are six charts that characterize the current housing market.

Affordability Is Lower Than Ever

First things first, mortgage rates have skyrocketed this year from an exceptionally low 3% to just over 7% as of early October. While 7% is still lower than historical rates that flirted with 20% in the 1980s, it has still created sticker shock for prospective homebuyers calculating their would-be monthly payments and has led to the fastest declining affordability rate ever seen.

Of course, we have the Fed to blame for this. Chairman Jerome Powell’s ultimate goal is to defeat inflation. Raising interest rates, especially at the pace they’ve been doing so, is meant to quell spending and slow down the economy. Housing prices are just one piece of the puzzle.

The combination of historically high real estate prices, rapidly rising interest rates, and 40-year highs in inflation have made this the least affordable market we could imagine. According to the NAHB/Wells Fargo Housing Opportunity Index, which measures the relationship between household income and housing cost, the index is at the lowest its ever been.

Prices Are Starting To Soften

Speaking of prices, the S&P/Case-Shiller Index has looked wild since the beginning of the pandemic. Would you believe me if I told you that it had its first recorded month-to-month drop since December 2018 to January 2019? Look for yourself.

Of course, a one-point drop isn’t the beginning of housing armageddon, but it breaks the trend and shows that we’re moving into a softer market. It’s also important to note that this data hasn’t been updated since July, so when August’s data comes out, we’re expecting to see this fall even more. 

Overall, appreciation has been rising since 2012 and really hit the gas in 2020. This is the first time many new investors are seeing any sort of drop in prices, which is a significant development. It’s important to note that home prices are still up year-over-year (YoY). Redfin’s data from August suggests we’re still up 6.7%YoY. However, this is expected to change as the months roll by. 

Supply And Demand Remains Complicated

BiggerPockets’ VP of Data and Analytics, Dave Meyer (who also just happened to write this book), spoke about the “lock-in” effect several months ago before mortgage rates were increasing as fast as they are now. The idea is that as mortgage rates increase, homeowners will be less inclined to sell their homes as they likely have lower fixed rates and may find it harder to afford their next home. They’ll also find themselves selling in a market with falling prices yet higher costs of living. 

While statistics suggest that the average length of time a homeowner stays in their home is eight years, the odds of them selling right now are low anyway if they locked in a 3% rate within the past couple of years. 

I’ll also remind you that mortgage rates still hovered around 4% in 2014. As rates increase, you may find that many would-be equity-rich sellers who have lived in their homes for a long time will hold out until rates come back down. It’s also important to note that homeowners who may have had high rates probably refinanced within the last two years, resetting the clock.

Regardless, inventory, while rising, is still staying within cyclical norms.

However, new listings are down, which is a sign of what’s to come. 

Here’s the conundrum. If supply decreases, demand remains higher, despite it decreasing. I think it’s pretty evident that demand will remain higher than supply for the foreseeable future. The question is how well it paces against supply, as that will be a big factor in how much home prices rise and fall. And, even more importantly, where.

Migration Patterns Are Distinct

The question of where brings me to my final analysis for this article. Migration patterns are ever-present, but there were some big-time winners during the pandemic. 

Austin, Texas; Boise, Idaho; Tampa, Florida; Phoenix, Arizona; and many other cities saw tremendous growth during the pandemic. Meanwhile, juggernaut cities like San Francisco and New York City lost some of their population.

During the pandemic, many of those boom towns saw the highest appreciation rates in the country. Austin’s median sales price capped out at $670,000 in May, up 15.5% YoY. Boise got up to $585,000, nearly 21% YoY.

But now, those same markets are softening, both taking $100,000 median sales price tumbles since their peaks.

What does this mean? A couple of things. One, it proves the affordability crisis is real and is either pushing people out of markets or preventing them from coming in. Second, it means that some markets will continue to appreciate while others will decline. 

Most importantly, the markets that experienced the most rapid appreciation stand to lose the most, as some may have overinflated well beyond their intrinsic values. Picking and choosing which markets will wind up like this is easier said than done. However, by looking at the regional migration patterns below, you can get a pretty good idea of what homeowners are thinking.

Real estate is local. Therefore, keeping track of local trends is just as critical to making sound investments as any national trend can show. One of the more overlooked but essential elements of market analysis is recognizing and understanding population trends. 

If a state’s population is growing, is that because the state is experiencing an influx of newcomers? Or is it just a product of birth rates?

Furthermore, does the state offer business or tax incentives that would lead folks to move from places with higher taxes or poor business incentives? Exhibit A is the migration from California to Florida. California, one of the country’s highest-taxed states, versus tax-free Florida.

With enough research, you can make well-educated bets on what markets stand the most to gain—and lose.

Conclusion

As the housing market shifts, staying informed is the best way to protect yourself and your investments. These charts paint a picture of where we’re at right now, but things can change quickly.

However, even if the market you’re in (or want to be in) is starting to soften, it could still be a decent bet in the long run if the intrinsic economic factors are in line. If the population is growing and business and wage growth are solid, you wouldn’t be out of your mind to invest during the dip and ride out the wave.

After all, real estate is considered one of the safest investments you can make. And most of the time, when markets fall, they rise again.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.