October 2022

Ashley:
This is Real Estate Rookie.

Josiah:
Yeah. And so that is the thing, a lot of people, they just see the end result and so they don’t see the work. It’s just like with my out-of-state rental, I did spend five months just researching different markets and digging in and making offers on properties before I finally found something that worked out. And when we started looking at the Airbnb, I mean it was about a year from the time we started looking at them to when we finally got it on our property and all set up and stuff.

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 oftentimes like to start the podcast with some reviews from folks in our Rookie audience.
And today’s review comes from Ashley Nichols and she says, “To give this podcast less than a five star review is pure insanity.” I appreciate that enthusiasm, Ashley. Ashley says, “I’ve listened to every single episode and every single one is full of so many gems. Tony and Ashley are literally out here giving out free game and changing people’s lives. If you’re a rookie investor, the information they’re exposing you to is exactly what you need to help master your mindset and take action to achieve your real estate investing goals.”
Ashley, we appreciate you for the kind words. And if you are listening and you haven’t left us an honest rating or review on whatever platform it is you’re listening to, do it right now. The more reviews we get, the more folks we reach, the more folks we reach, the more folks we can help. And that’s our goal here, isn’t that right, Ashley Kehr? We want to help people, right?

Ashley:
Tony, you are so ethical by saying an honest review when I say a five star review.

Tony:
Leave us a five star review. Five stars, we don’t need one. I think because I also get joy from reading the mean tweets about us too. So it’s like, if you guys want to say something mean, we can do that too.
But it’s so funny, every time that I get with people in person, we host our meetups here locally, we were just together in Denver, and every single time since I’ve started reading the mean reviews, people always come up to me and they’re so offended that people will write such mean things about us. And they’re like, “I couldn’t believe that person said that. Don’t listen to what they’re saying.” So even the bad reviews, I think they help bring the community together.

Ashley:
But they also hurt the podcast and my feelings. So next time, they should just slide into my DMs with their hurtful comments. And I will just leave it at that.

Tony:
There you go. Fair enough, fair enough.

Ashley:
So today on our episode we have Josiah, and this is really exciting because he talks about how he added a short-term rental into his property where he lives without having to get permits, without having to get utilities because they were already there, just all these different things and how he pieced it together to make this perfect short-term rental and also didn’t affect his property taxes, which we all love.

Tony:
People always ask me, “Tony, hey, how do you choose which market to invest in?” And a lot of times honestly it’s just having conversations with people. So listening to Josiah’s episode, he talks a lot about the success he’s had in this market that a lot of people wouldn’t think about investing in.
But the other thing that Josiah talks about is going out of state, one of his properties is out of state, and how he built that team and manages it remotely. So if you’re thinking about investing not in your backyard, you’ll definitely want to listen through to the end to hear how Josiah manages that part of his business as well.
Josiah, welcome to The Real Estate Rookie Podcast. We’re super excited to have you on. So if you wouldn’t mind just share with us, with the listeners a little bit about who you are and how you got started in real estate investing.

Josiah:
Okay. So my name is Josiah Hein. I’m 36 years old. And my wife and I are actually an investing team. And so we started real estate investing basically in 2020 right before COVID hit. But if you back up a little bit before that, I started really digging into real estate investing and learning about real estate investing in 2019. I actually got hit by a drunk driver while at work. They were going 100 miles an hour and rear ended me and it messed up my neck and back pretty bad.
And so I actually have a pool and spa cleaning and repair business and it’s a lot of upper body work and being bent over and stuff. And so for about two years after that I was able to do very little physically within my business, and so I really had to lean heavily on my employees at that point.
But because I was basically incapacitated, I got out on YouTube and started searching about real estate investing and found BiggerPockets and was just hooked. And so I would watch two to four podcasts a day literally just because I had a lot of spare time on my hands all of a sudden. So that’s what started with the whole education piece of it, and then from there it led in.

Ashley:
How did you even start thinking about real estate investing? Did someone talk to you about it? Did you come across a video? What even intrigued you to start searching?

Josiah:
Well, when I started my business, I learned everything online about business. And so watching YouTube videos primarily, everything from how to set up corporations and how to structure businesses to how to run systems and help manage everything.
And so I knew that my wife’s dad did real estate and so we knew real estate was something we wanted to do as a long term goal. We weren’t really looking to dive into it in depth, but after getting hit by the drunk driver and being all messed up, I wasn’t sure if I was going to be able to continue my business going forward.
And so I just got online and I was like, “What else can I do? What can I do in real estate especially to make money?” And just started digging in and learning about it because I wasn’t sure if I was going to be able to keep going with my business.
And so it was her family and then it was just something we knew we wanted to do long term as a retirement strategy. But then I kind of got forced into it a lot sooner than I was planning and my shift focus for my business specifically to real estate because that’s what I felt like I could probably do at the time.

Ashley:
Okay. So you had something really, really crappy happen to you, something unexpected and instead of getting into the mindset of this sucks, pity me, you took advantage of your time by learning about real estate and researching. That right there just shows the type of person you are, that mindset, because it would be so easy to feel sorry for yourself and that my life sucks.
But instead you took that horrible thing and you somehow found one little tiny piece of advantage is that now you had time to research and watch those YouTube videos. And that is awesome that you did that because I’m sure that was not easy to do, to get into a mindset of, okay, I have to figure something else out, I have to do this. And to have that kind of endurance is really awesome.

Tony:
And Ash, it kind of reminds me of AJ Osborne’s story where it’s this really debilitating or discouraging thing happens and like you said, they use it. They use that additional time and just that epiphany to say, “Hey, real estate is the thing that I really want to invest in to be able to provide for my family in case I’m ever not able to myself.” So we all have those moments, Josiah, and I’m glad that moment turned out to be a positive one for you in the long run.

Josiah:
Yeah, thank you. I really appreciate that. And I mean, I have a wife and three kids now, but at the time I had two kids and when I got hit, it was just a week after my second daughter was born. And so it was traumatic, but I walked away from it, thank God. I was happy about that, but I was like, “I need to keep making money for my family and keep pushing forward if we want to be okay.”
My wife was working and stuff as well, but I really need to feel like I’m bringing value to the family and stuff and to our relationship. And I’ve always just been someone who’s really driven and motivated to keep going and going and going. And so it’s hard for me to just stop and give up or not do anything. It’s just not really in my DNA or who I am I guess.

Tony:
Josiah, can I ask one follow up question? You said you started investing in 2020, so this is in the middle of COVID. I think there was a lot of uncertainty in the world in general, but especially around just making big investments. Were you at all concerned about investing during such uncertain times? And if so, how did you work past that fear and uncertainty?

Josiah:
So that’s a good question. So basically it was February 2020 when we started, so right before COVID hit and it definitely was a big fear. I wasn’t sure if it was going to derail everything we were working on, but we had already started and we started by buying a new house for our family to live in.
Our family was growing. Our first house that we bought together, my wife and I, was getting a little cramped and stuff and I was starting to feel a little anxious. And so we ended up buying a second house and then we were able to keep our first house and turn that into a rental actually.
So we did a remodel on it, basically just a long-term BRRRR. We lived in it for a couple years, remodeled it, rented it out, and then refinanced it and repeat. But yeah, starting all that whole process in COVID, it definitely made us pretty anxious for sure.

Tony:
We recently interviewed another guest, Nick Troutman. He was on episode 223 I want to say it was. And he had this really beautiful, not even an analogy but just distinction between danger and fear. And his whole premise was that people oftentimes confuse danger and fear.
Danger is something that can hurt you. Danger is something that you should avoid, but fear is something that exists only within your mind. And sometimes it could represent danger, other times it could just represent you stepping outside of your comfort zone and being fearful of the unknown.
So it sounds like you were able to make the distinction between the two versus actual danger and what was just fear that might be holding you back.

Josiah:
Yeah, and so it was pretty crazy. As soon as COVID kicked off, it seemed like the whole world just paused because they didn’t know what was going to happen, and so we did the same as well. I mean we were still working on remodeling our previous house, but we didn’t know how any of that was going to look or any of the stuff with the eviction moratoriums or what the government was going to do, if they were going to start printing money like they did, trying to bail people out, keep things afloat.
And so we did pause a little bit, but we were already in the process also at the same time with our first house. So we got it remodeled and then rented out. And it took us a while to remodel it. We got it rented out basically in September of 2020. And so we were full in on COVID then and the rent moratoriums were getting put in place already.
And so I mean the main thing was we just made sure that we really vetted our prospective tenants and stuff and went through and checked that they were paying rent, taking care of the places they were in and had a good credit score still and was just staying on top of everything. And so basically just really the core fundamentals of real estate.
And so anyway, that was our first place. We got it rented out almost immediately. We live in southern Oregon and so it’s a really hot market, I mean pretty much anywhere on the West Coast is right now. And so had lots of applications and stuff, got it rented out.
And then did some work around our own house, meandered for a bit. And then finally got to the point where we could do that cash out refinance to pull our equity back out of it. And so we got to that point in the spring of 2021 and we were basically able to pull out $60,000 to go towards our next deal.

Tony:
60 grand? That-

Josiah:
Yeah.

Tony:
You say that so casually, Josiah, but that’s a big number, man. I mean that is the ultimate goal for every new investor, especially the ones that want to use the BRRRR strategy, is to be able to buy a property, put some love and a little bit of money, time and effort into it and then get back the majority if not all of what you put into it.
But before we keep going, Josiah, if you can just set the table for us, how big is your portfolio with your wife today and what markets are you guys invested in?

Josiah:
So it’s actually pretty small still. We’ve only done three deals so far. And so we started with our single family home that we lived in and then did a BRRRR, pulled out the 60,000 and then we also did a HELOC on our house because we remodeled it and then refinanced it and then we did a HELOC on it as well because we didn’t pull any money out when we refinanced. We wanted to keep something that was easier to stay liquid with so we could keep using that money in the future to invest with, and so we did a $60,000 HELOC as well.
And then pretty much other than refinance stuff in 2021, that was all we did. I did start searching in September for our next deal and after reading David Greene’s book on out-of-state real estate investing, I decided that that’s what I wanted to look at because Oregon is a really expensive market.
And so I spent about five months just going from market to market. I started in Ohio, like Akron area and stuff, looking in cheaper markets. And I’d get on Google Maps there and start looking around and see a bunch of boarded up windows and some houses half burnt down and that kind of scared me.
And so ended up getting some advice from our lender actually and she was investing in North Carolina. And so I started looking in North Carolina. After that, reached out, got on BiggerPockets, found a property management company and a realtor, reached out to them, started looking around. And that market was just so crazy and such a hot market that we made multiple offers, couldn’t get anything locked up and I was looking there for months.
And so it was getting around Christmas time or just before Christmas and my mom was telling me that I should look around Tulsa, Oklahoma, because they just moved there a couple years ago and she’s like, “Oh, it’s a good market. It’s seen good growth and the property prices are pretty affordable.” And so switched to my third market, Tulsa, Oklahoma.
And again I got on biggerpockets.com and I searched property management companies in Tulsa and I found this amazing one and they had a 4.7 star review on Google and 300 or 400 reviews that were … So lots of reviews to say that they were actually a good company.
And so I got online on Zillow and just started looking for deals and stuff and going through. And as before, I even reached out to the property management company and then I found our two bedroom, one and a half bath that we ended up purchasing there.
And so we bought that there and it was actually being listed by the property management company that I wanted to use and it had been recently remodeled by them and had a long-term tenant that was placed in six months before that was on a two year lease.
And so I called them up, the manager of the property management company that was also a listing agent, answered right away. And I just expressed to him, “Hey, I want to look at purchasing this property.” And I told him I wanted to continue working with the property management company and use him for the transaction for both me and the seller. And I think he really liked hearing that being a dual agent and stuff.
And so everything honestly went really easy. The purchase price on that property was $80,000. So we ended up buying in cash, doing a quick close and then we did a cash out refinance on that as well. And so because that tenant was in there already, we were able to just make that happen immediately after the purchase.

Tony:
So you guys have the one in Oregon, the one in Tulsa, and then where’s the third unit at?

Josiah:
So it’s actually on our property in Shady Cove, Oregon, and it’s an Airbnb. And so we set up a little tiny home that one of my clients that I met through my pool cleaning business makes. And it’s just a really high-end tiny home built on a trailer. And I had this concrete pad and I was trying to figure out what I wanted to do with it. It already had utilities down there.
And so initially I was thinking I could put a shop down there and then do an apartment or something above it to rent out. And then one day I went to my client’s house to clean his pool and I saw him building it there and I was like, “Oh my gosh, what is this?” And he shows me it and I’m just like, “This is amazing. I have a perfect spot for one of these.” And so that was in the summer of 2021.
And so we knew we wanted to get another long-term rental just because we weren’t sure about the whole short-term rental thing yet, but we also knew we wanted to try it. And so we ended up staying in contact and going back and forth with him. He built a couple of them and we ended up, after we did the cash out refinance on the Oklahoma property, being able to make the timing happen to where we could purchase one from him. And so-

Tony:
That’s amazing.

Josiah:
And so we ended up … I watch Rob’s channel a lot, Robuilt, and I watch you in the Real Estate Robinsons as well. And so taking a little play from Rob, we ended up naming the tiny home Casita De Venado, which means tiny house of deer basically is how it translates because we have a bunch of deer all around the property.
And since we launched it, it’s just been doing phenomenal. It’s been probably 95 plus percent booked. We just launched it on May 18th and I mean it’s doing probably a $100 a night more than we ever thought it would also. So it’s been pretty phenomenal for us.

Ashley:
That’s awesome. Are you guys self-managing it then and do you want to talk about the operations of it? Because getting a short-term rental up and running, I’m currently sitting in one right now of getting everything ready to make it go live. But even once it’s live and it’s bringing money in, how are you handling the actual management of it?

Josiah:
So yeah, we are self-managing it and we do most of the stuff just through the Airbnb and Vrbo platform, but my wife handles that mostly. She actually ended up leaving her job that she was at back in May and so now she manages it full time, turns it over for us and runs everything from that aspect.
It was funny though because while we were getting it set up and started, we knew it would take a couple days for it to go live on Airbnb and Vrbo, and so we were just almost done with it and we go ahead and we go to post to get it live and stuff and a couple days goes by and then it goes live. And we didn’t know anything about the platforms or how they worked yet even really, and so we had instant booking on. And so we got a booking for the same day that it went live on Airbnb, an instant booking.

Tony:
That’s good news. That’s a good thing.

Ashley:
Yeah. So did you have to rush to get some things finished?

Josiah:
Oh yeah. So we were thinking, “Oh, it’s going to get booked out and then it’s going to be maybe worst case scenario a couple days before someone comes and stays in it, so we can get all the finishing touches done.” And no, it got the instant booking. My wife’s like, “Well, we might as well accept it and just see how this works out.”
And so I was at work and it was on a Friday and they said that they wanted to come. They were traveling from Seattle to the Bay Area and they wanted to stay the weekend when they came through. And so we were up until midnight just scrambling to get it done. I mean I was putting fake grass out in front of it because it was just a concrete pad in front of it and doing the final cleanup stuff.

Tony:
I mean, Josiah, these are the stories that you don’t usually hear. People see the Instagram flex of people, “Hey I got the keys from our first,” but they don’t see the staying up till midnight laying down some grass for your guests. They don’t see you recording podcasts in your new Airbnb unit because you got to stay there to get it set up. Or they don’t see you renting a U-haul and driving all the furniture and everything from your house to your Airbnb and staying there for three days.
So it’s easy to glamorize the idea of becoming an Airbnb host or a real estate investor in general, but there’s so much hard work that goes into it as well. So I’m glad you shared that battle story with us.

Josiah:
Yeah. And so that is the thing, like a lot of people, they just see the end result and so they don’t see the work. It’s just like with my out-of-state rental, I did spend five months just researching different markets and digging in and making offers on properties before I finally found something that worked out.
And when we started looking at the Airbnb, I mean it was about a year from the time we started looking at them to when we finally got it on our property and all set up and stuff. And I mean with our first house that we remodeled even, I did a lot of that myself with a messed up neck and back after getting hit by the drunk driver. And I demoed out all the old carpet and stuff and was repainting the house on the inside.
And it was really hard and that’s why it took so long. It took I think four months to get the whole thing done, start to finish. And it was because I didn’t have the money to just pay someone to get it done for me and I was having to grind out and do it on my own even though I was injured.
And it’s like there’s always struggles and stuff that people go through, and especially as real estate investors, people don’t see all the struggles. And it’s just the main thing you got to do is just keep going and keep on grinding and never give up. And so-

Ashley:
What was it like for you, Josiah, when you went from doing all that work into your first property to doing an out-of-state property where you did no work for it? How did that feel? Was it almost like you’ve lost control as you’re not doing it anymore? Or was it like, this is amazing, I never want to rehab a property again?

Josiah:
So I actually really did like the out-of-state investing and I do want to continue doing the out-state investing and long-term rentals in the future just because it is so passive. But it was a lot on my phone and a lot of communication back and forth with the realtor and the lenders and stuff.
And even, because the property has an HOA in Oklahoma and they take care of the outside. And so the inside was completely remodeled, but the outside really needed some repairs done and completely repainted.
And so when we were in the process of doing the refinance on the Oklahoma property, I was actually involved with managing, trying to help manage the HOA company or the people doing the remodel from the HOA, keep them going and on their toes. And so I was a property manager. So it wasn’t completely hands off in that sense, but ever since we did get it up and running, I mean it’s just been cash-flowing good for us and super smooth.
And so yeah, I definitely enjoy that aspect of it and so want to continue that. But also, I mean the cash flow of short-term rentals is just phenomenal. And so I think the goal is to just keep the short-term rentals building for now and then maybe in a couple years do some multi-family that’s out of state.

Ashley:
That’s awesome. With your short-term rental, the one behind your house there, the tiny home, how does that affect your property taxes? Since it is mobile, does it not count into the assessment on your property taxes at all? That’s something I’ve always wondered about.

Josiah:
Yeah. So the tiny home is actually built and certified as an RV. And so I plug it right into an RV outlet and it’s got the same hookups for sewage and because of that it’s just an RV trailer essentially. And so it is on the line in a gray area as far as codes go and stuff, but as long as no one’s staying in it more than two weeks, then it’s not really considered a rental, and so it works out really well because of that. But there wasn’t any heavy permitting to do. It is allowed within the county. And I mean it was really easy for the most part to get it all done.

Tony:
Josiah, one follow up question on the tiny home piece. I know you said it’s been booked like 95% of the time, but are you getting a lot of people that are coming to actually visit that area or is it more so people, like you mentioned, that are road tripping from one part of the country down and you’re just a stop in the middle? Have you noticed a trend there?

Josiah:
Because we’re so new with it, I couldn’t really … It’s been a mix of both, actually. A pretty decent mix of people traveling from northern California to the Bend area, that’s a big vacation area and then also just up and down the I-5 corridor.
But we’re also about, well, we’re exactly an hour from Crater Lake National Park. And so it’s the deepest lake in the world and it’s absolutely beautiful park. It’s up on top of an inactive volcano that erupted I think almost a quarter million years ago.
And then this area has tons of lakes. We’re a quarter mile from a boat ramp for a river that is huge for rafting and stuff in the summer and tons of waterfalls and hiking areas as well. It’s really just an ideal Pacific Northwest area.

Tony:
Crater Lake, I’ve actually never heard of Crater Lake before, so I’m going to look into that. Who knows, maybe we’ll be neighbors here in the future. I’m always looking for that next market to invest in. So Josiah, I mean first, congratulations to you and your wife on the success you guys have had. That’s awesome. But I want to talk a little bit about the funding aspect of these units that you’ve purchased.
What are you guys doing to be able to afford all of these properties? You’ve purchased three properties in about two years. Is it all money that you guys have saved up? Were you guys partnering with other investors? Just walk us through what that journey has been like.

Josiah:
Okay. Previously, I mean up to this point it’s just been my wife and I. And I’ve had my pool cleaning business and that’s done really well. I started that in 2016 and it pretty much just exploded. There’s a ton of pools in this area, a ton of demand.
And then my wife did accounting actually. Well, she was a bookkeeper at a school for about five years and then she worked for a payroll company for another five years. And so when we’re doing all these deals and taking things down, she’s been imperative because I am terrible on computers and that paperwork and keeping stuff organized and stuff.
And so she’s the backbone there with sending emails back and forth to the lender and stuff and I’m the one that finds the deals and tries to manage them and get them across the finish line in that sense.
But yeah, we’ve done it just working regular jobs, just regular people. Like I said, we did the cash out refinance on our first house and then the HELOC on our personal home. And so other than buying our first house and our second house just using conventional financing, we’ve used some fundamentals of real estate to get the rest of our cash.
And then moving forward though, I mean we did spend all of our money on the tiny home and stuff and that’s been going great, but I do think we’re going to try to partner with people.

Tony:
For the tiny home, so did you use your cash from your HELOC to fund that construction or did you get some kind of construction loan to fund that project?

Josiah:
Oh, okay. So yeah, we did all cash with that. And so it was $76,000 for the tiny home and then all in we’re about a $100,000 on it because we had some unexpected paving for the driveway. It was too steep for cars to get in and out of. And then we did a Trex deck. That was more expensive than we thought as well. Both of those things were about 6,000 each. And then we did a hot tub and a gazebo and a fire table and stuff. And so that’s all on the deck at the end of the tiny home. That’s all underneath the gazebo.
And then actually where it’s at, my property is shaped like an L and it’s only an acre, but you have your own private hillside where the tiny home’s at. And so because of that it makes it really private. You’re looking at mountaintops and tree tops and stuff when you’re sitting either at the fire table or in the hot tub and it really just gives you a feel that there’s no one else around even though there are a couple houses, a hundred yards behind you and then a couple hundred yards down the hill in front of you and stuff.
But yeah, in the future we definitely want to partner with some investors and I have a deal that I’m looking at putting together right now.

Ashley:
You said that the land is an acre that your house is on?

Josiah:
Yeah, that is correct.

Ashley:
Okay, so one acre, I mean, that’s not a huge amount of land, but you were able to put another unit on there, produce income off of that. So I’m super curious now, okay, so you’re a $100,000 in, what are you cash flowing off of this and what do your expenses look like on it? What are you actually paying for? You paid for the property in cash. Your utilities, are they separately metered or do they connect to your house utilities on the same meter, so you don’t really know how much is exactly going to that unit?

Josiah:
Yeah. So the gross on that property right now in the tiny home is about $6,000 a month.

Tony:
That’s great. That’s fantastic, Josiah.

Josiah:
Yeah.

Tony:
For a $100,000, I mean, that’s great.

Josiah:
Yeah, it’s pretty phenomenal. When I was running the numbers for it, I was estimating, I was being really conservative, but I was thinking it’d do at least $3,000 a month, which would still be a way better cash on cash return than anything else we did. But it’s been steady, 95% booked anywhere from 180 to I think to 240 a night with a $50 cleaning fee.
And so self-managing and doing the cleanings ourselves, we’ve been able to keep pretty much all of that. Even the hot tub running constantly and it’s got a mini split air conditioning unit in it, with it being 100 degrees almost every day, 95 to a 100, it’s only been about a $100 a month for power.
And so we clean all of the bedding ourselves and then we do provide just a couple water bottles for each person or couple that stays. We do a couple little snack bars and stuff and then we do a bottle of wine as well. And so it’s just a nice little welcome pack.
And then one thing we do actually for a little bit of extra income is we’ll do these special little setup packages where my wife will go in and decorate for anniversaries and stuff. And then she even had a college graduation a few months ago that she did. And so we’ll do little charcuterie boxes and stuff and some flowers and even flower petals up on the bed. And then get a couple …
Well, we did one that was an anniversary and then one that was actually for a honeymoon. And so it was a honeymoon that was delayed due to COVID. And so we just had congratulations and stuff hanging on the wall and really spruced it up a little bit.

Tony:
So Josiah, I mean, just congratulations again, man, to be doing that well on the tiny home. I’m super pumped for you guys. I actually have one follow up question. What city did you say your property is in?

Josiah:
It’s in Shady Cove, Oregon.

Tony:
Shady Cove.

Josiah:
So it’s a very small town.

Tony:
And how far is that from Crater Lake?

Josiah:
It’s literally an hour from the lake itself.

Tony:
Oh, it’s still an hour. Wow. That’s amazing. So to be that far from the main attraction, but still gather that much interest and demand to do six grand a month on a tiny home is super, super impressive.
I guess one last question for you. Do you know, in that area, is there a limit to how many short-term rentals you can have on your property? Because you’ve got some land, you could probably slap on a few more tiny homes with the acreage that you have, right?

Josiah:
I can’t because it’s a hillside and it’s pretty rough, it’s a lot of river rock and stuff being right up above the river. And so it would just be hard to keep it such a good experience for the customers of the tiny home right now, if you have multiple just units on it. I feel part of the thing that people really enjoy is just how secluded it feels and how private it feels. And so I don’t really want to take away from that.
As far as being by Crater Lake National Park, so there’s not much else any closer. It’s a lot of national Forest and stuff around it. And so there’s only one even smaller town that’s closer to it and there’s probably only a handful of short-term rentals there. And so this is a pretty prime spot to be for that.

Tony:
But from a permitting perspective, for example in Joshua Tree, we can only put two short-term rentals per parcel. Are you limited in that same way near Crater Lake in shady Cove?

Josiah:
Yeah, there is a law. And so the way I did it on the RV pad, you can’t have multiple RV pads and RVs on your property in Shady Cove, but there is no law saying how many short-term rentals you can actually have. And so they’re pretty relaxed. Shady Cove is primarily a tourist town, especially in the summer. And so that’s where most of its revenue comes from, is just people traveling in the spring, summer, and fall.

Tony:
Interesting. I’m sold. You sold me, Josiah. I’m going to Shady Cove. I’m writing it down. I’m booking my flight.

Ashley:
He just booked your Airbnb.

Josiah:
There we go. Do it.

Tony:
So I want to move on to our next segment, Josiah, which is our Rookie Request Line. So for those of you that are listening, if you guys would like to get your questions featured on the show, give us a call at 8885-rookie and we just might use your question on the show. So Josiah, are you ready for today’s question?

Josiah:
Yeah, I’ll do my best.

Tony:
All right. So here’s today’s question from Corey.

Corey Robinson:
Hey guys, my name is Corey Robinson. I just had a quick question for you guys. I was thinking about the turnkey rental route, but have you guys ever thought about doing turnkey rentals and using those rentals as short-term rentals for either travel nurse rentals or Airbnb? I’d just like to know your thoughts on that, if you guys think it’s a good route to go or if you think it’s not a good route to go. Thank you. Appreciate you guys. Later.

Josiah:
I think that’s a great route to go, honestly. It’s not something I’ve looked at a whole lot specifically with the travel nurses. I do know that’s a huge industry though, and a lot of people in my area that do the travel nurse short-term rentals, it’ll often be they’ll be making like 20, 25% more income off their property. And so I feel like that is a really good route to go just because you just have to buy some furniture and stuff, but other than that, do a little bit of decorating, it’s good to go.

Tony:
And Corey, I mean honestly it’s slightly a personal preference, but I mean if you don’t have the time or ability to find a good deal, find a good property manager, get it set up, then turnkey could be the route to go. But typically your returns on turnkey investment are going to be lower than what you get if you did that work yourself. So there’s some give and take.
But is it a good way to break into the world of real estate investing for someone that’s new? Absolutely. I think you just got to ask yourself if it’s worth it or not. So thank you for that awesome advice, Josiah.
I want to move on to our next segment, which is the Rookie Exam. These are the three most important questions that you will ever be asked in your entire life, Josiah. So are you ready for the exam?

Josiah:
I think so. We’ll have to wait and see.

Tony:
All right. So question number one, what’s one actionable thing a rookie should do after listening to your episode, Josiah?

Josiah:
One actionable thing? I would say the biggest thing is just learn to run numbers. And so learn the numbers on the type of deal you want to do, whether that’s short-term rentals or long term rentals or out-of-state rentals even. But if you can learn to run the numbers, that’s about 90% of it, I mean as far as having the confidence to know what you need to do.
And that’s what’s helped me so much. I’ve learned to run the numbers in different scenarios and because of that it’s given me the confidence to just keep moving forward even through uncertainty and the pandemic and stuff like that. And if you can do that, that’s number one that’s going to help you just get started in your career for real estate.

Ashley:
Josiah, what is one tool, software app or system in your business that you use?

Josiah:
So one that I use a lot to actually help me run the numbers is a rental calculator. And it is a long-term rental calculator, you could use it for short term as well, and it’s called CDS Rental Calculator. It was actually developed by Chandler David Smith who was on the main BiggerPockets podcast I think about a year ago.
And it’s really good for just going through quickly on your phone and analyzing deals. You can put in purchase price, percent down, taxes, insurance, I mean it has every single metric you can think of basically. And then you process it and it’ll go to a cash on cash return and a total return on investment and stuff.
And so that’s what I used with the out-of-state purchase and with the out-of-state property and it’s just been … I analyzed hundreds and hundreds of properties. So that was such a big key. And then when I go into the long term, once I find a deal that looks like it’s going to make sense, then I’ll get on BiggerPockets and use the BiggerPockets calculator for a more in depth analysis.

Tony:
Awesome. That’s great advice. Obviously we love the BiggerPockets calculators as well, but I’ve heard good things about Chandler David Smith as well. Awesome. Last question, Josiah, where do you plan on being in five years?

Josiah:
In five years? Hopefully on a beach somewhere, just taking it easy. No, seriously though, in five years I’m hoping to be able to spend a lot more time with my family and have a good portfolio of both short-term and long-term rentals.
And so like I said earlier, I would like to grow the short-term rental side of things pretty quick because it is so scalable and get the income up pretty quick, but then invest in multi-family out of state and do that using both partners and maybe even some private investors along the way.
So the ultimate goal would be to get to about $20,000 per month income from our real estate investments. And then at that point I feel like we could comfortably just do real estate full time and not have to worry about much else. I would want to keep doing deals and growing and stuff, but not feel like I have to push myself as hard as I can basically to keep going. I

Tony:
I mean, Josiah, you’ve already had success with your pool cleaning business, so obviously you’re a smart, savvy business person, so I’m sure you’ll be able to take a lot of those skills that you learned in that business and apply it to your real estate deal as well. So five years from now you’ll be on the Real Estate Podcast with Rob and David talking about all the great things you’ve done, man.
So we appreciate you answering those questions for us. And just a heads up, you passed the exam, your answers were phenomenal. So you’re in our good books, man. So before we wrap up, I just want to highlight our Rookie Rockstar for this week. So this week’s Rookie Rockstar is Andrew Reese.
And Andrew says, “Today my fiance and I closed on our first real estate deal. 35 days ago we went under agreements on a three family near Boston, but the story doesn’t start there. Two years ago, I lost my job and I literally couldn’t afford my own rent. Now I’m engaged, have a great job and achieved my goal of acquiring a three family in the town of our choice. I started working with my agent 18 months ago looking at houses before I became even preapproved. Then we got squeezed with the rising interest rates, but when this listing went live, we were ready.”
And Andrew finishes this by saying, “Let this be inspiration to all of you who think it’s too difficult to get your first rental in this market. It is possible and don’t lose hope. Don’t lose your vision of what you want and your dream of building towards your goals and becoming wealthy.”
So Andrew, major congratulations to both you and your fiance on taking this amazing first step in building your real estate business.

Ashley:
And great advice too, Andrew, at the end there. Josiah, thank you so much for all of your advice and your knowledge that you shared with us today. Can you let everyone know where they can find out some more information about you and reach out to you?

Josiah:
Yeah, so I’m just Alpha REI LLC on Instagram and then we also have Casita De Venado on Instagram. And then outside of that, we’re not really too active on any other platforms and so you can find our tiny home at just if you search Casita De Venado around Shady Cove, Oregon as well, if you want to book that out.

Ashley:
Well, thank you so much for joining us. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson on Instagram. And we’ll be back on Saturday with a Rookie Reply. (singing)

Rob:
This is the BiggerPocketS show, episode 67-

David:
Rob, thanks for trying, but that was so bad. I cannot let that stand. Let’s take this, and do it the right way. Watch and learn, my man. This is the BiggerPockets Podcast, show 673.

Dave:
You can’t just lock in on one metric. You have to just learn to think like an investor. There’s no magic formula. It’s not like appreciation plus cash flow minus taxes divided by amortization. There’s no magic formula. It’s a mindset that you have to develop by understanding the concepts that underpin investing. These are not super complicated topics. This is not calculus. It’s stuff like compound interest. It’s stuff like depreciation, like J said. It’s stuff like amortization.

David:
All right, I will let you guys take it from here, but before I do, one quick tip for everyone listening. This show was recorded before the book is released, so you have an opportunity to go buy the new book that we’re going to be talking about on the show today, Real Estate by the Numbers, written by BiggerPockets personalities, Dave Meyer and J Scott. If you go order it before it’s released, you will get all of the bonus goodies that come with the pre-order as well as your opportunity to get a coaching call with J and Dave specifically just for you.
That’s incredibly valuable. I would encourage you guys to go get the book. You can head on over to biggerpockets.com/store, and look for Real Estate by the Numbers.

Rob:
Today, I am joined by my co-host, Dave Meyer. How you doing, man?

Dave:
I’m great. I’m super excited to be here. I have the very unique and weird position to be hosting this show, but I’m also the guest on the show, so hopefully this goes well.

Rob:
Oh, listen, spoiler alert, I’ve already lived through the interview, and I think it went pretty well, man. What are we going to be talking about today?

Dave:
We’re going to be talking about how to think like an investor, which is what we should all be aspiring to, to not just think about an individual metric or anything like that, but to think more holistically. The reason that we are talking about this today, and we are bringing on my friend J Scott, is because Jay and I actually wrote a book about this. It is called Real Estate by the Numbers. In addition to the formulas and things you should be thinking about, we really aspire to just teach people how to think like an investor.
What are all the concepts and different elements of being a real estate investor, and how can you combine those many different things into a holistic strategy that works for you to pursue your financial goals?

Rob:
I’m really excited to get into this one, man. I feel like I really took a journey through my own investment career over the last five years with this one. So really excited for people to learn more about this book. Before we get into today’s podcast, let’s get into today’s quick tip. That’s my David impression.

Dave:
You are good at it.

Rob:
I know. That’s his Batman. I think I’m working on it little by little.

Dave:
I like that.

Rob:
All right, so today’s quick tip is to think more like an investor, don’t just think of yourself as a short-term rental operator or a flipper or multifamily expert. You got to think of yourself as a more elevated investor, and think through more than just your cash on cash. Every investment is not about getting a 10%, 15%, 20%, 30% cash on cash. There are so many other variables in any investment that can make it a good investment, such as debt paydown, appreciation, tax benefits, and of course cash-on-cash return.
When you think through all those components, it can radically shift if a deal works for you, if not. With that, let’s get into today’s show. J Scott and Dave Meyer, how are you guys doing today?

J:
Doing great. Thanks for having me. Having us.

Dave:
Happy to be here. Thanks for having us on.

Rob:
I know it’s our first time formally meeting here in the BP family, so this is an exciting day for me. Can you tell the listeners at home a little bit about your background? I mean, I’m sure a lot of people are pretty familiar with both of you two. But for anyone that’s just tuning in today for the first time, give us the scoop here.

Dave:
Oh, all right. Well, if you don’t know me, my name’s Dave Meyer. I do work at BiggerPockets full time. I’m the vice president of data and analytics. In addition to that, I have been an investor since 2010. I mostly invest in Denver, but moved to Europe about three years ago, and have been getting into passive and multifamily investing over the last couple of years, and generally just love data and numbers. That’s why I had the great honor of writing the book we’re going to talk a little bit about today with J.

J:
For those that don’t know who I am, I am J Scott. I don’t work at BiggerPockets, though a lot of people think I do. I’ve been involved with BiggerPockets since, wow, 2008 when I did my first deal. I actually found BiggerPockets when I was looking for information about flipping my first house, became friends with Josh Dorkin, the founder, and been involved with BiggerPockets in lots of different ways over the past 15 years, written four books for BiggerPockets, and here to talk about the fifth.
I guess for those that don’t know my backstory, I’m an engineer and business guy by education, worked in the tech space for a long time. I’m basically just a geeky engineer who got into real estate 15 years ago, and has done a bunch of flips, and bought a bunch of rentals, and now owns a whole bunch of multi-family.

Rob:
Well, J, even if you don’t work at BiggerPockets, I think it’s safe to say you’re an honorary part of the family here. Tell us a little bit about the book. Hey, let’s start. What’s it called, and where did it come from?

J:
The book is called Real Estate by the Numbers. It was something that I started thinking about probably a decade ago, but I actually started writing about five years ago. The whole idea behind the book was basically the math and the numbers behind real estate are something that confuse a lot of people. While there’s lots of books out there that talk about the math and the numbers, there’s flipping books by BiggerPockets, and rental books by BiggerPockets, and plenty of other books by BiggerPockets that talk about the math behind real estate investing.
I never felt like there was anything that was really holistic and captured, soup to nuts, all the math that we needed to know and the reasons behind the math that we needed to know. So, I started writing this book, I think 2017 or ’18. I got about two years in, and very, very little done. It was just a really tough book for me to write. What I realized was I wasn’t smart enough to write this book by myself. I don’t like to write unless I feel like I’m really an expert on every topic that I’m writing about, and so I realized about half this book, I felt like I might have been smart enough to write, but the other half of the book, it just felt a little bit out of my wheelhouse.
So, sat down with the folks at BiggerPockets, and it took about two seconds for us to realize that Dave was the right guy to be writing this book with me. Two or three years ago, literally two or three years ago, Dave and I teamed up. From there, the book took shape really quickly. What we realized was we had a great set of complimentary skills. The stuff that I know really, really well is maybe not the stuff Dave cares about or is good at. The stuff Dave knows really, really well is not necessarily the stuff that I’m really good at. But between us, we had all the knowledge that it took to put together this book that delves into all the math, all the finance, all the deal analysis that goes on with real estate.
Now, when we started writing the book, the original concept was let’s teach people how to do deal analysis, how to analyze deals. But as we got in, what we realized was that was a way too narrow topic. It’s real easy to give people formulas, and give people math, and give people tools, spreadsheets to plug numbers in and get numbers out. But until you really understand what those numbers mean, it doesn’t do you any good. I’ve had plenty of times where somebody has given me a great spreadsheet. I plug a bunch of numbers in. I get a bunch of numbers out, and I still have no idea if I should be doing the deal.
I can say I analyze the deal. I can say I have all the numbers, but I still don’t know, “Is this a good deal? Does it make sense for me? Does it fit into my portfolio?” So Dave and I, a couple years ago… It took a long time to write this book. It’s, I think, the biggest book BiggerPockets has published. It’s over 400 pages. But a couple years ago at the beginning, we came to this idea that knowing the numbers doesn’t really matter if you don’t know what you’re trying to answer, if you don’t know what information you’re trying to get.
So, we approached the book from this perspective of, “What’s the right questions to be asking every time you go into a deal, and then how do you use the math and the tools and all the other concepts to answer those questions?” As we’ll talk about, basically, the book is written from the perspective of, “What’s the right questions to be asking, and then how do we use the math and the tools that we have available to us to answer those questions?”

Rob:
Wow, that sounds very, very comprehensive. 400 pages, man, I’m excited to dive into that, because I think that analyzing deals, oh man, that’s such a big conversation point. I think you’re right. I think there’s certainly a process that has to be taken when you’re analyzing deals, because it’s also very important to learn from someone as well who can teach you that. Because I remember I had someone that analyzed a deal, and they’re like, “This is a 50% cash-on-cash return,” but they weren’t asking all the right questions, right? They were just looking at it on the surface of the deal. But I was like, “Well, what about this, and what about snow removal, and what about this, and what about this?”
By the end of our just back of the napkin calculation, it went from being a 50% cash-on-cash return to an 8% or something like that. There’s definitely multiple layers of analysis that you can take when you’re analyzing a deal. I’m curious. I mean, when you’re getting into one of your very first deals or just whatever deal that comes across your desk, do you feel like there’s just one moment in which you’re analyzing that deal, or is it a consistent level or a consistent mindset of analyzation from the day that you put an offer in to the day that you actually close?

Dave:
I’m happy to answer that, but first, I just want people not to be scared. 400 pages, there’s a lot of pictures. We got a lot of graphs in there. It’s a very approachable book, and so we do talk a lot about math, but J and I… I think honestly the reason why it took so long to write is because we wanted to make it understandable and digestible for people of all experience levels. So even if you’re not good at math, even if you are a new investor who haven’t done a deal before, you’re going to learn a lot from this book. It’s not going to be overwhelming.
J and I spent hours banging our heads against walls to make sure that everyone could understand that. I love the idea of what you just asked, Rob, because, I think, people treat deal analysis and portfolio analysis as a point in time, and they want to just know a rule of thumb, or they just want to get an answer like, “Is this a good cash-on-cash return?” Unfortunately, at least this is the way I see it, is it’s not that simple. You can’t just look at a deal, and say, “It’s good at this point,” because even if it’s good at the point of purchase, you need to be continually evaluating the performance of that deal to make sure that it’s still working for you.
A good example is a situation where your equity in the property goes up significantly. We’ve seen this over the last few years. People are generating a huge amount of equity. That means that although they might be generating good cash flow, they might not be generating a great return on equity, which means that their money invested into that deal isn’t generating cash flow as efficiently as it could. So, you need to be continuously evaluating and determining how you should be redeploying your capital.
I’ve definitely made this mistake in the past. There’s actually an example in the book where I talk about my first deal. It kept going up in value and value, and I was so proud of that, but I wasn’t reinvesting the money at the rate that I should have been. As a result, I was not building my portfolio as effectively as I could have. I think that’s something that we talk a lot about in the book, and I think people listening to this should be thinking about is it’s not just about the point of acquisition. It’s about continuously evaluating your entire portfolio, and making sure that it’s aligned to your own personal financial objectives.

J:
Just to add to that a little bit, like Dave said, it’s not just about, “Is this a good deal, or a bad deal?” Is this the right deal for me is often the question we need to be asking, because I’m sure Dave and I could look at the same deal, and Dave might say, “Yeah, this deal doesn’t fit in my portfolio, because here are my goals, and here’s how much cash I have, and here’s how much time I have.” Here’s where I need to be in five, 10, 15 years.
I look at the same deal, and I say, “Well, based on my portfolio, and based on my goals, and based on everything that I have going on, that deal’s perfect for me.” So, we’re looking at the same exact deal, and it doesn’t mean that the deal is good or bad. It means that the deal may not be good for him. It may be good for me, and so a lot of the times that we’re looking at deals, it’s not about objectively a good or a bad deal. It’s, “Is it good or bad for me?”

Speaker 5:
Now, to our Real Estate by the Numbers correspondent, what are you seeing out there, David?

David:
I just wanted to give you guys a practical example of how this information can be applied to your own wealth building. Now, the first thing that I think people should acknowledge is that it’s better to buy real estate than not buy real estate. You’ll often hear it say take action, get in the game, buy real estate. It’s almost always better unless you buy a terrible deal that you bought something that you didn’t. But there comes a point where the rules of the game switch, and instead of saying, “Should I buy it or not buy it?” You’ve overcome that fear, and the question becomes, “What is the best deal for me?”
You heard J talking about that. That deal may have worked at one point in your career. It doesn’t work now. It may work for a different person with different goals, but it doesn’t work for you. Then sometimes, that will evolve as you progress. I’ve got some good examples I can share of how this concept works in practical terms. I bought a house in Buckeye, Arizona probably seven or eight years ago. Now, that house was a goodbye. It gained in equity and appreciated, but the rents didn’t keep up with the value of the home. That’s because they were building new homes in the area.
So if people could choose between renting my home or a brand new one, they would rent the brand new one, so my rents didn’t go up. However, the value of the home went up, because I was comparing it to homes that were brand new that were selling for more. So I realized my return on equity on this property was very low, and it no longer fit for the portfolio I had even though it fit when I bought it. I sold that house. I used the money to buy my first BRRRR property in north Florida. I got the money out of that property. I bought another one. I went on to buy about 10 properties with the equity that came out of that one sale.
Now, I’ve got a presence in north Florida, so I kept buying. I built up to 25 homes in that area. That was jump started from the first house that I sold that no longer worked for me. Now, it continues to evolve. I now have 25 to 30 homes in North Florida that are all somewhere around $100,000 to $250,000 in value, and they’re not appreciating at the level I want them to. I also want to take on more debt because I think inflation’s coming. I sell the entire portfolio, and I 1031 into 10 much more expensive short-term rental vacation properties. The 10 properties are much easier to manage than the 25.
Less things are going wrong. It takes less of my time. I quadrupled the amount of debt I had on the original portfolio to the new one, and I put myself in a position where appreciation will be much greater, and the cash flow was greater as well because I went into short-term rentals. Now, if you had brought the end result to me eight years ago when I bought the Buckeye house, and said, “Do you want to buy this 1.2 million vacation rental?” I would’ve said no. The Buckeye house made sense for me then. But by continually evaluating the portfolio, and saying, “Does this make sense for where I am right now? Can I get more out of this equity? Can I make my money work harder for me?”
You take steps, and you can climb to great lengths when you just take it one step at a time. So now that I am redoing my portfolio, or at least big chunks of them, I’m selling off the properties that weren’t performing at the level I want them to now, and reinvesting into new properties. I’m putting together a new spreadsheet that will make it easier for me to track the cash flow of every individual property as well as the equity that’s in every single property, as well as the money that I have put into that deal. With that information, I can track the return on my equity.
If I can see what cash flow I’m getting with the equity that’s in every deal, and have that turn into a number on a spreadsheet, I can quickly look at what I call my investment property tracker, and determine which properties have equity that’s working hard, and which properties have equity that is being lazy. It makes it very easy when the next opportunity to come around, if I don’t have enough capital, to say, “These are the three homes that I’m going to sell, because the return on equity is the lowest.” Then I know it’s time to make this money work harder for me.
Now, if I’m at a point in my business where I’m not looking to evaluate new properties, and buy new stuff, and I’m busy with other things, I could just keep on tracking the progress, and making sure that they’re cash flowing, and I’m not losing money on them. But when I want to ramp up my buying, it’s very easy to see which ones I’m going to sell first. In this way, your portfolio continues to evolve to meet the new requirements and goals that you have for your life. I will now throw it back to J to finish his thought.

J:
The other thing to keep in mind is that it’s not just one technique or tool or concept that works for every deal. I can look at a rental property, and I can analyze the deal and say, “Here’s all the return metrics,” and that’s great for a rental property. But what happens if somebody now hands me two different deals? Somebody hands me a rental property, and then they also hand me this note deal. Both of them are going to cost me $100,000, and all I have access to is $100,000. Well, what deal is better for me? Again, we can look at all the numbers, and Dave might decide that the note deal is better for him based on whatever criteria he’s using to look at his portfolio right now.
I might look and say, “No, the rental deal is better for me,” and so we need a way of not just being able to analyze deals, but we also need a way to compare deals. We need a way to make decisions. Sometimes, we have to make a decision. I have a story in the book about how I had been flipping houses for a couple years. I was flipping 30, 40, 50 houses a year. One day, I’m looking at my expenses for my business, and I realized that I’m paying literally $100,000, $150,000 a year in insurance costs for my flips. So I said to myself, “Well, do I need to be paying for that? Is the amount of expense that I’m seeing in terms of property insurance I need, do I really need all this insurance?”
So, I used a decision-making tool called Expected Value. I know it’s a term that… Again, I’m not trying to get into the math. We want to explain these terms in real-life terms. Expected value, this concept, allowed me to plug in a couple numbers, and realize that I was losing tens of thousands of dollars a year by paying for insurance. Even if I had insurance claims, I would’ve saved money by not insuring my products, and just paying for those costs out of pocket. So we have all these tools out here that allow us to make these decisions, to compare investments, to look at an individual investment, and look and see if it fits into our portfolio.
It’s not one size fits all, “Here’s a formula that you plug everything into.” Again, it’s knowing what questions to ask, and then figuring out how to look at a problem based on the question you’re trying to answer.

Rob:
That’s really great. Here’s what I love about that, especially for me where I am in my real estate journey. It’s that yes, no deal is perfect for you, and when you’re analyzing a deal, everyone has their own… I’m going to put quotes on this “system,” but for I would say the majority, especially the majority of new investors, we have systems. We have processes and everything, but they’re not really written out. They’re not… There’s no terms assigned to them. It’s always floating around in the ether, and so you have a way of doing things, but you don’t have terms and analogies assigned to them.
This is why I really like David, because David’s really great at bringing home an analogy that makes this very complicated real estate term very simple, right? The term you just talked about, expected value, and then Dave just talked about return on equity. These are really important concepts that I think the moment you assign a term and some system behind it and why it’s important, it really starts making you analyze deals a lot differently. The return on equity is something that was really big for me recently, because a lot of people get scared to use the equity in their homes because they’ve got a very cheap interest rate.
I’ve got a house in LA. It’s got, I don’t know, half a million dollars of equity in it, but it’s got a 3.25% interest rate. I’m like, “Oh, man, I don’t want to touch that, because it’s such a great rate.” But when you think about what you could do with that, and how you could leverage that into other deals, I’ve never actually done the analysis on the return of equity up until recently where now I’m like, “Oh, yeah. I mean, it makes a lot of sense to pay the extra 1% or 2% every single year if that means that I’m actually going to be able to make more money in the long run in my real estate portfolio.”
This is really great. This comes at a great time, because I think for me, I found myself really in love with single family acquisitions. That’s how I was building up my portfolio for a long time. Then now, I really do have to ask myself every single time a deal comes across my desk, “Is this right for me? Does it make sense in my scaling model?” A lot of the times, the answer is no, unless there’s something very cool about the single family acquisition. Someone sent me a house that had a cave underneath, and they’re like, “This would be an awesome Airbnb.” I was like, “All right, that one makes sense for me only because it’s very cool.
But other than that, I’m turning down so many things because I’m at this point now where the actual scaling side of my strategy, it really does demand a lot of analysis outside of just analyzing an acquisition.” Dave, I’m curious on your end, what kind of deals are coming across your desk now that wouldn’t really be a great fit for you that might have been a better fit for you maybe two or three years ago?

Dave:
That’s a great question. I think you raised a great point, Rob, just about building up your own knowledge base. Like you just said, you started to learn and now you understand return on investment. I think we all follow this pattern in our investing career, where we fall in love with a couple of metrics that we might like, and don’t fully understand and understand how to evaluate each individual thing. I totally identify with that. I just want to say that, because I really missed out on a lot of potentially beneficial analysis over my career.
Now, I’ve gotten to the point to your question about where you can really have a well-defined buy box, and you understand exactly what you want to invest in. I think a good example is over the last couple of years, there has been this exception to the rule where you don’t invest for market appreciation. Most people, most investors believe that appreciation is icing on the cake. I think for the last couple years, I even personally got away from that for a couple years when you look at short-term holds, because the market conditions were really favorable for market appreciation.
But now looking at new market conditions, I think that the type of deals that I would look for have to be much more fundamentally sound than what they were over the last couple years where you’re looking for a better cash-on-cash return, for example. So for me, I am mostly a passive investor at this point. I am just looking for places that have a really strong cash on cash return right now. I still think value add opportunities, where you can get forced appreciation, are probably the best deals that I’m seeing in these current market conditions. But I’m curious J’s answer, because he is a much more prolific investor than I am.

J:
It’s not so much being prolific. Again, it’s knowing what each of us is looking for at this particular point in time. I’m at the point in my career where I don’t necessarily need cash flow every month. I have enough cash flow coming in from other sources that if I bought a rental property today that was generating no cash flow, would it make sense? It might. I’m not saying it would, but it might. So, I like to look at things in addition to cash flow for me because, again, it’s not all about… I’m not at a point where I need to quit my job, and I need to replace an income.
So what are some of those other things I look for? Number one, I do look at appreciation, but I’m not a fan of natural appreciation. This is one of the things that Dave and I have talked about a whole lot, investing for appreciation. I tend to invest in places that don’t see a ton of natural appreciation. The market doesn’t just go up over the last 100 years in the places where I invest. The markets tend to reflect inflation. If inflation’s been at 2%, or 3%, or 4%, real estate values have gone up at 2%, or 3%, or 4%.
Now, maybe in the last two years, that’s not been the case. Everything’s skyrocketed. But again, if you look over the last 100 years, I can expect 2%, or 3%, or 4% increase in value in my property every year. If I’m not looking at natural appreciation, why do I like appreciation? Because I’m somebody that I have the ability to renovate properties. I’ve done a lot of flips, and because I’m not scared to renovate properties, I have the ability to do this thing called forced depreciation, which means I can buy a property that’s worth $100,000 today. I can put $50,000 into it, and now it’s worth $200,000 tomorrow.
So, this property that I’ve put up total of $150,000 into is now worth $200,000. I’ve basically forced the increase in value of $50,000 on that property. Now, that’s something that I can do, because I have time to do it. I have the knowledge to do it. Not everybody does. Dave mentioned he likes passive investing. He may not want to buy a fixer upper. He lives out of the country. He may not have the ability to manage a project from far away. So again, what might be a good deal for me may not be a good deal for Dave, but I’m going to look at cash flow, number one.
I’m going to look at that forced appreciation and even natural appreciation, so those are things I definitely look at. But in addition, I also look at two other things. I look at this thing called amateurization, and that’s just a fancy word for principle paydown. When I buy a property, and I get a loan against it, let’s say I get $100,000 loan, every month, my tenants are paying down part of that loan. After the first year, that $100,000 loan may only be a $98,000 loan. After year two, it may be a $96,000 loan. So every year, I’m building up equity because my tenants are paying down the loan.
That’s money that even though it’s not cash flow, I’m not getting that money in my pocket every month when I sell, I get to capture all of that extra equity that my tenants are paying down every month. That’s the third thing, so cash flow, appreciation, principle pay down. Then the fourth thing is tax benefits. Let me tell you something. For a long time, I didn’t appreciate the value of tax benefits. I think that’s the way it works with a lot of investors. You’re starting out. You buy a property. Maybe you’re saving $600 a year in taxes, or you get depreciation of 600, so you’re actually only saving 100 or 150.
But as your portfolio starts to scale, as you start doing larger deals, which what you realize is that you pay a lot of money in taxes, and real estate is literally the best way to hedge those, or defer or completely eliminate that tax burden. So for me, this year, I’m likely to have over a million dollars in depreciation, which means I can make a million dollars in profit in all my businesses this year, and I’m going to pay zero tax. Now, I’m not going to not pay tax forever. Eventually, I’m going to pay it. But if I can put off paying that tax for five years or 10 years, or best case, I put it off till I die, and now it’s my kids’ problem, literally, I’m now saving literally hundreds of thousands of dollars this year in taxes.
If I can do that every year, I’m going to make millions of dollars over my career just in not paying taxes. So, one of the topics that we focus on in the book is it’s not just about cash flow. It’s not just about appreciation. It’s not just about principal paydown. It’s not just about tax savings, but it’s all of these things put together that really help you define, “Is this deal good? Is this deal not good?” Again, more importantly, is this deal good for you or me, or not good for you or me?

David:
This is one of my favorite topics to get into with real estate investing. I love it. Dave makes a very good point that in the last couple years, the environment was geared more towards market appreciation. My opinion about that is because the government has printed more money through quantitative easing, and houses went up in value, but not necessarily because their value increased, but because the value of money decreased, which led to appreciation. J makes a really good point that at this stage in his career, some deals could make sense if they don’t cash flow.
Let me give an example of a deal that I bought six years ago, and see if you do the same. I had opportunity to buy a house that had to be an all-cash purchase of $150,000 from a wholesaler that had to close in I believe three weeks. The ARV on the property… No, sorry, not even the ARV, just the value as is was $250,000. Now, when I ran my numbers on this, it was going to lose about 125 bucks a month for the first year, and the next year, it was probably going to lose about 25 bucks a month. Then in year three, it was going to make $50 to $75 a month.
Would you buy a deal that you were walking into with a little over $100,000 in equity if you are going to lose money on it every single month to the tune of 125? Would you do the same thing if you were going to lose 300 a month? What if you were going to lose 500 a month? You were not going to lose that money forever, but just for a couple years until the rents caught up with what your mortgage was. Now, for me, that made a ton of sense, because I could afford to lose $125 a month on a property because the rest of my portfolio would cover that, or the money that I made at my job would cover that. I wanted that $100,000 of equity. My guess is most of you would too.
But what if you were in a position that you could not afford to lose 125 bucks a month? You’re living paycheck to paycheck. Now, of course in this example, you’d probably buy that house, and then sell it, and get the money. You turn it into a flip to someone else, but you see my point. There are stages in your investing career where it doesn’t make sense unless it cash flows incredibly strong. That’s usually the time where you have a job, and you’re trying to get enough cash flow to quit your job, to get your time back, to focus more on finding more deals or becoming a better real estate investor.
Then there’s other times in your career, like J mentioned, where he has cash flow coming in from businesses he owns, previous real estate, books that he’s written, different things that he does that the cash flow from a specific property just isn’t as important. He has cash flow from other places, so he could buy a deal that has a lot of equity but doesn’t cash flow, and it’s not irresponsible. The point here is evaluating where you are in your journey, and looking at every deal on its own merits.
Dave Meyer made the point there that he wants to find a house with a stronger cash-on-cash return because he doesn’t think it’s going to appreciate. That is a solid point. However, let’s expand it a little bit. Are we assuming that the only way that you gain equity in a property is by market appreciation? That’s surely one way the value of the property going up. Well, you also have natural appreciation, which is you could buy a house anywhere, and it’s going to go up in value because we diminish our money supply. Then you have what I call market appreciation, which is you buy a house that has geographic barriers, limitations, unique amenities, so it’s forced to go up more than houses around it.
This could be a house on a beach. This could be a house in a city like Austin that only has so much ground actually within the city limits that you can build on. You certainly increase your odds for appreciation by playing the market appreciation game, but then there’s other kinds like forced appreciation. That’s where you add value to the property, and make it worth more by executing a vision. Surely, we shouldn’t throw that out and just lump it into the category of appreciation is risky, and cash flow isn’t. Then you also have what I call buying equity. It’s not even based on appreciation.
You just got to deal at a lower price than what it’s worth, because you found a deal with a motivated seller that was marketed. You negotiated really well. I use that all the time. Appreciation comes in many forms. It’s not just I hope the price goes up. There’s things you can do to make the price go up. There’s things you can do to put the odds in your favor that the price will go up. I just want to highlight that there’s lots of different ways to execute on this, and at times, cash flow is important, but cash appreciates also.
If you bought a house in Malibu 30 years ago, I’m pretty sure the cash flow would be much higher than it is right now. If you bought a house 30 years ago in a low appreciation market like somewhere in Indiana or the Midwest, the cash flow would not have gone up to the same degree that a beach house in Malibu might have. These are all things to take into consideration, and like J says, “Ask yourself where are you in your journey? What is most important to you?” Then what I will add into the conversation is plan ahead. Don’t assume that you’re going to be in the same place in five years.
The house you’re buying right now in Ohio might make a ton of sense for you, but be planning your exit strategy when you buy it. Assume you’ll be in a different situation with different needs and different goals, so have a way that you can sell that property later. That’s why I always look for value add. I want to know that I added value to this property so that if I want to sell it or if I want to refinance, I can get my equity back out, put it into the next deal. These are BRRRR principles that don’t always work into a specific BRRRR deal, but they’ll benefit you all the same.
Let me give you a quick example of how I use the principles that I just described in my own investing journey. I’m buying a property right now that’s going to be a short-term rental in Georgia, where people from Atlanta would visit to if they wanted to stay in the mountains as a vacation rental. I don’t know that I’m going to want to own that property forever, because short term rentals are a lot of work. The cash flow is great, but the work is going to be very high. So, I’m buying a property that I don’t know if I’m going to hold forever, because I can add value to it.
I’m basically going to be able to turn a two-and-a-half acre property with two structures on it. One is a home. The other is a garage into two different homes. Now, that will add a ton of square footage to the property. It will also add a ton of cash flow to the property. If I ever get sick of owning it, and having to manage it, and the pain that comes from managing a short-term rental, I can either sell it, and it’s worth much more because there’s now two homes on it. I can reparcel it, and sell it as two different homes, and get more money, or I can sell it to another investor who’s going to buy it based on the cash flows of the property, which I will also have increased by adding the second structure.
If I want to keep it, I can keep it. If I want to exit, I can exit. I know in a couple years when I’m looking at my goals, time may be more important to me, and I may want that time back. By adding value to the property, and thinking ahead, I put myself in a position where I can get that time back if I want without actually losing money on the deal.

Rob:
This is huge. I mean, this is… You just touched upon… Even with just those four things, I think the biggest thing that most investors really don’t think about… I’ve been talking about this a lot, because I’ve had this really big renaissance, a big revelation and evolution in my journey where cash on cash, that’s all I cared about. Give me that 20%, 30%, 40%, 50% in short-term rental’s cash flow. Let’s do this thing. But you’re so right because when you think about your tax deductions, and paydown and all the other things associated with the actual return on the investment of your property, your actual ROI can double from that cash on cash when you think about all the money that you are making or depreciating and all that kind of stuff.
For me, J, you just really… You triggered a little PTSD here, because this year was the first year that I’ve had to pay a substantial amount of taxes, multiple six figures. The only reason I didn’t pay, I don’t know, a lot more, let’s say two times more in taxes was because of depreciation and cost segregation. Had I even known about that, I didn’t even know really about it too much until about a year, a year and a half ago, and now that I’ve figured this out, I’m like, “Oh my goodness, I feel like I’ve just unlocked the greatest real estate superpower of all time, and it’s depreciation.”
Had I really thought about that when I analyzed some of these deals, I really started to think about all the deals that I walked away from, because I just didn’t understand how many layers of things could benefit me from that specific deal, or how many deals I’ve taken simply because the cash flow “was really good,” and I didn’t really think about any of the quadrants, right? I’m really glad to hear you talk about that, because I think that this is something that really anyone can learn. Real estate is about making money, right?
If you’re not paying in taxes like we’re talking about, if we’re kicking them down, we’re making that money that we can then use and reinvest in real estate, and do it over and over and over again.

Speaker 5:
Let’s head over to depreciation station. David?

David:
Now if I may, I’d like to give you an example that introduces just how powerful depreciation and specifically bonus depreciation through real estate can be. It ties into the whole cash flow argument that we’re going back and forth with. Last year, I bought a property near the beginning of the year. That was a triple net property. That was the most expensive property I bought. You guys have heard me talk about this on podcast where the mortgage was just so high. I think it was around $80,000 a month. I took a lot of fear to get over buying a property that was that expensive.
Now, it doesn’t cash flow amazing. It’s a triple net property. They typically don’t cash flow super solid, because they’re very hands off. But it covered all of the taxes that I’m going to make for the next two years. This property saved me almost three million in taxes by buying it. If I only looked at the cash flow, I would’ve said, “No. Why would I buy that? The ROI is too low.” But when I look at holistically how much wealth it saves me over time, that’s a lot of money. You may not be in a position where it’s going to save you $3 million over a couple years, but you might be in a position where buying a property and using the bonus appreciation could save you $50,000 to $75,000 a year.
Now, keeping $50,000 to $75,000 is making at a W2 job $75,000 to $100,000. So buying a property under the right tax conditions could be the equivalent of getting a job that pays you $75,000 to $100,000 a year that you barely have to work at. When you start to look at it from that perspective, it really jumps out at you that this is how people build big wealth through real estate. When you’re only looking at ROI, cash-on-cash return, I should say, and cash flow, you miss some of these opportunities.

J:
It’s interesting when you think about the different ways of making money in real estate. I have conversations all the time with a bunch of non-real estate investor friends, and we have this debate between the stock market and real estate, or real estate and crypto, or real estate and precious metals, or real estate and whatever it is. They always come back to stock market is typically 8% to 10% per year. Obviously, it’s volatile, but on average over time, it’s 8% to 10% a year. These days, in real estate, cash flow is near zero. I mean, over the last couple years, we just weren’t making a lot of money because we were paying a lot for our properties.
I don’t want to say near zero. Some people are doing a great job of finding properties that are generating 6%, 8%, 10%, 12%. But me personally, somebody that doesn’t hunt for properties that much anymore, I’m not getting a lot of cash flow. Likewise, these days, I mean, I’ve been getting appreciation over the last couple years, but I expect anything I’d buy today probably isn’t going to appreciate much over the next couple years. So if we look at a deal that’s essentially very low cash flow, essentially no appreciation over the next couple years, shouldn’t it be obvious that the stock market’s a better place to put your money if you’re going to get 8% to 10%?
Well, at first glance, it might be. But if you take just those other two things I talked about, the principal paydown and the tax benefits, and we talk about this a lot in the book, just those two things, especially in our low interest rate environment. I mean, things are higher… Interest rates are higher now than they were six months ago, but they’re still low. In our low interest rate environment, we’re building up a lot of principal every month right from the beginning of the investment. So even if you ignore cash flow, even if you ignore appreciation, and you just look at principle paydown and tax benefits, I’m getting more than 8% on every single one of my rental properties that I’ve bought over the last couple years.
So, I’m beating the stock market without cash flow and without appreciation. So if I get that cash flow, which I will, I’ll get more cash flow over time, and appreciation, eventually, we’re going to be in a better economic situation, and we’re going to see values rising again. At that point, I’m going to be much higher than 8%. So again, if you only look at cash flow, or you only look at appreciation, or you only look at the two of those, it really gives you a stunted view of what the investment’s really returning. But when you take a holistic view, and you look at all the return metrics, and you look at it again relative to your entire portfolio and what you’re trying to achieve, a lot of times, the obvious answer is real estate is better than other investments, or it’s better than you think it is.
I’m not saying there isn’t the right time to be buying stocks or bonds or crypto or other things, but what I’m saying is don’t take a myopic view of real estate, and not really understand all the benefits it’s providing because a lot of times, it’s performing even better than you think it is because you’re not looking at each of these factors.

Dave:
That’s such a good point. It’s such a false comparison too because like, “Oh, the stock market gets 8% or 9% cash flow, and real estate is bad,” but the stock market generally doesn’t produce cash flow. The best dividend stocks produce one, maybe a 2% yield. If you’re looking at the total return of the stock market, and comparing it to cash flow in real estate, that’s not an apt comparison. I think what I love about what J was just talking about, and Rob, you before, is you can’t just lock in on a single metric. I’m sure you guys get these questions on social media or wherever where people are like, “Is a 4% cash-on-cash return good?”
It’s like, “I don’t know.” You have to explain so much more. I think that’s what J and I really… After debating how to structure this book, we kept coming back to this idea is that you can’t just lock in on one metric. You have to just learn to think like an investor. You have to… What Jay is talking about combining these four different topics, there’s no magic formula. It’s not like appreciation plus cash flow minus taxes divided by amortization. There’s no magic formula. It’s a mindset that you have to develop by understanding the concepts that underpin investing. These are not super complicated topics. This is not calculus. It’s stuff like compound interest.
It’s stuff like depreciation, like J said. It’s stuff like amortization. If you can educate yourself to the point where you at least have an understanding of these concepts, and you don’t need to be able to calculate every single metric in your head… There are calculators. There are spreadsheets that can do it. But if you can learn the concepts, then when you’re evaluating deal, the numbers start to make a lot more sense, and you can combine them, and get a fuel for the deal, and how it’s going to help build your portfolio and how to compare them against one another, because they’re not always apples to apples.
There’s going to be… A multifamily deal might be better in cash flow and amortization, but like J said, it could be in a low appreciation area, or you can invest in somewhere. I invest in Denver where… Not anymore, I agree with J on that. Over the last couple years, there was a good chance of market appreciation but, maybe it didn’t have as much cash flow. But since we understand the concepts, you can think about them holistically, and just honestly feel more confident about your investing decisions.

David:
This is a very solid point that is particularly applicable to the market that we’re in right now. One of the things that I’ve noticed that can be very misleading is that people are starting to use cash flow and ROI synonymously. So, return on investment has been reduced to being what is the property cash flow in a month? I just think it’s inaccurate, because the return on your investment incorporates a lot of things. It incorporates your loan paydown. It incorporates appreciation that you’ve had in the deal. It incorporates the fact that cash flow over a five or 10-year period of time should be increasing every single year.
I’m on a mission right now to differentiate cash-on-cash return versus ROI, because they’re not the same thing. I think J is highlighting that. Now, part of the reason that you’ll hear us say cash flow isn’t great, man, we’re not trying to say don’t buy cash flow and properties. The fear is that cash flow tends to be stronger at the lower end of quality and price. The higher end properties that you get that tend to build wealth over time better, and tend to appreciate more, and tend to have better tenants, they don’t cash flow as strong because they’re priced higher.
Now, the problem is when the market gets competitive like it is right now, and more people are chasing after cash flow. There’s this pressure that pushes you further and further down into markets that can become like a D class neighborhood. They’re the areas that you don’t want to own rental property, but the price to rent ratios are so strong that they make cash flow look good. This is why we give warnings about don’t only look at cash flow. It’s not that cash flow is bad. So many people hear this, and they just get defensive.
It’s that if you chase cash flow, and you only look at cash flow, it will push you into these markets that you don’t want to own long term where all the headaches come from, that will make you not like real estate investing. So the great advice that we can offer to you is to look at it holistically, and include in your analysis, “How much time would this take, and how much headache would this give me?”

J:
To add on to that, Dave used the term think like an investor. If we were to retitle this book, I like the title Real Estate by the Numbers. It says what the book is, but if I had to go with a different… If we had to go with a different title, I think, Think Like An Investor is the title of this book. Because this book, while we do focus on real estate, and basically, 95% of the examples are real estate related. Everything we teach in this book is applicable to any type of investing you might do. So again, this book isn’t just about analyzing rental properties, or analyzing flip deals. It’s learning to think like an investor.

Rob:
That’s awesome. There are a lot of tools like the BiggerPockets calculators out there that make deal analysis relatively simple. What do you think is missing from this?

Dave:
I don’t know if there’s anything necessarily missing. It depends on the deal, but I think we’re trying to inject two things into the conversation. First and foremost is context. I got my start in investing or in real estate I should say. I got an internship in college just randomly at a construction management company. I was building financial models, and I learned how to calculate something called internal rate of return or IRR. We talk about this in the book. I could calculate it. I could throw it out there, and I had no idea what it meant.
I couldn’t have any less concept of what a good IRR was. Even if I knew a 20% higher IRR is better than 14%, I couldn’t really understand what that meant. So while there are great calculators out there, like the BiggerPockets ones, if you don’t really understand what the numbers mean, it’s hard to judge whether or not a deal is good for you and if it’s going to help you meet your financial goals. Then on top of that, I do think the BiggerPockets calculators are excellent for rental property analysis, but there are some things… J gives some really good examples of this in the book where a traditional rental, like cash-on-cash return or just the annualized rate of return doesn’t help you understand rates of return when you have a lot of inputs and outputs.
So, J gives us… J, you could probably give a better example, but this deal where he has to put some money in, and he does a ReFi, then he does another renovation. It’s like, “How much money is even invested in that deal? What’s the rate of return?” It’s a little bit more complicated when you’re doing value-add deals, when you’re doing development deals, when you’re doing multi-family deals. I think in this book, we introduce some new concepts and formulas that aren’t traditionally covered in the calculators that you can apply to some more advanced deals.

J:
In addition to what Dave said, and let me address this, so it’s a good question like, “Is there things lacking in the BiggerPockets’ calculators?” There are things lacking in every calculator, and the BiggerPockets calculators are the best in the world. When somebody hands you a rental property and says, “Analyze this deal,” or somebody hands you a flip property and says, “Analyze this deal,” or somebody hand you a BRRR property, and says, “Analyze this deal.” The problem is a lot of the decisions that we make as investors aren’t going to be covered by one of those three or five calculators.
I give an example in the book of a deal. I did a flip deal. I listed the deal. I don’t remember exactly. It might have been, let’s say, $100,000 I listed it at. I got two offers pretty quickly. First offer was an all cash offer at list price. This was a long time ago. I got to offer all cash at list price. Then I got another offer from an investor who said to me, “I really want this property. I’m going to hold it as a rental, but I can’t pay for it for seven months. I have another deal that’s closing in seven months. I’m getting money back from…” I think it was a syndication or something in about seven months.
“I’ll buy it now, but I want you to sell or finance it to me. I basically want you to hold the note. I want you to not take money from me for seven months. I’ll pay you in seven months, and I’ll pay you more than the $100,000. Just tell me how much you want, and I’ll pay you more. I just can’t pay you for seven months.” So, if I said that to you, what do you do with that information? How much more does he need to pay me in seven months so that his offer’s better than that $100,000 today?
There’s this whole concept called time value of money, this idea that money today is worth more than money tomorrow or next week or next year, because I can invest it if I get it today or that tomorrow or next week or next year. So, I now have seven months that I can’t do anything with the money until I get the money, so how much more does he need to pay me in seven months for that to be better than getting $100,000 today? That was a real problem that I had to answer the question. It turns out there’s a pretty simple formula for me to figure out how much he needed to pay me. So if he would pay me at least that much or more, his offer was better than the guy that was going to give me $100,000 today.
These are the types of questions that you get asked all the time that you can’t just go to a BiggerPockets calculator or any other calculator, and just plug the information in. You have to understand, “Well, what is this concept of time value of money? What is this concept of seven months from now is a worse time to be getting money than today, so I need more of it in seven months than I need today, and exactly how much more do I need?” So, by understanding, by thinking like an investor, we can answer questions like that. Then you can’t just plug into a calculator, because calculators weren’t designed to answer questions like that.

Rob:
Oh, I see. So basically, what you’re saying is there are the tangibles of every deal, things that are very objective. That’s like, “What’s the property price? What’s the rehab price? What’s the interest rate?” But then there’s also the intangibles, like what you’re talking about, which is the value of your money over time. Money’s going to be less valuable in seven months than it is today. You really have to consider the impact of your money just sitting in a bank account for that amount of time, or money that’s owed to you.
I totally understand that. There really is an intangible aspect of analysis. This is something that David and I talk about quite a bit on the podcast, which is that analyzing a deal is, oh man, I don’t know, it’s part art. It’s part science. That’s how we feel. But I’m curious, what’s your POV on that, Dave? Is that something that you’d agree with, or do you feel like analysis is somewhat objective?

Dave:
I think there’s two sides to it. The numbers… One of the reasons I just love math is because it is objective and you can get real numbers. To J’s point, if you just put in good numbers into a calculator like BiggerPockets, you’re going to get the right answer, but there are assumptions in every deal that there is some art to. That’s something like rent growth. We’ve seen rent going up over the last couple of years, and we can look at data to look at historical trends, but no one knows for certain what’s going to happen in the future.
You need to use some art, a lot of experience talking to other investors to figure out what assumptions to put into those deals. I think there’s an even bigger subjectivity into what J was talking about, which is what is a good deal for you? You can get an objective answer about what a good cash-on-cash return is, but that doesn’t necessarily mean it’s good for you. I think there’s a good example, especially now with rising interest rates. It’s like, “What kind of loan should you use? Should you be putting more down on a deal right now?”
Should I use a HELOC instead of a conventional mortgage? The calculator, if you tell it what to do, it will give you the answer, but you sometimes don’t even know what questions to ask yourself, and the analyses that you could do to optimize a deal even further beyond the objective numbers unless you understand some of these concepts. I do think there is both a subjective and objective part, and that’s honestly what we’re hoping to help teach people in this book is how to answer both sides of that.

Rob:
Certainly. I mean, let me clarify. I mean, part art, part science. What we mean by art is not just, “Oh, I viscerally feel this way about a house.” What we mean is the strategy behind real estate investing. However, when you say part art, part science, that sounds a lot better than saying part strategy, part science.

David:
A frequent theme of this episode is asking yourself what are the right questions to ask? Here’s an example of a great question you should be asking. In five years, what will this property look like, and how will it be performing? In five years, what will my goals be, and how will they be different from today? Here’s an example of if you take the bait of the high cash flowing property right out the gate, you go buy in some Midwest state where there’s not a whole lot of rental demand, but there’s tons of properties that meet the 1% rule. You buy that property that’s going to cash flow, let’s say, $100 a month.
In five years, it’s going to be cash flowing $150 a month. There could be a scenario where inflation has been so great over a five-year period that $150 in five years is worth less than $100 today. So even though it looks like your cash flow has grown by 50%, which would be a healthy number, the actual value of that money has diminished so long over time that it’s worth less. Your return has actually gone down. Now, this becomes even more clear when you compare it to investing in a growing area. That might have been harder to find the deal. You might have to work longer and harder to get it, but your cash flow has gone from $100 a month to $500 a month or $400 a month over a five-year period, which is not uncommon in areas that I invest in at all, particularly coastal markets.
If you’re asking the question of what’s it going to look like in five years, the right answer becomes really, really clear. If you’re asking the question what’s it going to look like right now, it can become muddy because the cash flow looks much more solid than where you can get anywhere else, and the deal is easier to find. Then to further elaborate on this, you’ve got the art and the science position that Rob talked about, and that Dave Meyer supported. Real estate is part art and part science. You can’t focus too much on either end. The people that focus only on the art, they miss out on opportunities, because they don’t understand if the property’s going to actually pencil out.
They don’t rent it by the numbers. The people that focus only on the science miss all the ways that they can improve the way a property is valued. Particularly in the short-term rental space, I see this a lot. There’s a lot of creativity that you have in the art side with the short-term rental that can actually increase the science side, which are the numbers. You got to understand both, and you got to be good at both. But man, real estate is nothing else because when you do well at this, it grossly, grossly beats all of its competition.
J mentioned earlier in the show that his friends want to compare crypto to precious metals, to real estate to stocks. It’s really not a fair comparison. Real estate is going to be all of them, but that’s because they’re not apples to apples. When you buy precious metals or stocks or crypto, there’s no work that goes into it. You just click a button on a computer. There’s none of your time that’s involved. Real estate does involve some of your time. It’s not as passive as those investments, which is why it outperforms them, just like most of the time, running a business will outperform real estate from a cash-on-cash perspective, but there’s way more effort and way more risk that goes into running the business than real estate.
So again, asking the right question, “Is this a property, or is this an opportunity that’s going to make me money without a lot of time, or is this an opportunity that’s going to have a higher ROI, but a lot of my time will be required?”

Rob:
I really love what you guys talked about here, which is thinking like an investor, because I think this is also something where we pigeonhole ourselves very quickly in our real estate careers, where we brand ourselves as a house flipper or a short-term rental operator, or a multifamily expert. But really, what we are is we’re investors. I’m very guilty of this. As someone that I’m very pro short-term rentals, I’m like, “I’m a short-term rental investor, and this and that.”
But really, I do think that it devalues the fact that I am an investor, and should be thinking a lot more broadly than what we talked about earlier, the cash-on-cash metric. So, what are ways that our audience can be thinking like investors?

J:
I think, again, it goes back to figuring out what the question you’re trying to answer is. Don’t just stick numbers into a calculator, and get numbers out. Start with what are you trying to figure out? Here’s just something that I think was fun that we added in the book. On social media, if anybody is on Facebook, or I guess mostly Facebook, people like to pose this question. I don’t know why they do it, but I guess it gets interaction. They pose this question, “If you could have $2 million today, or you could have $200,000 every year for the rest of your life, which one would you rather have?”
I mean, we’ve all gone on Facebook, and seen somebody post that question, and then there’s hundreds of responses. Half the responses are like, “I’d rather have the $2 million today, because I’ll turn it into $100 million tomorrow.” The other half are like, “I’d rather have $200,000 today, because then I never have to work again the rest of my life.” Then people will argue, “Well, this one’s objectively better than this one,” but nobody ever gives any reasons. The interesting thing is you can actually do the math to figure out what one is better.
This is very analogous to a lot of situations we run into in the investing world where you have the choice of a lump sum amount of money today, or cash payments every month, or every quarter, or every year for some amount of time into the future. If you think about it, that’s all investing is. If I buy a rental property today, all I’m doing is taking this lump sum. I’m trading this lump sum for monthly cash flow. So, it’s the equivalent of saying, “Would you rather have $2 million today or $200,000 per year for the rest of your life?” Well, if I’m looking to buy a $2 million rental property that’s generating $200,000 a year in cash flow, that’s the same question.
So, when you look at people on the internet, and they can’t answer this question with any objective response, they just say, “Two million sounds better, or 200,000 sounds better,” if you don’t understand that question in that form, you’re also not going to understand the question in the form of, “Is a $2 million rental property that generates $200,000 per year in income, is it worth it?” So, you have to learn to recognize that these are the types of questions that are universal in investing. There are a whole bunch of questions that are universal in investing.
So instead of asking the question, should I buy this rental property? The bigger question is, “Should I be willing to spend X amount of dollars in order to generate X cash flow over the next however many years?” That’s the more generic question. Chapter eight in the book is literally, how do you answer the question, “Should I invest X dollars for Y amount of cash flow over the next number of years, or how much should I invest for this much cash flow over the next couple of years?” Now, once you learn the concepts and the math and the formula behind answering that question, you can now apply that to a whole bunch of situations.
You can apply it to buying a rental property where you pay money now, and you get cash flow over the next couple of years. You can apply it to life insurance, where you might pay money now. You live a certain number of years, and then you get money later. You might be able to apply it to a note. Let’s say somebody’s going to sell you a note. I have this note that’s going to pay $312 a month for the next eight years. How much are you willing to pay for that note today? These are all questions that are predicated on the same… or these are all situations that are predicated on the same question, which is, “How much should I be willing to pay today for a set of cash flow in the future?”
Once you start thinking about things in that question-answer, that more generic format, it allows you to start thinking like an investor, because now you don’t just need a formula for rental properties and a formula for notes and a formula… You get the idea that all of these things to some degree are the same, and I can use this one formula for all these things. Then there’s a whole bucket of other things over here that fit into the same different category, and we can use these techniques for that category. There are all these categories.
Once you start to recognize these patterns of different types of investments, you’ll also start to recognize how we evaluate these investments, and compare them to each other.

Rob:
Makes a lot of sense. I was just… I’ve had this troubling deal that’s really haunted me since the day we sold it. We had a property that we built from the ground up. We operated it for maybe, I don’t know, two or three months. We sold it for… I think it was around a $400,000 profit, me and my business partner. It was set to gross between 130. I think our net on that was going to be 100 to 110. We sold it. Not really sure, right? It’s like what you’re talking about. There’s all these different levers, but we just didn’t have a system or a methodology to think through the ramifications of both sides keeping it or taking the lump sum.
In that moment, I think for us, we thought, “If we sell it for a profit, we can 1031 that into more properties,” which we ultimately ended up doing. We ended up buying four more properties. Then we’ve sold some of those properties, and now we’re 1031-ing that into other properties. Overall, our portfolio is growing, but it was something that really troubled us for a long time, because we just weren’t really sure how to analyze that deal. This is something that definitely… Some kind of system, some methodology to how to think through this would’ve really helped me sleep better at night, because I think him and I…
We switched back and forth every month. One month, we regret it. The next month, we’re like, “Oh, this was a great decision.” Where we’re at now in that philosophy, I’m not sure. I’m not sure. We’ll let you know pretty soon. I think we’re still flip flopping on that one. But Dave, what about you? I’m curious, is there any other way that the audience can be thinking more like investors?

Dave:
The first one that I think a lot of people overlook is how to keep score. There’s this idea. You might have heard this term in business. It’s like, “What gets measured gets done.” Honestly, I didn’t really do this for first years of investing. I kept a P&L. I knew profit and loss for my individual properties, but I wasn’t keeping track of my net worth and how much equity I had out into different deals, and how much cashflow I was really generating on a holistic sense, and whether or not my… All these individual things about my investments were all over the place. I think that is a key component to being an investor.
If you don’t know how to keep score… We talk about this creating your own personal financial statement where you track your net worth. How much money’s coming in? How much money’s going out right now? How do you know if you’re doing better or worse? If you don’t know to keep score, how do you decide on a particular deal if you need more cash flow? Maybe you can take a long-term approach, and look for more appreciation over time. I think that’s one concept is learning how to keep track of where you are in your investment journey in a real numbers quantifiable way is super important.
We already talked a little bit about the time value of money. Man, I feel like learning the time value of money at some point in your career is like a superpower. Once you really understand the time value of money, your life will change. I promise you that. You will not think about any purchase you make in your life the same ever again. Once you learned that $10,000 today, if you went out and bought a new car or whatever, how much that could be in your retirement, I promise you, you’ll stop buying stuff now, and you’ll start investing it. Those are two-

J:
Let me interrupt you real quick, Dave. I’m sorry to interrupt, but this is so important. This whole time value of money thing, this concept, we’ve all heard that term, time value of money. But honestly, the difference in my experience between successful investors and not successful investors in a lot of cases is literally the understanding of that concept in more detail than just the term time value of money. I found… One of the reasons why we devote a lot… There’s five parts of the book, and we devote three quarters of one part of the book to this time value of money concept, because there are so many different aspects to investing and measuring investment returns, and analyzing deals that’s related to it that literally, it’s probably 10% of the entire book focused on time value of money.
The reason for that is because I’ve seen so many articles, and texts, and blog posts, and books that talk about time value of money, but they talk about it from a formula standpoint. They talk about it from, “Plug the numbers in. Get the numbers out.” I’m lucky that… Again, I have an engineering background, so I understand time value of money, but let me tell you something. If I handed one of these texts that’s out there to the average, non-mathy person, their eyes are going to glaze over. It’s like they don’t want the formulas. They want to understand what does time value of money mean.
Obviously, the formulas are important, and we need to include that as well, but we also need to tell stories about why this is important. We need to tell stories so that people can understand why this matters. So, a very large part of this book was focused on just that concept of time value of money, but telling it over many chapters so that people really get why it’s important. Again, I honestly believe that just that concept in and of itself is going to make a lot of people better investors, and is going to differentiate the not so good investors from the good investors. I apologize, Dave, for interrupting.

Dave:
No. No, you’re totally right. I genuinely believe, once I understood, that it completely literally changed my life. J gave a brief example of what it means. It means money now is worth more than money in the future, because you can invest it. But once you really… It’s not just knowing that. It’s like once you see the numbers, and almost can feel it, I know that sounds weird, but can really internalize it in a way that it becomes a part of your decision making in almost everything that you do. It will change your life, so I totally agree with you, J.
Then there are so many in the book, but the last one I really think people should understand the concept of is leverage too, because it’s unique to real… It’s not unique to real estate, but it is more common in real estate, and that’s the concept of borrowing money to purchase an asset like a home. We talk a lot about that too, which is another thing that I think really is a mindset thing that helps people. It’s not really about the formulas. We do go on the formulas, and it’s helpful, but that’s another thing, I think, learning to think about leverage and how to use your financing strategically, and not just treating it as this hurdle across.
I think a lot of new investors are like, “I need to just find a loan.” They’ll take any loan. For your first deal, that could be okay. But I think over time, you learn to think strategically about how to use your financing to create better deals. We do talk about that a lot. I think those are three of the highlights in the book. There’s plenty more in there, but those are three that I really like.

Rob:
I mean, all of those really do hit home for me truly. I mean, I wish I would’ve had this book five years ago when I got started, because one thing that people really did try to… I don’t know. They saw the bullet train heading towards me, and they’re like, “I can save you. Just listen to me. Keep track. Do proper bookkeeping. Have a personal finance statement.” Because when I was starting out, it’s no big deal. I was keeping track of expenses on a spreadsheet. That even worked for the first two properties, maybe even the first three.
But very quickly, the bolts start falling off the tires there once you actually have to get really into the nuts and bolts of taxes, and getting all that information to your CPA. So, for me now, I scaled so quickly that I remember my CPA was basically like, “Hey, we need to get you on doing proper books and QuickBooks.” We did that. Then last year, he was just like, “Hey, that QuickBook file, we need to throw that away. I want to put that into the trashcan. Pour gas on it. Light it on fire, because you need to be keeping track of your books this way.”
It’s a very specific way that’s going to actually inform you on cash coming into your account and cash coming out. That’s very, very important because a lot of the times, you think that you’re making a lot of money, but then once you actually track it correctly, you realize that maybe you’re not. That can drastically change that investment. So if you’re not keeping track of all those different things, you’re not able to cut costs at all, because you don’t know what’s crucial and what’s not, what’s eating your budget.
For me, keeping track of your finances, that’s a huge one. I cannot overstate how important it is to do proper bookkeeping. Start it from the very beginning, pay a bookkeeper, learn how to do it, however you have to do it, but it’s going to be so crucial. I promise you, it’s going to save you so much time and money with your CPA, because CPAs could be… They could be a very costly expense. The other thing you talked about is leveraging too. I mean, we talked about that one for hours.

J:
We tried to make this book. Again, it’s a thick book. It’s 40 some chapters. We wanted to devote at least a few chapters to the bigger picture. It was just what you and Dave were talking about, this whole idea of tracking your business’s success, not just on a per deal basis but on a business basis. Because when you think like an investor, it’s not just thinking about making everyday decisions. It’s thinking about making decisions for a year out or five years out or 10 years out. The way we do that is we understand how our business is performing.
Just like you just said, Rob, understanding how your business is performing is all about creating these financial statements, and doing accounting correctly. For a lot of us, that whole idea of accounting and financial statements is just like your eyes glaze over when you hear about it, but we spend several chapters basically talking about breaking down financial statements in a way that makes it really simple to understand. We give an example of a fictitious flipping business, and we say, “This is what a financial statement for this business would look like. Here’s how you categorize income. Here’s how you categorize different expenses.”
Then how you can then look at that, and then say, “Is my business operating efficiently? Is it operating efficiently from a business standpoint? Is it operating efficiently from a project standpoint? Is it operating efficiently from a people in a labor standpoint?” Basically, by keeping that accounting and creating those financial statements, it doesn’t just give your CPA or your account the ability to do your taxes at the end of the year, but it gives you insight into how efficiently your business is running. It gives you insight into, “What can I do today to make my business more efficient?”
It gives you insight into, “Is my business…” This is the most important thing, “Is my business running as efficiently as 99% of other flipping businesses out there?” Because really, at the end of the day, we have this thing called profit margin. It’s a division of a couple different numbers in your financial statement, but this idea of a profit margin is a way for you to compare the efficiency and the success of your business to somebody else’s business, or somebody else’s business, or all the businesses in the industry as a whole.
So again, it’s not just about analyzing a deal for today, or analyzing a flip deal over six months, or a rental deal over five years. It’s really analyzing your business over the lifetime of your business, and forecasting and planning to get to some place. We’re all doing this. We’re not doing this because… Well, maybe some people are. I’m not doing this because I love flipping houses. I’m not doing this because I love buying rental properties. I’m doing this to get to financial freedom, and to provide a legacy, a financial legacy for my kids. The only way I can do that is to have a plan, and I can’t have a plan from today until 20 years from now unless I know what 20 years from now looks like.
So, I need to figure out what 20 years from now looks like, and then I need to design my business so that I can get from today to that point. So, using financial statements, using the correct accounting techniques, understanding the income and the expenses in your business and how they work together is how you get from today to whatever your 20 years from now looks like.

Rob:
Awesome. Yep. I’ve just learned a lot of this stuff the hard way. I think most people learn this stuff the hard way.

J:
We all have.

Dave:
Totally.

Rob:
But here’s the good news, you don’t have to.

Dave:
Honestly, when we’re talking about this book, I realized maybe the value of this book is it just speeds up all the painful lessons by five to 10 years. You get there eventually, but it’s through some pain. We’ve all probably seen a tax bill, and you’re like, “Man, I could have done that better.” For me, I told you earlier about failing to reinvest. I think that was a consistent problem I had for the first few years of my investing career. I’m sure you guys have your own as well, but there are so many things to think about as a new investor. We hopefully can help you consolidate the things that you should be thinking about to optimize your investing through the course of this book.

Rob:
This is really great because I’ve really just developed the emotional roller coaster of breaking out in hives, sweating the PTSD of doing it all the wrong way, and then knowing that there is a light at the end of the tunnel here where I could have just probably, like you said, saved five years of gray hairs on my head. But that’s okay, because I’m still going to pick it up. There’s still so much to learn. Even talking in this conversation, I’m like, “There’s actually a concept to this whole thing like return on equity.” Who would’ve known that that’s a thing, right?
You don’t really think about some of those more advanced concepts, so thank you guys so much. Is there something that we didn’t cover in this book? Is there one final nugget that you guys want to leave the audience with before we end today’s podcast?

Dave:
Obviously published through BiggerPockets, and you can go to numbersbook.com, and you can buy it there. I do also want to add. In addition to this book, it also comes with a bunch of bonuses. We talked about a personal financial statement, how to create a balance sheet. Those kinds of things are in the book. We do have some downloadable Excel documents that come with the book for free. So if you are wondering, that is… We make it easy for you. We explain the concepts, and then we give you some tools to do this for yourself.
Check it out if you want to learn how to think an investor. We’re really excited and proud of the book, and think that whether you’re a newbie or an experienced investor, there’s a lot in here for everyone.

J:
Everybody’s asking me, “Is there an audio version of the book available?” There is, I believe already, or there will be an audio version of the book, but what I recommend to anybody is definitely get a physical copy of this. You may want to get a hard copy as well.

Rob:
Great tip. The models and everything like that, the Excel, that stuff is worth as weighted gold. I’m excited to start plugging and playing with that kind of stuff. Dave, can you tell us where people can find out more about you on the internet?

Dave:
Sure. Well, you can find me on Instagram, where I’m at the DataDeli. I also host a BiggerPockets podcast called On the Market where we talk about news, data, and trends that impact the lives of investors. You can definitely check that out as well.

Rob:
Awesome. What about you, J? Where can people find out more about you?

J:
Real easy. If you go to www.connectwithjscott, just letter J, scott.com. Connect with jscott.com. That’ll link you out everywhere you need to go.

Rob:
Awesome. Well, thank you guys for your time. I’m really excited for the book. I guess, let’s see. David always does this much better than I, but I’ll give it a shot. This is Rob, for Rob missing Dave Greene, Abasolo out. I think that’s how he does it. Bye, everybody.

Peter Churchouse of Portwood Capital says expect continued weakness in the Hong Kong property market as the “very negative sentiment” will probably continue over the next six to 12 months.

Mindy:
Hello, hello, hello and welcome to the Bigger Pockets Money podcast where I sit down with James Dainard, Jamil Damji, and Kathy Fettke, three of the panelists from On the Market podcast, which is a sister podcast of this show, and we talk about this flip-flapping real estate market we find ourselves in.
I am here to make financial independence less scary, less just for somebody else to introduce you to every money story because I truly believe financial freedom is attainable for everyone no matter when or where you are starting. Whether you want to retire early and travel the world, start your own business, go on to make big time investments and assets like real estate or even just get a handle on what is going on in this market right now, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
All right. Today, I am joined by James Dainard, Jamil Damji, and Kathy Fettke. James, welcome to the Bigger Pockets Money podcast. Please introduce yourself and tell us why you are so great.

James:
Hey, Mindy. So I’m a full-time investor. I’ve been an investor in the Pacific Northwest for the past 19 years now. I started when I was a senior in college. I’m a heavy value add investor where we do a lot of heavy lifting on properties of increasing day one margins. So whether it’s fixed and flip properties, development sites, building homes or large and small multi-family, we’re stabilizing them and increasing their value. I’m also broker up in the Pacific Northwest, where we do about 150 million a year with investors of just helping investors through the process, sourcing on and off market deals, and then handling the disposition as well, but just full-time deal junkie, Pacific Northwest. That’s where I hang.

Mindy:
Full time deal junkie, I love that. Jamil, welcome to the Bigger Pockets Money podcast. Let’s let everybody know why you’re so great.

Jamil:
Thank you, Mindy. I appreciate being here. I am Jamil Damji. I am a national wholesaler. So what I do is I wholesale properties all across the country. I founded the largest franchise for a wholesale in the United States called KeyGlee. Not only that, I also fix and flip property, and I’m on a television show on A&E, where I flip properties with my best friend and big sister, and like James, do a lot of value add, a lot of heavy construction-type projects. So this is very interesting to me. Nice to meet you.

Mindy:
Well, it’s nice to meet you too. Thank you for joining us today. Kathy, last but not least, she is alphabetically last. Kathy Fettke, welcome to the Bigger Pockets Money podcast.

Kathy:
Thank you.

Mindy:
Please let our listeners know why you are so fantastic.

Kathy:
Oh, thank you. I’m the co-founder of Real Wealth. We’ve been helping investors in high-priced markets find properties in cashflow markets, so that means understanding what it takes to own a rental property out of state. We do a ton of education at Real Wealth, and I have a broker-to-broker relationship with agents across the country who really know investment property and know what the rents are. Many of them own property management companies so that you’re not stuck with an agent that just wants the commission and is going to take you to the wrong neighborhood.
We also provide the resources that come along with that like insurance companies and the lenders that can do loans in those states. So we’ve been doing that for, oh, my gosh, almost 20 years now, and then I also started syndicating in 2010 in the downturn when we were buying land for 10 cents on the dollar. So that’s been an interesting ride as well for the past 12 years.

Mindy:
Well, I’m so excited that the three of you are here today. I’d like to say I assembled this amazing mastermind team of panelists to come in and talk about the real estate market, but I actually had some help. They are the panelists that regularly appear on our sister podcast called On the Market, where they talk about the state of the market in general, and that’s what we’re going to do today. We’re going to talk about the state of the market in general.
If you haven’t been paying attention, the fed raise interest rates, what, three times in a row, and they didn’t just give them a little bump. I believe all three times was 0.75 basis points, which is a huge amount. They haven’t done that … Well, they used to say they haven’t done that since, what was it? 2010 or something? Now, it’s like every month they’re doing this. So it’s been a lot.

Jamil:
I think I had read it was ’94 since it was-

Mindy:
’94, yes.

Jamil:
… that large of a raise.

Mindy:
Yes. They haven’t had this much of a raise since 1994. You are correct, and now they’ve done it three times in a row. Why does the fed keep raising these rates? Because inflation. They’re trying to fight inflation. Let’s talk about inflation.

Kathy:
Well, it’s interesting last year that same fed said it was transitory and a lot of us were looking at each other like, “Are you sure about that? Because we’re seeing something different out here. We’re seeing bidding wars and lines out the door and 90 people want a house paying way too much for it.” So it’s shocking that the federal reserve, which is really the banking system, it’s not a government entity and people get confused about that, but they are tasked with controlling inflation. So they really got it wrong. They have admitted that, but to me, the bigger picture is the amount, again, well, you said, “What is inflation?” It’s simply prices going up and, like you said before this show, supply and demand usually controls that, but we’re in a very different world today.
The economy is not the economy of our parents. Economics is not what people learned in school. It’s extremely manipulated by the fed, by the banking system. Again, not a federal, not a government agency. The banking system is what it is, and they have been able to create an enormous amount of money, which was not okay when I was young. They would print a little bit of money and it made headline news, but to just give an example of how much, I’ve talked about this on our On the Market podcast, in my parents’ time, it was two trillion dollars circulating or less. If they printed even a few billion dollars, it was a big no-no. Today, they’ve created seven trillion dollars in the last two years. How could that not create inflation when there’s that much more money circulating?

Mindy:
What I find very interesting is that it’s usually supply and demand. When supply goes up, rates fall or prices fall. When supply goes down, prices increase, and it doesn’t really matter what you’re doing. If there’s no supply, prices are going to go up unless nobody wants it. Like typewriters, you can make those a thousand dollars a pop. Nobody’s buying those. You make them a dollar a pop, nobody’s buying those, but right now, we don’t have supply. We have supply chain issues that stem from this little thing called COVID, and raising interest rates, in my opinion, I’m not an economist, but raising interest rates when we already don’t have supply doesn’t seem like the right move here because, yes, you are dampening demand for housing in some markets, not in all markets, but in some markets.
I’m in the Denver market and our demand with the June rate increased. Our demand was like, “Oh, no more. We don’t want any houses at all,” and that was very difficult as I got my first listing in a very long time and now it’s still on the market, which is shocking to me that it’s still on the market three months later, but in other markets it doesn’t matter. It doesn’t matter how high the rates are going to go. People are still buying, and we still have record low inventory. So how does increasing interest rates help with inflation? All I see is this hurting the people who have to move, who have to buy, who have to … and it’s not just houses, it’s cars and other things as well, but this just seems like the wrong direction that we’re going in.

James:
What we’ve seen is we’ve seen inflation come down a little bit off peak of June. I think it was at 9.1 and now we’re down to 8.3, but a lot of these rates, they’ve been adjusted because it’s not just a supply and demand thing that is part of the problem, but we are seeing the supply start to increase. Even the other day, we do a lot of construction, and we’ve heard that there’s actually warehousing with oversupply of flooring and different types of material because they bought up, bought up, bought up, and now they’re stuck with inventory. We’re actually seeing that also in the used car market. I’ve been seeing that too. Lots are starting to fill up, but part of the reason they’re also increasing the race is they’re trying to slow the money down in our economy. It is going way too fast or it’s been going way too fast and it’s been consuming everything, which was a lot of the reason there was also no supply in addition to it’s not just a supply and demand thing, but it’s a labor issue is a lot of the inflationary cost that I’m seeing is a labor issue, not just a material cost.
That is just because unemployment is basically at zero. It is causing labor costs to skyrocket, and they’re trying to get that back down, which unfortunately means slow the money down. Slowing the money down leads to a recession, and then you have to kind of transitionally push through. I know personally as an investor who does a lot of construction, manage a lot of employees, the labor market is a mess and it does need to be fixed because it is really hard to get your job sites done, and until they make these corrections, it’s also going to push that down, which there’s going to be a lot of relief for investors on that side. You’re going to be able to get guys to show up to your work. You’re going to be able to actually pay them an affordable rate, but it has to be slowed down and that’s half the reason they’re also increasing rates. It’s not just a supply and demand thing.

Jamil:
I agree, James. I think we’ve got such a complicated situation right now that we’re dealing with, and the variables that are creating the inflation crisis I think it’s not just the simple math of, “Okay. Let’s raise rates and everything will fix itself.” I think that that is just indicative of the very surface level problem solving we have right now from the fed. I truly don’t believe that they’re looking at the problem deep enough. Again, I’m not an economist and so I don’t have better solutions to say but there was an interesting article that I read. Steve Forbes said, “We need to be looking at this situation from the level of the currency. We need to be shoring up and strengthening our currencies, not just raising rates to weaken the economy.”
In fact, all that we’re doing right now is we’re beating up the people that are the working class people, folks that are really need help in markets like this. When things get tough, we find a way to continue to beat up people who are in most need of the help. So again, I think that the way that we’re approaching this right now is totally backwards, but it’s interesting.

Kathy:
Yeah. I see it as a silent tax if politicians and their constituents want more things and want, again, student loan debt canceled. I look at Europe and they have free university and healthcare, but here in the US, if politicians want something, it is much easier to just print more money for that thing versus taxing people because at this point, you’d have to tax people 150% of their income in order to pay for all the debt. So it’s a silent tax and it does hurt the people that are already struggling because when prices go up, you’re paying more at the pump, well, I have an electric car, it doesn’t affect me or if people I know who they still bought their RVs and they’re still driving around paying all this money for gas, they’re not as affected obviously or else they wouldn’t be doing that, but it’s the people trying to just get to work that they were already struggling. So it’s an interesting time and, hopefully, more and more people will awaken to some of the manipulation of the market.

Mindy:
Do you think that rates are going to continue to go up? I mean, the fed has indicated that they are not real concerned with keeping everybody happy. They want to keep inflation down and they’re going to do it, they’re the boss, but where do you think rates are going to go in 2023?

James:
Well, I think they’ve said that they’re going to keep increasing the rates. What’s too bad is they’re being so reactionary now, and so they’ve had to go on this aggressive hike because they ignored the issue for nine months because at the beginning of the year, what he was saying was that the fed rate was going to land around two and a half to three points by the end of the year or up into 2023 and that should fix the issue, and then it changed from two and a half to three, to three and a half was the prediction. Now, they’re saying four and a half percent from the fed rate, and typically, rates are three points higher. So it’s going to be a seven and a half, eight percent loan for most investors, buyers, anybody getting any bank financing, which is a huge increase than it was 12 months ago because we were at two and a half percent and now it’s going to be eight, and there’s going to be shock waves by that.

Mindy:
Do you think that’s going to affect pricing? We’re still really low with inventory. I mean, you look back to 2008, 2009, we stopped building, essentially, in 2008, so 2008, ’09, ’10, ’11, ’12. I don’t know when they started building by you. I don’t remember seeing building, big subdivisions going back up until ’14, maybe even into ’15. That was a long stretch of time with no building, and that wasn’t just my neighborhood, that was everywhere. Builders went out of business. Trades people left the market and didn’t come back, left the industry and didn’t come back. So now, we’re short all this housing. I hear people say, “Oh, this is just going to be like 2008,” and I don’t really feel that that’s going to be that this market is the same that has different causes, but do you think prices are going to fall like they did in 2008 or anywhere closer like they did in 2008?

Kathy:
It’s already happening.

Jamil:
We’re baking in around a 10% correction for pricing moving forward in most of the markets that we’re in, and we’re seeing a lot of opportunity for people to actually position themselves temporarily right now to benefit from what’s happening in the market, right? So you’ve got cash-heavy investors who are actually pulling the trigger, but really, really, really getting significant discounts on their purchases right now, but I don’t think that lasts. I think it’s a temporary situation where there’s going to be some … Those who have to sell will sell, right? That’s the thing that we’re finding is that the individual who’s in the situation where they’re moving, they’re relocating or they’ve inherited a property or a sale is a necessity, they will make the decision to sell. Are they going to absolutely get creamed because of this? Yes, they will. They’re going to feel that.
I don’t think that we can ignore the fact that you said, Mindy, we are at record low inventory, and because of what’s happening right now, builders are pausing building, right? So were already short. We were already short on supply, on inventory, and now you’ve got rates going to where they are, builders pulling back even further. What does this create? At the end of the wave, what does this create for inventory and pricing? I think what you’re going to find is you’re going to have a temporary, a momentary opportunity where people, investors or whoever can get in and buy.
I was on a flight yesterday, and it’s really interesting when you sit with people who really aren’t even in housing, they’re not in real estate, they don’t trade in it, but the sentiment, right? It was like when I told them that I was in real estate, immediately, they were consoling me. So the sentiment that they had about what’s going on in the housing market, they were like, “Oh, I’m so sorry.”
You think, “Okay. This is the sentiment out there for the average person who’s not investing in real estate but just watching and reading the headlines.” Then I think what ends up happening is we will absolutely get a small depression because people, they believe that the value of housing is going down, so sellers are more open to a steep discount, but I think what shakes out at the end of the wave is going to be an even bigger inventory crisis and this is going to create even more appreciation and another correction going back up with pressure moving prices up. That’s what I’m predicting two years down the road.

Kathy:
I just said at the beginning of the year when I do my predictions that you got to pay attention to the fed because we’re just puppets, they’re the puppeteers. They control things, we need to listen and follow. Really, experienced investors do that, especially stock market investors. Early this year, Jerome Powell said, “We’re going to raise rates seven times.” I actually didn’t believe. I was like, “Why would the fed, federal reserve …” When you say the fed, it sounds again like a government agency. It’s the banking system. The central bank decided we’re going to raise rates seven times, and I thought, “Why would they want to crush our economy? Why would they do that?”
First of all, overstimulate it and then decide, “No, we overstimulate it, now we got to crush it.” So I just thought, “Why would you do that if you’re representing this country?” but they have come out loud and clear just last week that, “No, we’re going to crush it, and there’s going to be job losses, and we’re going to bring asset values back to where they think they should be, which is affordable.”
So depending on who you are, it’s either good or bad. Headline news has a different interpretation, depending on what you’re doing and where you are. For a buyer, that’s going to be a good thing. In the meantime, it’s a terrible thing for people who own the asset class that the federal reserve’s trying to kill, basically, right? So you have certain areas that went up as much as 40% just in one year.
So there’s a good chance that those areas are going to correct, and that’s the way Jerome Powell said it, “We’re going to correct the housing market,” and I only see that as one thing. They’re the ones who blew it up. One of the ways they blew up this bubble is buying mortgage-backed securities to keep interest rates low. When you have the central banks buying these mortgage-backed securities and then you pull back, which is what they’re doing, they’re tapering, now you don’t have a buyer for those. So then rates have to go up.
So again, why would they have done that all the way up until March of this year when prices already gone so high? They were still stimulating in overly stimulated market. Now, they’re like, “Oops, okay. We’re going to pull all that back and stop buying or, at least, again, taper the buying.” So I listen. Really, a month ago, I would’ve said something different, but based on what Powell said last week, he’s like, “No, we’re we’re going to destroy it.” So you got to pay attention.
Now, that doesn’t mean some of the things that we’re doing I would change because we’re still buying homes in the 150, even $80,000 range in parts of Texas where there’s job growth. So there’s always ways to work through an economy like this, but at the end of the day, people who are in short-term loans pay attention. People who have overpaid for properties hopefully are locked into a rate that will still make it okay over time, but the value might go down. That doesn’t mean your cashflow will go down. So maybe just if you’re locked into a low rate for 30 years, don’t worry so much even when you see you might have lost some money. Just keep holding because eventually it comes back, but there’s going to be some bubbles that get popped.

James:
Yeah. I think you can’t increase the cost of money by 40 to 50 percent and not expect for things to deflate down. Stock market, crypto, housing is also coming down and deflating down. It’s just too expensive on the monthly payment. The quicker they get down to a more stable market, I’m a pro rip the rates up. Let’s get to where we need to get to to start working off like even what Jamil just said was 100% right. There’s an overreaction right now and there’s more deals in the market, and then once they get to where they need to get to, we can actually level the plane field back out and just buy like we normally buy, which is, “Here’s the math on the deal, execute the right plan, stabilize it out whether you keep it or dispo it out.”
Everyone should expect, or at least I’m expecting a retraction and values because you just cannot increase the money by that much in a short amount of time and not have an overreaction. With every action is a reaction. We pumped in too much money, it went flying through the roof, now we’re pulling the money back the other way, it’s going to come down the other way, and that is okay. It’s just leveling it out.

Mindy:
What retraction do you foresee in prices?

James:
We’ve seen about in the Pacific Northwest, we’ve seen about a 25 to 28 percent drop off peak pricing. What we saw in February, March and April is we saw an appreciation rate that was absurd. It was hitting 19 to 24 percent, which is just nuts. So we’re seeing it back down this other way, but we’re still sitting four to five percent over the median home price growth from last year. It’s just off that peak, peak number. If you bought a short-term deal doing February, March, April, May, it’s going to hurt a little bit and sting because those are the fly that have just been deflated down. I don’t really see this as a crash, I just see that we’re deflating things.
So it’s totally different than 2008, which was like a brick wall market free fall down. This is like a slow, we’re just letting the air out, and as the air gets loosened up, everything will level out, but we’ve seen about 25 to 30 percent off peak pretty quickly.

Mindy:
Okay. That’s interesting, and that aligns with something that I was speaking to a local agent in the front range area in Colorado and she said, “Yes, we are seeing prices going down, but if you look at the trajectory from 2021 up in December, if you drew a straight line and skip the huge bump from the spring, you’d see the same steady growth up into the right, but if you look at with the spring, you’ve got this huge hump here and then it’s continuing to go.”
So it’s like you said, it’s off the top of the peak, but it isn’t prices falling. It definitely is not 2008 level crisis thing. I’m wondering, Jamil and Kathy, if that’s the same price decrease, I’m doing that in air quotes, that you’re seeing, a deflation as opposed to a free for all drop.

Jamil:
Absolutely. From what we’re seeing, especially from our investor activity because I primarily wholesale, and that means that I’m betting on people, betting on the market, right? The people that I’m transacting with on a day to day basis, these folks are looking at making projections as to what they’re value or what the property that they’re buying right now after they fix it is going to be worth in three or four months. So we’re all putting on our little fortune teller hat when we’re trying to make these decisions.
What I’ve been seeing right now in our primary markets, so we’re talking Phoenix, Tampa, Orlando, these are spots where we heavily transact, we’re seeing about a 10 to 15% drop right now, but again, I don’t feel like it’s bottomed yet. So that’s what we’re experiencing right now, some markets fairing better than others, but I’ve also heard in some markets as well that the 25, 30 percent drops have been seen.

Kathy:
Yeah, and there is no, as you know, housing market. Every single market is behaving differently, and some markets were just really popular. There was job growth or there was big money moving to those areas, so they saw gains that they hadn’t ever seen, again, Boise, Austin, Nashville. Nashville was not, when I started investing, was never a growth market. Austin was once the tech industry moved there. Seattle, of course, same thing, when the tech industry blossomed there became a growth market, but these are areas where there has been tremendous job growth, tremendous migration, and the people there were priced out, for sure.
People moving in, it’s still cheap, it still is. For people moving into those areas, it’s a deal, it’s a bargain, but how much longer is that going to be the case? So definitely, the markets that went up unsustainable are going to feel it the most because no market, no matter how much growth you have, can sustain a 40% growth in rents or in home prices.
One of the things that is concerning is that shelter inflation is one of the big metrics that the fed or that the government looks at when looking at inflation numbers, energy and food, certainly in housing, and it’s a lot, the rental costs. Will those rents drop? That is a bigger issue, right? We’re seeing home prices drop, which is, again, good for buyers, not so good for people who own that asset, but in rents, will we see that same correction? If we don’t, then the fed is just going to keep going at it because if rents are staying high and that keeps inflation high and they think the only way to solve that is to kill landlords, you know what I mean, what are they going to do to get where they want?
At this point, it looks like Jerome Powell is in battle, a battle against inflation that, again, happened because of too much stimulus of the economy. The way you undo that mistake is you pull that money back out, and the way you pull money back out of an economy is through bankruptcy, it’s through job losses, it’s through stock market crashes. That’s how you get it back out, and that’s just a horrible way to run an economy, but it’s what they’re doing and it’s what they plan to do and he’s making no qualms about it like, “This is where we’re going.”

James:
He referenced that at the end of his speech. He said, “The inflation around housing would take some time to work its way through but it will get there.” When you hear that line, that means, yes, I think Kathy’s 100% right, they’re going to try to deflate rents, deflate values, and create affordable housing. That is something all investors should be paying attention to right now as you’re doing your projections.

Kathy:
On top of that, make it an opportunity. The world doesn’t really know this yet. So if you’re in a property that it’s not your best property, maybe just put it on the market. You might take a loss, but maybe it’s less of a loss than later.

Jamil:
I just don’t see how we’re going to get to a spot where rents come down because even if, just say for instance, you’re sitting on the sidelines right now and you’re like, “Well, the rates are too high. I don’t want to buy,” so you rent, there’s a lot of pressure right now for the rental market. I don’t know if it’s the same everywhere, but just what you can see here in Phoenix where you put a house up for rent and there’s multiple people trying to get that property and the rents are stupid high. So I still don’t understand where that money is coming from. It’s all of the pressure, all of the things that are happening, but there are lineups right now for people to rent houses because they don’t want to make the decision to buy.

Mindy:
Yeah. Buyers have to go somewhere. I’ve got several questions. Is now a good time to buy real estate? Jamil said a few minutes ago there’s a small window to come where rate prices are going to drop even though rates are high. Cash investors, investors are heavy with cash, they’re coming in to snap up these properties at lower prices. Do you see rates coming back down in the future so that buyers who don’t have cash can eventually refinance out of these crazy high rates? I say crazy high rates, I think we should acknowledge that 7%, traditionally, historically is not a crazy high rate. That’s a historical average for a mortgage. The problem is prices have gone up so much that now 7% makes that mortgage payment just 99% of your income.

Kathy:
Yeah, I mean, it just comes down to what your intention is. If you are on the hunt for cashflow, there’s opportunity out there even though rates are still high. It’s interesting because the non-conventional loans are actually lower than conventional right now. You can go to a private lender, it’s amazing how things have flip-flopped, but if you’re able to find a property right now that cashflows, so you’re able to get a good price at it and you’re paying maybe a little bit more for that debt but it still cashflows, great. Granted, some areas might possibly see rent go down, but that’s questionable. It depends on supply. That is definitely a supply issue. If there’s lots of jobs and people need a place to live, they might not buy but they’re going to rent.
So if you’re buying your own primary residence and it’s cheaper than rent or there’s not a lot of other options, you’re still getting all the benefits of real estate. You’re locked in to a payment, you’re paying down your loan, over time you’re getting tax benefits. So there’s always good reasons to buy real estate. Same with investing. If you’re buying for cashflow and you’re able to lock in a rate, and you have somebody else paying that loan down for you, and you’re getting tax benefits and asset protection, and over time, generally, if inflation is an issue, then debt is a good thing. Debt becomes less big in an inflationary economy.
So all of the fundamentals are still there. If your strategy from five years ago or 10 years ago is a strategy that’s worked for you, keep using it, but just know that some of the things have changed where you’re maybe buying it cheaper, but in trade you’re getting a higher interest rate, but maybe the cash flow is the same.

James:
I’d say it’s a different type of BRRRR property now or process. 24 months ago, how you buy a BRRRR property is you’re buying something with a heavy value at. You’re buying it at a discount. You’re putting in a rehab. Sometimes you’re stabilizing that, at least in our expensive market, for 12 to 18 months. We’re not getting any cashflow at that point and we’re having to do all this work. The reason we’re doing that is to get an equity position and a high cashflow position at the end of the day because we bought it cheaper.
Now, it’s actually a different type of BRRRR is how I’m looking at everything. I’m running my metrics on a deal and looking at their current rate, if it’s at 8%, and if I’m getting a four to five percent cash-on-cash return right now, I do am projecting that rates will be around 5% in about 24 months. So now, I’m actually just looking at a deals, “What is this going to look like in 24 months? In 24 months, my 4% return. I can buy something that’s actually in a lot better condition. Now, I don’t have to do all the hard work, I just have to hang onto it at a 4% return. Once the rates fall down to five, it actually goes to a 12 to 14 percent cash-on=cash return, and in addition to, because everyone’s a little bit nervous right now, I can get that massive equity position right now.”
So it’s a different BRRRR process. It’s the same type of process. You’re buying something, you’re waiting on the cashflow to get the big upside at the end. It’s actually an easier way to do it now. I don’t have to go tear a building to shreds to get the margin. I just have to hang in there and stomach some okay cashflow for two years. So as long as you look at things and just run the math, you can position, change your process, and it’s the same end result.

Jamil:
I just want to point out because, James, the thing I was saying is happening, these cash investors coming in, just literally coming in and taking huge, huge discounts on properties. It’s exactly what he just said he’s doing. Guys, if you’re sitting there listening right now and you’re like, “I don’t know if now’s the time,” follow the leader of the pack. Follow the people who are making the market. Exactly. He has the market timed out for the next 24 months. He knows how this plays out.
So you should not be sitting on the sidelines and letting yourself miss a massive opportunity to come in and get a property at a significant discount. Look, I’m not a fan of an adjustable rate mortgage, and please don’t make this sound like I’m saying that, but if there was ever a moment that I thought that it would be less of a risky situation to get into an adjustable rate mortgage, it would be right now. Go in. Get a property significantly discounted. Get an adjustable rate mortgage. Lock in at a lower rate for the next five years if they give them to you that way, and then refi out of that thing in five years when the rates come back down, but you will get a huge benefit by taking advantage of the market situation right now. Do you like froth? I like froth in my coffee. Go get the froth. Now’s the time.

Kathy:
Yeah. People shouldn’t be so afraid of ARMs today because the lenders have learned there’s much tighter regulation, and you actually have to qualify for that adjustment if rates go up. So they’re really qualifying ARM borrowers. So they want to make sure you can handle an increase in payment in five years. That was not the case 10 years ago. In fact, they were giving out ARMs. We were. I was in the mortgage industry at that time, and we were literally, not my idea, someone else’s in the big offices in New York was saying, “Nah, let’s just qualify people on a teaser rate, so just a fourth of what their actual payment will be and see how that works out,” which didn’t work out.
Today, it’s the opposite, “No, we’re going to qualify you on the adjustable rate of what it could be.” So I’m not worried about ARMs. I think they’re a wonderful, wonderful solution for today, and that is exactly why we’re doing a single-family rental fund right now, which some people might think is crazy, but it’s like people can put in a $50,000 investment in that and we’re going in and paying cash. Again, that’s why I said we’re buying stuff in one of the fastest growing parts of Dallas where all these chip manufacturers are moving because the Biden administration is subsidizing that, 52 billion dollars, and they’re moving to this North Texas area. Yet, we’re able to negotiate with all cash offers at, like I said, $60,000, $80,000 for a property. Put about 50, 60 thousand into it to make it really nice for those tech employees, I don’t see how a huge recession would affect that. So there’s still opportunity. There’s tons of opportunity out there.

Jamil:
Take notes, guys.

Mindy:
I’m really glad you mentioned ARMs because that’s one of my questions up here. Traditionally, the ARM is not a “good product” in air quotes because it’s going to go up. It always goes up. In the past few years, nobody was getting an ARM because rates were so ridiculously low and now, even now, ARMs are higher than regular rates were, but they’re still lower than the fixed rate loan.
I just want to point out that if you’re considering getting a loan at all, talk to your lender. Ask questions. Your lender cannot read your mind. They don’t know what you’re thinking. Talk to them about ARMs. ARMs are not just three year loans. The ARM, the adjustable rate, it’s a fixed rate for a certain period of time and then it can adjust. It can adjust, what, once every year, once every two years? It can start adjusting, but there’s a fixed period of time. So a three-year ARM means for the first three years it can’t go up. There’s five-year ARMs, seven-year ARMs, 10-year ARMs.
Do you think rates are going to stay like this for the next 10 years? I don’t. I don’t have a crystal ball. Past performance is not indicative of future gains, but I think a 10-year ARM is still better than a 30-year mortgage, and people move on average every five to seven years. So if you’re going to be buying your primary residence and your options are, and I don’t have quotes on ARM rates, but I think a 30-year fixed right now is 6.5% for an owner occupant. So let’s go with a 10-year ARM is 5.75 or even 6%. That’s less. So that means you’re paying less, so that’s better.

James:
The thing is capital is just a cost of the deal, and I think investors fall into this, and I can do it too. You fall into this rate trap where you’re like, “Well, the deal doesn’t make sense with this rate,” but each capital has a purpose. When I’m borrowing money at 10 to 12 percent on hard money for a one to two-year period, I’m not just fixated on this. That’s just the product that I had to factor as a cost of the deal. Right now, when you’re looking at buying a rental and you’re using an ARM product, that’s what you’re doing to get you by if you do think that rates will fall in two years. I do believe that rates will be back in the fives in about 24 months.
Having an ARM product can be risky, but not if I’m getting it for the intention of bridging me to where I can get my high cashflow. So whatever the loan product is, talk to your lenders, like you said, and then just factor it into how you structure your deal and the cost of the deal, and then at that point, it’s just absorbed in the math.

Mindy:
I do want to point out that Kathy, James and Jamil are more investment-minded than owner/occupant-minded, and they’re in it for the long haul. They’re holding period is forever to quote Warren Buffett, my favorite. So if you are thinking about buying a house that you’re going to live in for a couple of years, this is going to be advice that may not apply to you. If the rates are still going to be really high in two years and you’re not going to have an opportunity to pull your money out or to refinance and then you’re going to sell and maybe it’s still a down market in two years, maybe it’s not, this is going to be different advice. This is more for people who are investing.
A few minutes ago, James said, “Run the math.” I think that now even more than ever before when it was already really important, knowing how to run your numbers is so important and really running them carefully is key, but we’re still, like James said, in historically low inventory market, and that is not going to change anytime soon. You can’t just build four million houses overnight. You can’t just get … I mean, have you ever tried to get anything approved to the permit office? Even the most generous of permit offices take forever. What does it take? I’ve never built a whole neighborhood from scratch, but it’s a three or four-year process. It’s not just like, “Hey, I want to build houses in that vacant land over there,” and then tomorrow you’re pouring cement. It’s a really long process.
So we are going to have historically low inventory probably for a decade to come. So when this little blip that we’re going through right now changes, if you’re looking to buy a house that you’re going to hold onto for a really long time, we could be in a situation where now is an awesome time to buy, and if you want to buy a long one, I have a house for sale.

Jamil:
Well, what happens in 24 months, guys, when we’ve got depressed building now, we’re already short four million houses? What happens when rates stabilize? Where does the market go then when so many builders are pausing right now and inventory is already short? What’s the effect

Mindy:
The building fairy is going to wave her magic wand and say, “Poof! There’s four million houses.”

Kathy:
I think I actually have changed my mind about this. I have changed my mind about inventory just recently because at a time when the government is, basically, or the fed is pulling the plug on economy and people are losing money in the stock market, they don’t have that extra money, when you have extra money, you buy things you don’t need, right? When you don’t have it, you don’t. So there are people who got short-term rentals that maybe they’re like, “Oh, this isn’t going to work,” or they got rental properties and it’s not working out the way they thought.
You also have baby boomers getting a lot older and dying, the oldest ones, and then you’ve also got the millennial population that over the next three years or so is a really large generation, but then after them, it starts to wane. So I don’t know that I’m in the camp anymore that this inventory problem’s going to last forever. I actually think it’s going to normalize in a year or two, if not sooner. So that’s something to pay attention to as the population, as the demographic shift a little bit.

Jamil:
Interesting. I’d like to talk to you about that further and expand on that a little bit because it’s a very contrarian perspective, and at the same time, I’m curious as to what data, and I know you make decisions very thoughtfully, so I’m interested as to what made you make the shift.

Kathy:
Oh, I just interviewed John Burns on the Real Wealth Show and he sent me all his slides and he studies demographics, and he’s just got an enormous amount of data. We’ve known for a long time that the largest part of the millennial generation is now. From 2020 to 2024, this was going to be the biggest buying pool and we weren’t prepared for them, but after that, the Gen Z population is smaller. So when you look at the population growth, you’ll see this bump, but then it’s a bump. So what’s behind them is less people, less buyers at a time when you’ve got baby boomers aging.
So it is a blip in time, for sure, where we weren’t prepared and we didn’t have the inventory. We shut down the economy. We stopped producing, and yet we had all these families forming. So if we had just planned things a little better and not stimulated the economy at a time when there wasn’t enough supply and huge demand, then we wouldn’t be in the situation. When I say we, I’m not talking about me, I’m talking about the fed. I know that’s depressing, you guys, but I’m a firm believer that no matter where, there’s always opportunity in any city.

James:
I think inventory is honestly going to go into overcorrection mode for a minute because that’s … Real estate, when it goes up, it comes down, and then it levels out. The thing about the American public, the American consumers is they’re very reactionary. We’re seeing it now. We are getting really good buys right now because people dump and they’re just reactionary in general. So as you see those things, people get FOMO, they want to maximize their equity, they’re seeing other things like their stock accounts getting shrunk down to. People feel like they’re losing wealth right now, and when they feel like they’re losing wealth, they make very bad decisions and very quick decisions.
So we may see this surge of housing come to market, but then it will work its way through and it’s all okay. You just don’t want to be the reactionary person giving away your asset or selling off your asset too quick or just trying to buy too quick as well, but it’s to be expected, when rates increase, when we go into recession, things will slow down, inventory will increase and will work its way through the system.

Mindy:
I think that’s interesting your comment about the surge of inventory. During the spring, I’m a real estate agent who primarily represents buyers, and I would look in my MLS, my local MLS, and houses came on the market on Thursday, showings were Friday, Saturday, Sunday, offers were due Sunday or Monday, and they were under contract on Tuesday. So on Wednesday, there was nothing on the market. I’m talking maybe 10 properties. In my city of 90,000 people, there were 10 houses available up to $700,000, and this was every single week for about three or four months.
Now, I can go in and search, and there’s 75 or 80 houses, which is a whole lot more, but still historically low. There should be 100 or 200 houses on the market to give you a really good mix of houses to buy and to look at, and there’s still low inventory. I think there’s so many people who are not in real estate who don’t pay attention to this. Not everybody is as big a geek as we are about real estate, guys. So they don’t know that 70 houses is low. They think, “Wow, there’s seven times more houses now than there were in the spring, so we are back to normal.” We’re not even close.
So I just think that this is very interesting that we’re having this inventory conversation. I think that Kathy’s incredibly intelligent and she just spoke with somebody who is far smarter than I am, but I just hate to argue with you. I don’t see a change in the inventory and I hope I’m wrong.

Kathy:
I think the boom is going to go for a while. Like I said, it was 2020 to 2024, before all of this. I mean, that was predicted that this millennial population would be at home buying age and household formation age. So I don’t think it’s going to change today, but just the 10-year outline in the future, maybe we’ll see some shifting then. Unless, again, we depend on government policy, unless there’s a change to immigration because the birth rate is slowing down too, so if we become more open to immigration, that could change it.

Mindy:
Okay. I think this has been a fantastic discussion. I really thank you all so much for your time today. Let’s remind everybody where you guys are normally found every single week.

Kathy:
I’m at realwealth.com and I’ve got the Real Wealth Show, and then my syndication company is growdevelopments.com.

Jamil:
You can find me on my YouTube, @JamilDamji, also on Instagram, @JDamji. Check me out Saturdays at 10:00 AM on A&E and watch us flip houses, make mistakes, and try to make some money.

James:
First and foremost, check us out on the On the Market podcast. This is where we all get a hangout. It’s by far one of the highlights of my week. I mean, just amazing people on the show. Then for more construction tips, investor tips, check me out on Instagram, JDainFlips, and on YouTube, @ProjectRE.

Mindy:
Okay. James, Jamil, Kathy, thank you so much for your time today. This has been a lot of fun. Don’t miss checking out James, Kathy, and Jamil, along with Henry Washington and Dave Meyer on the On the Market podcast, which is available every place you get your podcast.
Holy cats! That was one of my favorite episodes. I love talking about real estate, and Kathy, Jamil, and James are so informed and so smart. Some of my key takeaways from this episode are, number one, investing can be scary and there is always risk involved in investing, and the best way to mitigate that risk is to be informed. So look at what’s going on in the market. Interest rates are the big story. Listen to what the fed is saying. Like Kathy said, she listens to what the fed is saying. She listens, she watches the videos, she reads the articles.
All three of our guests today listen to the videos and read the articles and they’re really doing their research. It isn’t just, “Hey, I bought a house. Now I’m an investor.” You really need to stay informed if you want to continue to grow as an investor, but there is, like James said, there is success down the horizon. There is a light at the end of the tunnel, and he’s predicting about 24 months we’re going to see a difference in rates, we’re going to see prices starting to go up again. So now is a really great time to be buying a house, so long as you can afford the payments currently.
Like Jamil said, the market, he’s seeing price corrections in his market. I’m seeing price corrections in my market, and that’s not super awesome when you’re the seller. It’s a good time to be a buyer right now. It might become an even better time to be a buyer in the next few months. The market is going to be down for a short period of time. So there is opportunity to buy even with these current higher interest rates.
Inventory is going to continue to be down for years. We are not going to be able to correct our low inventory, historically low inventory situation in just a few months, in just a few years. I don’t see us getting back to correct inventory levels for a decade, and even with Kathy’s very well-reasoned comments about the baby boomers was the largest generation that we’ve had and they are getting older, they are starting to pass on. Even with them passing on, we’re still four million housing units short.
That’s the number that I keep hearing from all of my people in the data analysis department of Bigger Pockets, Dave Meyer, who happens to be the host of On the Market, which is where all of my panelists came from today. I keep hearing that we’re four million housing unit short, and even if we’re three million housing unit shorts or five million housing unit short, that’s not overcomable in just a few months. That is years, even decades down the road that we will finally be able to figure that out if we start taking steps now, but like they said, builders are even starting to pull back. So I really do think that inventory is going to be a factor for a while, and there are outside factors affecting our current inflationary period that are outside of our housing market control that I think will come into line very shortly. I think we’re looking at an interesting window right now of opportunity for those who can afford to buy.
One last takeaway, my biggest takeaway, if you are at all interested in investing in real estate, you need to add On the Market to your podcast rotation. It’s hosted every week by Dave Meyer, who I think walks on water. He is incredibly smart data analyst guy who’s been with Bigger Pockets for I think six years. He has this amazing ability, just like Kathy, Jamil, and James, he has this amazing ability to take complex real estate and economic ideas and theories and translate them into understandable English. So that is an excellent podcast to check out every week wherever you your podcasts.
From the Bigger Pockets Money podcast, this is Mindy Jensen signing off.

Abhishek Lodha of Lodha Group says the Indian property market is at the start of a “long-term upcycle.”

Dave:
Hey, everyone. Welcome to On the Market. I’m Dave Meyer, your host, and I am here with two BiggerPockets and investing legends. We’ve got Henry Washington who’s here a lot. Henry, how’s it going?

Henry:
What’s up, buddy? Glad to be here.

Dave:
Thank you. Thank you for being here. And we also are bringing back, I think you are our first two-time guest, J Scott. What’s going on, J?

J:
I am doing great and I am thrilled to be your first two-time guest. I can’t wait. And hopefully, I’ll be your first three-time and four-time and five-time also.

Henry:
Whoo. Whoo.

Dave:
All right. Wow, I like it. Yeah. I mean, I think your episode about investing in a recession might be one of our best, if not our best episode of all time. So if you haven’t listened to that already, you should check that out. J has written a book about recession, investing in all sorts of market cycles, particularly useful in this type of economic environment. But J, can you tell people why you’re here joining us today?

J:
Yeah. I’m here today because you wanted me to be here because you and I are getting ready to release a book, our next book for BiggerPockets, and you were too ashamed to self-promote and announce it yourself. So you brought me on to announce it so you wouldn’t have to look bad.

Dave:
That’s exactly right.

J:
So we’re here to talk about a lot of… Or I’m here to talk about a lot of things, but would definitely want to mention that you and I, Dave, are releasing a book called Real Estate by the Numbers. It’s coming out in a couple days, I think October 13th, from BiggerPockets. It’s now available for pre-order. And basically, it’s all about how we can better think like investors. So how we can think more strategically, how we can employ investing concepts that really successful investors use, all the math that goes on behind the scenes that we need to underwrite deals, and how we should be thinking about investing from the most basic level, like underwriting deals, to how we should be thinking about structuring our business and structuring our portfolio basically to be a more successful, more profitable investor.

Dave:
That’s perfectly right, and thank you for taking the responsibility of the shameless plug. We got to do it, but I do want to mention that it is available for pre-order for two more days. And if you do pre-order it, there are benefits. J and I are both giving away coaching calls. We’re going to be hosting a webinar that you can attend. It’s a live Q&A. There’s a couple other benefits. And you can use a discount code, DAVE, to get 10% off. Or J, I think, do you have a code also?

J:
Yeah, JSCOTT.

Dave:
Okay, or you could either use the code Dave, D-A-V-E, or J-S-C-O-T-T, JSCOTT for 10% off. So you should check that out. So it’s a great book. I think you should read it. I think Henry actually even wrote a little blurb about how much he loved the book on it.

Henry:
Yes. You know what’s funny is if I were to direct somebody, if somebody came to me and said, “Hey, Henry, I really need to know about what are the best rules of thumb or financial equations, or how do I get really good with numbers? Who do you know at BiggerPockets that could help me with that?” My 1000% answer would’ve been like, “Oh, you got to talk to Dave and J Scott. Talk to those two people. Those are the ones who can really break down the numbers for you.” And so the fact that you actually wrote a book called Real Estate by the Numbers, it’s almost like, it’s like a meme. Like, “Of course, Dave and J Scott wrote a book Real Estate by the Numbers. That is 1000% who they are.” So I think people should take advantage of that because you want people to speak on the things that they are passionate about and that they know the best. And if I know anything about the two of you, it’s that you’re passionate about data, the numbers, and real estate. So that’s super exciting.

Dave:
Well, thank you, Henry.

J:
Thank you, Henry. I don’t want to spend the whole episode talking about the book. There are so many more important things to talk about, but I do want to point out that Dave and I, we worked for several years on this book. This is my fifth and by far the hardest book that I’ve ever worked on. And no way I would’ve accomplished it at all, let alone it be as good as it is without Dave. So we put a lot of time and effort and blood, sweat, and tears into this one. But at the end of the day, I am more excited about this book launch than any of the other four that I did because I really think this book is going to help more investors over the next 10, 20, 50 years than anything we’ve ever written.

Dave:
All right. Well, we will get into the meat of this episode because we want to hear about what J is doing with investing. But I am also excited because I now have physical proof to all my teachers and guidance counselors who said I’d never graduate college or do anything with my life, that I have done something with my life. So there.

J:
I like how he says he has physical proof and he just holds up an invisible…

Dave:
Yeah, it doesn’t even exist. I’m just holding up nothing. But in a couple of weeks, I will. This is what they meant, J, when they said I’d never amount to anything.

J:
It was all a dream.

Dave:
All right. Well, let’s take a quick break, but then we are going to talk to J all about his investing and what he’s doing in this very confusing economy, and we will be right back.

Speaker 4:
(singing)

Dave:
Okay. So J, tell us about your read of the economy. And what are you doing in your investing business right now to adjust to these very confusing market conditions?

J:
Yeah, I wish I had a better answer than what I’m about to give, but I think right now is very much… I’m not stopping investing. There’s no reason to ever stop investing if the right deals are coming along, but I’m certainly being a little bit more introspective, and sitting on the sidelines a little bit and waiting to see where things go probably not for too much longer. I think we’ll have a good bit more clarity in the next month or two. So everybody knows that we’re experiencing some high inflation and that’s leading the Federal Reserve to raise interest rates to slow down that inflation, which is leading to higher mortgage rates. And now, debt is more expensive. It’s harder to get a loan, or it’s not hard to get a loan, but it’s harder to get a cheap loan to buy your real estate.
And so nobody really has any idea of how high interest rates are going to go. And so we’re in an uncertain time right now. But what I will say is that even though some other asset classes, I mean, the stock market has struggled a little bit recently and crypto is down like 80%, and other asset classes that I look at are down a good bit, real estate has stayed pretty strong. Now, certainly there’s a few markets around the country that things got so hot over the last couple years, places like Seattle, San Francisco, Boise, Idaho, New York City, where things are starting to slow down a little bit and we’re seeing prices actually decrease in a few markets. But for the most part, in most markets… And I know it’s going to be a couple weeks before this episode’s released, hopefully nothing’s happened in those two weeks that make this statement look idiotic. But for the most part, most markets have been pretty resilient.
And so what we’re seeing is there aren’t a lot of sales. Sellers aren’t really lowering their prices and buyers aren’t necessarily willing to come up to the high prices right now. So what we’re seeing is a drop off in sales. We’re seeing increased inventory in a lot of these markets and we’re seeing lower transaction volume, but the nice thing is we’re not seeing desperate sellers. We’re not seeing a real… I mean, foreclosures are up a good bit percentage wise, but they were so low that even the big jump percentage wise doesn’t translate to big numbers. So foreclosures are still relatively low. Lots of people locked in long-term, really low fixed-rate debt a couple years ago. So I don’t see right now a whole lot of desperate sellers, which means prices are going to stay relatively strong.
Now, the downside is, as real estate investors, we don’t mind if prices drop because we just dollar cost average and buy more real estate, but what I expect over the next at least six to 12 months is that we’re going to see just a stagnating market. We’re going to see prices that don’t really go up, don’t really go down, we’re going to see sellers that aren’t really willing to budge off their prices because they don’t have to, we’re going to see buyers that aren’t really willing to come up to the seller’s prices just because they don’t know where things are going. And so I think it’s going to be a quiet six to 12 months, despite the fact that we could be facing a big recession in the economy and other parts of the economy could be getting much worse. So it’s interesting that we’re facing a lot of economic headwinds, but real estate could really just be boring for the next six to 12 months.

Henry:
Yeah, man, that’s super interesting. I share your perspective. I think things are just going to stay where they are. I don’t see much of a drop coming in prices in most markets. Like you said, some markets are going to see somewhat of a drop, but we’ve got this… What did Jamil call it? We’ve got this standoff happening in real estate until there’s some change that has an actual major effect. One thing you did mention that I want to ask you about is you did say that you’re not stopping investing, but also have been waiting on the sideline. And so can we define that for people? Because I think there’s a lot of investors out there who feel like they should be waiting on the sideline. And I think us as investors, when we say that, we’re really meaning like, “I may not be as actively aggressively searching for something to pour my money into, but I’ve still got my eyes out there. And if something comes along, we’re going to jump on it.” So what does that really mean to you?

J:
Well, here’s the big thing, I can stay active and we can all stay active in real estate without buying or selling anything. So I’m actually using this time to investigate some new asset classes. So there’s some asset classes that I think are likely to do well during a downturn. So over the next year or two or three. There are a couple asset classes that I’m starting to look at and we can talk about those. But just at a high level, I’m using this opportunity, one, like you said, I’m not stopping investing. I’m still looking for deals. I’m not finding as many deals. I’m not finding as many opportunities, but if a good deal comes along, I’m going to jump on it. But at the same time, I’m using this slow down to do research, to learn how to underwrite other asset classes, to build relationships with operators in other asset classes.
When I say other asset classes, I don’t mean outside of real estate. I mean instead of focusing on multifamily, which is what I’ve been focused on the last few years, I’m starting to investigate other commercial niches, and I’m still buying some single-family stuff. But I’m trying to see where the market is going, where the economy is going in the specific locations where I’m investing and seeing what opportunities might exist outside of the core asset class, again, for me, multifamily, that I’ve been in. And what I like to tell people, is that you don’t necessarily ever have to stop investing. You may have to move to a different location, or if you want to stay in the location, you may have to find a different niche, or different asset class, or different business model.
But if you’re good at being flexible and you’re good at pivoting… And this is why… And to go back to the fact that the book Dave and I wrote is so important, it’s really important that you’re able to evaluate deals in different ways. We all probably know how to underwrite if we flip houses. We all know the equation to evaluate a house flip. And if we hold a rental, a lot of us know the equations and the formulas for how to evaluate a single-family buy-and-hold. But the reality is every deal is going to be analyzed differently. Every asset class is going to be analyzed differently. And there are lots of different ways to look at deals and look at markets, and there are lots of different reasons we invest in real estate.
And so using this time to really educate yourself on how to look at deals from different perspectives, and how to maximize the returns on deals with other things other than maybe cash flow, or other than maybe just equity growth. There’s a lot of things that we can be learning and doing right now to really find these needles in a haystack, and to find other asset classes that might be more advantageous given where the market’s headed and where the market currently is. And so what I’m spending a lot of time doing is, one, I’m not stopping looking for deals, but I’m really trying to get familiar with other asset classes, and other business models, and other niches that I can leverage to really grow my portfolio in a market that’s about to change.

Dave:
J, can you remind everyone what your primary niche is currently? And then talk a little bit about some of the niches that you think are going to work short term, or maybe some of the niches and opportunities you are excited about on the longer term perspective as well.

J:
Yeah. So long term, I’m excited about everything. Honestly, I mean, we’ve talked about this before. Go back and listen to the last episode we did of this podcast that I was on. But the reality is that historically speaking, recessions don’t last that long. And so if the Fed started raising interest rates six months ago on average between the time the Fed starts raising interest rates and starts dropping interest rates, is about two years, just over two years. The longest it’s ever been is about three years. So if history is going to repeat itself, which it normally does, we can expect that in the next year and a half to two and a half years, we’re going to see interest rates starting to come down again. So if you’re a house flipper, if you’re a buy-and-hold investor, whatever you do, most likely in the next two to three years, it’s going to be a great time to do it again. The market’s going to have recovered and interest rates are going to come down. Everything’s going to be good.
That’s longer term. From a shorter term perspective, the next 6, 12, 18 months, what I like about real estate is that there’s a segment of real estate called commercial real estate where values of properties are based on the income those properties produce. So if I go and buy a single-family home… I live in a house right now. The house that I live in, the value of that house is going to be impacted by the value of all the other houses around me. So if somebody goes to sell… If I go to sell my house right now, I’m going to look at what my neighbor sold his house for last month, or what the guy down the street sold his house for three weeks ago, or whatever. I’m going to find other houses that are similar to mine, what we call comparables or comps. And whatever they’re selling for, that’s probably what my house is worth.
In the commercial real estate world, and when I say commercial, I mean anything that you use that generates income that’s bigger. So multifamily, or self-storage, or mobile home parks, or office space, whatever it is, the value of that real estate isn’t based on what the building next door sold for, or what the complex across the street sold for. The value of that building, or the value of that real estate is based on the income it’s producing. And if it makes more income next year than it did this year, the value is probably going to go up. And so the reason I really like commercial real estate right now is because even though values may drop on a comp basis, even though single-family values may go down or stagnate over the next 6, 12, 18 months, in the commercial space, as long as rents are going up, we’re going to see values going up for the most part. Now, there’s another component there, but for the most part, if rents are going up, values tend to go up.
And so the question we need to ask ourselves is, “What are those asset classes where we expect income to go up?” So multifamily, that’s the niche that I’m in. I own a bunch of apartment complexes and what we’ve seen over the last couple of years is this trend away from home ownership and this trend towards renting. More people are renting, wages are going up, people are moving to certain population centers. So if you’re in the right market with good population growth and good wage growth and good employment growth, you’re going to see that rents are going up. And so I really like multifamily in a lot of these markets because I know that rents are going to go up, which means values in my properties are going to go up. And so any asset classes where you think income is going to go up over the next couple years, that’s a good place to be.
Historically, during recessions, people move from bigger houses to smaller houses, but they don’t like to sell their stuff. What do they do with their stuff? They put it in storage. So historically, self-storage is counter-cyclical to the broader economy. If the broader economy is doing worse, self-storage is doing really well because people need a place to put their stuff when they downsize. So I really like self-storage right now. Mobile home parks, mobile home parks tend to do pretty well during a recession because it’s the lowest common denominator for housing. And so a lot of people that have to move out of their house or out of their apartment, a lot of them will look for a mobile home. And so typically, mobile homes do pretty well during recessions.
Other asset classes that I like right now are industrial and warehouse. So we’re seeing this shift away from in-person retail. People aren’t walking into stores and malls as much anymore. This isn’t a revelation. Everybody knows this. They’re ordering off of Amazon, or they’re ordering off of other online retailers, and these retailers need to be able to ship in 24 or 48 hours. And so they’re opening warehouses all around the country to make basically their fulfillment and delivery systems more efficient. So lots of big companies like Amazon are buying warehouses all over the country, as well as smaller online retailers doing the same thing. And so what we’re seeing is demand for these light industrial warehouse lots and warehouses has been going through the roof. And so I really like that because I think that trend is going to continue.
Now, there are other asset classes in commercial where I think income is likely to go down; office space. So we saw a ton of office space open up after COVID, simply because everybody was working from home. And a lot of companies have recognized that this work-from-home thing is actually working okay for them. Not saying everybody. Some companies are starting to tell their employees to come back to work, but for a lot of companies, they’ve recognized that this work-from-home movement is a great way to save costs for the company. And so they have all this office space that they may have leased for a year or two years or three years or five years, but at some point, that lease is going to come due over the next couple years and they’re not going to renew. And the landlord, whoever’s holding the building, is going to have trouble leasing this office space. So office space, I have a feeling, is going to be one of those asset classes that’s going to start to contract over the next year or the next couple years.
Retail. So retail tends to not do well during recessions. People don’t go out and shop as much. Certain types of retail do well. If you own an anchor store like a grocery store or the big store on the corner of the shopping center, that might do well. But in general, retail and strip malls and mall space isn’t going to do well during a recession. So I’m staying away from retail. So this is basically what I mean by there are going to be opportunities out there, but you really have to understand how the market works, you have to understand how the economy works, and you have to understand how the two work together, how the economy impacts the real estate market in certain asset classes. And so I’m starting to do research on those asset classes that I think are likely to do well over the next couple years, as well as starting to build relationships with other operators who are working in those asset classes so that I can either learn from them, I can partner with them, I can invest with them, whatever it is.

Henry:
That’s super interesting because we have taken some time this year to do almost exactly the same thing. And so I purchased my first commercial office complex this year, and also we’re looking at a trailer park. And so all that to say, not to toot my own horn, but I’m agreeing with the point that you’re making, is that there are other niches and there are niches that are going to be better suited to the economic conditions. It’s an echo to what you said in the beginning. There’s always room to be an investor. It’s just about what you invest in, what price points you enter at, and then what your return on that investment is.
A good deal, is a good deal, is a deal. And we say a good deal is based on what you’re getting it for in that current market condition. And so you can get a good deal in any market condition. So I love that you’re looking into those things. And I hope that encourages some people to think, not necessarily outside the box, but just be smart about, in sports, we call it take what the defense is giving you. And so you look around at your environment, at what the defense or what the country or what the economic status is giving you, and then you look for the opportunities there. So that’s awesome.

J:
Yeah. And another thing to keep in mind, I think one of the reasons I like real estate right now, I love real estate right now, is because I think the long-term growth trends are astronomical. One of the big concerns that the Federal Reserve has now, for anybody that’s listened to some of the recent press conferences or read some of the things that Jerome Powell, Federal Reserve has released over the last couple months, is this concern for housing. And they’re not concerned about housing because they want us real estate investors to continue to do well and make money. They don’t care about that. They’re concerned about housing because they know that if we don’t continue to create more housing, that we’re going to have affordability problems, that we’re going to have a housing crisis where people can’t afford to live. Basically, the Fed is telling us, “We need housing to do well because we need builders to keep building, and we need people to keep providing housing for all the people that can’t afford a place to live or a place to buy.”
And so I have a feeling, and not just a feeling, but the data supports this as well, that there’s going to be a whole lot of housing, millions of units literally somewhere in the three to five million units that are needed over the next five years to support all of the people that are looking for housing, and all of the people that can’t necessarily afford to buy and are looking for rental housing. And so if you’re a landlord, if you’re a developer, if you’re a multifamily investor, this is going to be a fantastic place to be over the next five or 10 years. So what I would suggest to anybody is if you’re flipping houses right now, start investigating how to buy single-family rentals because there’s going to be a great opportunity and it’s going to be a very powerful asset class over the next few years. If you’re already buying single-family rentals, start looking into multifamily and looking into going bigger. Because again, it’s not that difficult to do bigger in the residential space. And so start thinking about how you can scale up your business.
If you’re in multifamily or if you’re a single-family landlord, start thinking about development because there’s probably going to be some good opportunities. I’m not saying this month or even this year, but over the next several years, there could be some great opportunities for you to be doing either ground-up development or infill development, which means basically buying a house, knocking it down and rebuilding it. And so learning these new skills now while everything’s slowed down and boring is going to be a great way for you to be making a lot of money come two years from now or three years from now or five years from now.
I see too many real estate investors that are so focused on what they’re doing day in and day out that they’re not thinking about, “How am I going to be able to make a lot of money two or three or five years down the road?” Well, now is the time. If you’re not doing a lot of deals, now is the time to be reading, and learning, and studying, and building relationships that you can leverage a couple years down the road when the market’s really going to need more rental housing.

Dave:
I love that, J. It’s such a good synopsis of the long-term prospects for real estate investing. There’s just a supply shortage in the market. There’s going to be so many ways to profit from that over the next couple years. And not just profit from it, but provide housing for people that need it. You are providing value to society and you could benefit from it personally too. To me, I agree. That gets me super excited about real estate investing over the next couple years.
A couple of the asset classes you talk about, to me, at least when I was getting started, felt a little daunting, retail. Henry, you’re just buying office spaces. What would you say to people who are ready to get into the market now, or maybe they’re in one of those markets that have already settled down or maybe is going to keep growing over the next few years? Do you think now is a good… Would you caution people away from single-family rentals right now if they can find good deals? Or do you still think those are possible to be profitable in the next year or so?

J:
Well, let me start with the first part of that first. Yeah, people are definitely scared of these bigger asset classes. I know that when I started, I used to think that people that owned apartment complexes were special people. It wasn’t people like you and me. I grew up living in an apartment complex, probably literally one of the largest department complexes in the country. It was something like 1600 units. And so my idea of an apartment complex is, “You’ve got this multi-billion-dollar company that buys these things and that’s who owns apartment complexes.”
And what I’ve realized over the last couple years is, “No, there are a lot of mom and pop investors like me and you and Henry and other people who are buying up apartment complexes or buying office space or buying retail space.” We’re not talking about necessarily having to go in and buy a billion-dollar shopping mall or having to go to New York and buy a skyscraper for office space. Henry, tell us a little bit about the office space you built or that you bought, and break it down for us in a way that makes it sound like it’s really not that daunting. I imagine it probably wasn’t once you broke it down.

Henry:
Yeah, no, the way I approached it is the way I’d probably advise someone who’s new to commercial real estate investing. I had a general interest in wanting to understand it better. And so the way I went about doing that was obviously on my own research, but I put intention around networking with people who already do it and are good at it. And so I was able to then create a friendship with someone who thrives in this space, and then we started looking for deals together. And then as deals would come across, we would analyze them, and then we would make… Just like in residential real estate, we would analyze the deal, we would figure out what we think the value is based on the income that it’s making, and then we would figure out what we think the value could be based on the income that it would be making if everything was at market rates and in good condition, and then we made our offer.
And when we made our offer, the financing worked almost the same as how it does when I buy my residential properties. The only difference was the evaluation was based on the money it brings in. And so we put the deal under contract, we went and looked at the property, we did an inspection on the property, it had an appraisal. And then we bought the property, we then met with the tenants, and we either are renewing leases at market rates or we are going to bring in new tenants at market rates. The only major differences between this deal and what I do in the residential space was these new leases are going to be on triple-net leases, which is not something we can get in residential, but it’s super sweet if we could. And then the evaluation and the value of it is based on the income that it brings in. Those are really the only two things that were different.
And so as I got into doing it, first of all, I partnered with somebody who’s an expert. So that way, when I do my analysis and when I looked at something, I could be looking at it through the wrong lens because I’ve never done it before. So I had that sounding board to bounce things off of. And then so I partnered with somebody, I brought value to the table, and then I learned along the way and I’m still learning. And what I’ve learned was that it’s not much different than the process I’ve been doing with residential minus a few things, but the values are higher and the income is higher. And so that’s what I would tell people. It’s daunting until you surround yourself with people who are doing it and then it just seems like the thing to do.

J:
Yeah. And I think you hit a couple really important things there. And Dave, I have not forgotten your main question and I will come back to it.

Dave:
Go on. You could ignore me. Don’t worry about that. Henry’s got more interesting things to say anyway.

J:
Yeah, but the way he described it is the same way you would describe buying a single-family rental. Basically, you have to find the deal, and then you have to underwrite the deal or analyze the deal and figure out, “Do the numbers work?” And then you have to figure out how to make the money part, the financing part work, and then you have to manage it on the back end. And so at the end of the day, these are the same steps we take, whether you’re buying a hundred-thousand-dollar single-family house or a hundred-million-dollar skyscraper. And so I just want people to start thinking from the perspective of yeah, the nuts and bolts change.
You need to learn how to underwrite different types of deals. Finding these deals are going to be completely different than finding single-family deals. And structuring the loans and the money you put in is going to be different. And then managing it on the back end is going to be different, but it’s the same four steps. It’s finding, underwriting, capital stacks or financing it, and then managing it. And so really, I would encourage everybody out there, don’t not think big. If you want to be doing single-family, that’s fantastic. I did single-family for 10 years. I love single-family, but don’t stay in single-family just because you’re scared to move out of it. If you want to stay in it, great, but don’t think you can’t do other things.
Now, getting back to your original question, Dave, do I think single-family is still a good asset class to be in? Absolutely. Here’s the thing, there’s more single-family houses out there than any amount of commercial real estate in the country. So opportunity is obviously larger. And here’s the other thing, real estate in general, single-family real estate in general is one of the best hedges against inflation on the planet. And we’re all concerned about inflation. I think we’re not going to see 7, 8, 9, 10% inflation like we have the last few months. But I think there’s a really good chance that over the next five or 10 years, we see inflation a little bit higher than it’s been the last 10 years. Last 10 years, it’s been under 2%. Most likely over the next 10 years, it’s probably going to average two and a half, 3%.
And so what is real estate… Why is real estate good when you see a lot of inflation around you? Well, number one, if you look over the last hundred years, real estate in general, single-family real estate in general in most places tends to track inflation in terms of home values. So we like to think over the last couple years, home values are going up 5, 10, 15, 20% a year. That normally doesn’t happen. But if inflation’s at three or 4%, home values are likely to go up at least three or 4% per year. Secondarily, the best part of real estate is you can get loans against it. You can get the bank to give you money and they’ll give you money at this low interest rate.
These days, it might be 6, 7, 7.5%, but still, you can refi it in a couple years if rates go down, but the best thing is your mortgage payment never changes. In 20 years when your income is doubled because of inflation and everything, all the money you’re making has gone up because of inflation, that mortgage payment’s going to be exactly the same. I mean, I know people that got loans on real estate 20, 25 years ago. They’re almost done paying it off and their mortgage payment is like three, four, $500 a month because they locked in debt 30 years ago when everything was so cheap. And when I say three, four, $500 a month, that sounds like little, but back then, that was a lot of money because we didn’t have 20 years of inflation.
So yeah, I love single-family real estate and there’s never going to be a bad… As long as we see inflation… And we’ve had inflation pretty much throughout this country’s history. As long as we have inflation, single-family real estate’s going to be a great place to be. And so obviously, you need to know how to underwrite your deals, you need to know how to analyze your deals and look at the numbers. And right now, you might want to be a little bit more conservative than you have been in the past, and you want to be more cognizant of the location that you’re buying. Buy in places where populations are growing, people are moving, employers are coming in, laws tend to be landlord friendly. As long as you’re focused on those things, you’re not going to make a mistake buying real estate that you’re going to hold for the next 10 or 20 years.

Dave:
I love what both of you’re saying because you’re reinforcing the idea that if you learn the principles and concepts behind analyzing deals, it applies to single-family rentals, it applies to multifamily, it applies to trailer parks, self-storage, office space. It’s almost like if someone wrote a book that taught you how to analyze those deals and to learn all those formulas, that that would be super helpful. So that’s me giving you a shameless plug for J and my book. We have two of them now. We’ll give you one more shameless plug. We won’t do more than three.

J:
But here’s the thing, it’s not just about the numbers and the formulas. It’s understanding that for any deal you do, you have to ask the right questions. And Dave and I came up with this idea back when we started writing the book a few years ago, that instead of just throwing a bunch of formulas out there and saying, “Here, learn the math,” basically, we decide to write a book to teach you how to think about how to do these investments. And we wrote a book that starts… Every chapter starts with a bunch of questions, “Here’s the questions you need to be asking for these types of investments and here’s how to answer them.”
And so it doesn’t just teach you to fill in the blanks or put numbers in a spreadsheet. It teaches you how to ask the right questions and be thinking about investments because I have investing situations every day that come up where I don’t know what formula to use. I can’t just stick the numbers in a formula because I don’t know a formula. I give an example in the book where I had this house that I was selling a couple years ago, and I listed it for sale and I got two really quick offers. And the first offer was full price, full list price, cash, close in two weeks.
The second offer was from another investor who really wanted the property, but he didn’t have the money because he had another deal that was closing, and he told me he was closing seven months from now. And basically, he said, “I’ll pay you. I’ll close on the property. I’ll buy your property today, but I can’t pay you for seven months. You’ll have to wait seven months. And I paid cash so I could do that, I could hold the note, I could do what’s called seller financing.” And he said, “I’ll pay you in seven months. I’ll buy it now, but I’ll pay you in seven months.” And he said, “I’ll pay you more than list price.”
And so I needed to figure out how much more do I need to be selling this property for in seven months so that it’s a better deal for me than selling it for full list price today? And so once I knew the right question to ask, and that was the question I needed to ask, “How much is a property going to be worth in seven months to me? Or how much do I need to sell a property for in seven months for it to be worth it not to get the money for seven months?” And once I realized that’s the question to ask, well, then I can figure out what formula or what concepts to use to plug the numbers in and figure out that number was.
And at the end of the day, this was a real deal I did. I went back to the guy. I figured out how much more I would need in seven months to make me actually get the same amount of money and then I bumped it up 10,000. I went to him and I said, “Here’s how much I need.” And he said, “Okay.” And I knew that I was actually getting a better deal waiting seven months for my money. And so again, that’s not something where I could just have said, “Okay, stick it into this formula and get an answer.” I need to understand the concepts behind, in this case, something called time value of money. If I wasn’t going to get my money for seven months, how much more do I need to get to make myself whole?

Dave:
Well, learning about the time value of money legitimately changed my life more than almost anything. Once you understand and can incorporate that concept into your everyday thinking, your spending, your investing, it’s really honestly life changing. Henry, I’m curious, are there any formulas, investing tricks, or concepts that you have come across in your career that have just opened your eyes that really changed your perspective on investing or money in general?

Henry:
Yeah, yeah. So for me, I’m mainly single and small multi. And so my whole business is based off of the 70% rule of thumb. For me, that’s my measuring stick to, “Is this even worth my time?” Because what it did was when I was first starting out, I would have to go look at every single house, and then you do the dance of, “Do they want retail? Do they not want retail?” And you waste a lot of time. Now, when you’re new, I actually encourage you to do that. The more houses you can walk into and evaluate and make offers on, the more experience you’re going to get. But as you close more deals, that time that you’re putting into that is better used on deals that are actually going to produce the income. And so I had to figure out a way to still evaluate property and scale, still make the amount of offers I need to make, but not have to physically go put myself inside of every property before I knew that.
And so I know everybody understands, or most people have a general understanding of what the 70% rule is, but understanding it and then putting it into practice in a way that’s going to benefit you financially are two different things. And so for me, everything gets run through that filter before I’ll even go put my time into looking at that property and making an offer. And I’m not saying that that rule is a hard and fast rule, but what I needed was something for me to say, “Hey, this is probably worth your time,” or, “This is less likely to be worth your time,” so that I could spend my time on the ones that fit better. And so for me, I evaluate everything through that lens. If I’m talking to a seller and I can get them to tell me what they want and it doesn’t seem like it’s going to fit at a 30% discount, then we don’t even waste the time. It directs the conversation that I have.

Dave:
Can you just quickly though explain to anyone who doesn’t know what the 70% rule of thumb is?

Henry:
Yeah, absolutely. So as an investor, if you’re going to make money on a property, typically either as a rental or make profit as a flip, it’s that you need to be buying a house at a 30% discount or buying it at 70% of its value minus the repairs that it’s going to take to fix that property. And when I started just running it through… And I mean, you get enough where you’re just running it through it in my head. But yeah, typically, if I’m talking to somebody and I know their house in that neighborhood is worth a hundred-thousand dollars, I get it, there’s no house worth a hundred thousand dollars. I can hear you all already.
But just for numbers’ sake, if I’m talking to somebody and I know that their house is probably worth a hundred-thousand dollars and they want 95 for it, then that’s a lead that is less important to me than one that’s worth a hundred and they’ve already said they’d entertain an offer of less than 70. And so it helps me prioritize where I’m going to go to first and then prioritize who I’m going to make offers to first.

Dave:
I love that. Yeah, it’s a great way. Yeah, just allows you… These kinds of rules of thumbs, these concepts allow you to scale your business a lot faster than you would when you’re running everything single deal through a calculator, treating every lead equally, spending a lot of time just in random houses. I felt really old when I bought a deal that I had been in twice. It had been in the market and sold and then I came back to it. And it’s because when I first started, I would go to every open house. I was like, “Whatever, whoever will show me a house, I will go,” but you quickly learn that that is not sustainable. Well, thank you both. We do have to start wrapping this up, but this has been super helpful. J, is there anything else you think our audience should know about investing in this current climate? Or any words of wisdom for people who are trying to get in right now?

Henry:
Yeah, I’m going to use… Anybody that’s listened to me speak more than two or three times has probably heard me say this, but for anybody out there that hasn’t heard it or that just needs the reinforcement, anybody out there that’s looking to get that first deal, I don’t believe there are any secrets in real estate. Go to BiggerPockets. It’s all out there. But if I had to pick that one idea that’s the closest to a secret in real estate, it’s this, I’ve met two types of real estate investors in my life. 95% of the people, of the real estate investors I meet have never ever done a deal. They want to do a deal, they’re trying to do a deal, they’re thinking about doing a deal, but they haven’t yet done a deal. That’s 95% of the investors I meet. The other 5% of investors I meet are people who have done three deals or five deals or 10 deals or 50 or a hundred deals.
There’s one type of investor I hardly ever meet, if ever, and that’s an investor who has done one deal. And there’s a reason for that. There’s a reason for that because if you can do one deal, if you do one deal, you’re going to do a second, and you’re going to do a third, and you’re going to do a fifth, and you’re going to do a 10th. It’s so hard to get that first deal. But anybody that does recognizes the second one becomes so much easier because all the pieces fall into place and the third one becomes so much easier after that, and the fifth one and the 10th one, they all get easier.
So if you’re one of those people that’s on zero deals right now, just remember if you can get to one deal, you will do 3, 5, 10, 50, a hundred deals. You just cannot stop until you get to that first deal. Don’t give up until you get to that first deal. And once you do, you’re going to realize, “Wow, this really isn’t that hard, and now I understand, and all the pieces have fallen in place, and everything’s going to get easier.” So for anybody out there that needs a little bit of motivation, don’t think about how hard it’s going to be to do 10 deals because it won’t be. It’s hard to do one deal. And as long as you don’t give up before you do that first deal, the rest of this business is easy.

Dave:
I love that. I’m feeling inspired now, J. That is good. I totally agree. That’s a good point. I don’t know anyone who’s been in the game, who did a deal five years ago and was like, “Eh, I had enough. I’m good.”

J:
Exactly.

Dave:
Well, J and Henry, thank you so much. Again, if you want to check out the book that J and I wrote together, it is available right now for pre-order. If you use the code, either JSCOTT or DAVE, you’ll get 10% off and a chance to win coaching calls with either J or myself. And hope you check it out. I think you’ll really like it. J, where can people connect with you if they want to do that?

J:
Yeah, absolutely. So anybody who wants to connect with me, go to www.connectwithjscott.com. And that’ll link you out to everything you need to know and also let you get in touch with me directly if you want to.

Dave:
And Henry, I know that everyone who has an Instagram account already follows you. Your Instagram is so, so popular, but if there’s three people out there who don’t know yet, where should people connect with you?

J:
Yeah, best place, Instagram. I’m @thehenrywashington on Instagram.

Dave:
All right. Thank you both for being here, and thank you everyone for listening. We’ll 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 Ascarza 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.

David:
This is the BiggerPockets podcast, Show 672. If you chase cash flow, it takes a long time to build financial independence. You typically get a couple of hundred bucks per unit for every good deal that you buy. If we all live to be 900 years old, I think that would be a great reliable and steadfast strategy, but we don’t. You also have less control over building cash flow. You can’t automatically force cash flow in a property unless you convert it from a long-term into a short-term rental, you raise rents that were kept artificially low by the landlord before you. There’s a handful of situations where you can create more cash flow for your properties, but it’s not a lot. What’s going on everyone? This is David Greene here in Scottsdale, Arizona with the desert behind me, bringing you a show from the sanctuary that I bought with Rob.
I got a little retreat going on where I’m teaching people how to invest in real estate. We’re having a blast, and I get to make some content for you guys while we’re here. Now, this is a great time because I’ve got all this stuff on my head because I’ve been teaching people. You’ll notice my voice is a little bit hoarse. I’ve been doing a lot of talking and giving it everything I have all day long to give as much value as possible, and today is no exception. Today, we have a Seeing Greene episode where listeners like you submit questions, and I do my best to answer them in a way that will help them grow their wealth. It’s part of education knowledge, it’s part of motivation, and it’s part of giving you direction for what you can do to get from the place you are to the place you want to be.
Some of the topics that we cover today is, can you buy a house with someone else, and how much of the down payment are you allowed to contribute? Should you start flipping houses at 23 years old, and if so, what should you be learning? And one of my favorite topics, I had something great happen, what do I do with it? We have a listener who’s got a bunch of equity in a property that they bought, managed well, made good decisions on, and now they’re trying to figure out, should I keep this property? Should I refinance this property and reinvest the money or should I sell it? And if so, where should I put the money? I have a really fun time answering the question of what you should be looking at, and how you should be analyzing opportunity when you have a property with a lot of equity as well as opportunities to buy more property.
And again, I’m just going to say it, these rising interest rates are not a lot of fun, but they lead to a lot of fun because rising interest rates lead to decreased demand which leads to investors like us having a better shot at landing better deals. And in today’s show, I go into a good framework to operate by with understanding supply and demand and individual markets, how it affects them so you can pick the right one. If this all sounds crazy and cool and new to you, that means you haven’t read my book, Long-Distance Real Estate Investing, so I would encourage you even as a new investor to check that out because it talks about a lot of the principles of what you want to look for in a market as well as the systems that I use to buy properties everywhere. Today’s quick tip, get around people that are different than you, and more importantly, that think different than you.
If you get around people that think the same as you, you’re going to have the same life tomorrow that you have right now. Changes in life and improvements in life come from getting around people with a different mindset. You want to be around wealthier people, happier people, more honest people, fitter people, better overall quality of life people. You’ve got to get out of the areas that you’re comfortable. It will feel uncomfortable when you go do that, but it’s worth it. It feels uncomfortable every time you start working out again. Every job you ever took started uncomfortable when you first had it, but it usually made you more money than the job you had before and that is why you took it. So today’s quick tip is to get around people that are more successful in whatever way you can.
At the retreat today, I’m getting to learn a lot of new people that are getting to learn how I think, but you can do this on the BiggerPockets forums. You can do this at a local meetup. You can do this by just talking about BiggerPockets to other people that you come across in life and sharing it with them, and seeing if it resonates with them and possibly making a new friend. But just remember after you listen to this, if you leave thinking the same way that you thought before, you’re going to have the same life that you had before you listened to it. All right, let’s bring in our first question.

Brantly:
What’s up, David? My name is Brantly, I’m an investor and a real estate developer in Rexburg, Idaho. My question is hopefully simple, I’m going to break it down. So I’ve got a 16 unit apartment complex here in Rexburg, Idaho, a fantastic college town. It’s close to Yellowstone National Park, so that brings traffic this way as well. I’m trying to figure out if I should hold it or if I should sell it or refinance it. So we bought it from 1.5 million. It’s roughly worth 2.7, I would say, so I’ve got about 1.2 million in equity which based on the cash flow, it’s bringing in a measly 3% return on equity which I know is pretty low.
So I’m trying to figure out if A, I should just be grateful for what I have, that I hit the jackpot on it. B, refinance, but I’m worried about interest rates, and I’m worried that I would be in negative cash flow if I did that. Or C, sell it and then redeploy the money. I’m confident in my ability to find other options for it and to find more equity, more cash flow with redeploying that money, so help me out here. I love the show. Keep up the great work. Thanks, David.

David:
Hey there, Brantly. First off, I want to commend you for knowing the terms on return on investment and return on equity, and looking at your investment from a financial perspective. That’s exactly what you should be doing. Now, let’s talk about whether you should hold it or whether you should sell it. There’s actually a method that goes into this that you can use. The first question you want to ask is, do I want to hold this property? Is this something that I would want to keep? Because there’s something about it you really like, some reason to think that some new industry is going to be moving in soon, and you’re going to make more money, something like that because not every property is a property you want to hold for a long time. Now, here’s what gets in the way. A lot of the time we get emotionally attached to our properties, they start to feel like our children.
You’ve poured time into them, you’ve literally invested into them, you’ve thought about them, you’ve worried about them, you’ve solved their problems, and you’re like, “This is my baby. I don’t want to let it go,” but that’s not a good habit to get into. You can’t look at properties as your baby. They’re not people. Properties exist to serve you, and if this property isn’t serving you, it’s okay to let it go. Now, the question you have to answer is, “Should I refinance it and redeploy or should I sell and redeploy?” Here’s a few things that I like to tell people when they’re faced with this problem. I’ve already mentioned the first one, “Do I want to keep the property? Do I really like it? Is it an area that I think that there is more value that’s going to come to this property?” The second thing is, “What are my options elsewhere? Can I get an ROI and another property? Are there deals to be had?”
Now, in today’s market, we’ve got some better deals than I’ve ever seen in a very, very long time. I like buying in this market. So that’s something that I’m optimistic about, and I think you should be too. The next piece is, “Can I break my emotional connection with this property and sell it?” Now, if you’re only getting a 3% return on your equity, it should not be hard to beat that with more properties. And you also mentioned that you bought this property with partners, so you’re going to have to get their input on this as well. What I remember you saying about the area and the property itself is that it’s in a college town of Colorado where you’ve got people visiting a national park. So a third option you could look into is moving it from a long-term rental into possibly a short or a midterm rental and you can increase your revenue that way as well, basically finding the highest and best use for that property to increase your revenue.
If you really like Rexly, Colorado, it would be okay to hold it and refinance it and redeploy the money, but you’ve got to talk to your partners first. This isn’t a market that I would say, definitely sell. There are some markets where I say, definitely sell if the population isn’t growing very quickly, if industry is not moving into that area, if there isn’t a very clear and well defined path to appreciation in holding that asset, sell it let another new investor get in and take that over and move into a higher echelon of investing where the stakes are higher, but that’s okay because your skills are higher as well. If you feel like that market is slow and not growing, I would say move your money. The Southeast is growing rapidly as the population moves into that area.
Certain areas like Idaho, Arizona, Florida, Tennessee and Texas are exploding right now. As people move there, they need places to live. You seem like a pretty smart guy, so I would recommend that you look into where businesses are moving, try to get ahead of a very big plant, and then provide housing to the workers. That would be the advice I’d give you if you’re going to sell and move it somewhere else. If you end up keeping it, I don’t think that’s a bad area. I don’t really think you can go wrong either way. And congratulations on getting this asset that has over a million dollars in equity. That is fantastic, and I love you sharing this with the BiggerPockets community. Thanks for your question. Let us know what you decide.
All right, our next question comes from Mike Higgins. “I’ve got a good problem. I openly share my lessons learned and financials with all who ask, and this has sparked a lot of interest from friends and family and a willingness to become an investor, but not an equity partner. I’ve already identified an off market property with two duplexes on the same plot of land in the vicinity of my last duplex. Therefore, I am confident in my financial analysis forecast. My goal is to invest in this property using only private money funding. You should know I have listened to recent podcasts with Amy Missouri, and it was helpful. So what’s my problem? I need help understanding and explaining the best practice in the flow of funds that go from an investor’s account to an escrow account to using the money to buy the property. Where do the investors send the money or what type of account? Is this account part of an LLC or another type of entity? How is the account managed or controlled in such a way to ensure investors feel safe that the money is secure?”
All right, Mike, I don’t do a ton of this because as a lot of people know, I don’t partner on a lot of deals, but I have done it a few times, so let me take my best stab at answering that question. I’m going to give a caveat out here. There’s probably some people listening who could even give you better advice than me because they have done this. So this is a great question to go to the BiggerPockets forums and ask there because I bet you there’s a lot of people with more experience than even me when it comes to borrowing money and then deploying it in the right way. If you’re doing a partnership where there’s equity involved, you would typically have an LLC created or some form of legal entity, and every partner would have a percentage ownership of that entity. So if you’re 50/50 partners, you create a legal entity, you make yourself 50/50 partners of that, if there’s three of you, maybe you go 33 and a third for every person.
Or maybe there’s one partner who’s bringing in less money than the others, so they get 20% and the other two split the other 40%. But it’s easy to split ownership of an LLC, it’s a little more difficult to do it of the actual property which is why people tend to create a LLC, and then own the property in the name of that LLC when they’re going to be equity partners. But you said something different, you said you don’t want equity partners. So if your friends and family are willing to become partners with you but they want to be debt partners, now what you’re talking is them letting you borrow money and you pay them interest on that, and their investment is secured by the property that you’re going to buy. So what they’re going to be worried about is, “If I let this person borrow my money, if I give it to Mike, how am I going to make sure that I could get it back if something goes wrong?”
So what you want to do is have a title company at a lien to the property with their information attached to it so that if they don’t get paid back, they would technically be able to foreclose on you to get that money back. This can all be written up by an attorney. You just have someone draw up a legal document that says, “This person is letting me borrow this much money at this interest, amortized this way over this period of time, and they will have a lien on the property.” Any title company around if you tell them you want to do this will know exactly what to do. It’s not very tricky. This is another case of people that say, “I have to understand everything about what I’m trying to do before I go do it.” Now, you’ve just got to ask the right people to be involved that will tell you how to go through this process.
You can set it up so that you have a bank account attached to an entity that you already own that’s going to own the property or the duplexes that you’re buying, and then have them send you the money into that account. But again, their biggest concern is going to be making sure that a lien is put on the property with their name on it so that if they don’t get paid back, they can get access to that property to sell it to get their money back. It’s the lien on the property that the investors have that lets them know that their investment is secure, not necessarily the type of account they put their money into or if you have an escrow account set up.
Technically, their money doesn’t have to go into the actual escrow and into the deal. You could get their money sent somewhere else to you, have that money and then close the deal with your own money. If they’re letting you borrow 50,000, it doesn’t really matter if you put your 50,000 in, and then reimburse yourself with their 50,000 or if you use their 50,000 to close on the deal. What does matter is that they get a lien against the property, and you have a title company, and likely an attorney draw up the documents that spells out the terms of the loan. Thank you for the question, and I hope it goes well with those duplexes.

Al:
Hey, David. I hope all is going well. My question to you is centered around investing in this high interest rate market that we’re in. A little context about myself, I’m single. I live in the New York City Triplex here in The Bronx with my father. I work a W-2. My father is retired. The property that we live in was purchased in around 2006, 2007 for 650, and it’s since then appreciated to 1.1 mill. The house cash flows, we live in it, all expenses paid, big advantage.
As a result of this advantage, I’ve been able to accumulate a down payment over the number of years hoping to find another property, another gem like this one down the line, but due to high interest rates and home price is not really dropping, I believe I’ve been priced out. So I’ve been looking at cash flow markets like the Midwest or upstate New York. I’m thinking of potentially buying in cash. The thing is I would love to add leverage to my portfolio, but I don’t want to run the risk of over leveraging myself due to these high interest rates. So I guess, my question to you is, if you were starting out, and you had around a quarter million, how would you invest it in this market? Look forward to hearing your answer. Thanks.

David:
Okay, Al. Here’s where I’m going to challenge you. I heard you say, how would you go about investing in this current high interest rate market for investment properties that typically require 25% down? And you say this would rule out house hacking because you care for your father. Few things, I don’t know if you’re looking at it the wrong way, but I just want to challenge you and let everybody else here because I think the questions that we ask determine the result that we get. By the way, I bet Brandon Turner himself would love what I just said right there. You said, “How would I go investing in this high interest rate market?” I’m reading that as you are implying that it sucks that rates are high, but I’ve got to say, I’m having more fun investing than I ever have in my entire career. This has been a blast for me, and the only thing that changed that made it possible for me to do this is the higher interest rates.
I want to take a quick minute to explain how interest rates affect real estate because many people think they know, but they don’t really know. Conventional wisdom or maybe common knowledge I would say, suggests that as rates go up, prices go down as there is this inverse relationship between rates and values, and that is true, but kind of. While there is an inverse relationship, it’s not directly connected. There are situations where rates can go up, but prices don’t go down, and that happens when supply and demand are off. I think a better way to look at it is that interest rates affect demand. The higher rate goes, the lower demand goes. You can see a direct relationship between the two and it is inverse. Rates go up, demand goes down, rates go down, demand goes up, and that’s because when rates go down, the house becomes more affordable, so of course, you wanted it more, and when rates go up, the opposite happens.
Now, let’s talk about supply and demand. If they are even when rates go up and demand goes down, you would theoretically have more supply than demand. You would have to reduce the price of that supply which would increase the demand for the asset, and then they would come even again. But in many markets throughout the country, we don’t have even supply and demand. We have not enough supply and way too much demand, and even though rates are going up and it’s pushing demand down, it’s not getting all the way down to where supply is. Other markets in the country, we had too much supply even further demand that was there, and so in those markets we didn’t see prices going up anyways. In this current high interest rate market, a better way to look at it is that there is less demand, meaning you have less competition for the same assets.
Now, in an environment like that, my advice is you buy the best assets. If you could go get it and there’s less competition, but we don’t really know, what if prices come down even more because rates could go up even higher. Well, to hedge your bet against the market going down, get into the better neighborhoods, get into the better assets, get into the stuff that you never could have bought before because someone was going to snatch it up right away. I’m not a old man, but I’ve been around the game for a little bit now, and I’ve seen a couple different market cycles, and here’s something I remember from the last nasty one. In 2010 when prices crashed, they did not crash evenly across the board. The best neighborhoods, the best cities, the best real estate had a little bit of a dip. It didn’t collapse.
The worst areas, the déclassé neighborhoods, the places where there wasn’t natural demand, a demand was kind of artificial based on the market, those areas were decimated. If you’re from Northern California like me, think about Stockton, California. It got hammered. Now, think about Walnut Creek, California, needle barely moved. So whatever your market is, understand that when the market could drop more, you actually want to get into the better homes which are typically higher price but they’re safe. After our market is crashed, that’s when I would go invest into some of these other areas that aren’t as desirable because they’ve got nowhere to go but up. So it’s the first piece of advice I’m going to give you. We don’t know what’s happening in today’s market. We don’t know if rates will keep going up, and therefore prices could keep going down, but demand will keep going down if that happens, so buy better assets.
What do I mean by better? It doesn’t just mean they are more expensive, but often they are more expensive. It means better locations, better schools, better amenities, better views, better neighborhoods, bigger lots, pools, better floor plans, better constructed homes. We’re talking about this stuff that people that have money would prefer to buy, not the stuff that’s entry level that someone who doesn’t have as much money just has to accept. The next thing I’m going to say, your broker told you that you got to put 25% down, but caring for your father shouldn’t automatically mean that’s true. There might be more to the story than what I’m reading here, but I would advise you to talk to a different broker and say, “I want to live in this investment property. My father’s going to live with me as I care for him,” but I don’t think that will automatically disqualify you from getting a primary residence loan.
And if you’re worried about putting 25% down, find a place that you can live in that you can also rent out which would be house hacking. Do that for a year or the period of time that you can, and then move out, let a tenant move in, and repeat this again. You can go from butting down 25% to somewhere in the five to 10% range depending on the type of property that you buy. You want financial independence, here’s my personal advice. If you chase cash flow, it takes a long time to build financial independence. You typically get a couple of hundred bucks per unit for every good deal that you buy. If we all live to be 900 years old, I think that would be a great reliable and steadfast strategy, but we don’t. You also have less control over building cash flow. You can’t automatically force cash flow in a property unless you convert it from a long-term into a short-term rental, you raise rents that were kept artificially low by the landlord before you.
There’s a handful of situations where you can create more cash flow for your properties, but it’s not a lot. What you do have a lot of control over is creating equity. You can buy equity, you can build equity, you can force equity by improving a property. You can get into the right market where appreciation is more likely to happen, and oftentimes with appreciating values comes what? Appreciating rents. That’s another way that you put the odds in your favor to grow more cash flow. So don’t just think about getting cash flow right off the bat, especially if you’re going to stick all your money into one deal and it’s hard to get it out. Think about how you can improve the value of the property that will result in equity being created. Think about how you can buy in the best markets where people and business are moving to. That will result in equity growing over time.
Once you’ve done this several times over several properties successfully, you can move that equity into a higher cash flowing asset. You can literally house hack putting five to 10% down on several different properties, 1031 all of them into one commercial property that gets really good cash flow, and get a commercial loan and then go back to buying properties the house hacking way, and just keep turning these little green houses into big red hotels over time. Last piece I’m going to leave you with is, just remember these higher interest rates have made it possible to get some of the best assets and define the more motivated sellers. You never found them before because as soon as our house hit the market, somebody else snatched it up because there was 10 people trying to get it. Be grateful for the fact that we’re in market where rates have gone higher, demand has gone down, and we can actually get some real estate and just be extra careful about how you run your numbers. Thanks, Al, and good luck to you.
All right, thank you everyone for submitting these questions so far. At this stage in the show, I’m going to read you the comments from YouTube, and I would love it if you would leave me a comment on YouTube as well. Tell me what you liked about the show. Tell me what your questions are. Let me know what you thought was funny. Tell me what you want to see more of, if you haven’t noticed I’ve got the desert behind me. I’m out here in Scottsdale at the sanctuary that Rob and I bought, putting on an event and recording the Seeing Greene for you guys. Do you like it when I’m on location to different places? Do you want me to post more videos of where I am? Would you like to see these recordings with different backgrounds and different spots? Tell me what you think would make the show cooler, and we will do our best to put it in there.
By the way, make sure you give a shout out to Eric Knutson at BiggerPockets, who got me a brand new microphone while I’m out recording because I think I sound fantastic. All right, our first comment comes from Assassin Dude, “Yes, to Deal Deep Dive episodes. It would be great to have them as a recurring episode type. I find it very educating to walk through real examples.” Do you know Assassin Dude, also known as AD in the streets? We’ve been toying with this idea of having me walk through properties, some that I’m buying, some that I don’t buy, and then making episodes of why I liked it, why I didn’t like it, what I looked at, what made me chase it or what didn’t. If enough other people come on YouTube and they say, “Yeah, we want to see an episode where David’s walking through a property, we can see the deal and then he can break down what he liked or didn’t like about it,” I’ll make sure we do more of those.
Next question comes from Inzora 100, “Deal Deep Dive for sure, 1031 as well. I sold the property for a $98,000 profit. I’m looking for the strategy to best leverage that and reduce tax liability.” Well, Inzora, you should go to BiggerPockets.com/david, and submit the information about this so that I can give you advice on how you can reduce that tax liability and increase the cash flow as well as your future upside on that property and build some wealth my man.
And our last comment comes from Benjamin Pape, “Thank you so much for taking my question, David. You earned me some bragging rights at work.” I love that man. Everybody at your job should see you featured on the BiggerPockets podcasts if you are a loyal listener and you’re listening to this right now. At your local meetup, you should be able to show the clip of you talking to me, asking a great question and getting it answered. How can you do that? You go to BiggerPockets.com/david and submit your question there as well as commenting on the YouTube page so that I can read your comment on one of these shows, and you can get bragging rights that way as well. All right, let’s take another video question.

Jace:
Hey, David. My question for you is around co-balling. I invest in the Salt Lake City market and have three rentals. My wife doesn’t really want to move a fourth time to get the fourth rental, and that means we’d need to put 20% down which is currently out of reach. However, I have a younger brother who I could co-invest with and he could move into the property for one year, so we’d only need to put 5% down. And here in Salt Lake City there’s a lot of properties with basement rental potential, and that’s what I’ve done with the previous ones is living in the upstairs while renting out the basement.
So if he could live upstairs for one year and rent out the basement, then he could pay for his portion of the mortgage and then get the remainder to pay towards the mortgage from the tenant below, and then after the first year he could move out. My first question is do you see any lenders having a problem with this, if I’ve provided almost all of the 5% down payment while my brother lives in it? And my second question is how do you recommend structuring the ownership split between my brother and I? I would provide the down payment. He would cover his portion of the mortgage, and we’d split the cost of the repairs. Thanks for all you do.

David:
All right, Jace. I like how you’re thinking here. You’re not asking the question of should I do it or should I not do it? You’re asking the question of how can I do it? And your questions are leading you down a good path. Now, let’s talk a little bit about what some of your options are. What I hear you saying is that you can’t buy a house because your wife isn’t on board with you moving your primary, so you’d have to put 25% down to get an investment property, but your brother is willing to buy a primary residence, and you’re trying to think about how you can use him to get the house. If your brother’s the one buying the house, and he’s the one getting the loan in his name, this could work. You could have yourself added to title after it closes. In most cases, that would probably be fine.
The problem is that you’re wanting to provide the down payment, but you want your brother to buy the house, and here’s how the lending standards are probably going to go down. They need the down payment from the person who’s getting approved for the loan, so if your brother can’t get approved for that loan or you wanted to be the person on the loan, this isn’t going to work. Now, one possible thing that you could do is you could have your brother buy the house in his name, and then you could gift him the down payment, but I don’t know if you can gift an entire down payment. I’d have to have one of the guys on my team look into what the guidelines are for that, and if you can get a full down payment gifted from somebody else. If you can’t, your brother’s going to have to have some of that money himself.
What you’re talking about is tricky because it sounds like what you’re saying is you want your brother to buy a house but with your money. Now, you’re correct in seeing that each person needs to contribute something to this deal, but where you’re wrong is when you’re thinking about borrowing money from a lender, and then having your brother be the person who is on the loan, meaning he was approved to make these payments, but you giving the money for the deal. That’s going to be very tricky to work, and on a primary residence it probably won’t go down the way you’re describing, so can we get your brother to get approved for a loan himself? You should reach out to us and see if that could work. Or if you’ve got a broker you’re working with, reach out to them. Assuming you can figure out a way to get the house, let’s talk about your strategy of if you’re going to split the mortgage with him because he’s basically paying rent to live there and split the expenses.
Your brother’s not bringing much to this deal other than the possibility to get the loan. Cutting him on the equity just because he’s paying rent which is the same rent that somebody else would be paying if they live there doesn’t really benefit you financially, and splitting the expenses with him could benefit you financially because a tenant’s not going to do that with you, but I don’t know that it’s as big enough benefit to be worth it. It sounds like you’re trying to get around the 25% down to buy an investment property. My advice to you, and I’m not in your position, is to try to find a property that your wife does not mind moving into. Not every house hack has to be a rent out the rooms to people you don’t know situation.
Can you get a nice house that has a basement and an ADU and you can rent out those, and you can live in the main house, and your wife never has to see the tenants or share a living space with them? Could you guys live in the basement and rent out the ADU and the main house? Same thing, you have your own living quarters. You’re probably going to have an easier time trying to get her on board with what you’re trying to do than to get your brother to buy a house with money that you give him. If your brother can get qualified for the loan, that would work. If your mom or dad can get qualified for the loan, that could work. Or if you could find another partner that could do this, that could work. The thing is the loan’s going to be in their name, and you’re going to have to get added to the title afterwards, that if you could make it work that way, I think this could be a strategy that could work. Thank you for your question.
All right, our next question comes from Dane in Omaha, “When we do a BRRRR, and you start the refinance process, we always use 20 to 25 year commercial loans which are a five year adjustable rate mortgage with an 80% loan to value.” Okay, so first off, what Dane is saying here is, when he does a BRRRR he gets a five year adjustable rate mortgage, meaning for five years that he has the loan, the interest rate is the same for all five years, then it can actually increase at that point, and usually by a certain amount every year, and then the 80% LTV means he’s having to put 20% down on the property. “I see a lot of people talking about DSCR loans. Do you have an opinion on which product is more appropriate, time and place for both?” Thank you for that, Dane.
Not only do I have an opinion, I think we do better DSCR loans than anybody in the country. We do a ton of them, so I know a lot about these. Here’s what’s cool about a DSCR loan. I know it’s confusing, and people are talking about it like it’s this crazy cool strategy. It’s really not. It’s very boring. A DSCR loan is just a way of saying we’ve always valued commercial real estate by the income it provides. So when I’ve gone to buy commercial real estate, the bank doesn’t even ask, “Well, David, how much money do you make? How many expenses do you have?” All they say is, “How much money does the property make, and how much expenses does the property have? Because once we know that, we can figure out the NOI, and when we know the NOI, we know what the property’s worth, and then we can determine if we’re going to give you a loan to buy it.”
You see, when you’re buying a commercial property, the bank just wants you to be the operator. They’re not lending the money based on your ability to make or save money. It’s a more financially sound underwriting process which is why they use it for big buildings. Nobody goes and buys a 400 unit apartment complex for $30 million and gets approved based on their ability to repay that loan. There’s not a whole lot of humans in the world that can repay a loan of $30 million based on their own personal debt to income ratio. The DSCR product is just taking the commercial underwriting of what does the property make and applying it to residential real estate because we are using it as a business, we are using it as an investment. We are intending for that property to earn income, so it makes sense that the person giving us the loan will look at the deal the same way.
The cool thing about the DSCR loans that we do is that they are still a 30 year fixed rate term. You don’t have to worry about this adjustable rate mortgage that typically comes with commercial property. You don’t have to worry about inflation taking your interest rate and making it skyrocket, and if you happen to not be operating the property well, your cash flow can get diminished. They’re actually safer than the commercial option, and that’s why I like them more. Time and a place for both, only if you think it’s better to get an adjustable rate mortgage. If you don’t love the adjustable rate mortgage which, in general I try to avoid it unless it’s clearly way better, I’d go with the DSCR loan at the 30 year fixed rate so that you can lock things in and you can always refinance it if rates do come down in the future.
Question six comes from Christian in Chicago, “As I am 23, I only invested in stocks currently, and looking for which property to buy. What is a good amount to have in cash for me to be able to flip a home? I keep seeing many people talk about creating a business structure to flip homes. Is that a good route to take? I’m also open to other tips as I’m going to be a new home investor.” All right, Christian, let’s break this down a little bit. I appreciate you reaching out. You’re asking some good questions, but there’s a lot of questions you’re not asking, and I’m going to focus on those in this answer. It’s not just about how much cash you need to have on hand to flip a home. It’s much more about how familiar you are with the market you’re flipping the home in, and how well you can manage the operation of said home flip.
There’s two things that destroy most home flippers, and ironically that the same things that hurt most BRRRR deals. The first is that the value that you intended to sell the home for goes down, either you misestimated what it would be or the market shifted on you during the renovation. The second is that the construction gets out of hand. If your contractor rips you off, if there’s more wrong with the house than you thought, if there was a bait and switch where they told you what it would cost, and then they came back and asked for more. If they’re not experienced, if their crew quits in the middle of the job or if they’re just lazy, the whole thing can balloon out of hand, and you can put a lot more money into that deal than what you originally expected. So flipping houses is something that I would typically recommend for someone that has experience, knowledge or a background in construction.
Now, after you’ve invested in real estate for a while, you will gain those things, and then house flipping becomes a more viable option. But for you at 23 just getting started, it’s very difficult to acquire those resources that I just described, and learn how to flip at the same time and try not to lose all your money. I don’t know you, so I can’t deter you from doing this, but I can say what it sounds like as this is a very risky endeavor. Now, I would ask the question, “Well, why do you want to flip homes as a 23 year old who’s never invested in real estate and only invested in stocks?” Probably because you’re thinking you don’t have that much cash, and you heard people say, “If you don’t have money, go flip houses and you can make it. If you don’t have money, go wholesale and you can make it.”
And I’m going to be blunt with you, frankly, I think that’s bad advice. It’s just easy to tell a person that doesn’t have money, “Well, go use these strategies of real estate investing and you can make money with them because they’re not long-term investment strategies. They’re short-term income producing activities.” On paper, that’s true. The problem is they’re also part of the riskiest and some of the hardest ways to make money in real estate. It’s much easier to buy a property, wait a long time and it’s going to go up in value if you wait long enough, the cash flow’s going to go up, and it’s hard to lose. That’s why I typically encourage everyone to buy more properties like house hacking, a great way to build yourself equity over a three to a five year period of time. Get some capital that will supercharge your business much less risky, which is why I tell people to go do it.
Flipping houses, very risky. I flip houses, and still at times I get caught off guard by stuff that I just didn’t think could have gone wrong including the price of materials going up or my contractor having issues in their personal life, stopping how well the deal gets put together. You can have neighbors in the city complain about it, and that can slow everything down, and it can take four to six months of extra time to get things done where you’re holding costs which could be anywhere between two to $10,000 on most deals, accumulate every single month. I don’t want to make this all about horror stories, but I do want to say, if you don’t have very much money and you don’t know much about real estate, stop looking at flipping and wholesaling as the best way to go. And every wholesaler and flipper listening to this is giving me an amen and a hallelujah to what I’m saying because they know just how hard it is to do what they do.
Here’s my advice, if I’m right and you don’t have a ton of knowledge about real estate investing, and you don’t have a ton of money saved up. First off, ask yourself the tough question of why you don’t have a lot of money. You are 23 years old, you haven’t given yourself very much time to be able to save money. You probably don’t make great money at the job you have. Those are two things that you can change by continuing to save money over time, and by continuing to focus on making more money, by bringing more value to your employer or to a different employer, you can actually start to accumulate more capital. While you’re doing that, you can buy properties that accumulate capital for you. That would be house hacking. This is where you buy a house with anywhere from three and a half to five to 10% down in a gray area.
You find something under market value that you can rent out to other people. You earn some cash flow from the rents that you get from them as well as the value of your property increasing. Once you’ve built up equity, you can move that equity out of the home and into your bank account and then go invest it. If you really think about it, capital is what we call value when it’s in your bank account, and equity is what we call value when it’s in a property, but you can move them back and forth. Now, I did not mean to crush your dreams there. What I really wanted to do is set some more reasonable expectations because I’m trying to figure out from your question what might be going through your head. I’m assuming that you’re hearing a lot of people saying the stuff that I said. You’re interested in real estate investing, and you keep hearing people say, “It’s a great investment opportunity, you’ve got to get into it.”
In many cases they’re right, but there’s different ways of doing this. Flipping is a short return that is very risky and takes a lot of work. Buying a primary residence and house hacking it and waiting for a long period of time is delayed gratification, a long-term requires less work and is also much safer, so I’d like to see you start with the safer route before you get into the more risky stuff. Now, nothing says you should stop learning about flipping while you follow my advice. So here’s some information that I could give you where you can increase your knowledge so that the podcaster that you’re hearing like this, and the mentors that you are out there finding will be giving you information that makes more sense. I’ve written some books that you should check out, reading The BRRRR book would probably be one of the better ones because it’s like flipping, but instead of selling the house at the end, you keep it, put renters in it, and let it build equity for you over time.
So that book is called Buy, Rehab, Rent, Refinance, Repeat. If you just search BRRRR David Greene, you can find that one. Also, BP has some really cool personalities that do this for a living that you can learn from, two of the greats are James Dainard and Terrell Yaba. Both of them are in the Seattle area where there are high price points, and they can make a great profit flipping. And there’s also many others on the BiggerPockets forums where you can go and find local Chicago meetups or meet other local Chicago flippers and learn from them. I appreciate you saying that you’re open to other tips as you are a new home investor, I would highly recommend learning about house hacking. I wrote a couple of articles for Forbes talking about it. If you just type in house hacking into the BiggerPockets forums, there is a ton of information.
I tell people all the time, you’ve got to be doing this. I wrote a book called Long-Distance Real Estate Investing about buying properties in other states. I wrote a book called The BRRRR Strategy which is about buying properties, fixing them up and getting your money back out. Even though I’m a huge proponent for both of those, I’m an even bigger proponent for house hacking. Every single person should be buying one house a year for themselves as a primary residence as a house hack, and then anything else you do like long-distance investing or the BRRRR strategy should be in addition to house hacking in the best location you can possibly get in. Last piece of advice, if you really want to flip, here’s a great way you can get into it with training wheels. Find a fixer upper property that’s really ugly and been sitting on the market a long time.
Buy it as a primary residence with a low down payment, move into it and house hack it. Either fix it up yourself or pay a contractor to come fix the house up while you live there. You get all the benefits of a flip, we call this a live and flip, without the risk of trying to get it done while you’re holding costs are super high. Sell that house or rent it out, repeat. The next thing next year you can go a little bit bigger and a little bit better, and grow your wealth safely, slowly, but in a fun way that’s sure to be rewarding for you over the long-term.

Matthew:
David, you have more analogies than Jim Carey has faces Green. Thank you so much for taking my question. David, it’s a simple question which is, I’m trying to set a 10 vision for my real estate portfolio, and to a degree, even just a 10 year vision for my life. But how do I make sure that I’m setting goals that are large enough? I’m afraid that because I’m shortsighted and can’t see 10 years into the future that I might be setting goals that are too small, and thus I might be chasing the wrong goals. Can you help me have better goals? I appreciate you, David.

David:
All right, Matthew Vanhorn. You know we have a Dave Vanhorn in the BiggerPockets community. He’s an awesome guy. I love talking to Dave Every chance I get. Super smart, very humble, and always giving back. So guys, go check out Dave Vanhorn, and send him a message saying that David Greene says he’s awesome. I’m sure he’d appreciate it. He is the note expert in this space. I’m wondering if you might be related to him and don’t know him, Matthew. All right, the question of, am I setting too big or too small of a goal? I like it. You’re asking a good question. Here’s the problem with the question, you’ll probably never be able to answer it. A lot of people hear this, and they hear someone say, set bigger goals, and they make a vision board, and they put a jet on there, and they say, “I want to have a private jet.”
And then they get a bunch of sports cars and they say, “I don’t want one Ferrari, I want 10 Ferraris, one in every color.” And then they get the biggest house that they can possibly find, and they put on the vision board and they go, “You know what? I actually need two of those houses.” And it goes on and on like this where they just say, “If I set my goal big enough, it’s just going to happen,” and goals do not just happen. The universe does not just bring you things and hand them to you. What happens when you set a goal is, your subconscious hears you say it and goes, “Oh, that’s what Matthew wants. Let me figure out a way to make that happen.” Now, oftentimes the goals we’re setting in our subconscious are actually more negative and fear based. So the goal would be, “Don’t look dumb, don’t lose money, don’t do something that I’m uncomfortable with.”
And your subconscious here’s that and says, “Oh, you would be really uncomfortable going to that meetup and learning from that person. Let’s not go today. Let’s watch Dancing with the Stars instead. Oh, you could lose money on that deal that you’re thinking about right now. We don’t want to lose money. Let’s find a reason to look at that deal and say it doesn’t qualify,” and on and on. Your subconscious listens to what you’re telling it and then does its job of making that happen. If you’ve ever said, I want to go work out, but secretly what you were thinking is, “I don’t want to get hurt at the gym,” or, “I don’t want to go to the gym and look stupid.” Your subconscious heard that, and when it’s time to go to the gym it goes, “You know what? Why don’t you eat a bowl of ice cream instead, you’ll feel just as good.”
Creating goals like you’re talking about, is just a way for you to program your subconscious, and if you program it to go by yachts and sports cars and private jets and these big goals, they’re probably never going to happen because you don’t have the means to actually get there. So here’s what I’m getting at, set a goal for yourself that is reasonable, that you can attain, and get comfortable with the fact that goals will always change. Very few people know when they start the journey what they’re going to want in the end. You can have some of the wealthiest, most successful, amazing people that set huge goals and hit them, and then their goal changes. They go from, “I want to make a billion dollars, I want to give to charity and help the most people. I want to influence the most people.”
Tony Robbins has a big goal of wanting to feed, I don’t know what it is, just tons and tons of people for Thanksgiving. He didn’t have that goal, I don’t think when he first started. If he did, it wasn’t the focus of his business. He had to go make money and learn how to be good at what he did. So here’s a couple of goals I think you should set for yourself, pursue excellence. In fact, I’ve started saying pursue excellence, not cash flow because cash flow will be the result of excellent work. As a real estate investor, if you become excellent at anything you do, money is going to follow you, and here’s how I know this. Think about what you want when you go somewhere. There’s a difference in the experience if you go to Jack in the Box versus Chick-fil-A. Why is that? Well, Chick-fil-A set a culture of excellence that they want everyone to follow. They are constantly raising the bar and raising the standard of what they want from people, and we have a better experience when we go to a Chick-fil-A.
Imagine, you go talk to a CPA and you say, “Hey, give me some strategies to save money using real estate on my taxes,” and they haven’t set a standard of excellence for themselves. Well, they probably give you some run around or tell you why it won’t work or it can’t work, and then bill you for that conversation. And every one of us who’s sitting here knows exactly what those conversations are like. Don’t get mad at a CPA. Don’t get mad at that individual person. Don’t get mad at the tax code. Get mad at the concept of shirking excellence because what you really want is a CPA who is chasing excellence, and as a result of that can help you, as a result of helping you, you make more money, as a result of you making more money they get paid more, and everybody wins.
This is what excellence does, is it raises everyone’s standard of living up, and my opinion is there’s not enough people that are chasing excellence. So if you’d say to yourself, “Well, I want to buy one house a year. What if I’d set the goal to buy two, I could have bought more.” It just isn’t realistic because it doesn’t work out like that. Set yourself the goal of, I’m going to buy as many properties as I can do safely. That could be one that could be 10, you don’t know. It could start off as one, and you start going to meetups, and then you meet an agent, and then that agent has a good contractor, and then that contractor has a good lender. And the next thing you know, you’ve got an awesome Core 4, and you’re so good at doing what you’re doing that you go, “Holy cow, I could scale.”
And then you go to that same meetup and start raising money, and within two years you’re buying a ton of properties. There’s no way that you could have known that was going to happen when you set your goal. And another circumstance you might go to the same meetup and not meet anybody there, and have to go to a different one and a different one and a different one until finally you meet those people, and that can be two and a half years of time. If you’re chasing excellence, it doesn’t matter. So here’s my personal philosophy, and this is going to be in a book that I’m going to be writing for BiggerPockets if God willing, I’m able to get it written. There’s three things you focus on to building wealth, and therefore your goal should be centered around these three things. Number one, is saving money. You want to live frugally, you want to live responsibly.
You don’t want lifestyle creep to cut into your life. So if you start making money, now you start spending money, you make more money, you spend more money, you’re always doing better as far as what you’re making, but you never actually get ahead because getting ahead is a difference between what you made and what you spent. So you want to focus on defense first which involves self-discipline and delayed gratification. You’ve got to find different ways to be happy than just spending money to make yourself feel good. Gary Keller had a really good comment. He told his son, “Son, the experience at the beach is the same for a billionaire as it is for the person that’s broke.” There’s so many things in life we can do that are fun that don’t cost money, and we don’t have money just focused on those things. Going hiking, going trail running, going to the beach, having really good conversations with genuine people, serving others, helping people that in ways you never got help.
All of these things feel really good and they cost nothing. Next step, focus on making money. Not enough people think about this. They just have a job and they say, “That’s my job,” and they don’t think about it anymore. If you’re at a job that is not challenging you, you go out and you cut grass every day for a landscaper. Chase excellence, try to cut that grass as good as you possibly can. Learn how to do it in the most efficient way possible. Look at the difference between going around the perimeter of the lawn, and just going back and forth across the lawn and see which one’s faster, which one you can do quicker and which one’s easier on the lawn mower. Make it a game to see how fast you can mow a lawn. The point isn’t to get really good at mowing lawns. The point is to get really good at solving problems and finding patterns because when you get really good at mowing lawns, and you’re chasing excellence, you get bored, and when you get bored, you start looking for the next opportunity.
And then instead of mowing lawns, you’re going to start wanting to teach the new people at the landscaping company how they can do the same thing. And now you need new skills, now you have new goals. I’ve got to learn how to train, I’ve got to learn how to manage. I’ve got to learn how to teach, and I start creating systems and models and training opportunities, and I start learning how to connect with other people. That’s a pretty valuable skill. Now, you can go start your own landscaping company, and you can be hiring and training the employees instead of doing it for someone else. Once that happens, you learn how to market. You learn how to grow the number of customers that are coming in, how to market to hire more people. And the next thing you know, you went from, “I just cut grass,” to, “I am a business person that runs a big successful landscaping company,” and that will probably open doors into finding really good deals.
Your neighbors that you talk to, the clients that you talk to are going to have neighbors that are going to be selling their house. They may ask you to go cut the grass of a house that someone would’ve found when they were driving for dollars. You might be able to buy that investment property. The universe rewards when we chase excellence, so continue to look for different ways that you can make more money by bringing more value. And then the third way that we build wealth is by investing the difference between what we made and what we kept. It’s really that simple. You don’t need to pay a hundred thousand dollars to take a course. You don’t need to look at 500 properties every single day hoping that the magical one will fall out of the sky.
If you are well capitalized and you are well educated, you will find the best assets, and then they tend to snowball and steamroll. You buy some really good properties this year, four years later they’ve grown a lot. You paid the loan down, they’ve gone up in value. You’ve got equity, you cash out or refi, that buys your next three. Five years later, those three, you’re ready to do the same thing, and you start to see exponential increases over time. But Matthew, you will rarely ever succeed past the level of success that you’re comfortable with. There’s no way you’re going to get to 30 or 40 properties if you’re still mentally at the point of, “I just cut grass.” You wouldn’t even be able to manage those 40 properties that you want to have. I guess, what I’m talking about is a shift in mindset from, “Real estate will help me escape the life that I don’t like,” to, “Real estate is a great way to build wealth, but it will challenge me, and I always have to be growing and trying to hit my potential.”
So rather than waiting to get a bunch of properties and then stepping it up, ask yourself, in what ways can you step up now? That is a goal that will never let you down. Every single day, you can get out of bed and the world is going to throw challenges at you, and you can ask yourself, “What can I do to be the best servant, the smartest person, the wisest person, the hardest worker, all of these virtues that will lead to success.” You don’t know the way that the universe is going to reward you for what you do, but you do know that you need to be become the quality of person to be able to handle the reward that comes. So my advice when people ask about goal setting is, don’t say I’m going to buy a 500 unit apartment complex. If you were given one of those right now, you would just run it in the ground and lose it.
Set the goal of I need to become the kind of person that can handle the wealth that I want, and I feel like the advice that I gave you will help you on that path. And then don’t leave anything on the table at the end of the day, work as hard as you can. Give everything that you can, learn as much as you can. Try to be perfect, chase excellence as much as possible, and you will find that these opportunities will find you. All right, and that is our show for today. I hope you all don’t mind me giving advice that’s not always directly tactically related to real estate investing, but does involve the character traits and the qualities that you will need to be a real estate investor. In today’s show, we got into how you can buy a house with somebody else using primary residence loans.
We had a great conversation there with Matthew about what you can do to set goals that require you to become excellent. Somebody made a very funny analogy saying that I have more analogies than Jim Carey has faces, which was pretty funny because in The Mask, Jim Carey’s face was green and that’s my last name and more. Look, to everyone listening, I really want you to be aware. We don’t know what’s going to happen in the market, but this is one of the best times to buy houses I have seen in a long time. As long as you are making more money, pushing yourself individually to hit your own potential, get out of your comfort zone in as many ways as possible. Avoid feeding your vices and the worst parts of yourself that will take all the money away from you that you have, continue to grow more wealth, make more money, save more of that money, and then invest it wisely.
You don’t have to worry about what the market does, and I’m such a fan of this because you can’t control the market, you can only control you. Last piece of advice I want to give everybody here, go to BiggerPockets.com/store and check out The Richest Man in Babylon. I wrote the Forward for the book that BiggerPockets has republished, but the book is incredible. It changed my life when I read it. Josh Docan loves it as well. It’s one of the first things that we bonded over. You can get a lot of value out of that book, especially if you’re a younger person like Christian here who wants to be a house flipper. Learn the fundamentals in that book, and then if you should buy something or if you shouldn’t, the decisions you’ve got to make become much more clear when you’ve embraced those principles. Thank you very much for being here with me today.
Thank you for letting me challenge you. Thank you for letting me push you out of your comfort zone a little bit as you heard this today, as I’m sure many of you were listening to these answers, and thought, “Ooh, I could probably do better in that area of my life too.” Get excited about that because that’s what’s going to lead you to more success. Thank you for your attention and taking this journey with me, and letting me be the person that helps grow your real estate investing knowledge. I’d love it if you leave me a comment, like this, share this and subscribe to the BiggerPockets YouTube channel. You can find me online everywhere @davidgreene24, Instagram, Twitter, LinkedIn, Facebook, all those places, and then on YouTube @davidgreenerealestate. I will see you on the next show.