October 2022

Don Peebles, founder, chairman and CEO of the Peebles Corporation, joins ‘The Exchange’ to discuss how real rates for mortgages are slowing new home purchases, how changes in housing trends impacting the rental market and considerations for property developers amid the current rate environment.

Ashley:
This is Real Estate Rookie.

Dave:
More good deals will come on the market over the next couple of years, but you do have to contend with some risks of declining value and high interest rates. I think that’s just because over the last couple of years there’s been super high competition and that makes it really hard for investors to land under market deals. Now the markets are shifting a little bit away from probably one of, if not the strongest sellers market in history, to one that is a little bit more balanced. And so that could create some more opportunity for people.

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

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information, and motivation you need to kickstart your investing journey. We often like to start these episodes by shouting out on some folks who have lend us some reviews. This week’s review comes from the Skids85. The skid says, “This podcast has great tidbits for rookie investors. Anyone looking to start in real estate investing will find nuggets of valuable information throughout the podcast. And if you couple this podcast with the original BiggerPockets Real Estate Podcast and all of the BP books, it’ll give you the courage to dive into investing, which is what it did for me after five short months. The rookie replies are shorter, but I love them because that’s what all the good information is.”
The skids, we appreciate you, brother. And if you haven’t yet, please you’ll leave an honest rating and review for the podcast because it helps us reach more folks and that’s our goal here. So Ash, how about we skip the boring banter for today? I think the guests were bringing on… They’re too boring enough guys so we don’t need to add to that, huh?

Ashley:
You know what Tony? I was hoping that you would say that line because I was still debating in my head, “Was our producer joking when he said that we could say that?”

Tony:
No. Ashley and I are joking. We got two absolute studs on the podcast today and I think that’s why Ashley and I are excited to get into the content. We’ve got J. Scott and Dave Meyer. You guys probably know Dave from the recently released On The Market podcast. J, he ran the BiggerPockets Business podcast. He’s written four, now five books for BiggerPockets. These are literally two of the absolute smartest guys I’ve ever met when it comes to real estate investing. I’m so excited we got to share their knowledge with you guys in the podcast today.

Ashley:
And by boring, we mean there’s no stories of bears coming on to your Airbnb or exciting things like that, the click bait things in. This is basically what you need to know. As a real estate investor, they wrote this book about running the numbers and how to analyze a deal efficiently and effectively, everything that you need to know. I think the book is like 450 pages long with all this data. It took them several years to write it because they really got down into the nitty gritty of it. It’s not only you have the BiggerPockets calculator reports, which are great, but it’s more than just plugging in the numbers. It’s understanding why you’re plugging in that number and what that number means and what outcome you want from that. So they break it down into four different ways that you can generate money off of your investment. We’re not going to tell yo. You have to listen and listen to all four.

Tony:
Yeah. I asked them two questions that I think most new investors are probably thinking as well, the first one is, is now still a good time to invest if you’re a new investor. And you get to hear both of their explanations or answers to that question. The second question I asked them is like, “Okay, what is a good cash-on-cash return or investment metric I should be using?” So these are two questions that Ashley and I get all the time. Both the answers that Dave and J. gave, I think, were phenomenal and you guys are going to get a lot of value from hearing it.

Ashley:
Make sure you check out J. and Dave’s new book Real Estate by the Numbers, available at the BiggerPockets bookstore. They’ll tell you guys about all the benefits you get if you purchase it directly from the bookstore, maybe even a call with them. So listen for that. And then at the end of the episode, they give you a discount code. We are super excited to see who you guys like better because there might be a little competition at the end of this.

Tony:
Guys, I am so, so, so excited for today’s episode. You two are literally probably two of the smartest people that I know when it comes to real estate investing in the economy and just all the data points that folks should be looking at when they’re thinking about investing in real estate. This is honestly probably the episode I’m most excited for. So Dave, we’ll start with you. Can you just give a quick background on who you are and kind of what we’re talking about here today?

Dave:
Sure. So I work at BiggerPockets full time. I’m the vice president of data and analytics where I handle a lot of our internal data analysis and business intelligence, but also get to spend time studying the housing market and trying to understand what’s going on in different markets and different opportunities that exist for the BiggerPockets audience. And in that effort, I am also the host of BiggerPockets newest podcast, which is called On The Market and is focused on just that, examining trends, data, news that impact the lives of real estate investors.

Tony:
Dave, we also had you on the Rookie podcast. I can’t quite recall which episode it was, but folks can go back and listen to that episode because I think it was one of our top performing episodes because people love when we talk about the economy and it just shows the kind of wealth of knowledge that you are, man. So excited to be chatting with you.
Our next guest, we’ve got two guests for you guys today, I just want to give a brief introduction because this man’s resume is quite impressive. But he’s written two books I think already for BiggerPockets, a book on flipping houses. Four books. So I’ve read two of them. You can tell us what the other ones are. He was on number 10 on the Real Estate podcast. He was on episode number 10. He’s been on multiple podcast episodes since then. A successful house flipper, now a successful real estate syndicator, apartment syndicator. I’m just super, super, I think, humbled and happy to have this guy on the podcast. So J, tell the folks, I guess, what I might have missed.

J:
No, it’s okay. So I found BiggerPockets back in 2008 when I started flipping houses. I was flipping my first house and doing an internet search for how to learn how to do it and found BiggerPockets and started becoming involved in BiggerPockets. And so a lot of people think I work for BiggerPockets, I don’t, but I’ve been so intimately involved with BiggerPockets over the last 15 years sometimes it feels like I do.
And so yeah, I’ve written four books. I think The Book on Flipping Houses, Estimating Rehab Costs, also The Book on Negotiating Real Estate that I wrote with Mark Ferguson and my wife Carol Scott, two amazing investors. And then my most recent book up until now called Real Estate… Wow, I don’t even remember the name. It’s called Recession-Proof Real Estate Investing, which is a book all about economic cycles and how they impact real estate investors. I was also the host of the BiggerPockets Business podcast for a couple years where my wife and I talked with literally over a hundred different entrepreneurs and business owners about all things business. And that’s still out there for anybody that’s interested in that topic and want to learn more about business and entrepreneurship. Check out the BiggerPockets Business podcast.

Ashley:
Well, J. and Dave, we have you guys on here for a reason because you have written another book. It is Real Estate by the Number. So do one of you want to give us a brief description of what this book is about?

J:
Sure. So Dave and I have been working on this book for a really long time. The goal of the book, and I think I’m proud to say I think we’ve accomplished the goal, but the goal of the book was very much to dive into and delve into all aspects of the math and the concepts and the strategic thought that goes into real estate investing. In fact, I think if we were to rename the book today, we’d probably call it Think Like An Investor, because that’s really what the book’s all about, how to change your mindset and really learn how successful investors think, again, from a concept standpoint, from a strategy standpoint and also from a math standpoint. And so it’s a long book, it’s over 400 pages. I think it’s the longest book BiggerPockets has published. We’ve been working on it for many years. But it’s something I think Dave and I are very proud of.

Ashley:
I can’t wait to read it because I think too, for rookies and even experience investors, it’s like going back to the basics of is it a good deal, is it a bad deal, should I do this deal. Well, run the numbers. That’s very, very common where I think people are looking for somebody to give them the answer if they’re making a good investment where if you run the numbers and you know how to properly do that, then you’ll be able to figure that out on yourself.

Dave:
Yeah, I just want to add to that this book I do think does make sense for rookies, even if you’re thinking math is not your thing or that this sounds complicated. J. and I, it took us so many years because we’ve gone through painstaking efforts to make sure that this is applicable to anyone. Whether you haven’t bought your first property yet or you’re an experienced syndicator at this point, we want to make sure that everyone, whether you’re a rookie or experienced, can analyze deals like professional. And as J. said, I think we’ve accomplished that.

Ashley:
One thing too, I’ve noticed if you go out and buy calculator reports or the BiggerPockets’ reports that they do to analyze deals, all of them will vary. They’ll have different formulas or ratios that they calculate for you or different inputs for them. So instead of going out and buying all these calculator reports, I would think it would make sense to buy your guys’ book and kind of develop your own from it. Can you go through that as to once you have this book, how do you put it to use?

J:
Yeah, well I mean I would start with, again, for anybody that might be a little bit math phobic, I’m an engineer by education, so I like the math, and I know Dave is a numbers guy. But here’s the cool thing. If you take this book and you literally cut out all the math, you cut out all the formulas, you cut out anything math related from the book, you’re still left with… What do you think, Dave? 250 pages of concepts and stories and narratives and examples of just deals that Dave and I have done throughout our careers. Then you add in the other 150, 200 pages and then that’s all the math behind it and you get everything. But even if you don’t care about the math and you don’t want the math stuff, I think anybody, now I’m not even going to say including, but especially new investors, if you want to know how successful and experienced investors think, this book is going to really going to help you achieve that.

Dave:
Ashley, I think one of the things that is tempting because the BiggerPockets’ calculators are extremely useful and helpful to people, especially rookies, is that you have to understand the concepts and what the numbers deeply mean. Of course you know that a 7% cash-on-cash return is not as good as a 9% cash-on-cash return. But when you actually go through the process of learning how to calculate these things, it adds new meaning and I think it allows you to make more confident decisions.

J:
Here’s the other thing. We often talk about getting the right answers and figuring out if something’s a good deal. And so we start with this assumption that we know what questions we’re supposed to be asking so that when we get the answer we know that that answer is meaningful to us. Dave and I actually approached this book from the other side. We approached this book not from the perspective of you asked the question, we’re going to give you the answer. We approached this book from the perspective of, let us help you ask better questions.
And in fact, I don’t remember, there’s like 40 chapters in the book. Each chapter starts with, “Here’s a list of questions that this chapter is going to be answering so you know the right questions to be asking.” And because I find a lot of new investors, they happen upon a deal and they get into a situation and they think, “Okay, I need to know if this deal makes sense, did the numbers make sense?” but they don’t know how to formulate the right questions to be asking to look at the deal.
So for example, a seller finance deal. You’re not going to evaluate a seller finance deal the same way you’re going to evaluate just a regular purchase or a note or a commercial property or a deal where… I give an example in the book of a deal I did where I’m going to sell a house and I list the house and I get two offers. This was a true story. I got two offers. One was a full price offer, basically quick close from a cash buyer. The other one was another investor who had a deal that was closing seven months later and basically said to me, “I really want your house but I can’t afford it for seven months because I have another deal closing. I’ll get a bunch of cash in seven months. So I’m happy to close on the deal now, but I kind of don’t want to pay you for seven months.”
I own the house for cash so I could afford to basically just not take the money for seven months. But then I had to ask myself the question, “How much more should I be selling it for if I’m not going to be selling this house for another seven months where it still makes sense? How much more would I have to ask him to pay where his offer is now as good or better than the guy that was willing to pay me in two weeks full price cash?” The nice thing is when you know how to ask the right questions, when you know how to ask the question, “How much is this house going to be worth if sold in seven months compared to if it’s sold in two weeks?”, when you know to ask the question the right way, then you can start evaluating the answer in the right way. And so I think a lot of new investors, they’re not always sure what the right questions are. And so we start with the questions and then we jump to the answers. And so it kind of hits both sides of the equation.

Ashley:
J, in that scenario, would you go and would you look at, “Okay, what would my money look like in a year?” So if you got the money in the two weeks and you went and invested it into something else, what would your return be in a year from that pile of money? Or if you waited in seven months and gotten it, what would you actually do when you’re asking that question as how would you run the numbers on that exact situation?

J:
Yeah. I don’t want to go into any of the math because a lot of us don’t care about the math right now, but the concept behind it like you just said is immensely important in real estate. It’s called the time value of money. It’s basically this concept that a dollar that I get today is worth more than a dollar I get a year from now or seven months from now. Because if I get it today, what am I going to do with it? I’m going to invest it. And in seven or eight or nine or 12 months, it’s going to be worth more than a dollar. And so I need to figure out that dollar that I’m not getting today, how much more would it have been worth in seven months if I had gotten it? And that’s the amount more that I’m going to need to get for that property to make it worth it to wait seven months to get the money.

Tony:
We’re like five, I don’t know, 10 minutes into this episode already and you guys have dropped an immense amount of knowledge, which is why I was so excited to chat with you guys. But I want to ask one question that I’m sure a lot of rookies are asking and then we can get into the meat of the episode. But there’s a lot of information floating around that I think has some new investors afraid to get started. There’s the two quarters of the GDP getting smaller, which some people makes us feel that we’re in a recession. There’s the climbing interest rates, which we all have reason to believe might continue to climb. So I guess my question to you guys, and Dave we’ll start with you, if I’m a new investor, an aspiring investor, I have no deals, is now still a good time to get started?

Dave:
Oh, you’re hitting on our most beloved topic that everyone loves talking about right now. I think it’s hard to say categorically whether it’s a good time or not. I think it comes down to individual investors and goals. And J. actually and I, talk a lot about this in the book, is a big part of being a successful investor is identifying what types of deals are good for you personally. So there might be times… Like say for example you’re a house hacker. I think in almost any market conditions, house hacking is usually a pretty good idea because if you’re comparing that to paying rent and rent is super expensive right now, it’s really great. I don’t flip houses, but I’ll just say I’m not going to start flipping houses right now. I think that there are different strategies that people should be taking depending on their personalized situation.
I know that’s sort of punting on the answer, but I’ll just say that my guess is that more good deals will come on the market over the next couple of years, but you do have to contend with some risks of declining value and high interest rates. I think that’s just because over the last couple of years there’s been super high competition and that makes it really hard for investors to land under market deals. Now the markets are shifting a little bit away from probably one of, if not the strongest seller’s market in history, to one that is a little bit more balanced. And so that could create some more opportunity for people.

Tony:
And J, what are your thoughts?

J:
Yeah, I 100% agree with Dave. There are lots of factors at play. Keep in mind that when we say real estate investing, if I say that to a hundred people, I’m going to get a hundred different thoughts of what that means. If you’re flipping houses, that’s a very different strategy than if you’re buying notes, which is a very different strategy than if you’re buying RV parks, which is a very different strategy than if you’re house hacking. And so there’re literally dozens, dozens of strategies out there and not all of them are going to work as well at different points in the market cycle. Some are going to work better during a recession or equally well during a recession. Some are going to work really poorly during a recession. Likewise, different strategies are going to work differently in different areas.
So what we’ve seen over the last couple years, not only is the market changing, but also the demographics and populations have changed in the US. People are moving from certain areas to other areas because we have a lot more remote work and people have the opportunity to go where they want. And so we’re seeing certain areas that are still seeing huge population growth. We’re seeing other areas that are seeing population decline. And during even the best market in history, I don’t want to flip houses in a place where we’re seeing population decline.
So even going back to 2015 when it was a great time to flip houses, it wasn’t a great time to flip houses someplace where people were moving out of. And so you can’t just look at the economy, you can’t just look at any one or two factors. You have to look at all of these factors. You have to look at the economy and you have to look at population growth and you have to look at employment trends and you have to look at the specific strategy that you’re looking to employ. And then you kind of put all of this stuff together and you ask the right questions about specific deals and then you determine does this deal make sense. And so again, like David said, I’m not looking to punt on the answer, but it really is, it depends. It depends on what you’re trying to do, where, when and how.

Ashley:
Okay, so even if you’re… Whatever strategy you’re doing, running the numbers, the reason you’re doing that is because you want to generate revenue, you want to make a profit or you want to have a good investment for down the road. What are some of the ways that you talk about in your book that you can generate money from making this investment into real estate and how does that kind of factor in when analyzing the deal?

J:
Yeah. So first let me step back and just say this one other thing. For anybody that’s out there that’s listening, this is the Rookie Show. So a lot of people that are listening are probably either just getting started or getting ready to get started in real estate. Something to keep in mind when we talk about the economy is that things move in cycles. And so, well, we may be headed into a recession, some people would say we’re in a recession. Historically, recessions last 12 to 18 months. So even if now isn’t the best time for you to be doing whatever strategy it is you want to do in whatever location you happen to be in, there’s a good chance that in 12 months or 18 months or 24 months, it could be a really good time. So it’s always a good time to be learning.
So even if now isn’t the right time to be flipping houses in New York City or whatever it is, now is a great time to learn about how to flip houses in New York City because in a year it may be a great time to be doing it again. So let me start with that.
But going back to your question of how do you make money in real estate, this is actually a really interesting question that we don’t talk about enough. A lot of us, especially when we’re new investors, we tend to look at real estate returns one dimensionally. If we’re somebody who is working a 9:00 to 5:00 job and looking to escape that 9:00 to 5:00 job, it may be that all we care about is cash flow. We want to make as much money every month as possible so that we can quit our job as quickly as possible and we can replace our income with our cash flow from our real estate. Other people aren’t in that situation. Other people might be thinking, “I love my 9:00 to 5:00 job. I’m going to be working for another 30 years. All I care about is that I build up enough net worth enough equity over the next 20 or 30 years so that when I retire, when I’m 50 or 60, I have plenty of cash that I can invest and get cash flow then.”
Other people are thinking they don’t care about either of those things. They care about the fact that they have a high paying W2 job right now, or they’re making a lot of money from some investments right now and they want tax benefits. Real estate’s a great way to get tax benefits. So there are all different reasons why we may be want wanting to invest in real estate, and the reason you invest may not be the reason I invest.
And so when we look at how real estate actually generates money for us, generally it falls into four categories. So number one is cash flow, and that’s exactly what we’re saying. That’s the monthly income or the quarterly income or the annual income that your cash flow is going to pay you when you invest in it. Number two is this thing called appreciation. And I know we think about appreciation as like if we invest today, the market’s going to go up 10% tomorrow and we’re going to have a whole bunch more money. There’s actually a couple different ways that we see appreciation in real estate. It’s not just waiting for the market to go up and we can talk about that. But number two is appreciation.
Number three is this thing, the fancy word is amortization. The layman’s term is principal paydown. If I get a loan on a property, I’m paying that loan every month. I’m paying my bank every month on that loan. Part of the money that I’m paying is interest. And so interest kind of goes away, it’s an expense. But part of the money I pay on my loan every month is actually paying down the balance of the loan. And so on day zero, I might take out $150,000 loan. In 30 years after I’ve made my final payment, that loan is now zero. I’ve made $150,000 by paying off that loan. It didn’t really make 150,000 and I still paid it, but presumably my tenants paid it. And so over time I’m paying down the loan and I’m accruing equity. I’m building up equity in the property. So this principal paydown or amortization is the third way that we typically see real estate make money.
And then the fourth way I mentioned it is tax benefits. So real estate provides tax benefits that you really can’t get from any other investment on the planet. Some amazing tax benefits. And when you know how to think about taxes and you know how to think about the benefits of real estate investing, you can find ways of basically offsetting income that you’re making today through those tax benefits, which is really as good as it’s cash in your pocket today. So cash flow, appreciation, principal paydown, and tax benefits. Those are the four ways that real estate makes money for us. And anything else, I mean there are lots of other things people can suggest, but that’s really going to probably fit into one of those four categories.

Tony:
J, what an amazing breakdown. I’m so glad that we kind of covered those four different categories because I think a lot of folks, especially those that are getting started, like you said, they just kind of look at real estate investing as this one dimensional kind of return that they should be looking at. But you really gave all these different categories that they can look at. So if we can, I want to just dive into each one of these in a bit more detail. So you had cash flow, appreciation, principal paydown, and then tax benefits. So Dave, I guess I’ll start with you first and we can go to you afterwards J, but let’s talk about flow. What exactly do we mean when we say cash flow? What kind of metrics should I be looking at when it comes to cash flow? And in your mind maybe who is it, what kind of investors should maybe value cash flow over some of the other types of investments?

Dave:
Yeah. Cash flow is a great place to start because I think most real estate investors get into real estate investing because they want to generate cash flow. I don’t know about you, Tony and Ashley, but that’s certainly where I was coming from when I first got started. Basically I was just hoping I produced more cash than I spent each month. And that was sort of the extent of my knowledge of these four different things. Like I knew of the other ones, but that’s really what I was hoping for when I got started. But cash flow is wonderful because it basically can end supplement or eventually replace your W2 income and it provides something that you can live on. If you’re investing in the right way, then it is a very reliable source of income and it could be used for whatever you want, either reinvesting or for covering your regular expenses.
Cash flow is relatively simple to calculate. We give some ways to do that in the book. But basically you add up all of your income, you subtract all of your expenses and after that you have your cash flow. You can also calculate easily. Once you have that, once you know that and how much you’ve invested into the deal, you can calculate what’s probably, I don’t know, I’m just assuming this is the most popular metric in real estate investing, which is cash-on-cash return. And that basically is a great measurement for how efficiently your investment is producing cash flow for you, because it’s great. I hear a lot of investors say like, “I did this deal. It’s producing $300 a month of cash flow. Is that a good deal?” Well yeah, if you invested 10 grand, it’s a great deal. If you invested 300 grand, not such a good deal. So you have to be able to calculate both the absolute number of cash that you’re getting in your bank account every month and be able to calculate how efficiently your investments are generating cash flow for you.

Ashley:
Before you go on there, can you just tell us, define cash-on-cash return is, so what the formula is, how somebody can figure that out.

Dave:
Sure. Yeah. So you just basically take your annual cash flow and you divide it by the amount you invested into that property. And so for each person, that’s going to be a little bit different. For most people getting started, it’s going to be your down payment, maybe some closing costs. And if there’s any maintenance that you did right at the beginning, that came out of your pocket, not like your mortgage, basically the cash that you took put into the property. So you take the annual cash flow, divide it by all of your expenses, that’s going to get you your cash-on-cash return. In the book we also talk about how you can advance your thinking about cash-on-cash return over the course of your investment using a metric called return on equity. But we won’t get into that nerdy here.

Tony:
One follow up question. J, I’ll point this to you first, and Dave we can go back to you. What is a good cash-on-cash return? In today’s market, say I’m buying maybe like a long term single family house, what’s a good cash-on-cash return?

J:
It’s a great question. It’s a question we get all the time. Let me step back before I answer that question. But as Dave said, it’s really important when we think about cash-on-cash return, it’s an indication of how efficient our investment is generating cash. So if I invest a hundred dollars in a deal, and obviously not real estate because it’s only a hundred dollars, but let’s say I invest a hundred dollars in something and I get back $10 at the end of the year, I then invest a hundred dollars in something else and I get $11 back at the end of the year. The second thing that I invested in is doing a better job of it’s more efficiently returning me cash on the money I invested. 10%, 11%, it’s just numbers. But the important thing is, the more money I’m getting back means that the money I invested is working harder for me. Obviously, we always want our money to work harder for us, we want it to be more efficient.
But here’s the other nuance that we really need to keep in mind, and too many newer investors don’t think about this. Returns are correlated with risk. And if I told you I could give you an investment that generates 50% returns or an investment that generates 20% returns, which one’s better? Well, you may want to just jump to, “Of course 50% is better.” But in the real world, returns are correlated to risk. A deal that returns 50% or projected to return 50% is typically going to have a lot more risk associated with it than a deal that’s projected to return 20%. So that 50% return deal, you might have a much higher risk of losing all your money or you might have a much higher risk of making zero return or losing a little bit or making a little bit. Your chances of actually making 50% return is going to be lower than your chances of actually making a 20% return with the deal that projects to return 20%.
So anytime you see returns, always think about it from the lens of how much risk is involved and what is the specific risk, what kind of risk is it. Is it a binary risk? So if I told you that we have a deal where there’s a 50% return projection and another deal where there’s a 50% return projection, even though the risk might be the same, it may not be the same type of risk. For one, the risk could be, yeah, there’s a good chance you’re going to lose all of your money, but there’s also a good chance that you’re going to make a hundred times your money, or a small chance you’re going to make a hundred times your money.

Ashley:
Well, J, I have a question too. Do you think, is time put into the deal kind of considered into that too as to like, okay, you can look at the cash-on-cash return, you only put 10 grand into the deal, you’re getting a 20% cash-on-cash return, but you also didn’t hire anyone to do the labor for the rehab. So is that another thing besides just risk, is taking into consideration the time that you’re putting into the deal too?

J:
Yeah, absolutely. This is where this idea of hourly return comes in. And so yes, one deal might generate 10% cash-on-cash return, another deal might generate 8% cash-on-cash return. Is the 10% better? Well, no. If I spent 10 times as many hours doing that deal and generating that return, that 10% might be a whole lot worse than the 8% return if that 8% return is completely passive.
And so, certainly in addition to risk, we need to be looking at things like what is the amount of time we spent and what is our hourly return. And this is why it gets back to the fact that there’s not just any single metric that we want to look at. Certainly there are some metrics that are more important than others, especially depending on our goals. But we need to be able to think about things multidimensionally from different aspects. And you have to be able to put all these things together so at the end of the day you can say, “Okay, I have two investments. Which one is better?” And generally the answer is we don’t know until we answer a whole lot of other questions about what our goals are, what we’re trying to achieve and what the risks are.

Tony:
J, I think so often, new investors, they just want the answer given to them around these different decisions that they need to make in their businesses, which I get it, right? Because it’s scary, you’re investing maybe your life savings, you’re buying this several hundred thousand dollars investment, it’s your first time doing this, you want some reassurances that you’re doing the right thing. But like you said, it’s hard for Tony or for Ashley or for J, or for Dave to know all the intricate details of that person’s life, their goals, their personalities, their skills, their abilities to be able to tell them, “Yes, this is the right deal for you.”
I’m glad we’re talking about these four different categories because like you said, if someone’s focus is appreciation, maybe them buying a deal that only cash flows 6% makes sense for them because they know 10 years from now that building will doubled in value. But for the person that’s focused on cash flow, maybe they want a 15% cash-on-cash return and they don’t care about appreciation. So everyone’s personality, situations, et cetera will dictate something different. So Dave, I just want to kick it back to you. Any other comments on that on the cash-on-cash return piece?

Dave:
Well, hopefully you’re picking up on the trend. If you try and pin J. and I down to answer any question directly, we’re going to say it depends. But it really does. It really is. You said it really well, Tony, that we all wish someone could just tell us what to do, but ultimately financial decisions are deeply personal. And they should be. You should have your own set of goals and ideas about what you want.
I’ll give you a quick example. In March or April, I sold a rental property and I wanted to do a 1031 exchange and I had an intention to buy a small multifamily. I just couldn’t find a deal that penciled. As you guys might know, I live in Europe, so it was really hard for me to go look for deals. And so I was looking at syndications, but I couldn’t find one in a market I understood. And so I didn’t have time to understand a new market. I wound up doing a deal that took about 5% cash-on-cash return, which is lower than a lot of people would accept and it’s lower than other syndications that I was looking at. But it was in a market I really understood, I felt like there was very little risk. My primary objective with the 1031 exchange was to preserve my capital and to defer my taxes.
And so I was able to accomplish all those things. Did I take a less cash-on-cash return? Yeah, but as J. said, I think I took a lot less risk too. And with this set of money that I had, my goal was long term preservation of capital. And so I think I made a good decision there, where someone have made a totally different decision. Someone might have taken that money and rolled the dice and been willing to take on more risk than I was because they wanted a 12% cash-on-cash return. So I think you guys said it really well, but I just wanted to hammer home the idea that you have to really factor in everything and personalize these decisions to your specific circumstance.

J:
Yeah. And keep in mind, I mean, going back to this whole risk profile thing, there are investments out there that have zero risk. If you want to invest in treasury bonds, like government bonds, you can do that. You can make 2 or 3% per year on your money. Now, a lot of us would sit here and say, “We’re real estate investors. I’m not willing to make an investment that only generates 2 or 3% per year, even if there’s zero risk.” But there are trillions of dollars worth of investors out there who are very happy to invest for 2 or 3% at zero risk. Their goals are very different than ours or yours. The fact that maybe they’re retired and they have enough money that 2 or 3% is great, but they want zero chance of losing that money.
So again, every everybody’s goals are going to be different. Everybody’s risk tolerance is going to be different. If you want super low risk deals, then you’re going to have to accept super low returns. If you want super high risk, if you want the potential to make tremendous amounts of money, you’re going to have to accept super high risk deals. And then there’s everything in between. So you really need to figure out where you are on that risk/reward spectrum to determine the types of deals that you should be doing.

Ashley:
And J, for our next one, appreciation. Can you go through and define appreciation and then what metrics are tied to appreciation that you talk about in the book? Then also, who’s the ideal rookie listener that actually should value appreciation maybe even compared to cash flow?

J:
Yeah. Again, cash flow is the money that our deals are giving us every month for investing in them. We’re basically getting/spending money or investing money every month or every quarter, every year after we invest. Appreciation is kind of just the opposite of that. That’s the money that builds up in the investment that we’re not actually getting back. So for example, just the simplest example, if I buy a house for a hundred thousand dollars today and in 10 years I sell that house and it’s worth $200,000, that’s appreciation. The value of that property went up a hundred thousand dollars over 10 years. There are two types of appreciation that we typically talk about.
The first is this thing called natural appreciation. This is the idea that just holding real estate over time, it’s going to go up in value. Why? Because it always has. Realistically speaking, real estate tends to go up in value over time. We’ve seen it for 150 years, it’ll likely continue. That said, a lot of people, they don’t have a true understanding of how much real estate tends to go up over time, especially for younger investors. If you started investing in 2008 or ’09 or ’10 and you’ve only seen what’s happened with real estate over the last 10 years, or worse yet, if you started investing two or three years ago and you’ve seen what happened with real estate values over the past two years, you probably think real estate tends to go up 5% a year or 10% a year or even 20% a year.
But the reality is, over the past hundred or so years, on average in most places in the US, real estate has tracked inflation. So if inflation has been somewhere between 2 and 3%, real estate values have tended to go up 2 or 3% per year. Not bad, but it’s not something that’s going to make you rich. Basically, your real estate is going to keep you from losing money to inflation. So that’s the first aspect of appreciation. Just overtime the market is going to tend to go up in value. Our houses are going to tend to go up in value and you’re going to make money typically at least enough to cover inflation, hopefully a little bit more.
But the real value of appreciation in real estate is what we call forced appreciation. And this is the idea that as real estate investors, a lot of us have the ability to buy real estate that’s undervalued and we have the ability to increase the value through the work that we do. And so when we talk about that work, it’s really in two areas. Number one, we can do physical renovations on the property, we can improve the property. So when we think about flipping a house, we buy a house for a hundred thousand dollars. By the time we sell it, it’s worth $250,000 let’s say. That’s appreciation. We’ve added value through renovations that we can then capture when we sell the house.
The other way we can capture appreciation is through management improvements. So number one is you make a whole lot of money by improving the physical aspect of the house. Number two is you actually lower the cost of holding that house. So if you’re a landlord and you can buy a property and you can make it a whole lot less expensive to hold, you can appeal your taxes or you can get your insurance costs down or you can get your other holding costs down, you’ve now increased the value of that property. So as good real estate investors, yes, we love the natural appreciation, we love that 2 or 3% per year that we’re going to get that’s going to offset inflation, but we should also love the idea of we can increase the value of a property through renovations and management improvements. And then once we increased the value, we then have the ability to capture that increase in value either by selling the property for a profit or refinancing the property and pulling out some of that value that we’ve added.

Tony:
Dave, let me ask you a follow up question here and then we’ll go back to you, J. What kind of rookie investor is the focus on appreciation best for? What kind of questions should I be asking myself to determine if focusing on appreciation is the right kind of, I guess, wealth tool for me to focus on?

Dave:
Well, to echo what J. said, I think for rookies really the key is to focus on forced depreciation. And particularly in this type of market cycle that we’re in right now, I just think that’s even more important. For most rookies, I would recommend being very cognizant about the amount of work that goes into forcing appreciation and making sure that you take on an appropriate amount of effort, risk, and capital that needs to go into a renovation.
When I was getting started, I did a lot of what you call a cosmetic value add, where you’re painting, you’re updating the appliances, maybe you’re putting in some vinyl flooring to make it look better. That to me is a little bit more manageable especially if you’re handy yourself or a good trades person. I wouldn’t be looking for places with foundation issues or who need a new roof if this is your first time out there. If you’re a contractor, if you have experience in construction, maybe you could. But for me that’s just my personal advice. People can take that on as much as possible. But for your first deal, I think those types of cosmetic value ads really can be achievable and are relatively low risk.
Another thing that I’ve done pretty successfully a few times now is, repurposing space is a great way to force at least rent appreciation and some value appreciation. For example, if you take a place that has a lot of living space but only has two bedrooms, can you add a third bedroom? Can you add a fourth bedroom given the existing structure so that you’re not building new walls and taking on a lot of construction risk? You’re just sort of repurposing the space in a more manageable type of value add situation that can add value to the property and can increase your cash flow as well.

J:
I think Dave and I both ignored the question. Tony, you and Ashley both asked the same question, we both kind of ignored the answer. So let me try to cover the answer that we ignored. Who is the right person that should be thinking about appreciation? Generally, you’re going to think about appreciation when you have a longer term wealth horizon, when you’re thinking about building wealth over time. Somebody that wants cash flow is somebody that needs the income every month, maybe somebody who’s looking to quit their job and wants to replace their income. Somebody that’s looking for appreciation is looking for a bucket of cash at some point. That could be a bucket of cash in three months by flipping a property. It could be a bucket of cash in 30 years when you sell your rental property. But typically the person that’s looking for appreciation is the person that’s looking for that bucket of cash, which I talk about how real estate has tremendous tax benefits.
Sometimes it doesn’t when you’re getting buckets of cash. But in general, if you’re looking to increase your net worth over time, appreciation is one of the best ways to do that. Let me also answer a question that you sort of asked. I used to work for eBay. At the time the CEO, a woman named Meg Whitman, used to say to the company, she had a really popular quote that she would always say, which was “Embrace the end.” Too often we think about do we want A or do want B without thinking of “Is there a way for us to get A and B, or A and B, and C and D?”
And in this case, when I say cash flow is right for this type of investor and appreciation is right for this type of investor, what I would encourage every investor to do is think about what’s most right for you, but don’t exclude those other things. So maybe your primary goal is flow, but still think about how you can get appreciation at the same time. Because even though cash flow today is great, you’re going to want that bucket of cash when you sell the property in 20 years and you’re looking to retire. So embrace the end and don’t just think about these returns as which one is most important or what’s the only one I want. Think about maybe which one’s most important, but how do I get the others as well.

Tony:
J, I’m so glad you mentioned that and it reminds me of you and I were having lunch in Maui. And when I asked you about why you switched from flipping houses to apartment syndication, that was kind of what you mentioned to me, is that when you looked at flipping, it was these big chunks of cash but there wasn’t that consistent cash flow. There wasn’t the necessarily appreciation long term. But it’s like when you went to apartment syndication, you kind of got the best of both worlds where you’re able to generate these big cash flows and oftentimes these big chunks of cash, refinancing and the fees that come along with putting those things together. And then when you go to sell, raising the value of an apartment complex is significantly bigger than one single family home.
When I think about why I started investing in Airbnbs, it was really the same thing. I felt like when you talk about risk adjusted returns and accessibility to a new investor, I feel like Airbnbs and short term rentals were the best asset class to do that because you don’t need to raise funds typically like you would for a syndication, but you get these much bigger cash flows than you do from long term rentals, but necessarily it’s not the same as flipping because it’s not as risky about like, if the market turns today, I’m not going to be stuck holding this property that I’m going to lose money on. So I mean, I just love that point of thinking of all the different ways you can combine some of these things together to get the best end product for yourself.

J:
Yep. Sometimes appreciation can be a tricky thing. It isn’t always obvious. Like when we want appreciation there, there’s cases, and we talk about this in the book, where appreciation might hurt you. So for example, let’s say I buy a rental property for a hundred thousand dollars and I can rent that property out for X dollars a month. I also have the option of doing a renovation on that property and now I can rent it out for more money per month. Should I be doing that renovation so that I get more money? Well, it’s a difficult question because depending on how much I spend and how much more money I put in, that’s going to affect my cash flow.
So the decisions I make around appreciation, I could potentially do a huge renovation. I could knock the house down and rebuild it and now make that a hundred thousand dollars house worth a million dollars potentially. But that’s not necessarily a good idea. If the rent’s only going to go from a thousand a month to 2,000 a month. I’ve created a ton of appreciation, but now I’ve reduced my cash-on-cash return, that other metric that we talked about with respect to cash flow. So all of these things play off of each other.
And so maybe appreciation, maybe doing a renovation on the property is a smart thing to do before I sell, but maybe it’s not a good thing to do now. Maybe it’s a good thing to do five years from now or 10 years from now. And so we constantly have to be looking at all of these different scenarios. And again, it goes back to asking the right questions and not just saying more appreciation is good, more cash flow is good. Yeah, in a lot of cases it is, but in other cases now might not be the right time or it might not be the right thing to do for this particular property, for this situation, for my particular goals.

Tony:
So we’ve hit two of the kind of ways that real estate can generate wealth and profits. I want to focus on those last two. So principal paydown. Dave, I’ll start with you. If you can, same as the other two, define what principal paydown is and what metrics I guess we should be looking at to kind of measure how well a property does with that specific metric.

Dave:
Sure. Yeah. So principal paydown is basically a way of generating returns that exists for pretty much any long term investment. Basically when you take out a mortgage, you pay back the bank every single month. There are two components of that payment. It stays the same every month, but every month you’re sending the bank principal, which is basically repaying the amount that you borrowed slowly over time. And then there’s interest, which is the bank’s profit. Unfortunately with interest, that’s just gone. As J. was saying earlier, that’s just the bank takes that, you don’t get anything back. But when you pay down your loan, that means that you owe the bank progressively less and less and less. And over time when you go to sell it, you may owe the bank half of what you used to owe them, or hopefully maybe you pay it off over 30 years and then you don’t own the bank anything at all.
The beauty of this is that it’s not you who’s paying the bank back, it’s your tenants who are paying the bank back. You are taking part of their rent and paying the bank back with them. And so over time, basically they are allowing you to owe the bank less. And when you go to sell your property, you’re going to realize that gain. And unlike cash flow, it’s not something you realize immediately. It’s much more like appreciation that we were just talking about that you see the benefits of loan paydown when you actually go to either refinance your loan and pull some cash out or go and ultimately sell your property.

J:
I like to think of the principal paydown sort of like cash flow. So every month if we’ve done things right with our property, we get this cash flow, we get this profit that goes into our pocket. Principal paydown, it’s not quite as good as cash flow. We don’t actually get money every month that goes into our pocket. But what we are getting every month is equity. We’re getting value added to the property when we resell it or refinance it. And so we can evaluate this principal paydown in a lot of ways the same way we evaluate a cash flow. So Dave talked earlier about the metric that we use for cash flow as this thing called cash-on-cash return. So for every dollar that we get out of the property, that dollar is working for us. Or for every dollar, excuse me, that we put into the property, that dollar is working for us and is allowing us to get money out of the property. And the more money we get out compared to the amount we put in, the higher our cash-on-cash return is.
We can do the same analysis. We can do the same kind of calculation on principal paydown. So if at the end of the year we have a property that we paid a hundred thousand dollars for and we paid down $5,000 of our loan balance after a year, we’ve basically earned $5,000 out of that a hundred thousand dollars we invested. We’ve now made 5%, not cash-on-cash return because it’s not cash that we’re getting, but what I like to call 5% equity on cash returns. So we’re getting 5% of whatever we invested back in equity. Now, how do we capture that? Well, since it’s a lower amount of our loan, we capture that by either selling the property, in which case it costs less to pay off the loan than the total loan that we took out, and that goes into our pocket. Or we refinance the property. We can actually take more money out of the property based on the amount that we’ve paid down in the loan.
So this idea of equity on cash return is very similar to cash-on-cash return. And when I look at a rental property, I’m going to look at my cash-on-cash return. So let’s say I put a hundred thousand dollars into the property. Let’s say I get $5,000 in cash flow at the end of the first year. 5,000 divided by a hundred thousand dollars investment, that’s 5% cash-on-cash. But then when I realize that I’ve paid down $5,000 in that loan the first year, that’s another $5,000 that I’d gained in equity. So 5% equity on cash return. When I add those two together, I’ve now made the equivalent of 10% return on my investment. Now obviously again, the equity on cash I can’t actually capture that unless I resell or refinance, but I’m going to do that eventually. So I can look at my return now as 10% return, not just 5% if I were just looking at the cash-on-cash.
A lot of people ignore the fact that they’re building up equity every year by paying down their loan. But this can be a huge part of the total returns that you’re generating. And if you ignore this, then your returns are going to look a lot smaller than what they actually are.

Tony:
J, I’m so glad you mentioned that. It kind of gets my mind spinning here a little bit, but we talked about metrics for each one of these individually, right? Metrics for cash flow, metrics for appreciation, for principal paydown. Is there one master metric that I can use to combine all four of these things together to say, “Okay, cool. This is the one”?

J:
There isn’t. Unfortunately, I wish there was some grand unification metric, like this one formula that you can plug all your numbers in and it comes out and it tells you this is how much money you’re making. But at the end of the day, again, each of these four ways of making money in real estate are going to have different benefits and drawbacks for different individual investors. And so you need to know what’s important to you, and then you need to analyze those metrics. If you really have no care in the world about tax benefits, well, you can ignore that and you can just look at the other three. But most of us care about all four of these.
And so what we do is, in the last part of the book… There’s several different parts of the book. The last part of the book kind of puts everything together and analyzes and looks at a couple different types of deals. And at the end of the day, it really boils down to, you need to run the numbers for cash flow, you need to run the numbers for appreciation, you need to run the numbers for principal paydown, you need to run the numbers for tax benefits and then put all of those numbers together in a way that you can see a holistic view of the investment itself.

Ashley:
Dave, let’s start with you for the last one, the tax benefits. So how are you generating money from the tax benefits of investing in real estate?

Dave:
Well, let me just start by saying that I think taxes are probably the last thing most investors start thinking about. I know when I first got started, I really wasn’t even thinking about this. If you’re a rookie, you’re like, “I just want to generate money first and I’ll figure about taxes and hanging onto it later.” I definitely fell into that camp. And I think as you mature as an investor, you realize how important taxes are, because the more money you can keep, the more money you can reinvest. And if you’re familiar with the concept of compound interest, which we talk a lot about in the book, basically if you’re able to keep more money into your investment machine, that means you can generate more and more returns and you can defer your taxes for longer and longer. And maybe in some cases you can defer them all together.
And so basically, similar to some of the other concepts that we’ve been talking about here, taxes are obviously, they’re not putting more money in your pocket every single week, but if you can strategically use real estate to optimize your tax mix, you wind up having a lot more money to invest into your deals that can generate you more appreciation, more cash flow, and more loan paydown over the course of your investing career.

J:
Here’s something a lot of people don’t think about. They think, “How do I lower the amount of taxes I ever have to pay?” But it’s just as important to be thinking about, “How do I put off paying taxes for as long as possible?” I talked earlier about this concept of time value of money. A dollar today is worth more than a dollar 10 years from now because I can invest that dollar today. Well, likewise, having to pay a dollar in taxes, not today but five or 10 years from now, allows me to keep that money, not pay it to the government and invest it for the next 10 years so I can earn more on it before I actually have to give it away to the government.
So a lot of what we talk about when we talk about tax benefits of real estate, it’s not necessarily that you’re going to pay lower taxes throughout your entire life. You will actually, and there are a lot of tax benefits there. But a lot of the things that we tend to think about less is how do we just push off paying our taxes till next year or the year after or five years down the road so that we can take that money and we can invest it in the meantime and make a whole lot more money before we have to give any of it to the government.
And so real estate kind of gives us these two benefits. One, it gives us the ability, one, to pay less total tax over our lifetime of the investment. But two, more importantly it gives us the ability in a lot of cases to defer those taxes for a long time. And we can do that through a couple ways. Number one, we have this thing called depreciation. And basically what that means is just like anything else we buy for our business, and real estate is a business expense, that thing is going to wear out over time. If you buy a car for your business, the government says, “Yeah, your car’s going to wear out about 20% per year for five years,” and they’re actually going to let you take a tax deduction for 20% of the car’s value every year for five years. I’m making that up, I think it’s five years. But it’s some amount of time. And you can take a deduction every year for your car.
Likewise, if you buy a printer, you can take a deduction because the government knows your printer’s eventually going to go obsolete. Or if you buy basically anything, a piece of office furniture or a computer, basically the government allows you to take a deduction against that every year as a tax benefit. Same way with real estate. So the physical real estate that you buy is going to deteriorate over time. Your properties, you basically need to maintain them and upkeep them. So the government’s going to allow you to take a deduction against the value of your property over time.
For a residential property, a single family house, you can take that over 39 years. So if you buy a property that the physical structure is worth a hundred thousand dollars, the government’s basically going to allow you to deduct $2,500 a year over 40 years, 39 years actually. And that’s a tax deduction that you get every year. You eventually have to pay it back. When you sell the property, you’re going to have to pay it back, but you can defer taxes for as many years as you hold it. And remember, deferring taxes is good because time value of money.
So depreciation is number one. Number two, we have this thing called a 1031 exchange, which allows you to take an investment property, a rental property or a commercial property, and it allows you to sell that property for another similar property under certain circumstances and not have to pay taxes on that sale. You can then basically hold off paying taxes until you sell that second property, or you can do a 1031 exchange on the second property and defer paying taxes potentially until you die. So between depreciation and 1031 exchanges, there are two great ways to basically put off having to pay taxes on your property for potentially years or even decades. There are plenty of other ways, but those are the two big ones.

Ashley:
J, a kind of a follow up to that is, what rookie investor would make this, I guess, route of investing their priority? Who would choose this one as, “This is the way I’m going to generate money off of my investment.”?

J:
Yeah, so there are a couple things to answer in that question. Number one, if you’re buying rental property, you’re getting depreciation. A lot of us, if we buy a single family rental, we’re going to pay close to zero taxes these days on that rental property simply for the depreciation that the government gives us. We have to take that… Well, we don’t have to take it, but we’re going to have to pay it back at the end so we might as well take it every year. So what we typically find is, if we buy a rental property, we may not be saving taxes on all the other things in our life, but we’re going to typically save taxes on that particular property. And for a lot of my single family rental properties, the income I earn from the rent that I collect, I pay close to zero taxes on that every year. So if I buy 20 rental properties, I may pay close to zero taxes across those 20 rental properties.
Now, in some cases, I may even get more tax benefits than I made in income on those properties and now I might be able to use that income to offset income I’m making from other places. I might be able to offset income I’m making from a consulting job I’m doing or from stock income that I’m making or from a W2 job. And so it has nothing to do with whether you’re a rookie investor or you’re a seasoned investor, it really depends on the type of properties you’re buying. If you’re flipping properties, you’re not going to get any tax benefits. Flipping properties is… If you’re getting into real estate for tax benefits, don’t flip properties. I’ve paid more in taxes then most people should have in a lifetime because I flipped so many properties.
But if you’re buying investment properties, if you’re buying rentals or you’re buying commercial property, you’re automatically going to get some of these tax benefits. And then if you’re smart about the way that you get rid of your properties when you sell them or exchange them, you have the ability to push off paying taxes. So it’s not a question of who should be focused on the tax benefits, I’ll get into that question in a second, but all of us, if we’re buying rental properties or commercial properties, we have the ability to take advantage of those tax benefits even if we don’t try. So that’s number one.
Then we get into the question of who should be investing primarily for the tax benefits. There are a couple people. One, if you are a real estate professional, which means you spend most of your time in real estate but you make a lot of money doing other stuff, you can then take the tax benefits you’re generating from real estate and you can apply it to all the other stuff.
So just to give an example, and I don’t say this to brag or to kind of mention numbers, but the reality is I work in apartment complexes now. We buy and sell apartment complexes. This year I’m going to have over a million dollars in tax benefits that I can use for any income that I might generate. Literally, if I make a million dollars from selling books or a million dollars from consulting or a million dollars in the stock market, I can take up this million dollars in tax benefits I’m getting from real estate and I can offset all that other income, and I can literally pay zero tax this year thanks to what I’m doing in real estate no matter where my income might be coming from. So for me, if I’m making a lot of money selling books, or if I’m making a lot of money consulting, or if I’m making a lot of money flipping houses, the fact that I’m doing apartment complexes and have a million dollars in tax write offs, I basically pay zero tax on anything.
Now, again, I’m not going to pay zero tax forever. I’m just deferring that. At some point I’m going to sell these apartment complexes, at which point the government’s going to say, “Okay, now you owe us all the taxes that you saved on.” But at that point, I’m going to buy more apartment complexes and do the same thing with the income I made from those. And so I’m able to kind of push my tax burden down the road. Hopefully I can push it down the road until the day I die, at which point it’s my kids’ problem. But more importantly, if I die, a lot of it is just going to go away because a state tax allows me to kind of generate a certain amount of net worth before I have to pay any taxes.
So somebody that’s a high net worth earner that’s working primarily in real estate, they may be looking for tax benefits. But even if that’s not you, even if you’re just a new investor that doesn’t make any other income and you’re just buying your first rental property, you’re going to be able to benefit from the tax benefits if no other place than just in that rental property that you’re buying. You might make $10,000 on that rental property just in income this year, and you might pay close to $0 in taxes. That’s a huge savings.

Ashley:
And even for rookie investors, if you don’t even have your first deal yet, it’s great to start your tax planning. BiggerPockets does have a book for this by Amanda Han, it’s The Book on Tax Strategies. It goes through basically a lot of what J. just talked about and kind of breaks it down for you if you want to learn more about it. And then that’s where you can take it to your accountant or your CPA, but better yet to find somebody who’s going to tell you to do these things during your tax planning instead of having to figure it out on your own.
But speaking of books, Dave and J, can you tell everyone where they can find your new book?

Dave:
Yeah, you can find it on the BiggerPockets store or you can go to numbersbook.com. Either one will take you to the BiggerPockets’ store where you can find the book. We just wanted to let everyone know, if you order now, it is still during the pre-order period. And if you buy it now, you have the opportunity to attend a webinar that J. and I will be hosting to talk about the state of the economy. We’ll also be giving away coaching calls. So if you buy the book, you might be able to win a coaching call from either J. or myself, and you can use the free code, DAVE, for a discount of 10%. Or I think you can use the name J. as well.

J:
I think JSCOTT or DAVE, if you put that into the coupon code, you get to save 10%. Whole bunch of other bonus materials as well that haven’t been announced yet, but you’ll see them if you go over to the bookstore. But yeah, a lot of bonus content. The book is called, I don’t know if we’ve even mentioned the name, but the book is called Real Estate by the Numbers. And like Dave said, if you want to get it, you can go to the BiggerPockets bookstore, biggerpockets.com/store, or you can go to numbersbook.com, which will take you right over there.

Ashley:
And where can everybody find out more information about each of you? Dave?

Dave:
Yeah, so either on BiggerPockets or Instagram where I’m @thedatadeli, or check out the On The Market podcast.

J:
Yep. And for me, obviously, BiggerPockets. Or you can go to www.connectwithjscott.com and that’ll kind of link you out to everything I have going on.

Ashley:
Well, thank you guys so much for joining us today on the Real Estate Rookie Podcast. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson. And we’ll be back on Wednesday with another episode.

Dave:
Hey everyone. Welcome to On The Market. I’m your host, Dave Meyer. Joined today by Kathy Fettke. Kathy, what’s going on?

Kathy:
Oh, so happy to be here again and see you.

Dave:
Thank you. Well, today we have a guest who you recommended and is your friend. How do you know Chris?

Kathy:
He’s one of the property managers through Real Wealth that we recommend to our members there. And he’s helped our members buy properties for years. We’ve seen the struggles. We’ve seen prices go up and people get angry about that. So we’re constantly trying to educate and let people know what’s really going on in the new build-to-rent world because it has had a lot of challenges.

Dave:
Yeah. Chris, who is, like you said, a property manager, a builder, entirely focuses on build-to-rent, super knowledgeable, articulate guy. I don’t invest and build-to-rent currently or new homes, but I learned a ton today. What do you think our audience should be listening for in our conversation with Chris?

Kathy:
Well, again, if you are somebody who’s in a contract to buy a new home already, you really need to read your contract and see what your rights are because people didn’t really think they had to do that before. One of the big benefits of buying a new home as a rental is that you’re locked into a price and it’s probably going to close a year later or six months later, and the price might be higher when you close. We just did that. We bought a town home and it’s gone up $400,000 since we went into contract. Fortunately, my contract was bullet proof and they couldn’t raise the prices on me. But many contracts today are different because builders don’t know what the end price is going to be and then you might not be able to close. So that would be the most important thing to pay attention to is if you’re going to buy a new home or if you’re in the process of buying one, make sure you understand your rights or the rights that you may not have in your contract.

Dave:
Yeah, that’s excellent advice. I really loved learning from Chris just why buy for rent is taking off and why it’s such an appealing option for some of the larger investors. And from our conversation, it seems like build-to-rent is potentially an option for smaller investors than I sort previously assumed. And Chris has some advice if you want to get into this particular niche on how you can do that. So with no further ado, well actually a little bit of further ado, we do have to take a break, but right after that, we are going to welcome Chris Funk, the president and CEO of Southern Impression Homes.
Chris Funk, president and CEO of Southern Impression Homes. Welcome to On the Market. Thank you so much for being here.

Chris:
Well, thanks so much for having me. Appreciate it.

Dave:
Well, we’d love to hear all about your business and what you’re thinking and doing in today’s market, but we’d love to just start by understanding your history and involvement in the real estate investing industry.

Chris:
Well, our history began back in late 2009 when it was a different place and a different time in the real estate world right after the last crash. We were buying foreclosed homes at the courthouse steps. Like many real estate investors today, that’s where they started their careers. And so we were buying renovating and leasing homes. So we’ve always had a focus on rental real estate. And through that process, we started a property management company. We started a building company and then ultimately a title insurance company here all in the state of Florida.
And at some point, we went from being renovators and fixed and flip sort of folks to build-for-rent. As the market started to increase in price over the years, we started to see that we could take advantage of the fact that we could get new product at the same price as old product and have a lot less maintenance related to that product because it’s new. So from about 2015 and ’16, we made that conversion until today we’re 100% built-to-rent and we actually don’t do any renovations in rentals anymore. So no more REO-to-rent for us.

Dave:
That’s incredible. Sounds like you’ve done a little bit of everything. Could you just tell us a little bit about the scale? How much build-to-rent are you doing right now?

Chris:
Sure. So this year we’re going to finish right around 800 units of build-to-rent. That’s down from where we wanted to be. Our plan was 1,100 units this year, but as we’ve all seen with the shortage of materials and the supply chain issues, we weren’t able to hit our goals. But still pretty respectable number. Now, we’ve also, in addition to that, put about 600 lots on the ground that we’ve sold to other builders, National Home Builders, properties that we don’t construct. Those are kind of our two main business models right now in addition to, of course, the management of the finished properties.

Kathy:
Chris, are you building homes on one-off lots? Or are you building full build-to-rent subdivisions?

Chris:
A combination of both. So right now we have a mixture of about 6,000 lots in our pipeline. And of that, about 3,000 of those are what you would consider traditional subdivisions where you see 150 houses being built typically by the same builder, a couple builders, track home sort of style. That’s about half of our pipeline. The other half is infill, which is scattered lots in our various markets. So there might be an existing community that there were a couple of lots left over that nobody ever built on and we would buy those. There’s some other areas like Palm Coast and Ocala where there’s quite a few more infill lots available due to the way that developers used to develop in those markets many years ago, and they would sell off lots to individuals from up north that maybe thought they were going to retire down to Florida but they never retired or they never built their home. So all these individual people own these lots that never got built on.
So we have a pretty robust acquisition strategy to find these individual lot owners so that we’re able to make that nice product mix between traditional subdivisions and infill. And then in our traditional subdivision side of things, that even segments out further where we have traditional single family home subdivisions, but we also provide a product that’s a quadruplex and duplex product that provides more of an investment vehicle as opposed to just single family homes, which are both investment and for sale to retail home buyers. Not by us, but they might be at a later point in time. So the quadruplex product is also about half and half between infill lots and new construction communities.

Kathy:
Yeah. When built-to-rent came into play in a big way, what was that? Four years ago, five years ago would you say?

Chris:
Yeah, I think that’s when it really started to take hold. Yes.

Kathy:
Yeah. And as you know, because we’ve had lots of conversations, I was always really concerned about a community of single family homes that was all rentals. So just tell me a little bit about the risks to that model and what you’ve seen play out in reality.

Chris:
Sure. It really depends on the buyer type. So we see a lot of institutional investors that only want to own a whole community of rental properties. And in that case, that’s more of a management style that they want to have. They want to know that they own the whole community, that there’s nobody else there and that they can treat it like a horizontal apartment complex. Whereas our model has primarily been selling some lots to national home builders that sell to retail clients and then we would build rental properties in and amongst those communities to sell to our clients, because we don’t sell to any retail home buyers, we only sell to investors looking for rental properties.
So what that does when you have that mix, and particularly the single family properties because it can be both a home buyer product and an investment product, it really gives a lot of upward momentum to the sale price for the investor that buys it. So typically as builders build their way through a community, meaning retail home builders, the price goes up as they go through the phases. So we have a community in Panther Creek here in Jacksonville, Florida that’s an 800 lot community. We’re building 50 or 60 lots for rental properties, the rest we’ve sold to National Home Builders. And every phase that they go through they raise the price. So it really helps boost up the values for the folks that are buying from us.

Dave:
Kathy and Chris, both of you, you said that build-to-rent got popular around four or five years ago. Were there specific market conditions that made build-to-rent become more attractive around that time period?

Kathy:
Absolutely. Right, Chris?

Chris:
Yeah.

Kathy:
I mean first and foremost it was really hard to find existing homes. And then like Chris said, they were about the same price as a new home. So why would you buy an old one, an old cranky one when you could get a new fresh one?

Chris:
Exactly. Exactly.

Dave:
I’m curious because something I’ve always thought, I mean it makes so much sense, Chris, you said earlier, right? If they’re close in price, the maintenance is lower, you have a nice product that’s really appealing to your perspective tenants, I probably falsely always assumed that build-to-rent only worked at subdivision scale like what Kathy was asking about. But it seems that you’ve been able to achieve that on infills and individual one-off lot. Is that because you have the scale of a large building company or is this something that small investors can also achieve financially even if they’re sort of outsourcing they’re building?

Chris:
Yeah, I think I’ve got kind of two answers to that. One of it depends on where that investor lives, first of all, and how they’re going to manage those properties. So one of the things that we really see sets us apart and that our clients really like, and I think why we’ve seen so much success in the build-to-rent market with Main Street investors, individual investors, is because it comes from a full service standpoint. Meaning we build the homes and then we immediately hand it over to our property management company that manages the homes. So we have scale to that effect where we manage a couple thousand houses at this point in time. So the clients that are buying from us are able to really get that institutional style management on a one-off basis where they might not be able to get that if they bought two, three houses and they’re trying to manage them themselves.
If you’re trying to manage a property yourself, you’re the leasing agent, you are the maintenance technician, you are the property manager and the complaint department and everything wrapped into one. Whereas we have 160 employees on our payroll right now, each one of them has a specialty in one of those segments. So we’re able to provide that institutional type management to folks that may only own one or two houses, but their houses get treated the exact same way as a large institutional buyers would. Which is again, that’s really part of our goal and our business model, is to supply that type of product to Main Street investors versus all the institutional Wall Street guys being able to get all the product and make all the money.

Kathy:
Yeah, I mean again Chris, I’ve known you a long time and we talked about taking on these subdivisions. And my fear was that if you have so many different owners, landlords in one subdivision, somebody might mess up. They might be in a situation where they need to rapid sell. They’re going to lower rents, they’re going to lower prices and then that starts to spread throughout the community. Back in 2009 when I was buying foreclosures too, I went to one of those communities and that’s where my fear stemmed from. I went to one where a group like mine, like Real Wealth but a different one, not us, went in and sold out the entire community to individual investors. And then when the market tanked, then literally I’m walking through the subdivision and it was for sale signs, like hundreds of them. It was awful. So suddenly this investor group, all these individuals are competing against each other trying to rent, trying to sell, not getting anywhere on any of it.
So maybe that particular area, and it was El Paso, Texas, so not a growth market like Florida for sure. So it could have just been market related, but that’s always been my fear. I get if an institutional company’s coming in and they’re buying the whole thing out and they’re managing it like an apartment but it just happens to be homes, that’s controllable. But how do you control it when you have so many individuals that could potentially be in competition with each other when it comes to rent and to sell?

Chris:
Sure. Again, two things on that. One is just how we manage it internally and one is just kind of a general market condition. So how we manage internally is when we sell a property in the community, it comes with a two year property management agreement. So at least for the first two years our property management company is stabilizing the community at the rents that we anticipated that we’ve underwritten. So there’s not a competing nature because it’s all one property management company leasing the properties. So everybody’s on the same page, incentives are 100% aligned. Now I will tell you, even here in Jacksonville and Florida back in 2008, 2009, the scenario that you mentioned very well could have happened here.

Kathy:
That’s true.

Chris:
I did not get in until 2009.

Kathy:
You got to pick up the pieces.

Chris:
Right. I’m not 100% sure what happened. But what I’ll tell you, and I’ve done a lot of research on this today. As you can imagine with a very large lot pipeline, one of the things that’s given me a lot of comfort to have that pipeline, because as a developer we need to be planning three, four years into the future with our product lines because it just takes so long to get these entitled and developed. So when we are looking at it, we’re really looking from that time period in that 2008, 2009 time period, what did the inventory look like? Inventory went up from 2009, ’10, ’11. ’11 was about the peak of inventory.
And so when we look at those numbers, I say, what does it look like today? Because what really caused that scenario was the fact that lenders were lending to anybody and everybody. So everybody wanted to become a landlord that, A, shouldn’t have been qualified to buy the house to begin with, but then, B, they was just so much overbuilding in the market that there were these properties that created all of these issues where people were competing with each other, which it’s just a downward spiral where there’s no stabilization.
In today’s market, we have such a shortage of housing. So we have about a third of the inventory on the market from a for sale standpoint today than we did in 2011. When you look back at the numbers, I’m very familiar with the Duval County numbers. That’s our home office here. It’s in Jacksonville. In this five county area around Jacksonville, in 2005… So remember, the peak of inventory was 2011. In 2005, there were 18,000 permits pooled in this market. This year we’re only on track for 16,000 permits. So we’re almost two decades later. So huge population growth. Probably over 20% population growth in that time period and we’re still pulling less permits today than we did at the peak back in 2005. And we see further inventory issues arising as we go along just due to the fact that development has become harder and harder to do and there’s less and less lot inventory coming online. So all of that’s to say not that there couldn’t ever be one of those issues again, but right now we just don’t see an overbuilding in the market that we saw back in 2005 to 2008.

Kathy:
And what’s so cool is that you get a view of both sides. Most builders have absolutely no clue about the rental side of things. But you’re able to gauge that. So how has the rental demand been over the last few months when… Or I would say just this year, but specifically the last few months when rents have gone up so high that it’s becoming really challenging for people to pay?

Chris:
Absolutely. It’s the good and the bad, right? I mean with inflation, as a landlord, as a property owner, you’ve locked in your basis. So you’re now a fan of inflation. For your tenant, not so much. So we’ve really seen some turnover in properties as rents have gone up and we’ve seen new tenants coming in at much higher prices. So when we’re speaking with our property owners, that’s really a decision to make. The rent could be 200 or $300 more on a unit in the market today than it was when the property was rented a year ago, a year and a half ago, two years ago. But you have a potential of a turnover over cost and whatnot if the tenant does not accept that rental increase. So it’s been a lot of conversation with our investors to say, “Hey, this is what we think we can get in the market. Would you like us to increase the property to that amount? Would you like to keep the existing tenant?” And in most cases, people are looking to increase those rents. That’s why everybody’s in real estate. You expect it to go up over time.
Real estate prices and rents have… You look it at a chart, they’re always up into the right. They have been for as long as they’ve been keeping score of those things. But it has put a little bit of a strain on the leasing staff. You really have to make sure that you’re vetting folks at these higher prices. When you’re giving an increase that’s 200, $300, does that tenant still qualify for the new increase, even if it’s an existing tenant? So it certainly brings its own set of challenges as we’ve seen rents escalate really more than they ever have in this given time period in history.

Dave:
Chris, you were talking about all this data that you look at with inventory and population growth. Can you just tell our audience a little bit about what the key factors and variables that you look at when you’re deciding which lots to pursue and what types of developments you’re pursuing strategically based on that data that you’re looking at?

Chris:
Absolutely. So Kathy mentioned it earlier, but our number one key component is, is there net-in migration coming to the area that we’re buying lots in? So if we’re going to be putting new housing inventory on the grounds, we want to make sure that there’s new people coming to that market to fill that gap. Fortunately, we live in Florida so you’re hard pressed to find a town or city or county in Florida that is not growing. We’ve been the beneficiary of a lot of COVID related relocation and we’re thankful for all these folks coming to town. So that’s the number one key component.
But then, quickly there behind that, we’re looking at the median household income in the market. Our goal has always been to provide housing that meets the widest range of tenants within a market. And so we look at, can the average person in a market afford three times the monthly rent? So if you annualize the rent, multiply by three, is the normal household making at or around that median household income? Because then we’re hitting the widest range of the market from a tenant base.
And so those are really the two biggest factors that drive our decisions. The others dig a little bit deeper. What are the jobs in the area? How many jobs are in the area? We pull a lot of this data from ESRI. I’m not sure if you’re familiar with ESRI, but it’s really the driving data behind CoStar and LoopNet, those sort of big data services. It really has a lot of granular information. Jobs and new jobs in the areas is a big one, college degrees versus not, or technical degrees within a particular community are a couple other things that we look at. And net worth. What is the net worth in each of these areas?

Dave:
Do you try and forecast out three or four years? Just out of curiosity. Because you were saying that as a developer you’re planning several years out. Are you just looking at data now and presuming these trends are going to continue or how do you think that far into the future?

Chris:
It is very, very tough.

Dave:
Glad we’re all the same page about that.

Chris:
We first try to make sure, does it make sense in today’s world? And then we look at what’s happening. So last year we saw rents go up over 20% on average. Certainly, that is not sustainable, that there’s just no way that continue to happen. So we have much, much lower expectations of rental growth in what we’ve seen. We still think that we’re going to see plenty of rental growth this year and we’ll reevaluate at the end of this year and see where things are trending. But we’re looking more at what are rents today when we’re making these decisions on property purchases. And if rents are able to go up over time, then fantastic. We’ve seen a lot of our clients go under contract and think the house is going to rent for $1,400 a month. By the time they close on it’s $1,550, $1,600 a month. So those are some really big pickups, but they’re not guaranteed. There’s no guarantees in real estate, that’s for sure. So we really try to stay on the conservative side of that approach.

Kathy:
So on the really challenging side of being a builder over the last two years as what you mentioned earlier, you shut down the world, keep people in their houses, you don’t have production. And then you turn the lights back on, everybody gets to go outside and do things, and the world isn’t ready for that. So obviously the builders felt the brunt of that in not being able to get the most basic of things. The things you wouldn’t even thought would be an issue, starting of course with lumber. That’s never, as far as I know, been an issue. Today it’s concrete. What are some of the big surprises you’ve had to face over the last couple of years?

Chris:
How long do you have? This has been a rough couple of years from a building perspective. Man, it’s been literally everything. You mentioned that the biggest one right out of the gate was lumber. Lumber was just skyrocketed and it went up. It doubled and we thought, “Well, it can’t go up anymore.” And then it tripled and it’s, “Sneeze Louise. It was impossible.” I mean we’ve seen such massive 30, 40, 50% increases in build costs in these markets in these time periods. It’s been incredibly hard to budget and to try and produce a product and give a price with the way it’s been.
If I was sharing my screen, I would share with you one of these reports that you were asking about, Dave. It’s the St. Louis Fed puts out a producer pricing index for inputs to housing. Oh my gosh, I mean for 20 years it was flat, flat, flat, flat, flat, and then all of a sudden it just went straight up. I mean, the last two years has been literally a straight up turn in the cost of materials. But lumber, again, to answer your question more specifically, lumber was the big one in the beginning. And then everything else started to pile on. As things got to be in short supply, it became more of instead of vendors bidding for our business, “Hey, this is what we can do the work for” and us negotiating a price down, it was really as a builder, we were bidding up prices to see if we could actually get them to show up at the job site because there were way more people wanting to build homes than there were vendors to do the various parts.
So we’ve seen shortages from everything from AC duct to garage door springs, to windows, doors, appliances for a while were a biggie. Oh geez, radiant ducts for fire rated systems in our quadruplexes. I mean, we finally found some of those and we bought a semi full of them. So we bought a couple thousand of them at once because we didn’t want to let them go. But that’s just perpetuating the problem, right? That’s just making it worse because there’s probably somebody else out there that needs them today and we have a truckload full of them. So it’s really been tough.
And I will tell you here over the last couple of months we’ve started to see some leveling out, I would say, at least in pricing in some of our markets. In some markets it’s still incredibly difficult. Southwest Florida, it’s hard to even find truckloads of dirt to fill the lots down there, let alone find concrete and block in those markets today. But we’ve seen Palm Coast, Jacksonville, Ocala, we’re starting to see our build times come down, which means that the materials are a little more readily available than they have been in the past.
Block is still an issue right now. That’s kind of our big, no pun intended, that’s our big stumbling block at the moment, is blocking concrete. But we start to see those coming around. When I look at the averages of what we are paying to build a home today, it’s still taking up slightly but not nearly as drastically as it has been over the last two years. So we look at our eight week average. Our eight week average right now is trending up about a thousand dollars. The total bill cost is about a thousand dollars per unit more than the average of the last eight weeks. I mean, in any given month during the last two years, that easily could have been 5,000 or $10,000 per unit. I mean, we’re down a several multiples of what we’ve been experiencing.
We still haven’t seen any decreases in pricing, which is a little frustrating honestly. As a builder, we see lumber prices coming down. But as lumber has come down, drywall’s gone up. Concrete’s gone up. Paint’s gone up. Every other input has really eroded any of the savings that we would’ve thought we would’ve seen from lumber. But to put a silver lining on it, it does seem to be flattening.

Kathy:
What have you had to change in your contracts? Your contracts with subs, with trades, with buyers. Because think of the builders who didn’t write the right contracts at the beginning and they’re stuck in these prices and can’t raise the prices and they’re just losing money. I mean, how have you changed the wording in your contract?

Chris:
Yeah. Well, and you’ve seen a lot of builders go out of business for that fact. Everybody thinks that this is such a great environment. A lot of people have been buying houses, but a lot of people have been losing money on houses too from a builder perspective. So to answer your vendor question, our vendor contracts have changed drastically because a lot of our vendors, we can’t even get to sign contracts anymore. I think those tides might be turning or might be starting to turn. But for the past two years, nobody would commit to a price. They’d say, “Hey, we think that we’ll have the material for you and we’ll let you know what it’s going to cost when we get it.” And so we’re really starting these houses without great budgets. We know what we think it should cost, but we’re really at the mercy. If AC units are in short supply and the vendor comes and says, “Hey, I got 12 guys that want one AC unit, how much are you willing to pay for it?” Those are some of the conversations that we’ve been forced to have.
And even right now, trusses for instance. They’re still in short supply. So even though lumbers come down, truss prices haven’t come down hardly at all because the truss manufacturers are going, “Well hey, you still can’t get them so we’re going to keep charging the price not because it’s what the material costs, it’s because nobody else has them.” So from a vendor perspective, it’s been difficult. We’ve really gone away from a lot of contracts because they’re not honoring them and/or they won’t sign them.
So from our perspective on when we’re selling home side, we’ve had to institute causes into our agreements that say, “Hey, this is the price right now, but when we go to build your home, if the price has increased, we’ll tell you what the increase is and then you have the option to terminate the contract or move forward at the increased price.” When we were seeing such delays to materials coming in, we really had to institute those sort of measures because we didn’t know when we were going to be able to start a house. And that was 2020, 2021 and early part of 2022.
I am happy to announce though, as of June, we were able to get caught up enough on production to eliminate the need for that. Those causes are still in our contracts, but the cause states that we’ll give you a price increase when the slab is poured. So since June we’ve been able to wait until the slab is poured so we have a much better visibility in pricing before we sell a home. So we are, knock on wood, hopefully out of the woods, on at least new contracts on those. We’ve still got a few working their way through the pipeline that are going to need some price increases but there’s a light at the end of the tunnel.

Kathy:
Does it still make sense for those investors? Again, most of your buyers are investors, whether they’re institutional or individual and they knew they were going into this with the idea that prices could go up. But have rents gone up equivalently and does it still make sense? Or have cash flows reduced dramatically?

Chris:
Well, we’ve seen two different things on that as well. For new product that we’re selling, as lot prices have gone up over time, we’re definitely seeing a compression in cash flow just simply because the interest rates have gone up so much here recently. Still positive cash flow on… The vast majority of the product that we build has positive cash flow. But to answer your question related to the people who have had price increases, the good news for those folks is we typically bought those lots at a lower basis. So even though there’s a price increase due to material increases, there’s not a full price increase to current market rates. So they’re still walking into a fair amount of equity in those properties, which is a great thing. But to your point, the rents have also gone up significantly over that time period as well. So really in a lot of cases, they’re the same or maybe slightly better in some cases, or maybe slightly worse in some cases, but very similar because we’ve seen such rent growth.
The real wild card is interest rates. What are interest rates compared to what they were when they contracted? What are interest rates today and what are they going to be in six months from now? I think as we sit here today, we’re probably going to be seeing another Fed rate hike. From my perspective, what I see in the world, I think we’ve already overcorrected, which tells me at some point in the future here, probably sometime next year, we’re going to start to see either leveling or maybe even backing off of some of those rates. So for me, in my portfolio, I’m looking at it from a perspective of locking in my basis now, because as I mentioned, the build cost isn’t going down. So locking in that basis and hoping for better interest rates in years to come.

Dave:
Chris, I’m sure you have a lot of friends and colleagues who are building around the country. I’m just curious what you’re hearing from them as well because at least what I see at the data is that construction starts and permits are trending down and people are not building as much. Is that what you’re hearing as well?

Chris:
We’ve seen the same data. Duval County permits are significantly lower. In all markets we’ve seen significantly lower permit levels. But what we haven’t seen because I think there’s a lot of properties still under construction, and that’s why we have not seen any real decreases in that pricing. So we’re hopeful that it’s to come. I talked to a lot of other builders throughout the country. We all keep thinking that we’re going to see some decrease, but it keeps not happening. So I don’t know if we’re just wishful thinking. Because some of this pricing gets very sticky. I mean, the material suppliers have now made commitments based on margins at higher price of goods that are paying their staff a lot more. So in some ways, it’s hard for the pricing to come back because we’ve all seen so much inflation over the last two years that we know we’re not going to get it all back. We’re never, never, ever, ever going to go back to pricing that we had pre COVID. That’s not ever going to happen.
We’re hoping for some sort of reprieve just as things stabilize and the supply chain straighten themselves out. But it always… Like I said earlier with the lumber, the lumber’s gone down, but we’ve had two or three other big things go up. So I’m reluctant to say that we’re going to see any sort of price decreases. I think from an inventory standpoint, I think we’re going to see a peak of inventory in Q4, maybe Q1 of 2023. So end of 2022, beginning of 2023.
But being a lot developer that sells homes to retail home builders, so all the National Home Builders, those guys are pulling way back on their starts. They all got burned in 2008, ’07 and ’08 badly so they have a big knee-jerk reaction to what we’re seeing in the world. So they’re saying, “Hey. Psst. Stop. Starts, mothball development projects,” which is going to in turn mean that we might have some increased inventory for a few months. But as that gets gobbled up, we’re going to be back to maybe even more of a severe shortage than we are today because really the building and development world/sector had really just started to catch its stride in being able to produce enough lots in homes to support the demand. And we were still at a major shortage, but we were starting to see that momentum to where we would have an equilibrium. Everybody putting the brakes on has really put a big damper in that. So yeah, we’ll see what happens, but right now I see a lot of people mothballing projects.

Kathy:
Even the build-to-rent institutional purchasers, are they slowing down?

Chris:
So the built-to-rent folks are not slowing down nearly as much, because as you can see with the retail home builders, not only are they pulling back on what they’re building so they’re going to have less supply ultimately, you have a lot less people that’ll qualify. So if you had somebody that was going to qualify at 3% for a retail home, they may not qualify at 6%, and probably don’t. Certainly not for the same home. So unless they’re going to move down in housing type, they’re probably not buying a home. So we have a lot more folks that are trending back towards rentals than really we had even anticipated previously. So the Institutional, again, some of the folks that we do work with, they’re still buying development projects. We’re just about to sign a contract with an Institutional to sell them another a hundred lots in one of our communities. So we see those guys still plowing ahead, but they feel the wind is at their back from a rental perspective. They’ve been waiting for this moment.

Dave:
Well Chris, this has been super helpful. You are obviously a wealth of knowledge and I’m just fascinated about this build-for-rent and think that it’s a really helpful lesson for everyone who’s listening to this, just learning from your experience here. But is there anything else that you think our audience of aspiring and active real estate investors should be considering about today’s current market conditions as they go and build their portfolios?

Chris:
Well, I’ll jump in with a couple of mine and I’m sure Kathy has some. One of the biggest things that we’ve seen change for our clients, our Main Street clients today, is they don’t have access to the institutional capital that these institutional buyers do. And so we’ve had to get creative with financing to help folks and figure out how to offset some of these higher interest rates. Everybody looks at that 6% rate that they hear on the news. That’s only one component. So we’ve seen a lot of lenders out there get very competitive. The lending market is rather disjointed at the moment. You see some lenders really hedging and putting big margins on their loans and then others are getting very aggressive and even offering rate by down solutions to clients to really bring that payment down. So we still see a lot of our clients doing Fannie and Freddie loans and buying the rate down to create that cash flow for the hold, for the investment that they’re buying.
We’ve also seen a lot of our clients move to some of these interest-only loans. So we’ve seen some very interesting product, 5/1 ARMs, everybody has a bit of a stigma of ARMs because that was one of the things that caused the problems back in 2005 and ’06. But ARMs done the right way for investor clients are great. That’s what these institutional guys are doing. They’re not getting 30 year fixed loans, they’re doing these adjustable mortgages that have some period of fixed rate. So I personally have been doing a lot of five year fixed rates. I found a product that’s non recourse, it’s five year fixed rate. At the end of five years it can adjust, but there’s caps on how much it can adjust. And at the end of the five years, it doesn’t balloon, it fully amortizes. So it’s still a 30 year loan, so you’re never stuck with that big balloon payment, you may get stuck with a higher interest rate.
But my thought is for my personal portfolio, I believe rates are going to go down in the next five years. I think they’re going to go down in the next 12 months, but I certainly believe they’re going to be lower in the next five years. So I anticipate that I’ll refinance out of those and into longer term debt. So I think for investors out there, particularly Main Street investors, don’t get stuck on the rate today. The beauty of real estate is you can refinance that property as often as you want to or need to maximize the return and the investment in that project.

Kathy:
Yeah. Another loan that at least in our developments people are choosing is the construction-to-perm loan, because it is scary to go into a contract and have no idea what rates are going to be like when the project’s finished and you got to close or else you lose your deposit. So I really like the, just get one loan, it covers construction, it converts to whatever your terms are, 5, 7, 10, or 30 year once the building is finished. So I’m taking those as well. I think it offers a lot of security.

Chris:
I 100% agree.

Kathy:
Sometimes, Chris, I don’t know if you do this, but if the buyer is then buying the lot and getting their own construction loan, oftentimes that means you can get the price a little lower because the builder’s not taking on that cost of debt.

Chris:
Yeah, absolutely. Debt is a… That’s big number in the home building game. That’s one of our biggest line items, is the finance cost. Individual line items anyway. So yeah, I think that’s a great way to go about it. We’ve done that on some of our personal building holds as well. I think all of these are things that we didn’t talk about a year ago. You know what I mean? And Kathy and I talk a lot, but there was no need to talk about it then. As the markets changed, now you need to think of these creative solutions. The option is, think of a creative solution to do business or just sit on the sidelines and do nothing and see what happens. Either one’s scary.

Dave:
Yeah, it wasn’t really hard when there was 3%, 30 year fixed rate mortgages to decide what loan product to go after as an investor. But as they say, the people who are going to get creative and find these solutions, like the ones you guys are pointing out here, are the ones who are going to get the best opportunities in this market. And from all the people we talked to on the show, it does seem like there are opportunities if you are willing to do that extra leg work and think through some solutions that you weren’t thinking through a year ago, just like the two of you.

Kathy:
100%. One thing about real estate having been in it for so long, is it’s always changing. When I first started, new homes were the thing. It was the same kind of thing. I could get amazing cash flow on a new home, so why would I buy an old one? And then all of a sudden everything fell apart and you could get existing homes for almost nothing. So of course we pivoted and did that and we’re buying foreclosures from banks and REOs. And then those all got bought out, I was like, “What do we do now? There’s no inventory. I guess we got to build again.” So it’s always changing. And if you’ve been in the game long enough, you’ll be changing too or else you won’t be playing the game.

Chris:
True. So true.

Dave:
Well Chris, thank you so much for joining us. If anyone who’s listening wants to connect with you, what’s the best place they can do that?

Chris:
Oh, we’d love them to come check us out at southernimpressionhomes.com. There’s a lot about our product and inventory on the website. There’s ways to interact with our team right there. Happy to connect that way. So just fill out one of the forms and somebody will be in contact almost immediately.

Dave:
All right, Chris Funk, thank you so much for joining us here On The Market.

Chris:
Appreciate you having me.

Dave:
That was awesome. Kathy, you have the coolest friends. Thank you for bringing Chris. How do I get cool friends like you?

Kathy:
Oh, well we search the country for them, I guess.

Dave:
Honestly, I’m actually curious, how do you meet so many people? Is it just networking and going to conferences? How do develop such a great network of other real estate investors and people who have helped you in your journey?

Kathy:
I do speak at a lot of conferences. I have had the Real Wealth show for, oh my gosh, 20 years so I’ve interviewed a lot of people. But our company is also based on finding really good builders and property managers and teams nationwide to help our members at Real Wealth buy stuff. So that’s my job, I got to find cool people.

Dave:
Well, you’re good at it.

Kathy:
Thank you.

Dave:
What did you learn from Chris today? I know you talked to him all the time, but was there anything in particular you got out of this conversation?

Kathy:
Just a reminder of how difficult it’s been. Obviously, we have three or four subdivisions. We finally sold off a couple of them, so that’s good.

Dave:
Nice.

Kathy:
But I’m not hands on obviously the way he is. And to hear all the challenges… And on my side I hear the investor complaints. So my job is to get everyone communicating. And so I figured there were some BiggerPockets people who also are frustrated with their builder. A lot of the comments we get from our buyers is, “Oh, they’re just trying to rip us off. They’re just trying to raise the prices because they can and they’re keeping all these profits.” And so I’ll put together the webinars and say, “Open your books. What’s going on? What are you paying for things? What’s your profit?” Generally, profit margins on new homes are really small anyway. They’re 5 to 10%. Generally, you make all your profit at the very, very, very end. And in our subdivisions, we still have to create… 30% of our subdivisions need to be affordable for the teachers and the firefighters and the police. There’s no negotiating on those. We’re locked-in in Park City, we’re locked-in on $400,000 properties that cost us 800,000 to build. But it’s an agreement, we have to do it.
So anyway, bottom line is I want investors to really understand that it’s not always the greedy builder that’s trying to rip you off. It’s just the way things are. It’s just inflation. Not just inflation, but it’s a severely unhealthy version of inflation that it also includes complete lack of supplies. It’s one thing to have things be expensive, it’s another thing to not be able to find what you need at all.

Dave:
Yeah, it’s crazy. That chart he was talking about, the Producer Price Index for home building is a crazy thing to look at if you’re at home and you just want to understand what Kathy and Chris are talking about. The new home industry actually has really good data, generally speaking, that just like an average person can look up if you just want to understand broad macroeconomic trends. So if you want to understand what Kathy’s talking about, go check that out for yourself. I think this whole industry is just really fascinating. The whole build-to-rent model just makes a lot of sense. And I know that there’s a lot of cries out there or headlines in the media that make it say like, “Oh this is the beginning of a renter nation.” The data honestly doesn’t really bear that out at all.

Kathy:
Yeah, doesn’t support that. I know.

Dave:
Yeah. Yeah.

Kathy:
I’ve been on CNBC. I’ve been-

Dave:
Home ownership rate is the same. It’s the same.

Kathy:
They’ve been saying that for 10 years and I would go on these big stations on, again, CNBC and Fox and ABC and say, “No, no, no, no, it’s not that different.” It’s always in the 60%. Like 62% home ownership. The highest was, I think, we got to 69. There are still a lot of homeowners out there.

Dave:
Totally.

Kathy:
Right.

Dave:
And to me, if I were a renter… I actually am a renter. I rent in Amsterdam. But if I were a renter in the United States, a build-to-rent like subdivision and getting single family home sounds like a good option. So to me it sounds like if this is a profitable endeavor for builders and investors and it’s allowing people to live in a product that they really like, it just seems like a really interesting trend that is likely going to continue for the next couple of years and something that investors should be considering. Because I always assumed it was just at the subdivision level, not that people were doing build-for-rent in terms of infill. But I guess to Chris’s point, you have to have the systems to manage those efficiently to actually generate the cash flow.

Kathy:
Yeah, ours has always been infill or we would negotiate with builders for our clients that will take 10% of your inventory. But most subdivisions don’t want more than 10% of the homes to be rentals because it can change the vibe be if they’re individuals, because some people might self manage, some might hire a horrible property manager and it can bring down the value of the other homes around it if it’s not well cared for. So I would say that the number one thing that investors should keep in mind, because there’s going to be a lot of builders looking their wounds right now, it is a good time to be able to probably get a good deal on new homes. But do keep in mind, ask, “How many other renters do we have? Who are you selling to?”
And most importantly, I’ve met a lot of people who’ve come to me and they want us to promote them and sell their stuff to investors. I won’t say any names, but there’s one guy who’s got 800 homes in his subdivision that he’s selling one off to investors who are not like Chris. Now, Chris is going to manage those subdivisions, but this other guy, he’s just building them, doesn’t have property management and he’s selling 800 rentals to different buyers. That is not going to end well. So always ask, in my opinion. Think about it, one person faces a hardship, they need to fire sell their property or they need to just get anyone in there, they bring in the local drug dealer and it just could really spread like wildfire very quickly.

Dave:
Oh yeah, yeah. Sorry. I was glad you asked that question because I’ve always stayed away from investing in subdivisions because it just seems like there could just be a quick race to the bottom. If there’s an increase in vacancy in the market and all of a sudden your neighbor needs cash more than you do and they drop their rents 200 and then the neighbor next door drop, there’s no way to differentiate. Your product is exactly the same. And so the only way you compete is on price. And if someone else is willing to go lower than you, you just get screwed. So I was really glad you asked that question. That honestly just sounds like a nightmare, just selling those individual units one at a time to individual landlords. That is not a situation I would want to get myself into.

Kathy:
Be very careful out there. Yeah, because there’s always going to be greed and there’s going to be desperate sellers, desperate builders that will just sell to anyone. So that would be my first question. How many investors do you have in here? And then you might have trouble getting financing if it’s all investor. I mean, that was my other question to this guy. How on earth or are these people going to get loans when the lender finds out that’s basically an apartment?

Dave:
Mm-hmm. Yeah, it’s a condo basically.

Kathy:
Mm-hmm.

Dave:
Yeah, that’s a good thing to look out for. But I do agree with you that right now is probably a better opportunity than most times to look at new construction. I’ve never bought it, but I’ve been looking at it because the premium now is about 8% nationwide. And in some markets it’s lower. It is extremely close in terms of the price of existing homes and new homes. Depending on where you are, that could allow you to get a brand new product at a similar price to what you would pay for an existing home. So like Chris said, the prices just aren’t that different and you get a better product. So I would recommend people look at it. It’s traditionally not the best way for investors to make money, but right now it could be.

Kathy:
Oh, I think so. I mean, I think I’ve mentioned we are launching another single family rental fund in the Texas area. We’re really focused on buying new homes that builders, like Chris said, they are going out of business and we can help them, save them, but also buy these either half finished homes or lots that they couldn’t complete. And that’ll be part of our rental fund.

Dave:
Great. And I just watched your YouTube video about it.

Kathy:
Oh, cool.

Dave:
Yeah, it was very good. So if anyone else wants to, check that out, Kathy’s Real Wealth Network. Well, Kathy, thank you so much for joining as always. And thank you for bringing Chris who was an awesome guest. I appreciate you recommending him.

Kathy:
Thank you. I learned a lot too.

Dave:
All right. Well, thank you all for listening and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kalin Bennett. Produced by Kalin Bennett, editing by Joel Ascarza and OnyxMedia, 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.

Office closures during the COVID-19 pandemic made it clear that productivity continues to flourish in many white-collar industries, even when employees aren’t directly observed under the same roof. For many companies, that meant a permanent shift to remote or hybrid work models. As of April, people worked remotely about 39% of the time, according to Pew Research. Data from a McKinsey survey shows that 58% of workers are allowed to work remotely at least once a week, while 35% have the option to work from home all the time. 

For many employees, this change is welcome. It means the opportunity to stay in pajama pants, spend more time with pets, skip the hassle of a commute, and claim the home office tax deduction. 87% of workers take advantage of the opportunity to work remotely. But for many commercial real estate investors, the change means higher vacancy rates in office buildings, less rental income, and debt concerns. What’s more, a decline in commercial real estate prices hurts cities and the broader economy. 

The Varied Impact of COVID-19 on Commercial Real Estate

Commercial real estate prices decreased globally with the onset of the pandemic and is now exhibiting a strong recovery in general. But outcomes have looked different across segments and markets. The International Monetary Fund found that the trajectory of recovery was most impacted by factors specific to the pandemic, including:

• The aggressiveness of virus containment strategies 
• The effectiveness of fiscal support 
• The aggressiveness with which financial conditions were loosened
• The vaccination rates in the area
• Local and segment-specific changes in consumer behavior 

Some segments of commercial real estate boomed during the pandemic. Stalled multifamily new construction starts combined with rising home prices increased the demand for multifamily units, and, consequently, rent prices and occupancy rates. And as e-commerce heated up due to retail closures, the industrial sector experienced increased rents due to high demand for distribution warehouses. 

But retail and office space segments were harder hit by the impact of the pandemic. 71% of workers worked remotely in 2020, and that left office spaces empty. This had a negative effect on urban retail, as foot traffic for downtown restaurants and shops declined. Suburban retail saw improved performance accordingly. 

As offices reopen, office vacancy rates are declining overall. In fact, of 139 metro areas, only about one-quarter have office vacancy rates that are lower than pre-pandemic levels. Some cities have even seen increased occupancy rates since before the pandemic. But for other cities, the situation is far more dire. The metro areas in the chart below have the highest vacancy rates currently. 

San Francisco saw a particularly vast increase in vacant office space compared to before the pandemic. The city has a high concentration of office buildings, many of which host major tech employers that have embraced the future of remote work. Experts believe the San Francisco commercial real estate market is headed for a devastating crash. 

And vacancy rates could worsen in areas most impacted by remote work since office leases are generally for three years or longer. As leases signed prior to the pandemic expire and tenants choose not to renew, vacancies may edge higher, further deflating the value of commercial real estate.

Landlords of Older Office Space Buildings Are Hurting the Most

Leasing activity has increased since 2021, driven mostly by businesses seeking top-tier office space. In anticipation of employees’ return to the office, many companies are relocating to new buildings with amenities designed to draw workers away from their couches—think expansive rooftop lounges with gorgeous views, fitness facilities, other wellness-oriented features, media centers, and restaurants. 

Therefore, the buildings most vulnerable to high vacancy rates are older office buildings that haven’t been updated. On part of Manhattan’s Third Avenue, for example, a cluster of buildings erected between the 1950s and the 1980s has more available space than the rest of the city’s office buildings, with a vacancy rate of 29%. And in San Francisco, owners of lower-tier buildings face foreclosure. Some of these buildings have lost as much as half of their value, which is prompting landlords to request lower tax bills. 

Tenants Now Have the Power to Make Demands 

Real estate agents say that empty space in central business districts across the country has turned commercial real estate into a tenant’s market. While Class A office space may still be attracting rents on par with pre-pandemic times, owners of older buildings are offering office space at a discount, sometimes up to 25% for creditworthy applicants in certain areas. 

It’s also common for tenants to ask for flexibility in lease arrangements. For example, leases can include clauses that allow for subleasing or an extended lease in case of business interruption. Concessions such as tenant improvement allowances are also becoming more common. Before the pandemic, landlords held all the power, but the market has shifted into the hands of the tenant.

Rising Interest Rates Add Pressure on Investors

In addition to struggling with reduced rental income, commercial real estate investors face financing issues associated with tighter financial conditions. The Fed will continue to raise the federal funds rate in an effort to control inflation. The resulting high-interest rates make it difficult for investors to finance new real estate transactions or refinance existing loans. 

In markets with relatively low-interest rates, commercial real estate prices have been more resilient. This shows the direct impact of higher rates on property values. Additionally, slowing economic activity and fears of an upcoming recession may limit the demand for commercial real estate as more people cut back on shopping and dining out. 

It’s bad enough that commercial real estate investors are losing money as their properties depreciate. But declining commercial property prices also pose a threat to the stability of the financial system and the broader economy. 

How Commercial Real Estate Impacts the Broader Economy

Local governments in most states get the vast majority of their revenue from property taxes. As property values decrease and tax obligations are reassessed, budget cuts will be necessary in affected cities. This will have a detrimental impact on the availability of social services and spending on education. State and local governments spend about one-third of their money on elementary and secondary education. If commercial property values decline enough, schools could be starved of resources. San Francisco could be poised to collect 15% less in property tax revenue, equating to about a 4% dip in total revenue, according to economists. 

The second problem is the impact on the financial sector, particularly small banks. Soon after the pandemic began, banks saw elevated delinquencies on commercial real estate loans. And declining property values impact how much banks can recoup when they foreclose. Banks hold about 38% of outstanding commercial real estate debt on their balance sheets, and community and regional banks tend to be more exposed to commercial real estate loans than larger banks, according to The Chicago Fed. That puts these banks at a higher risk of failure. 

When banks fail, it limits the availability of financing to businesses and individuals. This has a ripple effect, causing unemployment as businesses can’t afford to hire staff. With more people unemployed, economic activity slows, creating less demand. Businesses slow their production, creating further unemployment. U.S. bank failures rose sharply during the Great Recession. Though we haven’t seen any bank failures in the last two years, there’s reason to be concerned about commercial real estate loan loss. 

Predictions for the Future of Commercial Real Estate

Some analysts are calling the outlook for commercial office real estate “apocalyptic,” while others are more optimistic. Research from professors at NYU and Columbia puts the potential loss in value of offices nationwide at $456 billion. Data from CommercialEdge only shows a small dip in office listing rates, which are down 0.1% year-over-year. But as leases expire and vacancy rates increase, investment in the sector could further decline, pushing property values down. 

However, Lawrence Yun, chief economist at the National Association of Realtors, expects the market to grow overall. He notes that some midsize markets are improving as businesses opt for more affordable office space away from central hubs. And other sectors are faring even better. Both industrial and residential rents are expected to continue rising in the future. And hotels and retail properties are recovering as well. 

How Investors Can Adapt 

Investors can pivot to find deals in areas with booming economies or sectors that are exhibiting strong growth, such as multifamily housing and industrial space. Those who still want to buy office space in the largest metro areas will need to be prepared to make updates that accommodate companies’ evolving needs. 

Land is also a viable opportunity. Yun asked local governments to loosen regulations and zoning requirements to encourage investment in residential developments, which would address the shortage of homes. But there’s another option as well—e-commerce businesses seek land for delivery truck storage. Commercial banks may be more willing to offer financing for these deals because they can quickly become profitable. 

What’s clear from the outcome of the pandemic is that cities and sectors are typically not unilaterally affected by economic disruption. Therefore, diversification is the best defense against negative returns. Commercial real estate investors need to start somewhere, and right now, the multifamily and industrial sectors have the advantage, but ultimately it’s wise to have your hands in multiple sectors and markets. 

On The Market is presented by Fundrise

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

David:
This is the BiggerPockets Podcast show, 671.

Isabelle:
Nothing is recession proof, but this is probably as recession resistant as you could get. Because when money gets tight, you know what you pull back on is those high end items, that Euro vacation, that Disney trip with the kids. You stop going to Airbnbs. You stop buying nice items, but you’re not going to stop paying for your loved one’s care. You just don’t do that. This is probably as recession resistant as you can get.

David:
What’s going on there, BiggerPockets listeners? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with my co-host, Rob, the STR specialist, Abasolo. We’ve got a great episode for you today. We are interviewing Isabelle Guarino, one of the industry experts in residential assisted living facilities. This is a new strategy of investing in real estate that is relatively unknown and not talked about very often, and we bring you a ton of information that would help you decide is this an investment strategy that you should get into? Isabelle’s family is one of the premier experts in this space and she does not disappoint. One of the things that we should highlight about today’s show is this is a strategy that becomes a hybrid of business with real estate. We see in the industry this is becoming more and more popular.
Short-term rentals are actually a good example of this. You’re not just buying a house, you are running a business and the real estate becomes a part of that business. This is similar to cattle ranchers. A lot of people don’t realize a lot of cattle ranchers don’t make a ton of money on the actual cattle, but they usually do on the land. I think in the future, we’re headed towards a world where real estate and business are more closely tied together. The real estate element supercharges the business. It’s becoming a little less passive, but you’re able to make a lot more money. My personal opinion, this is a great strategy if you are in the healthcare industry, you know someone in the healthcare industry, your family works in there, your spouse works in there, and you want to get out of that W2 world and into real estate, but you’re not sure how. Rob, what are some of your thoughts?

Rob:
Oh man, this is a good one. I remember listening to this show long time ago, and we brought in someone else in this niche and I was just so fascinated, I don’t know, by the asset class of residential assisted living. I just remember at the end of that episode, I was like, “Oh, there’s so many questions that I wish they would’ve asked,” because I was just so fascinated. Today, I ask all those questions. I ask all the questions and things to consider and caveats, and I’m still really fascinated by this. I’m very entrepreneurial. Wheels are always turning when I really start uncovering new business models. One thing to keep in mind, not necessarily the most passive way to get into real estate. It’s very hands-on. But if you’re entrepreneurial, if you like hiring staff and building out systems, and like David said, if you’re in the healthcare industry, I think it’s going to be a good one. I think you’d be real fascinated and very curious as to what Isabelle has to say.

David:
If you just heard us talk about this but weren’t really sure what this phrase meant, after today’s episode, you will know at a very good level exactly what goes into a residential system, living facility, and if this is the right option for you. Before we bring in Isabelle, today’s quick tip is real estate is different in the ways that it works, and it’s a great way to play to your strengths. Different asset classes work for different personalities or level of resourcefulness, so don’t try to follow somebody else’s blueprint. What works for Brandon, what works for David, what works for Rob, don’t just copy and paste what you see from us. Ask yourself, “What are my personal strengths? What are the competitive advantages I have, and which asset class works best for what I’ve got?” Build your portfolio that way and you will like it a lot more. Our guest today, Isabelle, mentions that if it’s not a hell yes, it should be a no. I think this applies really good into the type of real estate that you invest in. Rob, anything before we bring in Isabelle?

Rob:
This is a good one. Like I said, we ask a lot of questions and I think by the end of it, you’re going to have a very clear picture on what this asset class has to offer.

David:
All right. Isabelle, welcome to the BiggerPockets Podcast. Tell me a little bit about how your family and you got started in real estate.

Isabelle:
Yeah. For me, it really started with my dad. He was a real estate investor his whole life for 40 years since he was 18 years old. He was in this industry and his mom, so my grandmother fell, broke her hip and the doctor said, “Hey, she needs 24/7 care.” She was living in Upstate New York. We were in Phoenix and it was just like, “Okay. What do you do?” Whether you have or haven’t dealt with this, at some point, you will, a loved one needing care and assistance, and especially if you are the wealthy one in your family, this is a big reality that a lot of times they’re calling you to say, “What’s going to happen? Where do we put mom or dad?” At that time, we flew up to Upstate New York to look for something suitable for her. Everything was disgusting. Everything was super expensive.
The things that were decent had a long waiting list, it was just insane. We went back to Phoenix thinking, “There’s a lot of old people here. There has to be something more,” and stumbled into residential assisted living. My dad saw an existing property and he was touring for his own mom, but did quick math, “Wait, I’m going to be paying five grand a month for her to live here, or I could own this property, own this business, be cash flowing 10 grand a month.” He literally pulled the owner aside and was just like, “Hey, can I buy this? I want to buy the real estate. I want to buy the business.” He got up and running right into it. Over the next coming years, we purchased two other single family homes that we converted into this, and I really just saw what he was doing and saw the changes it had made in his life.
I was a flight attendant at the time when he did this and I was like, “What are you doing? What’s going on? Why are you working with old people?” I just kept asking more and more and pushing my way in and became his first employee. We grew to eight companies, three homes and 50 employees since then and had so much fun. My dad passed last year, so I’ve taken over everything from there, but it’s been the biggest blessing being left with three cash flowing businesses. Now, I want to give that to as many real estate investors and entrepreneurs as I can, that legacy.

David:
Okay. You own three of these facilities yourself?

Isabelle:
Yes.

Rob:
With being a flight attendant, that’s a really awesome job. You get to fly anywhere you want if you have the right airline. It’s fun. I’m sure you’re dealing with things, so obviously it’s very secure as well. What was that like for you? Because you’re doing that and then you’re like, “All right. Maybe I’ll do this residential assisted living thing.” When did you actually jump from the stable job to going into real estate, which in a lot of people’s eyes isn’t really quite so stable?

Isabelle:
It’s really interesting because growing up with a dad who was a real estate investor, I watched him go through ups and downs, but I just never had that fear. He never gave us that fear because many people listening who are real estate investors and entrepreneurs know that, the example you’re leaving for your kids, it’s like the Rich Dad Poor Dad book. I grew up with that mentality of a dad who was the rich dad basically saying, “I’m going to get through this. I’m going to make it work. It doesn’t matter what happens. We’re going to make it go forward and have it be a really good thing.” I was never fearful of entrepreneurship or owning and operating any businesses or being in real estate. I saw it as a great way to cash flow and make an impact on your community. I will say being a flight attendant is a pretty sick job.
It is so much fun except for the fact that you basically make nothing. At some point, I turned and looked at my dad and I’m like, “You’re making a lot of money. What are you doing? I want to follow suit with that.” I think not only did the cash flow drive me to it, but honestly, I was on a missions trip out in Jamaica and I saw a retirement community out there and it broke me to see the conditions in other countries, what’s happening with assisted living and I came back and I knew what my dad was doing, but his homes were upscale, luxury, gorgeous. When I saw how terrible the conditions were, I was like, “We have to do something.” I actually really wanted to get involved to not only make more money for myself as a younger person getting involved in their career and starting their life, but also to be able to give back to other assisted living communities across the whole world because this is just a massive need that we’re going to start seeing more and more.

David:
My understanding is there’s several different levels of care. An assisted living facility in general is a place where typically older people are going to go that need in-home care, maybe the family is functioning as the caretaker and it puts a big strain on them or it’s too expensive to stay at a hospital all the time, so you have to have some way to take the pressure off of the family, but there’s different levels of care. Some people need a little bit of oversight, then there’s like memory care. Can you break down how that framework works and then how much energy and attention has to go into the different levels?

Isabelle:
Yes. Okay. The lowest level would be independent living, which think Golden Girls. Right? For mature women living in a home, they need minor help with landscaping, changing a light bulb. It’s really light. They’re really just paying you rent, plus a little bit for you to basically be a property manager who swings by and make sure, “Is everything okay?”

David:
Would you be dropping off groceries, stuff like that or no?

Isabelle:
I’ve never seen those homes run in a way that cash flows, so I don’t pay attention to that market because it’s just something that… You know what I mean? Maybe you do it for your own parents because it’s like, “Oh, let’s throw them all in a home and we’ll help a little bit.” Right?

David:
Would this be more when you see… It almost seems like an apartment complex, 200 units of older folks that are staying there, an old folks home is what we might call it. That’s what you’re describing?

Isabelle:
Yes. Independent living. They still have the salsa classes. They still have the pickle ball court, the pool, all that, because they’re still… That’s probably age 65 upwards to 85, but it’s like you don’t have to be that old to be there. That’s independent living. You just need a little bit help.

David:
You can take care of yourself, but you need oversight. You need someone on site in case someone does fall and gets hurt.

Isabelle:
Yes.

David:
But mostly, you’re providing amenities that make it a fun place for a senior person to live.

Rob:
David’s really interested in this model because he actually owns all the box to The Golden Girls from the TV series. Hopefully, we can unlock this for you, David.

David:
Huge Golden Girls fan. Nobody knows that.

Isabelle:
It’s a great show. It’s a classic.

David:
Thank you for being a friend. Okay. What’s the next level?

Isabelle:
Okay. Next level would be assisted living. That’s what we’re focused on. By the time you need this, you typically need help with three to five activities of daily living. In the industry, we call it ADLs. Right? That’s everything you do from the moment you get up out of bed to the moment you go to bed at night, including getting out of bed, walking, bathing, showering, eating, taking medication, brushing your hair and teeth. You need help at this point. Most seniors move in when they need help with three to five. Some need seven, right? Some need three. That’s where you’re talking about the level of care ranging. Every person within your home might be paying a different rate to live there based on their level of care.
If they’re a high level of care, they’re paying more and if they’re low, they’re paying less. Assisted living, we can take care of a lot of different issues. Honestly, most people, they only live in assisted living. They don’t increase to the next level, which would be a nursing home. Right? Doctors, gurneys, IVs, medical attention is needed at that point. Very expensive. A skilled nursing facility, a sniff, they call it in the industry. Both of those are… That’s like the highest form of care, but in assisted living, that’s what we focus on, that middle one.

David:
If I understand you correctly, you’ve got the basic level, which is what you called independent living. This is more providing amenities. This is the shuffle board court, the salsa dancing, perhaps a van that might take them from the place to go shopping and bring them back because they don’t want to have to drive?

Isabelle:
Bingo.

David:
Then, you’ve got the middle ground, which you’re saying there’s various levels of care. They might need help getting out bed. They might need help bathing. Maybe they don’t, but they need someone to drop off food or make sure they take their medicine, something in between. Those residents will have vary levels of care and maybe the facility classifies them and then lets the nursing staff know, “This is how you take care of him.” Then, the last here, which you said like… Was it a nursing home that you said? It’s almost like a hospital brought into a house.

Isabelle:
Not even in a house. I don’t think you can have nursing care in a house. It’s basically a hospital like setting because there needs to be doctors and nurses on call at all times. Basically, this person, it is very end of life by that point.

David:
Is that something that people can own a property and operate out of the nursing level of care?

Isabelle:
Not that I’m aware of because the licensing would probably need to be so great that… Also, I don’t know how many doctors would be down to just go to a home that only has six to 10 residents. Typically, those are big facilities that are very, very medical feeling.

David:
Okay. If we’re talking about residential real estate, you’ve pretty much just got the first two options that you’re choosing between?

Isabelle:
First two options and I only focus on the middle option.

Rob:
I’m curious. On the scaling side on that middle option, is that a lot tougher to scale than that first tier given the amount of customizations with each different patient?

Isabelle:
Interesting question. When we talk about residential assisted living, right? It’s not a commercial facility, it’s a single family home being used for this, scaling is a bit difficult because 80% of this industry is currently run mom and pop style, meaning the person who owns it might also live in it, might also take care of the residents themselves. It’s very mom and pop. When we came into this industry, we said, “This isn’t going to work. Let’s run it as professional owners, so that we can scale.” We really took the real estate play of it to the next level because everyone else was just focused on having one or two homes and not doing much or I will say some of our people that I work with, they want to have 50 or 100 of these, package them up and sell them to the hedge funds. That’s not my personal goal, but that is a way that you could scale and exit this for sure.

David:
All right. One of the benefits of this is that it’s a little less on the passive side. This isn’t investing in real estate like most people get used to hearing. You are running a business. However, as cashflow becomes harder to find, as yields become smaller, more and more people are understanding that real estate is less passive income and is becoming a form of active income. Rob, you’re familiar with this because running an Airbnb is much more work than buying a duplex and letting a property manager handle it. What are some things that people need to be aware of if they say, “Hey, this sounds good.” Well, maybe let’s take a step back. What are some of the numbers that someone can expect to make per rent and then what are some of the expenses that they should expect to have to pay? Because you’re providing a lot more service than typical just real estate.

Isabelle:
100%. The national average to live in one of these homes is $4,500 per month per person. Now, there’s a website, genworth.com/costofcare. When you go there, you can type in the area where you live or your loved one lives and it will show you how much the national average in your area is. This cost has gone up 79% over the last 10 years and with the silver tsunami coming, it’s going to keep going up hardcore. We are currently 1.3 million beds short and the silent generation is who’s living in assisted living. There’s only 46 million of them. The baby boomers, 76 million of them. If we’re already that short, this is about to skyrocket in cost of care.
What people are paying to live in these homes, let’s just call it $4,500 is our national average. Every state varies greatly. DC is the most expensive at average rates of $6,978 per person per month. I should also say this. Average assisted livings, I don’t want to leave my goldfish, let alone my mom. They are typically disgusting. They smell bad. The food is not good. The quality of care is not good. I really only like to do upscale, high end luxury assisted livings focusing on private pay or long term care insurance residents, not government funding, not Medicare, Medicaid. I want to go after that higher end market, not the tippy, tippy top, but the people who are making more money and willing to pay for the best of the best.
Within these homes, if you had 10 residents paying five grand a month, right? A little bit above average, you’re bringing in 50K a month, your expenses, I know you asked about that. Expenses are high in this industry because you’re paying for 24/7 staff, caregivers and administrator. You’re doing food for them, activities for them, all the regular house bills, plus your licensing and all these different things. Your expenses on that home that has 10 people might be running around 30K a month and then if your debt service, your mortgage is maybe like 5K a month, that means that home’s bringing in anywhere between 10 and 15 grand a month to you, the owner. It definitely is a more active investment, more along the lines of Airbnb. This is not set it and forget it, but I like to show people how to be as hands off as possible.

Rob:
Is there a reason? Because this seems like a high… Cash flow wise, this is great. Is there a pros or cons of pursuing residential assisted living versus just going to traditional rental route or is it just like a preference type of thing?

Isabelle:
I think for me, it’s a lot of intrinsic pros. You could literally have your loved one live for free. If you have a parent, a grandparent who is going to need assisted living care and you don’t want to be paying for it, they could live in your home for free and you are still cash flowing. Right? We know that the supply and demand is off based on those numbers I just shared and it’s only going to get crazier and crazier. If you’re looking, nothing is recession proof, but this is probably as recession resistant as you could get because when money gets tight, you know what you pull back on is those high end items, that Euro vacation, that Disney trip with the kids. You stop going to Airbnbs. You stop buying nice items, but you’re not going to stop paying for your loved one’s care. You just don’t do that.
This is probably as recession resistant as you can get because we know the supply and demand, because we know what’s coming and if you’re going after that higher end clientele, you’re not dealing with as much riffraff. Also, providing a home for yourself. Right? Supply and demand, leaving a legacy for your own children, a cash flowing business. I always say like money in the bank is cool, a trust fund is cool, but the fact that you’re changing lives, communities lives, these seniors get so much better care in these smaller homes than in the big box facilities. It is night and day. The caregivers as well. When you’re a medical professional and you go into an industry, you go into it because you have a big heart. You want to care for people and then you get thrown into a big box facility where you’re taking care of 15 to one, that’s not okay. There’s no ability for them to even be that good caregiver. Providing jobs and just making such a big impact is really what draws me to this and makes me say, “This is worth it. The extra effort’s worth it.”

David:
You make a really good point that you’re going to be getting better care, but that is going to come at a price. The caretaker that is providing that care has to be managed by the owner if it’s an owner operator of this deal. We have a couple clients that we’ve helped in the Bay Area, literally buying these deals. I go through the MLS. I find one that will work and then we go through the process of getting it licensed. There’s a lot of different ways you have to adapt the house. You need handicap access, fire sprinklers. There’s a huge list of regulations. This is a highly regulated industry. The people that I’ve seen do the best at it are the people that already work in the caretaker space. They’re typically working for someone else or in the healthcare industry and then they combine it with house hacking.
That, to me, is brilliant. They’re getting in and they’re buying a house where they normally would be paying five or $6,000 a month to live in the Bay Area and they’re actually making money because they run the facility out of their own house. I think that’s a cool combination of these two strategies, but I want to ask you if someone is hearing this like, “This is good. I’m in the healthcare industry. I’d like to be an entrepreneur.” This is a clear path that you can get into it and own real estate because it’s kind of a hybrid of business, plus real estate investing, but the regulations make this very difficult. Can you share some of the regulations when it comes to the administrator that you have to hire? How many people can be overseen by an administrator and how that varies by the different markets as well as all of the modifications that have to be made to the home so that it will be approved for licensing?

Isabelle:
Yes. I completely second what you said in the beginning that it is a perfect marriage between potentially someone who’s in the healthcare field and someone in real estate. I know you have a lot of male listeners and if they have ever wanted to be in a business with their wife or partner or spouse, this is one of the best businesses for couples to do together, especially that perfect mix of one abuse medical professional, one abuse real estate because sometimes it is hard to match those and that’s where I do see a lot of our successful people come from where they have that perfect combination.
As far as the regulations go, you’re 100% correct. They’re state by state. There’s no national rules on this. Some states are really hard and some states are not hard at all, right? Texas, the requirements to be an administrator is literally FAM, fog a mirror. Be 18, have a GED. It is lame. It’s so bad. You have to, if you live in a state where has low regulations, look at a state with higher regulations and make your home suit that. California, like you mentioned, much higher restrictions and requirements. Arizona, one of the highest in the state. It’s like 140-hour work that they have to do, hours of work that they have to do. They have to take a four-hour test every two years. It’s just a lot more rules and regs on getting that license.

David:
Can you clarify what role the administrator plays in the business?

Isabelle:
In real estate world, the best way for me to correlate them is they’re kind of your property manager. What they would be responsible for is far greater than that. They might be in charge of marketing the home, touring the home with the residents, filling the home, choosing which residents are coming, hiring and firing your caregivers, dealing with all your independent contractors. It’s kind of endless and…

David:
It’s a form of getting the… What’s the word I’m looking for here? Not responsibility, but the liability off of the owner and onto the administrator. Because if a rule is violated, if you are your own administrator, you lose your license, you can’t run the facility. But if you’ve outsourced that, if a rule is violated and the state comes in and says, “You can’t operate anymore,” you could just get another administrator in there as opposed to you as the owner losing the ability to run the business. Right?

Isabelle:
100%. I do not suggest that anyone become the administrator. I always suggest you pay someone to do that. You hire someone to do that, put them in there because exactly that. If they’re not the right fit, you fire them and you get a new one. Right? I want to encourage people to be the owner of the real estate and the business. Not working in it, right? Working on it, sitting in that owner’s box.

David:
When you’re establishing this business, how often are you taking on a green administrator, someone who’s just getting started or if they come up to you and they say, “Isabelle, I’m down to do the training. That sounds like a great opportunity. Would you hire me?” Kind of thing. Would you do that or are you always looking for someone that’s cut their teeth in the industry already?

Isabelle:
Personally, I’m always looking for people who have experience and I’m just big on character and reputation. I will ask other people in the industry in the local area like, “Hey, what do you know of this person?” Because it’s a pretty tight knit industry. Everybody knows everybody and if they’re scammy and slimy and doing the wrong thing, word gets around real quick. I prefer someone with experience who has a stellar reputation.

David:
Okay. One of the things that’s interesting about this model is you’re operating a home and you’re operating a business which opens up doors to financing because those are valued differently. You can use a standard mortgage, buy a house, but you also have SBA loans and other options to get a business loan, which means you potentially have two sources of financing. Can you tell me from your experience how you’ve seen people that are running these taking advantage of both sides?

Isabelle:
For sure. I would say the number one most popular ways to fund these is using SBA. They’re very friendly to us. They understand this concept and that’s got to be one of the biggest ways that people are funding these. The second one I would say that people are using the most is syndication or private money. A lot of people do like to raise capital on this because there’s plenty of people who are intrigued by this industry, but they don’t want to own the real estate. They don’t want to own the business, but they’re very willing to invest. I love teaching and training on this and sharing all across the country and when people have the mindset that. “No one’s going to want to lend to me,” it’s like, “You’ve got to be joking.” Every day, someone comes up to me and says, “I don’t want to do this, but I want to give someone money to do this. Who do I give my money to?” Money is out there. Literally, you might be one handshake, one conversation away. Syndication, private money, SBAs are all great ways to do this. Obviously, you can do bank loans, hard money. Really, it’s endless. I would not suggest crowdfunding. Right? I would go with something a little bit more solid and stable. But truly, SBA is probably my preferred point of direction.

David:
I think the clients that we’ve helped… Shout out to Stephanie Cruz. She’s bought a couple houses with us and she’s doing the same thing in the Bay Area. I believe the method or the strategy we came up with was that they used an FHA loan to buy the house. They put people and I think California limits you at six people per home or something.

Isabelle:
Six. Correct.

David:
Yeah. It was more strict. They got it filled up. They turned it into a profitable business. They had to rehab the house with their own money. They were then able to get an SBA loan which paid them back for their down payment and the money that they had put into the property and then made further improvement, so they could charge more per room. Then, that money that they got from the SBA loan became the down payment for the next facility. That became a way that this model is self-fulfilling as when you want to scale.

Isabelle:
I love that. That is a perfect way to do this.

Rob:
Isabelle, question for you on the syndication side, because I’m getting into the fundraising world myself and when you’re raising money for this, what types of, I guess partnerships or splits are you doing or what kind of returns can one expect from a syndication? Is it pretty comparable to other types of syndications like a 10% return, 8% pref?

Isabelle:
I would say typically, we’re looking at 10 or upwards of 12% returns. We do have some people who like to go that route. Yeah. I would say between 10 and 12% and it’s pretty competitive and aligned with what you’re seeing probably for most other deals.

Rob:
Okay. David, this is getting me all jazzed up. We have our $3.25 million mansion in Scottsdale. It’s a 6,000 square foot, six bedroom, eight bath place that has real luxury residential assisted living vibes.

David:
The sport court could be turned into a shuffle board court. Right? We wouldn’t have to spend the full 25 grand.

Rob:
A jazzercise court.

David:
That’s exactly right. We could make the pool a little more shallow and turn it into an exercise place for everybody. It would. That’s a perfect property to do something like this with.

Rob:
You’re already a jazzercise fiend, so that’s kind of a fit.

David:
Huge. Huge. That’s actually another page I have that people don’t know it’s me. It’s like my pen name. You could follow jazzercise with Dave and see my morning workouts. It’s exactly right. I still like to wear those ankle weights, those little sandbags that we used to put when our moms were exercising back in the day.

Rob:
Well, two pounders.

David:
Yes. Isabelle, I want to ask you, when the market’s red hot and it’s super hard to find properties at cash flow, there may be a property like this that will cash flow. What are your thoughts on if somebody can pay more for a property than what it would appraise as a typical house just off the comparable sales, if they could get more cash flow on it as an assisted living facility?

Isabelle:
That’s exactly what I tell people is that it doesn’t really… I should rephrase this.

David:
I know where you’re going with that.

Isabelle:
You are not in competition with your typical single family home buyers. Everybody wants the three, two that’s on a nice street. I do not care if there are power lines in front of the house. I do not actually love if it’s on a super busy road with a ton of traffic going by. I do not care if it backs up to a parking lot with a target in it or there’s a bus station around the corner.

David:
An apartment complex right nearby.

Isabelle:
That’s a pro to me because that’s more busy people, that’s more traffic coming by seeing it. A mom, dad and two kids doesn’t want Johnny to kick the soccer ball in the road. Right? But for me, I’m going to put a nice big sign out there and get a whole bunch more eyes and that’s marketing dollars for me. I’m already looking for something different. Other things like funky layouts, homes that… There’s a lot of baby boomers who are already retrofitting their homes, adding ramps, guardrails, things like that. Those homes, then when that senior passes on, it’s like a single family’s like, “What do we do with this home? It’s kind of weird. It’s kind of funky.” I prefer already the weird homes, the big homes, the homes on weird streets. We do not compete in the same things we’re looking at from so many other investors.

Rob:
Let me ask you this because one of the things that I deal with as a real estate investor is when I put an Airbnb in a neighborhood, everyone loves me. Right? Everyone’s like, “Oh my god, that guy put an Airbnb in the neighborhood. That’s going to make it better.” Not really, no. Everyone’s always mad that I’m creating the parties that are going to ruin the neighborhood. I have heard similar sentiments with residential assisted living. What is that like? What kind of community outreach or backlash? Honestly, I don’t know too much about this. What do you hear from neighbors? If you do buy a single family residence and you convert it, is there any pushback or is it usually smooth sailing?

Isabelle:
There is always nimbyism. Right? Not in my backyard. Everyone’s always like, “No, not here.” We have seen so many people just flip their lid over this happening, freaking out. Because of the Federal Fair Housing Act, it’s discriminatory. It’s against disabled persons to say that you cannot do this home in a neighborhood. That’s a federal law which pretty much trumps any city state government, angry neighbor HOA. We did create the RAL National Association, which is the only association that represents the smaller care homes. The big boxes, they have their own associations and believe me, they’ve got money and power fighting for them, but no one was fighting for us. People were getting told, “Hey, you can’t do this,” and no one was there to back them. We created that association and it has a whole legal team who’s there to support people wanting to get into this.
It’s a free membership, but it’s really important for us that these are being allowed, that people understand the value that they’re bringing to the community. It is not a million fire trucks driving by every day or old people running down the street. We are not destroying the value of the neighborhood by any means. If anything, our homes usually sell for more because if someone was to sell it, they’re going to sell the real estate and the business. It’s going to actually be a larger transaction and bring the value up. We also keep these homes so well maintained because if you can’t take care of your front lawn, daughter Judy is not going to think you’re taking care of mom or dad. It’s vital that everything is perfect and clean. Also, there’s 24/7 staff there. Talk about neighborhood watch. You literally have someone awake there every day all the time. We’re the best neighbors to have. You want us to take out your trash can, you got it.

Rob:
Yeah. That’s awesome. Yeah, I’ve got so many selfish questions here because we’ve had episodes like this and I’m always like, “How do I do this?” Okay. Question, when you’re trying to locate a house, is it best to… Because for example, our Scottsdale property, that is on a pretty secluded… All the homes on the lots are on five acres, for example. We’re on five acres. It’s relatively private to get in there. Is it a good idea to find a home that’s maybe right outside the city in a suburb that is on a larger estate away from neighbors or is it the same success rate either way?

Isabelle:
I have seen these homes where, for example, one person I worked with, their home is on 19 acres. Right? Stunning property. It’s beautiful. It’s out in Tennessee. But then, my homes have neighbors literally right next door. It’s a genuine neighborhood. They both can be successful. I will say this is not… You can build it and they will come. It’s not the field of dreams. It’s also not over the river and through the woods to grandmother’s house, we go. No. You need to be located so strategically. By that, I mean demographics. Demographics are absolute key in this industry. You have to be in an area where there’s a mass amount of 50 to 70-year-olds who are upper middle class making twice the median income who are typically homeowners because that is who we call daughter Judy who pays for mom or dad to live in your home. She does not want to drive 30 minutes away. She wants to drive five minutes down the road. Demographics is the number one key when it comes to location.

David:
I really like what you said there because it highlights a business and real estate principle, which is supply and demand. It’s very easy when someone is learning real estate to hear what someone else does and just think, “Okay. I’m going to hit control C and then control V and I should get the same result.” In many times when you’re buying real estate, you are looking for a big plot of land, amazing views, the location to something people want to go to where wages are highest. Those are all factors that weigh in for a particular demographic of buyer or tenant that they care about that. What you’re describing is it’s different here. You could be next to the most amazing waterfall, but if you don’t have an aging population of people, that is useless. What you’re looking for here isn’t necessarily the exact property’s location. It is the demographic surrounding the property.
You go to where you’re finding aging population, what you described as the silver tsunami in Arizona, in Nevada, some of these areas that are having… Populations like that Florida would be another one. Typically, that was always the stereotype as old people moved to Florida when they retire. Well, they’re closer to needing care at retirement age than when they’re 20 years old. They’re very far away and you can find deals that normally would not work. It’s on a busy street. That’s a terrible, terrible house that I got to sell if I’m a real estate agent to a traditional buyer. They skip it. School scores are terrible. That’s a beautiful property. It’s really big. A lot of square footage, can’t sell it because the school scores are bad. All of these things that used to be hindrances to demand are taken off the board. They don’t matter anymore. Right?
You’re not going to have your population played football in the front yard where a busy street could be a problem when you’re a mom with six-year-old kids. It’s actually a way if you get into this that you can use some of the deficiencies of other properties against them. The house sits on the market longer. You can get it at a better price because those things that would hurt its value don’t apply.

Isabelle:
I couldn’t agree more. I will say it’s the opportunity that matters, not the investment. I’m not afraid to buy a house full price if it’s the right house and I know that the numbers are going to work when you’ve seen that it’s working with another home in that area. Like your home in Scottsdale, I would search then the other homes right nearby, how much are they charging? What are they getting? If you know that your amenities are better, your location’s better or whatever and you might be able to get a little bit more, it doesn’t matter how much that house costs. If you’re going to cash flow on it, it’s all about the numbers at the end of the day. They have to work.

Rob:
One thing that would scare me here, and it sounds like maybe the success rate is usually relatively high, but let’s say that you buy a property. Let’s say you buy a five-bedroom place and you renovate it to make it up to code. You put the ramps in. You put the shower and the bath situation to be accessible. Is there ever any fear that… Let’s say the business doesn’t work out that now you’re left with this retrofitted home that is tougher to sell or is that a rare scenario?

Isabelle:
A wonderful question. One way that I like to show people how to get into this is actually just on the real estate side. If you were to have taken a home just like you said, you retrofit it, you get it ready, you get it licensed and for some reason, it doesn’t work out for you. You can lease that home to another operator, be charging them twice the fair market rent because you just did all the work. You just got it retrofit. You just got it licensed. You pretty much did all that hard work upfront. They’re just going to pay you that lease or mortgage and then they’re going to operate the business. You don’t have anything to do with the operations. You’re now just a landlord on that. That’s one way that you could get out of that situation potentially. If you have done your research correctly and you’ve run the numbers and what’s happening in that area, you should not go wrong in this.
But I will say I have met plenty of people who listen to me on a YouTube thing or a podcast and they’re like, “Oh, I went out and bought this house and now I’m in debt because I don’t know what to do.” It’s like, “Oh, my gosh.” Education is key. You have to learn everything you can on this before you go into it because there’s no HGTV show on this. 18-year-olds aren’t jumping to get into this. It’s a tough industry. There’s a lot of things involved, a lot of rules involved, and you want to make sure that you do it right because it’s a high cost to get involved to this.

David:
Yeah. There are certain things I’m noticing that are becoming much difficult to run these businesses like caretakers, I think were a lot easier to find before. You’re having to work a lot harder to find them and you’re having to pay them more than before, which means now you have to pass that cost on to the end consumer and that becomes more difficult. I really like your model of, “Look, you can get the benefits of this, which are the higher revenues without the headaches of this, which is running the business by using the arbitrage model.” Like Rob, we know a lot of people that do this with short term rentals. They buy the house. They rent it out to someone else at double the rent and then that person has to do the work of actually running the short term rental. The acronym for these assisted living facilities is RALF, Residential Assisted Living Facility. What you’re talking about is RALbitrage, which I would recommend for someone that doesn’t have experience in the healthcare industry, RALbitrage would probably be a better way to get started.

Rob:
Are you able to actually renovate a place and do this arbitrage method? But once you’ve put in… Because obviously, I imagine there’s probably some capital intensive aspects of this. Do you know? Are you able to go out and just do a bur and does the appraised value of a property go up if you do upgraded in these capacities?

Isabelle:
It’s not upgraded because when someone buys the real estate and the business for this, let’s back it up to that, truly what they’re paying for is those seniors in the beds. If the home isn’t full, it’s not worth as much as you think it’s worth. It’s just the real estate. Right? Depending on who you sell it to, if you’re selling it to an operator who’s going to run an RAL, okay, now it might be worth something or they might be willing to lease it for you for something more. But if you’re trying to sell it as a regular home, no, and it’s not that the bank is going to say, “Wow. You put in so much value.” They don’t see it that same way.

Rob:
Okay. That makes sense. I’ve got one more question and then I want to jump into some actionable ways to actually get started in the residential assisted living capacity. But I imagine that there’s probably a couple of deal killers, if you will, if you’re looking at a home. One of those things that, to me, is popping up the most is if a house is seemingly perfect, however maybe it doesn’t have a great parking situation, is that something that would deter you from purchasing that property or is that just another obstacle to get through?

Isabelle:
The seniors aren’t driving, but your caregivers are and there’s a lot of in and out throughout the day. Yeah. A lot of times, even some states have requirements where they say, “Hey, for every four residents, there needs to be one parking spot.” There might be some requirements that you have to do. Yeah. Parking would be something that I would want to see. I would also want to see just density of the area that there’s a lot of people, and I’m not just looking for one year trends. I’m looking for three, five, 10-year trends because if you’re going to start a business, you’re planning roots. You really want this to take off and have longevity. I want to see the density of the area. I also just want to know the story of what else is happening around this? Meaning are we having a lot of people who are moving away when they hit a certain age?
What did the other homes and facilities nearby look like? That would be a deal breaker right then and there. If someone is building a brand new big box facility, a brand new Brookdale Sunrise nearby, bingo. I want to put my home there because they did the internal feasibility study to determine that that is a prime place that’s going to need a lot of beds, but if there’s a really old 30-year-old assisted living building that’s there and it’s empty, that’s telling me something too. You have to look at the story of the area, not just in regards to demographics real estate, but also assisted living. What’s happening around?

Rob:
Love that. That’s awesome. Yeah. I get a lot of people that will ask me, “Rob, don’t you think Airbnb’s oversaturated. Short term rentals are over, right? Everyone’s getting into the game. Should I invest in this city?” I’m like, “Well, are there hotels in the city? They’re like, “Well, yeah.” I’m like, “Are there being new hotels being built every day?” “Well, yeah.” Then, I’m like, “They’ve already done the research for you and they’ve spent a lot more money than you’re going to spend researching it, so you’re probably going to be fine.” That feasibility check seems to be a really good way to think through it.
Moving forward here, we’ve addressed a lot of the pros, cons, things to watch out for, caveats, green flag, red flags. Can we talk a little bit about actually getting started? If you’re someone at home and you’re really excited and you’re like, “Oh, my gosh. I want to do it.” I know you have three steps to getting started in this business and I’d love to talk about that from someone that’s like, “Hey, how do I do this from step one?”

Isabelle:
Yeah. I had mentioned one earlier when we were talking about just owning the real estate. Right? We call that being a preferred real estate provider. You are just going to own the real estate, possibly retrofit it, get it licensed, get it ready to go, and you’re going to lease it to an operator. That is a more passive way to be involved in this industry and it’s a great way to get started. Learning exactly what you need to know about where to put that home, what renovations need to be done? Like David was mentioning all the modifications to the home. In most states, it does not have to be ADA compliant, but you want it to be as close to that as possible. Putting in that work to make sure that the home is ready to go. The second way that you could get started is owning the real estate and operating the business.
Again, I would highly encourage you to get educated on this topic, especially if you don’t have familiarity with it if this isn’t your background or where you came from. It wasn’t where I came from. It’s not impossible, but it is important that you know everything involved with this, so that you can make sure that you’re being the best owner possible. That way, it’s probably one of the easiest or not easiest. That way, it’s probably where there’s the most cash flow, I should say. The third way to get started would be to just JV lend or partner with someone and just deploy your capital in this.
We do have a lot of people who I speak to who that’s all they want to do. They just say, “Take my money and I don’t even want to see it back for another three to five years,” and getting some good returns on that. Still playing a role in the silver tsunami because it’s either going to be a mega crisis or a major opportunity and I want everybody to have a piece of this. I don’t want anybody to get pummeled by this wave. We can all play a role and that might just be lending to someone who does this.

David:
I like that. There’s three basic ways. There’s the most hands-on, most active, and that would be owning the real estate and the business.

Isabelle:
Yep.

David:
Then, you’ve got the hybrid model, which is owning the real estate and arbitraging it out to someone else who runs the business. Then, you’ve got the pure passive way, which is a JV funding somebody else’s deal, putting in the money and letting them run the business and getting a return.

Isabelle:
Yes.

David:
All right. Now, I wanted to ask you a question. If you’re trying to figure out what would be a good market, like a long distance investor who says, “I want to do this. I think I can run it long distance.” They have experience with hiring and operating a different business. I’m thinking like a Codie Sanchez. She’ll probably start making videos on this. This is right up per alley. Would you look for an area with a very dense population, but a lot of it is urban environments like apartment complexes and condos where there isn’t a lot of housing, so you’ve got a family living in an apartment, mom or dad is getting a little bit too old. There’s not a lot of space. Now, you’re going to go find a suburb where there’s actually bigger single family houses and they maybe drive 45 minutes an hour to go visit mom and dad because there isn’t space within the big city?

Isabelle:
I would not necessarily put an assisted living home near a bunch of condos and apartments because of demographics wise, I’m looking, I mentioned 50 to 70 upper middle class homeowner. Typically, where there’s more homeowners than renters, there’s more money. Typically, not always. Not every market, but a lot of markets, being a homeowner indicates primarily more wealth. I don’t necessarily want to be where there’s a lack of suburbia. I want to be right plop in the middle of upper class suburbia. That’s probably my prime location, but I did love what you said in the beginning where you said, “What if I wanted to do this somewhere else?” I always say live where you want, invest where makes sense. 31% of ARL owners are remote owners. They do not live in the same state as where their home is. Right? That’s fine. You can do that.
In that case, I would choose it somewhere that you don’t mind visiting every so often because emergencies happens, stuff happens and you may have to jump on a plane and go visit and be there. If you hate Oklahoma, don’t do a home in Oklahoma just because it’s cheap. Do it somewhere you actually want to be, you want to go and that you’re willing to do that. I want my homes to be hands off. I’m about 45 minutes away from them and I visit every other month. I run it like I’m an out of town owner because I don’t want to be hands-on. That’s not the role I want to play. I’d rather have a Zoom call or a conversation with my administrator than be there visiting and getting more into the weeds. That’s not actually going to help me be a business owner. It’s going to help me be more hands off, having scheduled things. You come to me with your issues in this formal way.

Rob:
When you’re trying to acquire your first residential assisted living facility, I know you have four ways of actually acquiring one. Do you think you could just walk us through those really quick?

Isabelle:
Yes. First, you can buy land and build a custom home from the ground up. For a lot of my… People I talk to who are in the Midwest where land still exists and it’s still relatively cheap, that’s sometimes the way they want to go or my guys who are in construction or their contractors, they love that option. Plus, when you’re building a custom home, when you live in a state like Texas, Ohio, Illinois where you are allowed to have 16 residents in a home, you’re not going to find a single family home that has 16 bedrooms and bathrooms. You’re probably going to have to build it. If I was in a market like that, I would want to build a custom home that’s perfectly suitable for this, so I can house as many residents as I am allowed to house. The second way that you can do this is buying a single family home and converting it to become a residential assisted living.
As we talked about, having as many bedrooms and bathrooms to start. That way, you don’t have to do too much of a renovation or addition. Some neighborhoods will tell you, you can’t make the home look different from the outside. What does that mean? Right? In one of our homes, we built out the garage. I still have the door facing on the outside, but it’s not a real garage. Now, it’s two or three bedrooms back there. Different things like that. The third way would be buying an existing business and the real estate. That’s the fastest and easiest way to get up and running in cash flowing, but not every market has good ones for sale or ones that you’d be willing to take over. It’s a nice easy way to get your feet in right away. Someone’s done all the hard work for you, but you’re going to pay a pretty penny for it. The last way is leasing the home, so working with someone who’s going to be the landlord and you’re going to lease the home from them to operate the business.

Rob:
Okay. We’re running out of time. I have so many questions. Last thing here and then David, I’ll let you get to the deal deep dive here because I know that that’s probably going to be pretty juicy. But when it actually comes to market. Let’s say we overcame all the obstacles, we got it permitted, the neighbors love us and great, move in, and you got the house and you got it set up. Now, how do you market it? Because this seems to be… You’re marketing to an older demographic in theory, I guess maybe you’re marketing to the families of the older demographic. I’m assuming you’re probably not going to market this on TikTok. How are you actually getting the word out there for your facilities?

Isabelle:
Yeah, definitely marketing is so important. Number one, you are going to want all of those different key components like a website and brochures and business cards as well as having a Facebook page, right? Daughter Judy, you’re correct. She’s probably not on TikTok, but 50 to 70-year-old, she’s probably on Facebook still. Being a part of your local community, working with elder law attorneys, hospice agents, long term care insurance people, geriatric doctors and nurses, showing up at community events, whether it’s your RIA group or your local farmer’s market to let people know you are a home in the community that cares for your seniors and you exist. You could do anything from boots on the ground marketing to old school paper marketing. One of my best tips is I always tell people, “Walk into the local churches, synagogues, and temples,” because daughter Judy, when her loved one needs care and assistance, if she’s a religious person, you better believe she’s going to church to ask for prayer. Right?
She’s bringing that to her elder or her pastor and saying, “Help me out here.” Do you know any resources? The church probably won’t take a referral fee from you, but if you just recently came in with some brochures and cookies, they’re going to be like, “Wow. This nice guy came by. He had this cool home. It’s right down the road,” and they’re an excellent resource for marketing. Last but not least, placement agents. There’s an entire industry of people called placement agents. There’s a national ones like A Place for Mom, absolutely do not like them and I stand by that. Do not use them. I prefer using local placement agents.
People who are local in the community, basically their whole job is when the senior needs assisted living, that’s who you call on. They say, “Where do you want the home? How much do you want to pay? What amenities are you looking for? What area do you want it to be in?” They basically pass out business cards of homes that fit that criteria. They charge either first month’s rent or half of first month’s rent, depending on who they are and their local fees, but that’s a really nice, easy way to fill your home pretty quick working with them.

David:
Awesome. I like that. Get into this method and you too can be the answer to somebody else’s prayer.

Rob:
David, you’re the answer to my prayers.

David:
Thank you for that, Rob. I didn’t even have to get into residential assisted living facilities and run a business. All right. The next segment of our show is the world famous deal, Deep Dive. In this segment of the show, we go deep into one specific deal with our guest and remember that you too can do more deals with the help of BiggerPockets tools and resources, which is you will find at biggerpockets.com. All right. Isabelle, question number one. Rob and I will alternate firing them at you. What kind of property is this?

Isabelle:
Residential

David:
Shocking. Residential assisted living facility. Wouldn’t that have been funny if she came in and said, “Oh, I flipped a house in North Florida or something like that.”

Rob:
Airbnb. Okay. Question number two, how did you find it?

Isabelle:
Oh, on the MLS.

David:
Okay. Question number three, how much was it?

Isabelle:
It was 795,000.

David:
It’s shocking that you were able to find a deal on the MLS. I’ve been told that’s impossible, and the only way to find deals is to spend your entire life talking on the phone for 12 hours a day trying to find an off market opportunity.

Isabelle:
In this industry?

David:
No. I’m being sarcastic because everyone says, “There are no good deals. There’s nothing on the MLS.”

Rob:
We’re workshopping David’s sarcasm still.

David:
I do hear that a lot. People complain that I need to send the emoji face when I send a text because they’re like, “I don’t know how to take that.” It’s like, “All right. I hear you. I just will never send emojis.” All right. Rob, you’re up.

Rob:
Right. The next question that I have is, how did you negotiate it? I’m sorry. Is that the right…

David:
Yeah. Yeah. She paid 795. How’d you negotiate?

Rob:
Oh, yes. That’s right. Sorry.

Isabelle:
795. This particular home was actually listed for 835. We put in an offer for 825. They did not accept. They took it off the market, ripped out all the floors and put carpet in. Not what I needed for assisted living. Then, they put it back on the market for 800 and we offered 795 and they took it.

David:
Wonderful. All right. What did you do with it once you bought it?

Isabelle:
We put about 200K worth of renovations in, so 995, just about a million dollars all in. We made… It was a six-bed, five-bath and we turned it into a 10-bed, eight-bath without changing the square footage. 5,500 square feet.

Rob:
Then, sorry. Really quick, how did you fund that?

Isabelle:
We funded it through private money. We had two lenders on the deal.

Rob:
What was the outcome of the property?

Isabelle:
We got it licensed for residential assisted living, hired a licensed administrator. We have 10 residents in that home. They are paying average rates of about $6,000 each. It’s about 60K coming in every month in our gross. Our expenses on that house run about 35,000. Then, our mortgage, give or take 12,000. Now, it’s a cash flowing between 12 and 18, if I’m at 100% vacancy or less.

David:
Okay. Now, what lessons did you learn from this particular deal?

Isabelle:
Well, it was very frustrating because we did not tell the seller what we were planning to do and my renovation costs went up because I had to take out the carpet that they had put in. I think they had tile in there. We also put in a hardwood and hardwood soaks up liquids. That was a mistake. Would’ve put in LV or tile. I think the flooring was just such a pain. I wish I would had a conversation with the seller and then I wish I would’ve chose a different material.

David:
I really appreciate you sharing that actually, because too often, we hear about what everything that went great with the deal and nobody says what went wrong. But trust me, in every deal, more things go wrong than they go right, even when it’s a big win. I think that’s a testament to real estate that you can screw up royally and come out with a profitable deal that makes you hundreds of thousands of dollars over time. It’s one of the reasons I like playing in that space, because the target is so big. It’s almost difficult to miss is you get a couple of things right, but individual elements of every deal go wrong.
I know people that literally have negotiated closing costs of $50,000 that didn’t know that they could only collect $30,000 of those closing costs. In fact, one of them was a residential assisted living facility buyer who was buying with an agent in another state and didn’t run it by me and they lost $20,000 of money they negotiated because they didn’t know that was a rule. Yeah. It hurts, right? It’s like the same feeling you get when you like Mike Tyson had all this money and he lost it all to Don King. It wasn’t me, but it still hurts to know that it happened. There are so many things that happened like that in every single deal. It doesn’t mean you did things wrong, it just mean that you learned.

Isabelle:
Yeah. Have you seen the Mike Tyson thing on Hulu? It’s amazing.

David:
Is it like a documentary?

Isabelle:
It’s like a foe. It’s like actors are doing it, but I’m pretty sure he was involved, but oh my gosh, it’s so good. You have to watch it.

David:
I wonder what the auditioning was like to get someone that could do Mike Tyson’s voice.

Isabelle:
Oh, I have to put on the close caption.

Rob:
He said, “Hi, I’m reading for Mike Tyson.”

David:
How hard was it to find someone that looks like him and can talk like him? That could not have been easy to do.

Rob:
Okay. Also, I didn’t want to say… I’m glad you said that because I would’ve assumed that carpet was actually a good idea because I have always hated carpet. But once I had kids, we moved into a house that had carpet and I was like, “Oh, thank God for carpet,” because kids fall a lot.

Isabelle:
I know. But the thing is carpet’s a trip hazard for seniors because it’s poofy and fluffy and their feet are shuffling. You know what I mean? It’s a lot easier for them to trip on it. It’s actually better just to have the tile or the luxury vinyl. Hardwood carpet stinks, soaks up liquids and some of the wood, I’ve already had to replace. It’s just like, “We paid a pretty penny and I wish we didn’t.”

Rob:
Okay. Awesome. Well, last question here, who was the hero on your team for this deal?

Isabelle:
Oh, hero on our team? Well, my dad because he had secured the private money through his connections.

David:
All right. That sounds good. Remember that you two could do more deals with the help of BiggerPockets marketplace. Simply go to biggerpockets.com, look for the nav bar, and you can find agents. You can find lenders. You can find tradesmen. You can find a lot of the people that you need through the website. All right. Isabelle, I’m going to head us over to the last segment of our show.

Speaker 4:
Famous Four.

David:
It is the world famous, Famous Four. In this segment of this show, we ask every guest the same four questions every episode. Question number one, what is your favorite real estate book?

Isabelle:
My favorite real estate book, which it may be a business book, but it applies to real estate for me, The Pumpkin Plan. Have you ever read it?

David:
No, I’ve never heard of this.

Isabelle:
Oh, my God. It’s really good.

David:
Was this Starbucks plan to build pumpkin spice that would just take over the world and dominate the white girl industry?

Isabelle:
No. It is so good. You have to read it. It’s basically about when you grow those massive pumpkins, like the huge winning ones, that you have to kill every small pumpkin to make that one pumpkin grow that big. To me, it’s like a real estate business book because it’s like, “Stop letting all these small little things drain you and drain your business. Focus on what is going to make you the most amount of money the fastest.” It’s about killing off clients, people’s deal that drain you.

David:
That’s really good. Rob would grow a huge pumpkin like that, turn it into an Airbnb and rent it out as a novelty. He’s salivating over there at the thought of what that could look like.

Rob:
I see. People see a orange piece of real estate that’s going to rot in three days, I see dollar signs.

David:
That could be your book, Rob. The Green Pumpkin.

Rob:
Question number two, which now you got to come up with another business book. This is on you, Isabelle. What’s your favorite business book?

Isabelle:
My favorite business book, I would say the 5AM Club. Have you read that?

Rob:
Uh-uh.

Isabelle:
Oh, man. You guys got to read. I’m just joking. 5AM Club is great. It’s just motivational. Mostly, like get the most out of your day, wake up, get stuff done, live every moment like it’s your last. My dad being such a big inspiration with me in this business is really important for me to just have that vigor in everything I do and try to translate that to as many people as I meet. So 5AM Club.

Rob:
Awesome. What are your hobbies when you’re not out there building your real estate residential assisted living business?

Isabelle:
I love hiking. Praise God, I live in Arizona. I try to do the 52-hike challenge, which is a hike a week all year long. I love spin class, traveling and I’m a foodie. Great food.

David:
Question number four, I’m interested to hear your answer on this because you’re in such a specific niche. What sets apart successful investors from those who give up, fail or never get started?

Isabelle:
I’m going to say three things, having grit, getting punched in the face and getting back up and back up and back up, never letting it stop you, having a strong why. If you don’t know why you’re doing what you do and it doesn’t light you on fire, then stop doing it. Everything should be a hell yes or a no. Everything. Three, having passion. I think that a lot of people live life drifting and never committing and never being passionate about what they do. I think that if you don’t have passion in what you’re doing, you’re not going to be very successful. Even if you are, you’re not going to be happy about it.

David:
I like that. If it doesn’t energize you and it’s not a hell yes, kill that pumpkin.

Rob:
Unless you can turn it into an Airbnb. Lastly, Isabelle, thank you so much. We really, really appreciate it. This was amazing. Very enlightening. I’m going to try to talk David into turning our Scottsdale Airbnb into a high scale, high luxury RAL. Can you tell us where people can find out more about you?

Isabelle:
To find out more about us, you can go to ral101.com. There’s a whole bunch of free stuff there. Just like free books, free webinars, free phone calls. You can connect with me and I’d love to chat with you, so ral101.com.

David:
All righty. Thank you so much, Isabelle. Rob, where can people find out more about you?

Rob:
Oh, you can always find me on YouTube being goofy at Robuilt or on Instagram being even goofier these days doing a lot of reels, putting myself out there as they say again. Again, Robuilt. What about you?

David:
I’m a little bit less goofy, I will admit that, but I’m on Instagram, Facebook, everywhere else, @davidgreene24 and I’m on YouTube at David Greene Real Estate. Rob, you tend to make content that just tastes better. You’re like a Pop-Tart. I noticed my stuff’s very dry. It’s like a bran muffin. There’s a lot of nutrition in it, but you might choke on it. I got to learn to put a little bit of icing on what I’m doing here. If you guys agree that you need to see a little bit more personality out of me, go to the comments for this show on YouTube and say, “Yes, we want to see more of David being dumb.” Or if you’re like, “Nope, I like David being serious and Rob being the Pop Tart,” just put Rob’s a Pop Tart and we’ll know what you mean.

Rob:
That was actually my nickname back in high school.

David:
Thank you for that. Isabelle, great having you here. Thank you for shedding some light on this. Not often talked about the option for real estate investing, but it’s very profitable if you can get good at it. This is David Greene for Rob “The Pop-Tart” Abasolo, signing off.

Brent Beardall, president and CEO of Washington Federal, joins ‘The Exchange’ to discuss impact of Fed actions on demand for mortgage loans and commercial real estate as well as his ideas around what states are healthiest for property development.