October 2022

Ashley:
This is Real Estate Rookie, episode 223.

Nick:
I relate everything back to my world of kayaking and being an athlete. Through my decades of competing, I’ve just realized that you either, you win or you learn. Through loss, I try to use that as a learning experience. So I knew that I’m either going to figure this out and it’s going to be a great and a home run hit, because I was running the numbers and I was like this is either going to be too good to be true, or I’m going to learn from this experience and I’m going to keep taking those baby steps forward. So using that win or learn mentality instead of the win or lose. It got me into that first deal, which then got me into the second and the third and the fourth, and has kept me moving forward.

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

Tony:
Welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information, motivation and education you need to kickstart your investing journey. Oftentimes, we like to start the podcast with some reviews from some wonderful people in the Real Estate Rookie community. This week’s review comes from, it’s actually a crazy username. I can’t even say it. It’s SP with 30 different numbers behind it.
But this person says, “I’ve been a listener of the BP podcast for years, but I find myself prioritizing this one throughout the week. I love getting insight into small-scale investors and I find it super relatable. I think the balance between Ashley’s and Tony’s strategy is an awesome learning experience. I’m so inspired by the stories. Even though I have a decent amount of knowledge, I still consider myself a newbie and I enjoy hearing from other people’s journeys.”
So we appreciate that. If you guys haven’t left an honest rating review on whatever platform you’re listening to, take the five minutes, do it. We really appreciate it. The more folks that we can reach from the podcast, the more folks we can help, and that is ultimately our goal here. So, Ashley Kehr, we just got back from hanging out in person, which we don’t get to do all that often.

Ashley:
I know. So if you guys listened to episode 217 with Evan and Katie Miller, we actually went out to Denver and got to interview them live, which was so much fun. My business partner Daryl came with me and on the way home, I fell asleep on the plane, took up two seats and everything. I was crawled up in the fetal position. He took a picture of me and he’s like, “Ashley after her BiggerPockets bender.”
But it was so much fun. Just three days, all real estate people. We had a meetup. Over 300 people came to the meetup. So make sure you guys are checking out our Instagram accounts and the BiggerPockets Instagram account to find out where we’re going next for our next meetup.

Tony:
It’s always so cool to get to meet people from the Rookie community. There were literally people that flew in just for the meetup, which was so unreal to me. It’s always so cool to get to meet folks. We had a wonderful, wonderful time. Like Ashley said, looking forward to being able to do it again soon. What else is new, Ash? What else you got going on?

Ashley:
I’m actually sitting in a new Airbnb that’s about to go live. It’s my second Airbnb arbitrage. I rented another unit within the same apartment complex. The bed just got delivered a couple days ago and I just need to get a couple chairs and a few odds and ends and the thing is ready to go. I actually had my mom set it all up for me. So today was my first time seeing it with everything put away in its place, and it looks great. I’m super excited. It’s just a one bedroom unit.
Then the other unit we have in the building already is a two bedroom. So it’ll be nice to have a good dynamic here. Plus, if you have people coming for a wedding or things like that, it’s nice that two families can rent out the units and be close together too.

Tony:
I love that. I’m excited for my invite out to Buffalo so I can critique your units in person and give you some feedback.

Ashley:
I would love that so much. Can you create a handbook and stuff like that too while you’re here?

Tony:
It’s actually been a pretty crazy week for us at our properties. One of our cabins is in the mountains of Tennessee, and we’ve been dealing with this mice issue. We’ve had multiple exterminators come out, but they can’t seem to find and catch these mice. The only time these mice show up is when there’s a guest at the property. So we’ve been refunding guests at this property.
We had another property, two of our tiny houses in Joshua Tree, the mini splits, the drains got clogged because there was flooding out there or something. I don’t even really know what the reason was. But the mini splits started dripping onto the wall and overnight, ruined two of our mattresses at two different properties because there was just this drip.
Anyway, I’m saying all this stuff to give you a heads up. Now that you’ve got two, the chances of you having weeks like mine are starting to increase. You’ve got issues going on at all these properties at the same time.

Ashley:
Daryl actually moved to one of our cabins. And so, he moved into it and I’m pretty sure it was the first night he was there, there was a mouse running across a beam. His son saw and it’s scooting across. And so, he’s like, “I don’t know what to do with this thing.” He’s like, “I don’t want to sleep here if there’s a mouse running around.” So he actually got his son’s BB gun and he shot it off of one of the rafters it was running on. I was like, amazing.

Tony:
No way.

Ashley:
I’m like, “I didn’t know you’re such a great shot. My God.” I’m sorry for anyone-

Tony:
Tell Daryl I got a free night and a flight ticket to send him out to Tennessee. If he can get this mice problem handled for us, I’m all for it.

Ashley:
I apologize to anyone who is sensitive about the mice being hurt. I apologize for that. I understand that it is not nice to do, but he is a man that does not care. This is the same property where we’ve had a beaver problem with the beavers damming off the ponds. There’s just nature everywhere on this. You pull in the driveway and there you are at a very high risk of hitting a deer running across the driveway as you pull in.

Tony:
No ways.

Ashley:
It’s such a cool. So you have to come out to that property too when you visit. We call it the compound, so it’s got a couple cabins on it.

Tony:
There you go. Cool. Should we talk about today’s guest? We got a good one for today. We’ve got Nick Troutman today. Nick is a professional athlete, but not in the traditional sense that most people think when they hear athlete. He’s not an NFL player, or an NBA player, or baseball, or hockey. Nick is actually a professional kayaker, which is so cool.
You don’t really hear about that all that often. He talks about his story about realizing that being a professional kayaker, which is very different from being a different type of professional athlete, doesn’t come with the same type of security that you would think. He talks about how that realization motivated him to get started in real estate investing.

Ashley:
My dad would always have us do rolls in our ponds in kayaks when we were younger to do those and flip them. My brothers actually got pretty good, but I’m pretty sure the level of kayaking that Nick does is way different than me and my pond as a child.

Tony:
Way different in your pond. He’s got 80 foot waterfalls he’s coming off of.

Ashley:
My biggest takeaways on this is just the power of being by like-minded people, of being constantly told you’re crazy, you shouldn’t do this. That applied to him in both his profession and real estate investing too, is surrounding yourself with people who are like-minded, who are like, what you’re doing isn’t normal, you’re weird just like us. But that’s way better because you can do so many different things and you have greater opportunity. That was my biggest takeaway.
And then just him talking about risk and fear versus danger actually and what the difference is between those were the big takeaways. So make sure you guys listen all the way through. He also mentions towards the end, and I won’t give it away, but what his favorite podcast is, so you’ll want to check that out too.
Nick, welcome to the show. Thank you so much for joining us. Why don’t you start off with telling us a little bit about yourself and how you got started in real estate?

Nick:
Well, thanks Ashley. A little bit about myself. Well, I am a professional athlete, white water kayaker, father of two, husband and I travel around the world doing what I love, which is kayaking and exploring and adventuring. I’ve got a family adventure TV show, which is pretty fun. But a couple years ago, after my second child, when my daughter was born, I had this, I don’t know if this was a fatherly instinct or this provider syndrome or what, but I just had this deep need and desire to figure out how to provide for my family.
And so I started researching finance and money and all this stuff and realized that there is this global game being played of financial freedom and finance and money. I didn’t even know the rules of the game and yet alone, how I was doing or that I was even really playing this game.
And so started reading a ton of books, started learning a ton, and eventually stumbled upon real estate. A friend actually introduced me to the BiggerPockets podcast. He was like, “You should just go check out BiggerPockets.” I was about to invest in one of those $30,000 programs where some guru was going to teach me how to do real estate, and my wife wasn’t too into that idea. So I started researching BiggerPockets, realized that there was just a ton of value and free information and being just like, I don’t know if it’s my personality trait or being a professional athlete or what, but I just dive head in and I’m super obsessed.
And so I think I listened to every podcast available, read a ton of the books, and just got super obsessed with real estate, which is pretty awesome.

Tony:
You went down the rabbit hole, right?

Nick:
I fully went down the rabbit hole. Exactly. And then during COVID, I pulled the trigger on my first rental property, which was pretty cool and haven’t looked back since.

Tony:
Nick, we’re only what, 60 seconds, two minutes into this conversation, you already said some pretty insightful things. One of the things you said was you realized that there was this game being played and you didn’t even know that the game existed, let alone what those rules were. I just like the way that you phrased that, because I just shared on my Instagram story yesterday, Sarah and I, my wife, we posted a video on YouTube about our journey in real estate investing.
There was someone who commented and said that we were terrible people because we’re taking homes away from people that could otherwise buy them. Just saying a bunch of mean stuff to us on the internet. It was so funny because there was that one comment that was super negative, but then there were 10, 20, 30, 40, 50, there’s 100 plus comments and the majority of them are positive.
Everyone is saying, I wish I could aspire to be like you guys. I shared this on my story. I was like, for me growing up, we rented my entire life. We always rented homes, we never owned. It wasn’t until I became an adult and I had my own money that I was able to afford to buy something. But as a kid growing up, I was never upset at the landlord for being the landlord. I was always thinking, how can I become a landlord myself and play that game at the same level?
I just thought that was such an interesting way to phrase it because the game is being played regardless. You can either be mad that the game exists, or you can start taking the steps to learn how to play the game yourself.

Nick:
Again, through being an athlete, it’s just that game mentality that I regularly think of Tony, where the game is being played regardless. And so if I’m a professional kayaker and I’m going to go do a freestyle competition, the judges are scoring me that the time is going and I either can know the rules of the game and learn how to play by those rules, and then do the best that I can do to the rules of the game. Or I can just go out there and hope that whatever I do gets scored high or whatever it is.
It’s like that in everything in life. I just like to gamify everything. You can think of it that everything is a game and once you start to learn that there are rules to each game, just like there are rules to school. School is set up.
Unfortunately, not that I’m trying to go down that tangent, but it’s set up for people to be tested on one, the subject that they’re learning, and two, the information that they’ve been given. And then three, it’s really about how to remember that information. You could go study for an exam and you just brainwash yourself, think of study it all, you do the test and then the next day you forget it all and great, you got 100% or whatever, a high grade on your test. It doesn’t mean that you actually remembered it.
And so that’s just gamifying school and whatever. But everything has a gamification. Once you learn how to play by those rules, that’s where the success comes in.

Tony:
That’s a great point, Nick. You mentioned something else I want to circle back on, but just really quick on the gamify piece. I’m not a boxer by any means, so you guys, forgive me if I get this metaphor totally off, but you think about watching Floyd Mayweather box. A lot of his fights were boring because all Floyd Mayweather was doing was dodging, good defense, and then he’d get a couple body blows, but a lot of his fights didn’t end in knockouts.
But he continued to win because he understood the game that if he protected himself well, he landed a few good punches, when it came time to make a decision, he was going to win. So Nick, it’s a great metaphor for life that once you understand the game that’s being played and you understand the rules, you could then figure out the way to be successful in that game.
Something else you mentioned Nick, which resonated with me pretty deeply. You said you had a deep need and desire to provide for your family after your second kid came. I think it’s an interesting statement for you to make because you are a professional athlete, you travel around the world, you were making a living for yourself. Why did you feel that that living you were making wasn’t enough to be able to provide for your family? Why did you feel the need to do more?

Nick:
That’s a good question and deep question there, Tony. First off, I would clarify that I am a professional white water kayaker that is a very different income level than a professional NBA, NFL, soccer, any of the traditional sports. Those guys are making pretty good income. I’m stoked with the income level that I make and so forth, but it’s a very different living and I’m only really able to make a living at it by doing a lot of different things.
So within kayaking, I make a little bit of money from sponsorship deals or from social media stuff nowadays. I make a little bit of income maybe from possibly winning events and some prize money. I make a little bit of income from teaching or coaching. I make a little bit of income from maybe selling content like videos or photos to magazines or to TV or whatever. With our new TV show, I make a little bit of income there. And so piecing all of that together, it’s enough to make a living and doing it that way.
Another aspect of your question is why wasn’t that enough? Well, I also wake up every day and I’m super grateful that I live my dream life. Every day I’m like, man, I’m fully living my dream life. I’m doing exactly what I want to do. I get to travel the world with my family. I have freedom. I get to be with my family every day, and I don’t want anybody to ever take that away from me. So right now, if we were to lose a sponsorship deal, or if we were to lose our TV deal or whatever it is, there’s several legs that keep the chair standing, but if you start losing a couple of them, the chair might fall.
And so I’m trying to think how can I figure out a way to create this financial freedom without any of that? My goal in life is to have enough real estate that it could substitute all of everything that I do so that I could continue this dream life and continue traveling and spending time with my family, and paddling and exploring and all that stuff, even if the brand partnerships fell through or God forbid I got injured or something like that and I couldn’t even paddle anymore. That’s the game plan and the goal.
I don’t know. Again, I’m not sure if you had it or not, Tony, but the idea of just becoming a parent, there was this deep provider syndrome and I just like, I’ve never had it or didn’t have it nearly as much with my first born, but for some reason the second came in and I was like, I’ve got to provide for my family. I don’t know what it is.

Ashley:
Was it the first born, strong willed can survive on their own, but the second one, got to take care of this one?

Nick:
I’m not sure if it was just that I was younger for the first, or if it was the fact that my second born. Our first was I had a son, and then our second was our daughter. And so I don’t know if it had something to do with the father daughter. I have no idea other than I have just this deep provider syndrome. I don’t know.

Ashley:
Well, Nick, before we go too far, what does your portfolio look like today?

Nick:
What does my portfolio look like today? We have four rental properties as of right now. We have 17 units. We’ve got a couple duplexes, triplex, single family. And then our last one was a nine unit apartment building.

Ashley:
That’s awesome. When did you first start? How long did it take you to acquire those 17 units?

Nick:
We started mid 2020, so it’s coming up on two years now. I think at one point, when we first hit the 17 units, I think I got 17 units in 16 months or somewhere right around the 17 month mark. And then we’ve slowed down a little bit after this last nine unit being that each one we’ve done the BRRRR method, and this last one has been a pretty extensive rehab. We’re still in the midst of the rehab of the nine unit.
I have learned lessons along the way. And in part of that I realize that I should slow down on the accumulation of units and properties, and still make sure that I’ve got that cash ready for the unknowns. Because what I’ve learned along the way is that there’s always unknowns in any rehab project. We’ve got some more properties and we’re still in acquisition mode and still trying to buy some more and whatever, but I’ve slowed on the gas a little bit until this nine unit is finished anyway.

Ashley:
Nick, what made you decide to go with the BRRRR strategy? There’s so many different ways you could have invested in real estate, and why did you end up choosing that?

Tony:
If you can define BRRRR, Nick, for those that aren’t familiar with that phrase?

Nick:
To define the BRRRR strategy, it’s buy, rehab, rent, refinance, repeat. I had to double check that I had all my Rs in the right order there. Why we went with it was in my learning phase, and I’m still in the learning phase, but definitely in the early learning phase of listening to a lot of BiggerPockets and reading a lot of the books, to me that one just seemed like one of the most powerful methods for getting into real estate in the sense that you can actually recycle that same seed capital. The money that goes into the property you can refinance, pull that back out and then use that same money for the next property.
That’s exactly what we’ve been able to do and it’s worked really well. That alone is the reason why we’ve been able to accumulate the properties as quick as we have. I would definitely say the so-called success that I’ve had this far has to do with the BRRRR methods with our properties.
The other thing too was within learning all of this, I read David Greene’s book, Long-Distance Real Estate Investing. For me, that was such a huge light bulb and shift, because a lot of the interviews on BiggerPockets, you’d hear about people trying to get out of their 9:00 to 5:00, trying to find that financial freedom so that they could leave their job. For me, I’m like, I love my job, I don’t want to leave at all. Because my job involves me traveling a lot, I had to figure out how could I do this on the road? How could I do this away from the properties and not being able to be hands on managing and all that stuff.
David Greene’s book really spelled it out so clearly for me that I finished the book and I was like, I’m going to give this a shot. So we bought that first property. I had never seen the property, I had never met our property manager, I had never met any of the contractors. I literally did it all over the phone and then I was like, oh my gosh, it totally works. It was like a test to see if the whole theory behind it. It’s easy to have a theory, but to implement it sometimes is a little bit different.
In everything in life, again, I relate everything back to my world of kayaking and being an athlete. Through my decades of competing, I’ve just realized that you either, you win or you learn. Through loss, I try not to use the word loss or losing, and I try to use that as a learning experience.
I knew that I’m either going to figure this out and it’s going to be a great and a home run hit because I was running the numbers and I was like, this is either going to be too good to be true, or I’m going to learn from this experience and I’m going to keep taking those baby steps forward. So using that win or learn mentality instead of the win or lose. It got me into that first deal, which then got me into the second and the third and the fourth, and has kept me moving forward.

Tony:
Nick, I’ve talked a lot on this podcast about me losing $30,000 from the Shreveport home, but I need to change that and say I had a $30,000 lesson on that Shreveport home moving forward. It’s a good way to frame things. Nick, so you’re all over the country literally, and you’re even outside of the country right now as we’re recording this podcast episode. Where is home base for you? If you say, this is where I live, is there a part of the country that you call home?

Nick:
We do have a house and a home base, Rock Island, Tennessee. Small town just outside of a state park in Middle Tennessee, which is just a gorgeous place. But again, through my work and being an athlete, we’re on the road anywhere from six to 10 months out of the year, traveling around with a truck and a trailer. So we’re definitely on the road quite a bit, but Tennessee is still where we call home. Where we go home for the holidays anyway.

Tony:
Your home is Tennessee, give or take, of these 17 units, where are these spread out at? What markets are you investing in?

Nick:
The first eight were in Columbus, Georgia. Being that I’ve been super fortunate to be able to travel around the country, I get to see a lot of different markets. What brought me to Columbus, Georgia was a white water park, and it’s actually going to be the home of the World Championships next year, so that’ll be super cool.
I had been going down to this city to go kayaking a fair amount, and I had noticed that they were really putting a lot of money into just redoing a lot of the riverfront community and a lot of money was going into upkeep in that city, and just trying to reintroduce a lot of the older buildings and stuff like that. When I was running numbers, it just had a great rent-to-price ratio.
The rents for the purchase price really were some of the most favorable in every market in the United States that I had looked at. And so I was like, well let’s start here. The next market and the one that we bought our nine unit in is in Cookeville, Tennessee, which is about 40 to 60 minutes outside of Nashville. It’s about 35 to 40 minutes from where I actually live. And so pretty familiar with that city. Tennessee Tech is there, so it’s college town outside of Nashville.
Definitely, it’s been growing quite a bit in the last coming years and being the closest city, that’s where we go for date night and stuff like that. I knew that area quite well over the last couple of years and I could see it growing and I just felt comfortable. Again, it was just another one of those deals that came across that I was like, this seems too good to be true. We ran the numbers, it looked really good, put in an offer and bought a property.
Like every property that we’ve bought, there’s always the unforeseens and there’s always the troubles afterwards, but it keeps me moving forward with those baby steps one at a time.

Ashley:
I think one thing we want to highlight right here is that you started investing in a city that you knew, that you had visited, that you had liked. I think it can get so overwhelming as a rookie investor as to, I know I don’t want to invest in where I live right now, but where do I even start to analyze a market? I think right there, you just gave a great example. Start with places you’ve been that you’ve noticed things, or that you’ve even just liked the city, or you’re going to end up going there occasionally. I think that’s a great starting point as to where you can analyze a deal.
And then after that, if none of those markets work where places you’ve been or you’ve known or even your hometown, that’s always a great starting point too, because growing up somewhere you know that market and have a better idea than somebody who’s never been there. And then just looking where other people are investing too.
So doesn’t mean you should invest there because other people are investing there, but that’s a great starting point. Looking on social media, the BiggerPockets forums and where other people are investing, then going and verifying data and doing your own research. That’s a huge struggle as a rookie as to how do I find a market? I think you gave a great example is you just picked a market that you were familiar with and you noticed things.
Besides that you noticed that they were doing a lot of, I don’t know if gentrification would be the right term there, bringing these old buildings back to life, things like that. Were there any other things that you look for in a market that may be important for a rookie to keep an eye out?

Nick:
I would look for, like what you said, look for areas that you’ve been to, anything that gives you maybe some advantage, even if it’s somewhere where you grew up, or if you’ve got friends that live there that you can have them help with boots on the ground, checking out the properties or driving for dollars, any of that stuff.
The other thing is that, for me anyway that I really just look for, is where is that price-to-rent ratio as well? Looking up where have prices gone in the last couple years? You can look back to the 2008 crash or whatever, see how they do through different market cycles.

Ashley:
Can you just explain real quick what the price-to-rent ratio is?

Nick:
The price-to-rent ratio is essentially how much… A commonly used term would be the 1% ratio or the 1% rule or the 2% rule or something like that. But a 1% rule is that the monthly rent is 1% of what the purchase price is. That’s that price-to-rent ratio right there where you want to figure out where does your monthly rent compare to your purchase price overall?
They use the 1% rule as a rule of thumb that if the monthly rent is 1% versus the purchase price, that’s a pretty good deal. I think Brandon Turner even did a while back on his social media saying something like the 2% rule is almost a given that if it falls in the 2% rule, it’s going to cash flow.
More than anything, I’d advise people to make sure that when you’re starting to try to see if, depending on what method that you’re going with, whether it be cash flow or appreciation. For anybody starting, I think if you go with the cash flow method, where as long as the property cash flows after all of your expenses, after your taxes, after your mortgage, after everything, it’s a pretty safe bet that you’re not going to lose the property.
Even through mistakes, even if you do something wrong, whatever, if it’s still cash flows, or even if the cash flow is negative, you’re at least in the black or you’re not in the red anymore. You’re not going to have this be a money suck project. More than anything, I really just encourage people to just pick a market. It could be any market.
We picked Columbus, Georgia, kind of because I knew the market, kind of because I’ve been there, but also because it was just the first really good deal that I found on the MLS and I was like, that looks pretty good. I kind of know that market, I think I’m just going to take a chance. That’s how it works, is that no matter what your first deal is, it’s always going to feel a little bit risky. You’re always going to feel like you don’t quite know enough. They call it a leap of faith for a reason because eventually, you just have to jump and go for it.
We could get into the whole risk and reward and fear analogies and all that stuff. Again, because I deal with a lot of fear from kayaking and from my history and background in white water, and I try to remind myself that fear is false evidence appearing real. Fear happens all the time. We all deal with fear.
I get regularly called crazy if I go over an 80 foot waterfall. People are like, You’re crazy. But what they’re not realizing is the analysis between fear and danger and scouting those rapids and scouting that waterfall and trying to analyze what is actually dangerous? Where are the actual dangers in this scenario? Can I avoid those dangers? And then if all that is left is the fear after I take away all the dangers and I remove all of those out of the equation, then I know the rest is just fear. That’s the demons of the mind as I deal with. It’s the same with real estate.
I was extremely afraid and fearful with real estate, but I knew that I just try to analyze, what are the actual dangers in this scenario? What if my house burns down? Can I get insurance for that? Maybe I’ll remove that. How am I going to manage this property from the road? Can I hire a property manager to do that? I remove that fear or that scenario. What if there’s a break in? Can insurance cover that?
There’s all these fears and you just try to list them all out, and then figure out what are actual dangers? What are actual scenarios that could go wrong? How can I avoid those? How can I address those? How can I prepare for those? Whatever is left after that, that’s just the fear, that’s just the demons of the mind and you know that, that’s that false evidence appearing real. After the dangers are gone, just go forward and take action.

Tony:
Nick, that is a great analogy about fear. I’ve actually never really heard it phrased that way about danger versus fear. So many new real estate investors confuse those few things. Just because it’s outside of their comfort zone, they think it’s dangerous, but it’s not necessarily dangerous, they’re just afraid. What a great breakdown, what a great analogy.
I just want to make one comment on the market selection piece, because I know so many investors that get stuck on that part alone. Where they’ll spend months and months and months and months trying to find the perfect Goldilocks market to start investing in. The approach that I’ve always taken is that just because you start investing in a certain market, doesn’t mean you have to be committed to that market forever. I started investing in Shreveport, Louisiana. We no longer buy any properties there. Now we invest in multiple different markets across the country.
I learned so many good lessons by just getting started. I think for most people that are listening, if you don’t have that first deal yet, instead of over analyzing and wasting a bunch of time trying to find that perfect market, just pick a market and learn the basics of real estate investing. And then you can feel out whether or not you want to continue to invest there or if you want to go somewhere else.
Nick, you went from Columbus, Georgia to Cookeville, Tennessee, and I’m sure when you started investing in that second market, you had a lot more confidence going into that deal than you did on that first one. That’s just a point. Just get started. If you choose the wrong market, sell the property, move on to the next one.

Nick:
It goes back to that win or learn mentality. You have to take that first step. You have to take those baby steps to get into the game in the first place, and then you either win with that first property, or you learn from that first property and continue moving forward. It’s just like the game of life, or the game of finance, or the game of whatever, there’s always a next step. So just keep moving forward and eventually you’ll get to whatever that end goal is, you’ll reach that result.
I have another phrase that I remind myself always too. It’s that if you never give up, you cannot lose. Meaning that you will always win as long as you keep moving forward. You keep taking action. You keep learning from those mistakes. Going back to which market to pick, I was in that analysis paralysis.
I was the one that was listening to all the different BiggerPockets podcasts. I was the one asking those questions on the forums; where should I invest? Eventually I picked a market and I just went for it and I just tried knowing that maybe this first deal isn’t going to be the right one. Maybe I’ll have to learn from these mistakes. Maybe I’ll have to sell it, who knows? But by taking that first step, it enables me to take the second step and the third step and the fourth step.

Ashley:
I think everybody just wants to maximize their return. So their first deal they’re thinking, I just have this amount of money, or I have this skill set, or I have this time, or whatever it is. What is the best way for me to use it and take advantage of this opportunity? You can get so caught up on that is the best way to maximize your return. Just getting started is going to be a way better return than you waiting five years for that home run deal to come about. Or wasting so much time trying to decide do I use my cash to buy one property? Do I spread it out over five properties? Do I invest it in something else, then go and buy in property? It’s just pick one because a lot of the times they’re all wins. You’re making a return somehow.
Maybe you’re giving up more time or less time based on what the return is for that, but it’s just that getting started. It’s going to propel you because that one deal could be one of thousands of deals that you’ll do later on. That deal won’t even matter anymore because it propelled you to bring on all these other deals and just getting started.
Nick, one thing you talked about was that people say you’re crazy. I’m assuming you’re talking about the risk of kayaking and white rapids. Did anybody think that about you too when you started to invest in real estate? What about your spouse? How did you get your spouse on board? What does your support system look like as an investor?

Nick:
You got a couple questions there and I’ll try to answer them in order there, Ashley. First off, I definitely get called crazy sometimes and that would be due to the kayaking aspect and running waterfalls and whatever it might be.

Tony:
Nick, when you said 80 foot waterfalls, I thought you were a little crazy too, man. 80 feet, I can’t even picture that in my mind. There’s a little bit of crazy in there, for sure.

Nick:
It’s like an eight story building, Tony, think of it like that, you’ll be fine. It’s the same in real estate. It’s the same in so many things where if you go against the grain or against maybe what society might deem as normal, then people are going to probably start calling you crazy. For the most people, you buy a house and you live in it and you have a 9:00 to 5:00 job and that’s just what life looks like.
If you start doing things that are outside that, people will start calling you a little bit crazy. The more that you veer outside of that, the more that you get called crazy. And so definitely I have been told throughout my entire life that people question regularly, what am I doing? What am I doing when I wanted to get into kayaking when I was starting? What am I doing after high school, left to go continue kayaking, travel the world and not go to university? People started questioning and thinking I’m crazy if I’m having a family without having this university or college degree, how am I going to support my kids and my family moving forward?
People think that I’m crazy if I’m going to start a podcast or start real estate. Doing anything that isn’t deemed normal, they’re going to start questioning you and being like, I don’t think you should do that. My uncle bought real estate one day and he didn’t do so well. So I don’t think it’s a good idea.
Instead of just following the narrative of what maybe society might deem as normal or okay… Something what I learned through a lot of my travels and what I’m super fortunate to have been able to travel the world, but that we grow up with this narrative of being taught what is right, what is wrong, what is normal.
Here in America, it’s super normal for us to eat cows. Seems normal. We have burgers all the time. It’s an American dish. You go to India and it’s not forbidden, but you would never eat a cow because it’s a religious animal. Here in America, we would never eat horses, a pet animal. It’s just deemed you would just never do that. You go to Iceland, that’s just normal.
You just have to start realizing that whatever is deemed normal might just be the environment that you grew up in. The more that you look outside that box, the more that you realize, for us three right now for this conversation, investing in real estate is totally normal, but maybe not for everybody. It might be opening and widening that horizon and that idea of what normal might be, and trying to realize there might be other ways to do this. That answers your question a little bit of people calling me crazy.
Back to is my wife supportive? Luckily for me, in this whole journey of trying to figure out the game of money and the game of finance, I tried some stock trading and some options trading and definitely lost money in some of that. My wife was way more on board with real estate. We’ve been talking about real estate since we got married. And so I’m super fortunate that she’s on board with that as well, and she really likes the idea of investing in real estate.

Tony:
That’s a great strategy Nick. If you try something and you fail miserably, then when you try and do something like real estate where the odds of success are a little bit higher, now the spouse is like, cool, you failed before, but I think this one has a better shot. So it’s almost like a reverse psychology type trick. I like that.

Ashley:
Tony, are you telling everyone to go gamble on the stock market and do day trading for a couple weeks, lose a ton of money, then invest in real estate to get their spouse on board. Is that your recommendation now?

Tony:
I think that might be the new best plan to get spouses on board. No, please don’t do that. Please, don’t do that. If you guys get messages from me and Ashley after this episode asking you guys to invest in crypto, just know it is not me. It is not Ashley. There’s a bunch of scammers out there that are pushing people to do that.
Anyway. I want to go back to your other point, Nick, about being normal and why you’re okay with not being normal. As you were talking, I was just looking up some stats. The median household income in the United States is just over $31,000, and the median net worth is just over $120,000. The average person in America is actually considered obese. Not even to think about, the average person gets up, goes to the same job, 9:00 to 5:00, they probably hate it, do that for 30, 40 years, then they retire with very little money left over.
I have this conversation with my son all the time about not caring about being normal. Because normal means that you’re underpaid, you’re close to being broke, you’re unhappy with the job that you have, maybe you’re unhappy in your relationships. I don’t want to be normal by any sense of the definition. I want to do things that make people think that I am weird because if I’m doing that, it probably means I’m on a path towards success.
The whole idea of being normal, I think we need to push that aside as real estate investors. Honestly, I think that’s why this podcast, this Rookie community is so important, because now you can interact with people who are just as weird as you are and are willing to do a lot of the crazy things that you are as well. I appreciate you sharing that insight with us.

Nick:
It’s also a lot more fun to not be normal because that’s where the adventure is, that’s where the excitement is in life. I think each one of us is unique. Every person has their own things, their own passions, the things that they love, the things that they enjoy doing. Figure out what that is and just go chase that. I encourage people to chase their dreams no matter how weird society might deem them.

Ashley:
I feel like almost once you get into the real estate investing community, it’s almost like this secret society that’s not a secret, but it’s all these aha moments or epiphanies of the American dream. You work a W-2 job, 9:00 to 5:00, you retire on your pension, you have a house that’s on a mortgage for your whole life with that white picket fence. That’s really not the American dream.
Nick, you’re talking about traveling around the country for your job. A lot of people are like, I wish I could leave and just go all over all the time. Or maybe it’s somebody that wants to move or have short-term rentals in different properties and for three months live in Florida, three months live in Colorado and all these things. Even in the beginning, you touched on schools and how schools are built to have you memorize data and they’re built to make you an employee basically, not an entrepreneur, not to run anything. They’re built to make you an employee.
I just think all of these things, as you get involved with these like-minded individuals who realize that real wealth is out there, and you don’t have to climb the corporate rat ladder to be a CEO to have this high net worth, that there’s way easier ways to do it. Real estate investing is definitely one of those and just opens up so many possibilities and opportunities that a lot of us couldn’t even fathom, maybe even growing up thinking that this is what our life would be now. It’s just because we actually did something normal.
We bought a couple houses. Buying houses is normal. It’s not like we went and invented some app or piece of technology that created wealth for us. We did something that’s actually quite easy. Just like you talked about, Nick, overcoming that fear and understanding what the risk actually is and getting into it. Go ahead.

Nick:
No, I was just going to add to that, that success and maybe wealth or anything like that is going to be deemed a little bit different for each one of us. Everybody has their own idea of what that dream life might be, what that success looks like. It could be one rental, it could be financial freedom, it could be the ability to travel, the time freedom to spend with family.
So realize that don’t get caught up on what society might deem success looks like. Don’t get too caught up on just what society deems as normal, because we make heroes out of so many people that went against the grain and chased their own passions, like Walt Disney, or Elon Musk. Just so many people that I’m sure during their time, were deemed a little bit crazy and a little bit against the norm, and then later on in life were like, look at those guys that just chased their dreams and went for it.
For all the rookies out there, I highly encourage you guys to figure out what your why is and just go for it no matter what it might be. Just take some action, take baby steps because that helps minimize that fear, but take action either way.

Ashley:
That’s great Nick. Thank you. Let’s talk about one of your deals. Let’s get into the numbers of it. Do you have a property in mind that you want to go over?

Nick:
I do have a property in mind.

Ashley:
It’s going to be rapid fire. I’m just going to ask you some quick questions, and then you can go into the story of it. Where is this property located?

Nick:
This was our first ever property and it is located in Columbus, Georgia.

Ashley:
What is the strategy?

Nick:
The strategy was the BRRR method and I was literally taking it straight out of the pages of Long-Distance Real Estate investing by David Greene.

Ashley:
How many units is it?

Nick:
It is four units and it’s actually two side by side duplexes. Ironically, it was listed on the MLS, I think it was written up as a duplex, but the square footage and the bedroom count and everything, it had per unit. So literally, it was listed as, I think two bedroom, one bath. And then I’m looking and I was like, that doesn’t make any sense. The photo had this odd photo from the street looking at it, and it looked like this two parallel side by side duplexes and I was like, I think this might be either they didn’t write it up right in the listing, or this just might be one of those opportunities that’s too good to be true. So I gave them a call and got some information on it, and I think we put in an offer that day.

Ashley:
That’s a good tip is that MLS listings are not always accurate. Sometimes you can go through a property too and look at the pictures and be like, wait, those two kitchens are different. Are there two kitchens in this property, and they have it listed as a single family instead of a two unit? What was the purchase price that you ended up getting this property for?

Nick:
The purchase price, this is going to be more normal for you Ashley. Probably a little crazy for Tony. The purchase price, it was listed for 45,000 for four units. This was in the peak of fear May, June of 2020. So the peak of COVID fear and it was our first deal and I was pretty intimidated.
I was running the numbers and the agent, it was actually a wholesaler, but the agent said that they were renting at 500 a unit. I’m running the numbers in my head and I’m like, this seems way too good to be true. We just kept going one step forward, making an offer. One step forward, doing our inspection. One step forward, continue that way and then we eventually closed on the property for 42,000.

Ashley:
Awesome. How much rehab did you have to put into the property?

Nick:
This is where it gets interesting. Technically, we’ve probably put in about 12,000 or so into it now give or take. When we first did the BRRRR strategy, we were able to BRRRR it without putting any rehab into it. The wild part was just the way that the bank’s work that you guys know you have to have owned the property for six months before you can refinance the property. I don’t know if it was just within those six months or if it was right from the peak fear of COVID into the crazy boom that went right after it. We purchased it for 42 and six months later, it appraised for 126.

Ashley:
Those are the best deals.

Nick:
We were able to pull all of our money. It was literally I left the closing office laughing and almost feeling like I had done something illegal, because I was just like, wait a second, I can close on this property. I now have no money into the property. My tenants are paying my mortgage and still a little bit of cash flow, and now I’ve got 30,000 in my pocket to go buy another deal. I was just mind blown. I literally was like, why does everybody not do this? And so since then, I’ve been trying to speak from the balcony to everybody that’s open to listen, you should probably look at this whole real estate thing. There’s money to be made here.

Ashley:
That is awesome Nick. What a great first property to get to. I’m sure that even just made you more motivated to go out and get your next deal. With the taking out, did you take out 80% then of the appraised value for the mortgage?

Nick:
I think we took out, I’d have to go back and look. It was either, I think it was 75 loan-to-value. I think we took out of the refinance, I think we took 72 back out. We paid off what our down payment was, we paid off our purchase price because we paid in cash, and then we still had 30,000 left. Now 12 of that went into rehabbing because one of those units ended up being a hoarder unit afterwards, which I wasn’t fully aware of, because I had never seen the property in person.
But either way, it was just again, one of those things that it was just another learning step along the way, and I feel like life is filled with all these steps that we’re to learn from and keep moving forward. But it was that first baby step that got my foot in the door in real estate and it is definitely the one that keeps me moving forward, because I can just see the power of what real estate has to offer.

Tony:
I love hearing stories about successful first deals Nick, and it’s like that gateway drug into doing more and more and more of that same thing. We appreciate you sharing that story with us, Nick. I want to take us next to our rookie request line. For those of you that are listening, if you would like your question featured on the show, just give us a call at 8885 rookie, leave a voicemail and we might just use it on the next show. Nick, are you ready for today’s rookie request line question?

Nick:
I think I’m as ready as I’ll ever be, Tony.

Tony:
All right. Here is today’s question comes from Trudy in Sacramento. Trudy says, “My husband and I have just started our real estate investing journey. We’re researching right now. We’re both W-2 workers. I’m a part-time worker, which would give me more time to be able to do the researching and eventually manage the properties. We have money about $180,000 set aside for an investment. But we’re looking around realizing that California is a really expensive market and we’re wondering what area, if any, that we should venture to outside of California and if it would be a good start to do that?”
They’re also trying to determine whether or not they should buy a single family property versus a multifamily property. Any ideas would be greatly appreciated. Nick is someone who has struggled with some of those same questions. What advice would you have for Trudy?

Nick:
Trudy, those are some great questions right there. I would encourage you to take that money and probably look outside of California. I would first maybe pick up David Greene’s book on Long-Distance Real Estate Investing, because you’re going to learn all of the ways to do it outside of your state and not being there and not being present, and being able to build that team up out of state. That money is probably going to be able to go a lot further outside of California.
Honestly, I would probably look at the Southeast. I think there’s a lot of opportunity in the Southeast, which is a lot of different states. That could be Alabama, Tennessee, Georgia, could be the Carolinas. Ashley might tell you to go up to New York and that there’s a lot of opportunity up there, but maybe she won’t because she wants to keep them all for herself. I’m not sure.

Ashley:
The tenant landlord laws are awful here.

Tony:
And it takes years to close.

Nick:
The Southeast is definitely pretty landlord friendly in that regard as well. So I would maybe look in the Southeast. I would definitely look out of state and start trying to build that Core Four. As far as whether to buy a single family versus multifamily, I would encourage if possible, to start in that small multifamily, whether it be a duplex, triplex, quadplex, because for the most part, the lending is going to be just as favorable with the 30 year loans as a single family might be. But you get the bonuses of getting two rents, three rents, or four rents, depending on what small multifamily it is.
It helps recognize that power of real estate when you start getting multiple rents coming in a month. Trudy, I wish you the absolute best with your journey and very excited for you guys. Definitely maybe pick up a book, go listen to some old podcasts and look out of state.

Tony:
That’s wonderful advice, Nick. I just want to take us to our next segment here, which is our rookie exam. These are three questions that we want to ask every single guest when they come on. Nick, these are the three most important questions that anyone will ever ask you in your life. Nick, are you ready for the exam today?

Nick:
Man, three most important questions ever. I’m ready. Let’s do it.

Tony:
All right. First question, what is one actionable thing rookies should do after listening to your episode?

Nick:
One most actionable thing that they should do is figure out where you’re at in the whole process. If you’re stuck in that analysis paralysis, figure out how to overcome that fear by looking at the dangers, listing them out and realizing what are actual dangers? How could I avoid these, and how could we move forward? Essentially just taking action with those baby steps.
If you’ve never done a deal before, maybe go onto the BiggerPockets calculators and start analyzing a deal for your first ever deal. If you’ve already done that, maybe call up your lender and see if you can get pre-approved. If you’ve already done that, maybe write an offer. Maybe if you’re too afraid, just write such a low ball offer that you know that you’re not going to get the property, but at least then you’ve written your first offer and you know the process of writing an offer.
All of these are just little baby steps, baby steps, baby steps, and eventually it’ll get you to your first ever rental property or your first ever home or whatever it is that that goal might be. Recognize that you can overcome the fear by realizing the difference between fear and danger, and then just take those baby steps to take action and continue moving forward.

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

Nick:
One tool, app or system? Honestly, this is going to sound pretty funny, but I would say as far as apps go, I’ve set up our whole system with out of state in mind being that I want to be able to travel, I want to be able to be on the road, I want to be away from these properties. We’ve got managers that are set in place to do it all.
The two apps that I use the most would be one, the Podcast app on my phone because I just constantly listen to BiggerPockets podcasts, to your podcast. I’m constantly just trying to learn new creative strategies, learn new ways that I could be writing offers. New ways that I could be taking action and moving forward with my goals.
And then the other one would be the Zillow app. All of our deals that I’ve found are all off of the MLS. It’s going to sound super cliche or weird, but it’s worked. If I’ve got free time, at least every day I look at the different markets that we’re interested in and I’ll just do a quick five minute search to see if there’s new properties, or even if there’s a new market that I want to look at. Probably those would be the two apps that I use the most, would be maybe the Zillow app and the Podcast app on my phone.

Tony:
All right. Obviously Nick’s favorite podcast is the Real Estate Rookie show. I know he didn’t mention that part, but I just wanted to plug that in for him anyway. We’ll move on to the last question there. Nick, where do you plan on being in five years?

Nick:
This is probably going to be again, against the grain of what most of your guests might say. I want to be right where I’m at. I wake up again, every day feeling like I live this dream life, so I want to continue living this dream life. I want to continue traveling the world, continue doing this family adventure TV show that we’ve got, continue spending time with my kids getting outdoors. For a lot of it, I just want to keep doing what I’m doing.
As far as finances go, I definitely want to get or want to be financially free and within five years, that’s definitely a goal of mine is to be financially free. To essentially substitute all of our current finances through our real estate to have that backup if something were to ever occur. Keep on living life and living it to the fullest. Tony,

Tony:
Awesome Nick. I love that brother. Sometimes it’s not about necessarily changing your life, but just fortifying the life that you already live, and sounds like that’s the path that you’re on. We appreciate you answering those questions for us, Nick. Just a heads up, you passed the exam so you pass with flying colors, so we appreciate that.
Before we wrap up, I just want to highlight this week’s Rooky Rockstar. This week’s Rooky Rockstar is Andreas Rebe. Andreas says, this is my second long-distance purchase. Closed two months after my first purchase, and the second one is a six unit, multifamily property in Pennsylvania. Bought it for 330,000 using hard money. Rehab was supposed to be 90K, but had to fire a contractor and then took a while for him to evict the tenants. Had to catch up and had to hire four different construction crews and went over $67,000 on the budget.
Either way, he has an opportunity to increase the rents, get a pretty high NOI, and he’s hoping that it’ll appraise for about $700,000 once it’s all said and done. Actually, he added one little note at the bottom. This is a 12 month update, Andreas said, “12 months later, nowhere near the profit I was expecting. But man, have I learned a ton. Growth has been the key here. It has been scary, but an amazing learning experience. Every time I get a curve ball that could have ruined the deal and me, I smile and I find it exciting. I don’t freak out. There is no choice but to keep moving. I brought this, quote unquote, stressful situation on myself, no one else did. I tried to create wealth and eventually I will.”
What a great Rookie Rockstar to tie into everything you talked about today, Nick, of rolling with the punches, taking these, quote unquote, failures and turn them into lessons and realizing that failure doesn’t happen until you give up. Andreas, we can’t wait to hear what that next successful deal looks like. When it does happen Andreas, be sure to put in your app for the show so we can get you on here and share the story with everybody.

Ashley:
It’s like a college tuition. So many people go to college and they are afraid of like, Oh my gosh, but I went to school for this degree. If I don’t work in this, it’s a waste that I wasted the degree. But look at how many real estate investors have quit their jobs. They went to school for four to seven years or whatever that may have been, and then they find real estate, and then they end up quitting and leaving. If you do lose money on the first deal, that could be your college tuition and you could be making money on the next one. So I really like this Rookie Rockstar story today.

Nick:
Congrats to Andreas and it sounds like an amazing deal. Like everything that we’ve been talking about, it’s the win or learn mentality and I think he’s winning in the long run. So super excited where he goes with it, for sure.

Ashley:
Well Nick, thank you so much for joining us today. Could you let everyone know where they could reach out to you and find out some more information about you?

Nick:
Where can people reach out to me? I’m probably most active on Instagram, so you can check me out at Nick Troutman Kayak. Troutman is like the fish, and then man. So Nick Troutman Kayak is my Instagram handle. If you’re interested in more of the family adventure content, check out Great Family Adventure, which is separated by a period of each word. So great.family.adventure is another one. That’s our family adventure TV show. Feel free to reach out. I’m pretty active and I try to answer every single comment and every message that gets sent to me. So would love to connect with you guys.
The other thing I didn’t even mention that I’ve got a podcast called The Art of Awesome. It’s a lot about what we’ve been talking about today, which is just encouraging people to reach their goals, to be as awesome as they can be. Feel free to check that out too if you guys are interested in a little bit more motivation. Stoked to talk with any of you guys, so feel free to reach out.

Ashley:
That’s awesome. I can’t wait to check out your podcast and maybe one day, Tony and I can be guests on it and we could go out kayaking together and podcast live from the river or something.

Nick:
Let’s make it happen, for sure.

Ashley:
Definitely. That would be so fun. Nick, thank you so much for joining us. We really appreciated all the advice that you gave and for sharing your story with us. I’m Ashley at Wealth from Rentals and he’s Tony at Tony J Robinson on Instagram, and we will be back on Saturday with a Rookie reply.

CNBC’s Robert Frank joins ‘The Exchange’ to explain how luxury real estate is impacting the housing market, why Manhattan is less sensitive to changes in mortgage rates and the trend of declines in buyer demand.

We are in a housing correction. It remains to be seen what this means for prices in the national housing market, but some trends are becoming clear. We can gather important insights from these trends to inform our investing strategy and help us all navigate and earn great returns during the correction.

The National Housing Market Has Peaked

First and foremost, the national market has likely peaked in absolute terms. In plain English, most markets hit their all-time highs in June and have started to come down month-over-month since then. The housing market is seasonal, and prices typically peak in the summer and then start declining in absolute terms. But peaking in June is a little early and reflects the beginning of a correction, in my opinion. 

Due to this seasonality, the housing market is often measured in year-over-year terms (i.e., what happened in August 2022 vs. August 2021.) When we look at the national housing market this way, it is still up about 6% year-over-year. That would be considered rapid appreciation in a normal year, but this represents a massive deceleration from the growth rates we’ve seen over the last few years. Just a few months ago, in May 2022, year-over-year appreciation was over 15%! 

Of course, everyone wants to know if the national housing market will turn negative year-over-year, but we just don’t know. In terms of where we’ll end 2022, I think it’s a toss-up. We’ll either see very modest growth rates or slightly negative growth rates for the national housing market at year’s end. It is worth noting that in August, San Francisco and San Jose, California, were the first two markets to show year-over-year declines. In terms of 2023—it’s too hard to tell right now.

The Real Story is Within Individual Markets

The above answer about the national housing market might not be satisfying, but in some ways, what happens with the national housing market doesn’t matter. Well, it matters, but by only paying attention to the national housing market, you miss the most important story about the housing market: the discrepancy between markets. 

In some markets, dynamics have barely changed and still look like a strong seller’s market. In others, the shift towards a buyer’s market has been dramatic. 

To measure this, I like to look at two lead indicators for housing prices: inventory and days on market (DOM). When either of these metrics is low, it indicates a seller’s market. When they are high, they indicate a buyer’s market. 

First, let’s take a peek at Philadelphia, Pennsylvania. In the chart below, you’ll see that inventory remains extremely low in a historical context and hasn’t really increased at all—indicating this metro area is still in a seller’s market. 

Philly isn’t alone. Many cities (predominantly in the midwest and northeast) look this way. Check out Boston, Massachusetts; Chicago, Illinois; Hartford, Connecticut; Cincinnati, Ohio; Madison, Wisconsin; and the many others still seeing pandemic-level inventories.

On the other hand, let’s look at some of the “winners” of the pandemic era. Below is the monthly inventory graph for Boise, Idaho, one of the poster children of rapid appreciation. Notice a difference here? Not only has inventory started rising, but it’s also risen above pre-pandemic levels. This strongly indicates that Boise has shifted to a buyer’s market. Other cities seeing rapidly rising inventory are low-affordability cities like Austin, Texas; Las Vegas, Nevada; San Francisco, California; and San Jose, California. 

We don’t know what will happen with prices in these markets, but it can be helpful to look at lead indicators like inventory and DOM to get a sense of the varying dynamics. I recommend everyone reading this goes and does some research on their own market. Redfin has a great tool for this. 

However, I want to caveat this data by explaining that these metrics only describe the current situation and provide an outlook for the next few months. Inventory and days on market say nothing about the long-term prospects of any of these markets. For that, you need to understand population growth, supply and demand, and job/wage growth. 

I call this out because many markets that are now seeing the biggest potential for correction are cities that may still be good long-term opportunities. Austin is a perfect example of this. Austin grew really quickly over the last few years, and for good reason! The city has enormous economic and population growth and shows no signs of slowing down. But, perhaps home prices grew too quickly and could see a “reset” in prices (declines) before starting to grow again (probably when interest rates go down again, at some point.)

On the other hand, some markets that are more “stable” at the moment, like Chicago, have seen modestly declining populations over the last few years, which could hamper future price growth. 

Overall, Housing Prices Are Set to Decline

Overall, I think we’re likely to see housing prices decline in absolute terms over the coming months. Rising interest rates have depleted affordability in the market. With recent events and persistent inflation, it seems that rates will stay high for the foreseeable future. I am not convinced the national market can withstand sustained downward pressure exerted by low affordability. Something has to change, and if rates stay high for a while, as it now seems they will, the thing that has to change is housing prices. 

That said, I still don’t think we’ll see a “crash” (declines greater than 20%.) There are a lot of reasons for this, such as better lending practices, long-term supply shortages, etc. But one emerging trend that could provide a backstop for price declines is a sharp drop-off in new listings. 

This graph is very telling (take note of the scale on the vertical axis, but still!) People just don’t want to sell their houses right now. The housing market is not the stock market, and when homeowners are faced with the prospect of selling into an adverse market, they just opt out. 

Unlike in 2008, the vast majority of Americans are in a good position to service their debt. Many Americans will opt to stay in their homes and wait out the rough market. This is particularly appealing because over half of American homeowners have mortgage rates under 4%. Who wants to sell into a declining market, only to have to rebuy with a much higher interest rate? It seems like many homeowners are rejecting that idea. 

That’s how I see the market right now. Market dynamics are changing rapidly, but I hope sharing my current read on the housing market is helpful to you. The market is cooling off rapidly, and there is a huge variance between regional markets, but a “crash” remains unlikely. Just for reference, most forecasters see the national housing market landing somewhere between +3% and -8% in 2023 on a year-over-year basis. Not a crash, but there is potential for a significant correction.

11 Ways to Invest During the Housing Correction 

The question then becomes, how do you invest in this type of market? Here are a few of my thoughts: 

1. Invest in hybrid cities

Ideally, cities that offer decent cash flow, are seeing stable prices right now, and have decent long-term prospects. These are often smaller cities like Madison, Wisconsin; Birmingham, Alabama; and Virginia Beach, Virginia.

2. Negotiate with sellers

Negotiate! If you want to invest in markets with great long-term prospects, look for under-market deals. Once prices start to drop, sellers sometimes panic, and you can often find value. The data might not show this, but every experienced investor I know says that sellers are willing to negotiate right now. If you can buy below market rates, that offsets the risk of modest declines in the coming months. In this type of market, it’s more important than ever to use an investor-friendly agent who can help you navigate local market dynamics. BiggerPockets can help you find one for free—just use the link above.

3. House hack

House hacking is pretty much always a good option, in my opinion. 

4. Stay away from flipping

Don’t start flipping houses. I don’t flip houses, so I’m biased, but I wouldn’t advise anyone to start right now. There is market risk, labor risk, and material cost risk. Experienced players are probably still doing well, but I don’t think it’s a good time for newbies to start flipping. 

5. New construction might be lucrative

Prices on newly constructed homes are likely to decrease more than existing homes and could provide a relatively good value for long-term investors. Traditionally, new construction isn’t a great option for rental property investors, but with many developers offering incentives and discounts, I’m keeping an eye on newly constructed homes that are unique and in good areas. I don’t like cookie-cutter developments in the suburbs. It’s too hard to differentiate your property to prospective tenants and can create a race to the bottom in adverse market conditions. 

6. Beware of short-term rentals

I think high-priced vacation rental markets are going to get hit the hardest. During the pandemic, demand for second homes skyrocketed alongside interest from short-term rental investors. That demand (not prices) has come crashing back down to earth (I don’t use that word lightly.) I worry that some STR investors bought at a bad time, and if demand falls off during a recession, there could be some forced selling. I never root for anyone to lose their shirt on a home they bought or an investment, but if that does come to pass, it could present buying opportunities. 

7. Explore creative financing options

Consider creative financing options, like Subject To (SubTo) and seller financing. These financing strategies offer the opportunity to buy real estate at lower rates than conventional mortgages and can help boost your spending power. 

8. Hold on to what you got

If you bought property within the last 10 years with low-interest debt, stay calm and carry on. You may give back some recent appreciation, but if your property cash flows, rent growth is improving your cash flow and might continue to do so into the future—making it a solid long-term investment. It may sound boring, but deciding to hold a property that cashflows, has a low rate, and could see increased income is a good move in this market! The alternatives, such as a cash-out refinance, 1031 exchange, or selling and paying taxes, will likely yield worse returns than just holding on. 

9. Use cash, if you can

If you have the means, consider buying with all cash. We all know debt is expensive. If you believe the consensus that price growth is likely to come in between 3% and -8% next year, then investing in real estate using high-interest rate debt may actually be dilutive to your returns compared with buying in all cash in the near term. If you buy a property generating income at a 4% cap rate, and assume 2% appreciation next year, then 6-7% interest rate debt will likely make your returns worse than if you buy all cash. Don’t believe me?

Try it out on the BiggerPockets Rental Property Calculator for yourself. Depending on your appreciation assumption, financing with debt may actually make your returns worse than buying all cash. Not many people have this option, but if you do, it’s worth exploring. 

10. Become a private lender

As rates continue to rise, it could be a great time to shift at least part of your real estate strategy to the lending side. Returns on private lending can be as high as 10-14% in the current market, and demand for private loans is likely to rise significantly in the coming months. Your worst-case scenario as a lender is that you become an equity holder in the real estate property you are lending to. If researched and executed carefully, lending may produce much higher returns than equity investments over the next 12 months, with a dramatically lower risk profile.

11. Time the market if you have a crystal ball

Lastly, you could try to time the market, but that is notoriously difficult and something I would not try to do. Instead, I stick to the basics and look for good long-term opportunities. Remember, property values are not the only way you make money with rental property investing. You could try to time the market, but in the meantime, you’ll miss out on cash flow, loan pay down, and tax benefits.

I’m not saying you should buy just anything, but you need to factor in variables other than property prices when deciding where to allocate your capital. If you want to learn how to analyze deals with all of these metrics, you can check out my new book, Real Estate By The Numbers, which I co-authored with BiggerPockets legend, J Scott. 

Conclusion

This advice is all based upon my current read of the market, so you may want to consider alternative strategies if you think my read is incorrect. With all the economic uncertainty right now, it’s really difficult to know what will happen next, but I hope this analysis helps you interpret what is going on and how to invest in the current market. I’d love to hear your take in the comment section below.

Run Your Numbers Like a Pro!

Deal analysis is one of the first and most critical steps of real estate investing. Maximize your confidence in each deal with this first-ever ultimate guide to deal analysis. Real Estate by the Numbers makes real estate math easy, and makes real estate success inevitable.

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, 670.

Kathy:
This is a wonderful time to get in. And you might even find that the metrics you’re searching for are the same, because if interest rates are up, the prices are down, the cash flow might be the same as if prices were high and interest rates low. The difference is you’re getting the asset for less, so over time, if you’re able to re-fi at some point, whenever that day comes, when it makes sense to re-fi, your cash flow increases even more.

David:
What’s going on everyone? I am David Green, your host of the BiggerPockets real estate podcast. Here today with a special episode for you. We’re doing BiggerNews with my co-host Dave Meyer. Dave, what’s going on?

Dave:
Not much, man. It’s great to be back. You still have me laughing from before the recording. I’m still trying to get my act together.

David:
We have a lot of fun here and that will translate into the show. But in addition to fun, you’re going to get a lot of amazing information. So in the BiggerNews episodes, we have created these to bring you what’s going on in the current state of the market, what’s happening with interest rates, what’s going on with the Fed, what’s happening with the country as a whole, which markets are exploding, which ones are shrinking, the information you need to make the best decisions possible for yourself all backed by data. Which is why we’ve got Dave Meyer here, because he’s the data guy. In today’s show, we have a special guest. We have Kathy Fettke of Real Wealth Network returning. She was our first ever guest on the BiggerNews podcast. And she comes in to talk about a term that I think is fantastic that my co-host, Dave Meyer here came up with, defensive investing.
So in our show we’re going to talk about how to invest in a defensive way, which I recommend doing when the market starts to turn like it is now. Before we get to Kathy, today’s quick tip is you got three options. And Dave Meyer brought this up, I thought it was brilliant, you can either play offense, you could play defense, or you can just not play the game. When it comes to investing, I don’t think this is the best time to be offensive. You don’t want to be just buying stuff in droves without looking at it very closely. You don’t want to buy any kind of real estate or buy it anywhere. You also don’t want to just sit out and not play at all, because you don’t know if you’re going to have a window to buy, like we have right now, this is one of the best buying opportunities that we’ve had period, in the last 10 years.
So what we recommend is defensive investing and we get into that in today’s show. But basically, you want to make calculated, careful and somewhat… I don’t want… Nothing in real estate is ever guaranteed, but you put the odds in your favor that this will be a very solid long-term investment based on strong fundamentals as opposed to speculation. Another important topic in today’s show that you want to make sure you listen all the way to the end to hear about, is time manage management or budgeting your time. Both Kathy, Dave and I give some really good information about how we get the most out of our day, how we stay productive and how we get as much done as possible.

Dave:
Yeah, it’s a great episode. Kathy’s one of the best, smartest investors out there, so you definitely want to stick around. But before we get into that great discussion with Kathy, let’s talk about some of the headlines recently, David, because if anyone is out there, you all know there’s just so much crazy economic news going on right now. But the number one thing has to be the Fed’s decision last week. And probably everyone has heard that the Fed raised their interest rate by 75 basis points, which is basically 0.75% and that’s pretty well known, that was expected. But there’s something more to this press conference and the announcement. And it really to me at least, was a showcase that the Fed is not messing around. They released some forward guidance that showed that they think rates are going to go up even more before the end of the year and even more into 2023. So that shows that we’re going to be in a higher interest rate environment for a while.
And if you look at Jerome Powell’s press conference, he was not pulling any punches. He was basically saying, “We are going full send, we are not stopping. We are going to basically go after inflation, even if it causes a recession, even if it causes job losses or a decline in the housing market.” And people have always speculated about this, but he basically said it more clearly than I think we’ve heard it articulated in the past. So I’m curious, David, what do you think of this really emphatic release by the Fed and what this means for real estate investors?

David:
Well, this was clearly a warning shot. When you see a warning shot you know things are getting serious. It’s not, “Oh we might be coming into the enemy or a battle.” It’s likely going to happen. So it doesn’t mean to run, tuck your tail and hide and panic and let fear overwhelm you, because we still live, in my opinion, the best country in the entire world. And we’ve got more tools to get ourselves out of a deep depression than anyone else. But it means that the current standard of living that we’ve been enjoying and some of the perks that we’ve had, probably are going to be going away. So if you’ve got a job, I would count that as a blessing and I would work very hard at keeping that job, more layoffs could be coming.
If you’re working in an industry that’s not really forward leading or maybe you’re in the blockbuster of whatever space you’re in, look for a different industry. This is a time where I think big economic changes are going to be happening. What I like about what Jerome Powell did, was he was clear and upfront about the fact they’re going to continue raising interest rates. When there’s uncertainty, when they don’t tell you exactly what’s going to happen, it leads to a lot of speculation in the stock market, in the mortgage backed securities market, in the economy as a whole. So by just coming out and saying, here’s what is going to happen, it does give us a little bit of an advantage as to how we can prepare for what’s to come.

Dave:
Yeah, I totally agree. It’s not what I think most people want to hear, but at least we know, because people have been speculating for a while that the Fed was going to “pivot.” Basically, they were going to start raising the rates up until the point where they got to a neutral interest rate and then they would maybe slow down, see what’s going happen. But now the Fed is just telling us that we should expect things to keep going up. That tells me a couple things, like mortgage rates are probably going to go up a little bit more over the next couple months. So if you could get a rate lock now that might not be the worst idea.
But that this is going to put a lot of downward pressure on housing prices for a while. If we were in this place where the Fed was going to take their foot off the gas, maybe coast for a while, more markets would probably be able to be resilient against that. Now, if we see two years of high rates, I think that’s going to put a lot of pressure on housing prices. But like David was saying, that just means you just need to change your strategy, it doesn’t mean that you need to get out of the game at all.

David:
And there’s a few areas that this might benefit us. It’d be nice to see food prices stop going up so fast. Asset classes that are highly financable, like cars and homes, it should keep the prices from going up faster, maybe even push them down. And the last piece I’ll say is savers could finally be rewarded. When is the last time that putting money in the bank and saving it was actually a viable option? It’d be nice to see some of that come back, especially for the aging part of the demographics, where people have retired and they’re living on fixed incomes. They were planning on getting return on that money and it’s been a big goose egg for a long time.

Dave:
That’s a really very good point, I totally agree. And for people who haven’t been able to afford houses, some markets might decline and you might be able to get into that. So that’s in my mind, going to put sustained downward pressure on prices. On the other side though, there’s this other dynamic in the housing market that might put upward pressure on the housing market. And again, the housing market, there’s all these forces. Some put downward pressure, some put upward pressure, no one knows exactly what the mix is going to be. But I just want to present that not everything is pointing down. So this is other dynamic that’s going on where new listings, which is basically just the number of properties that are put up for sale, are down 18% year over year, which is a lot.
People do not want to sell their houses right now, and we’ve been speculating about this for a couple months, this idea of the rate lock where people are going to be locked into these low mortgages. They don’t want to sell into a declining market to only get a mortgage at a higher rate and that doesn’t sound very good to me, so I understand why they would do that. And if inventory flattens out, which it is already in some markets or starts to decline, that could at least put a backstop on some of the declines that we might see or level it out, I don’t really know. But it’s just this really interesting phenomenon that’s going on, because right now everything is so weird and interesting. But curious, are you seeing this in your market and what do you make of this?

David:
I’m seeing this in a lot of markets, because as you know, I invest long distance. So I study a lot of the different markets and I’ll say if real estate has a relationship status on Facebook, it’s complicated.

Dave:
It’s super complicated.

David:
There’s a lot of things that factor into this and that’s why I get frustrated if someone says, “Oh, rates are going up, prices are going down.” No, rates going up affects demand, but a lot of other things affect demand. And then you’ve got supply, you actually got to balance both of these. So this is a clear indication that supply is not increasing. So even if demand is decreasing, it doesn’t necessarily turn into a difference in size.

Dave:
Exactly.

David:
Because supplies are… And why wouldn’t supply stay the same? Do you want to go sell your house at your 2.99 rate and go get into one that’s seven and a half and probably not that much cheaper of a price? It’s no reason for people to go put their house on the market and sell it. So what I would tend to see when this phenomena happens, what I observe, is that less houses come on the market, but they also don’t sell as fast. So at this point you’ve still got the majority of buyers that are hanging out in the background saying, “I want to see your prices come down.” Sellers are over there, like, “Well, the Cop show my house is worth this.” The days on market starts to go up. So you’re in a bit of a standoff, it doesn’t necessarily mean prices drop. And my strategy in that standoff, like I talked about in today’s show is that I go after the houses that I want the most with a very aggressive offer. And I look for the seller that isn’t getting interest from anyone else or who just flinches before I do.

Dave:
That’s very good perspective. Man, I love your analysis saying that Facebook, it’s complicated. It’s like, why did I pick this year to start a podcast about the economy? It’s so complicated. I guess in some ways now, it’s needed to more than ever. And I hope to people listening to this, this is helpful. But it’s like, why couldn’t I start a podcast about predicting the housing market five years ago? It’s like what’s going to happen? It’s going to go up. What’s going to happen? It’s going to go up.

David:
Real estate used to be like the Golden Girls, you knew what you were going to get every episode.

Dave:
Exactly.

David:
It was fairly predictable, right? It’s turned into Game of Thrones. Every episode you’re like, what radical, amazing change is going to happen between one podcast and the next one?

Dave:
Nothing is safe.

David:
Yeah.

Dave:
Nothing is safe. We have no idea what’s going to happen next, it’s just a free for all. But like you said, that’s why this episode is so good. It doesn’t necessarily mean… Oftentimes when there’s more risk, there’s more opportunity. When people are afraid, that’s when you often have less competition. So there’s pros and cons to the situation.

David:
Right.

Dave:
So that’s why it’s all about just staying informed and knowing what’s happening and adjusting your strategy, because there are good things about what was happening a year ago and there were bad things about that. Right now there are good things about what’s happening right now and there are bad things about that. It’s just about being cognizant of which way the wind is blowing and adjusting accordingly.

David:
Yeah, if you missed an episode of Golden Girls, you could still watch the next one and you’d be fine. You missed an episode of Game of Thrones, you’re lost. So don’t miss an episode of the BiggerNews podcast or any of the other podcasts, because things are changing rapidly.

Dave:
Yeah, if you missed an episode of Game of Thrones, I would call in sick to work, because you couldn’t go, because everyone would be talking about it and you’d missed the whole thing. Yeah, you can’t go.

David:
If you don’t know what Jerome Powell said, you are way behind what everything else is happening in the market.

Dave:
Exactly.

David:
All right. Our third headline to bring up has to do with you Mr. Dave Meyer and your new book Real Estate by the Numbers, analyze like a pro and get a holistic view of your portfolio. Tell me a little about this book and why you wrote it.

Dave:
Well, thanks man. So I wrote this book with Jay Scott. You know Jay, right?

David:
Mm-hmm.

Dave:
Yeah, so Jay and I wrote this book, because we are both numbers nerds. No, but really, basically we looked at the market and I get a lot of questions about analyzing deals, about learning some of the math, some of the formulas that help you analyze deals. And I didn’t find any one resource that was helping people holistically understand it’s not about math and formulas, it’s really about the concepts and the ideas behind investing, compounding the time value of money and using all the tools that your disposal as an investor to be able to look at a deal holistically. I don’t know if you see this, but sometimes I talk to people and they’re like, “Cash on cash return, cash on cash return.” That’s all they care about. Or they talk about force appreciation, force appreciation, that’s all they care about. Both are good things, but you have to be able to look at deals and real estate in this holistic sense.
And so that’s what the book’s about. Super excited about it and thanks for letting me talk about it quickly. We’re also going to have a couple of shows about this. Jay’s coming on, I think next week or something, so we’re all going to talk about the economy. Jay is super knowledgeable about recession investing, so definitely stick around for that. But yeah, I should just mention that it’s in presale right now and if you’re interested in the book, you should buy now, because you’ll get 10% off if you use the code Dave. And Jay and I are both giving away coaching. We’re doing a webinar for anyone who does a presale. So definitely check that out if you’re interested.

David:
Well, I want to thank you for writing that book, because I can’t say how excited I am enough that you’re bringing attention to the fact that real estate is about more than just cash on cash return.

Dave:
This is your thing.

David:
We typically call cash on cash return, ROI. Yeah, because if you’re just looking at it, real estate’s not much more appealing than stocks or some bonds or NFTs or crypto or a lot of other things that are out there, that all provided cash on cash return. Real estate makes you money in so many different ways that if you’re only focusing on one out of those, I basically have 10 ways that I think real estate makes you money, you’re missing out on 90% of the benefits of it, theoretically. So I’m glad that somebody is bringing attention. It’s not that cash on catch return doesn’t matter, it’s that it’s not all that matters. You don’t want to miss the forest for the trees.

Dave:
Exactly.

David:
And as I understand it, Dave, you’ve been doing a little bit of a tour talking about the book and the information that’s in it. So if you guys would like to hear Dave on the Rookie podcast, keep an eye out for the October 8th release. And then he will also be on the regular Bigger podcast show on October 11th, where he gets into how to think an investor. And Jay Scott’s on that interview with Rob, it’s really good. And if you guys like, I throw my 2 cents in there after the fact, a little bit of a reaction style to the interview that you all recorded. So everybody keep an eye out for October 8th and October 11th releases that have to do with Dave’s book. And Dave, if people want to get the book, where can they go?

Dave:
Just to the BiggerPockets bookstore, go to biggerpockets.com/numbers. And again, if you do it now, you can get 10% off, which is great. And yeah, thank you guys for having me and Jay on the 10th and 11th. We’re both super excited and proud of the book, think that there’s a lot of value there. So thanks for letting us come talk about it.

David:
Right on. I’m sure it’s a great book. Can you give the code if people want to get a discount?

Dave:
Oh yeah, it’s Dave like my name, D-A-V-E.

David:
D-A-V-E, there it is. All right, let’s bring in Kathy and let’s talk some real estate.

Dave:
All right, well Kathy Fette, welcome back to the Real Estate podcast for BiggerPockets. Thanks for coming here.

Kathy:
Oh, it’s always an honor to be with you guys.

Dave:
Well, I have the pleasure of seeing you all the time Kathy, because we’re on the other BiggerPockets podcast, On the Market together. But this is a reunion, because I think it was maybe about a year ago you were our first guest ever for BiggerNews. And since then, David and I have been doing these shows once a month and we’ve been having a great time bringing market data and trends to the masses. So thank you for helping us start this part of BiggerPockets.

Kathy:
Oh it’s so fun. On the Market show is just a blast, but I also learn a lot every time from the other co-hosts.

Dave:
Well, today we are going to talk about defensive investing. And David, this is something I hear you talk about a lot on the show, about the differences between defensive and offensive investing. For anyone who hasn’t heard this framework that you use, could you recap it for us briefly?

David:
Yeah, a lot of it comes from my personality. I think I’m perceived by people as being aggressive, go buy, I often get told, “Well, he’s a real estate agent, of course he says you should buy houses.” But I’m buying them myself at the same time. My personality just tends to be more conservative. I always look at the what could go wrong. I’m always thinking about the downside, I’m trying to protect against it. And when I’m investing, I’m typically not chasing after the highest return I can get. I’m usually looking for the safest option. But because I look at the property itself, the area, the asset class, whatever it is as being safer, it allows me to take action more freely. I don’t have that little, what we call the drunk monkey in your head screaming at you saying, “Don’t do it, this could happen. What if this? Everyone’s going to think that.”
By literally choosing asset classes that are more recession resistant or areas of the country that have stronger, long term outlooks, even if they don’t look as desirable right now, I find areas where other people are not flocking to, so I don’t have as much competition. I don’t get into that situation where 12 people want the same house. And I can also invest with confidence that I’m going to feel really good about this investment in five to 10 years versus really good right away. I find that when I analyze deals, this is not always true, but in general, you usually have a tortoise or the hare approach. There’s deals that on the spreadsheet look amazing in year one, you’ve got a 20% ROI, 15% ROI, sometimes short term rentals that can get into 40, 50% ROI.
But over a long period of time they’re in areas that are not growth oriented. People are not moving there, businesses are not moving there, wages are not increasing there, supply is not constricted, so they can just keep building more homes. And you find that in 15 or 20 years your house is worth very close to what you paid for it before. Versus areas that don’t look amazing up front. This would be the tortoise approach, that a lot of people see the cash on cash return and just gloss right over. Those over the long term can look really, really good. A hyper example I could give you would be investing in Malibu. Kathy knows that area, she’s in Southern California. It’s very difficult to find anything that would cash flow probably at all, let alone solid in an area like Malibu. But if you hold it for 10 years, it’s very difficult to find anything that isn’t going to make you obscene amounts of money.
Now I’m not advocating everyone goes and invests in Malibu, obviously that’s for a very specific avatar of investor, but it does highlight the point. And on the other end of that spectrum could be a turnkey property. “Oh this looks great, we’re just going to go into someplace in the Midwest, there’s houses everywhere. They just build them nonstop. I’ll go buy one of those and my cash on cash return can look really good.” And then as the house is falling apart, it’s not appreciating, you can’t pull money out of it to fix up the roof, fix up some of the capital expenditures you have. Rents are not going up, because there’s so much supply that demand never outpaces it and you hit the opposite results. So I try to avoid either extreme, right. It’s a spectrum and you want to figure out where to fit, but defensive investing is this idea that you are looking at long term fundamentals and delaying gratification and making investment choices with that perspective.

Dave:
And is this something you do always or is this a reaction to current market conditions?

David:
That’s a really good question too. In general, I lean more that way, but in different markets I play the game very differently. So in a market like this one, which we never know if a market’s going to crash or if it’s going to climb, you can’t tell and I’ve just made peace with the fact that I don’t know. But there are markets where odds are, like the one we’re in now, it’s likely to go down more before it goes up at least significantly. The Fed is announced they’re going to continue rising rates, they’re trying to slow things down. You’re getting an issue where home sellers don’t want to put their house back on the market, we can go into that later, because they’re going to lose that 2.99 rate that they have. They’re going to have to get into a higher rate. And then there’s not a lot of inventory to choose from. So when I think we are more likely to be headed down, I tend to invest more conservatively.
This is where I would pick the areas that I think are going to be safer long term where I see people moving to, even if the cash on cash return doesn’t blow me away. If I see that’s an area that in general Americans are trending towards moving into, it’s got a favorable tax environment, it’s got a favorable business environment, the demographics show that people and businesses are moving in that direction, I will favor that over an area, maybe a C class neighborhood. Now if we’ve just had a crash like what we had in 2009, 2010, 2011, I feel much better if I’m going to get into some of those C or C minus neighborhoods because you’re almost at the point where you’ve got nowhere to go but up. So in general, the philosophy that I preach is if it’s post crash, you can be much more liberal with what you buy.
You can go after areas where price points are lower and it’s easier to get into that area and the cash on cash return looks really good, because even if for some reason you don’t love it, you’re going to ride the elevator up and you can exit if you have to. But if you’re at a point where you’re thinking it might crash, you actually have to get extra conservative, because those A class properties, those A class locations, they don’t get hammered like the D class areas do. If you just think about whoever’s listening from wherever they live, the best neighborhoods in your city or the best cities in your state, the last time we had a crash, they had a dip. The worst areas were decimated. So we’re at that point where we’re looking like we could be heading over a cliff, nobody’s really sure, I want to be extra conservative about the areas and the asset class that I invest in at a time like this.

Dave:
Kathy, what do you think about this framework of defensive versus offensive investing?

Kathy:
A hundred percent, everything he just said. But I’m opposite by nature, I tend to jump into things. I’m a quick start, if you follow the Kolbe personality test. I need enough research and then I’m ready to jump in. Fortunately, I’m married to someone who needs all the information, so we help each other out, he slows me down and I speed him up. Otherwise, we probably wouldn’t own hardly any real estate if I weren’t in the picture, so that’s good. Listen to your spouse and listen to each other and each other’s fears and that can actually help you both move forward, that’s just my little marital advice. But back in 2005 when I didn’t know anything about out-of-state investing, I did have Robert Kiyosaki on the show and he gave me some fundamentals that I’ve stuck with since then, which is almost 20 years. And of course, if you don’t know who that is, that’s the author of Rich Dad, Poor Dad who’s changed many lives.
So I was lucky enough to have him on my show and at the time it was a San Francisco radio show before podcasts. And he was really explaining the dynamics of what was coming and it was so shocking that nobody could see what he could see when it was so obvious. And David, I was a mortgage broker back then and I knew something was wrong, it didn’t pass the sniff test at all. Being able to give teaser rates, not even the full payment to qualify people, knowing that when that payment adjusted, they would never ever be able to make that payment. But those were the loans, that’s what people were getting. So it’s intuitively like, this is going to fall apart. But the headlines were saying the opposite and even real estate experts were saying it, that it was going to be fine. But Kiyosaki was saying, “Oh no, no, no, these are going to reset in 2007.” So he had already sold all of his high price real estate. He made a killing in the growth markets.
But then when he knew when these loans were going to reset, it was in the books. People knew when that was going to happen. He just sold everything in the high price markets and bought in Texas. So I was like, “Why Texas?” And he explained it’s the biggest job growth in the country, the biggest population growth as a result. And yet home prices are still 26% undervalued compared to incomes there. The prices had not gone up as fast as the incomes, I mean, what a scenario. So it made sense to me and being a quick start, I’m like, “Rich, I want to go to Texas-”

David:
“I’m moving to Texas.”

Kathy:
And [inaudible 00:24:56]. Not even moving, I just was like, “Let’s go.” We ended up coming home with five properties, because if you remember, you could get loaned on investment properties an unlimited number with no money down. So yeah, I bought five of them in that trip. We went back and bought more and this was at the top of the market, it was 2005, 2006. And yet when everything crashed a few years later, those properties stayed rented, because like you were saying, we bought in really good neighborhoods. We had A class schools, it was near jobs, it was near new infrastructure growth. This is really important to me, if you know that a city is investing billions of dollars, billions of dollars in their infrastructure, they have been studying that for decades of where growth is going, they know. That when you see that new infrastructure coming in, it’s like, “Oh okay, this is a really a growth area.”
So it just made sense to us, we helped thousands of people do the same. And it was like being on a, I don’t know, if you’re in a movie and you’re watching this earthquake happen and some people are in the middle of it that it caves in and the there’s other people on the side just watching them fall. That’s what it felt like on those Texas properties. The ground was shaking but we were fine except for the properties that we didn’t follow that advice on. The California properties we kept or we bought three properties in Boise where there was two employers at the time, it didn’t make it through that.

Dave:
Wrong bubble for that one.

Kathy:
Wrong bubble, yeah. It would’ve been better to wait, yeah.

Dave:
This bubble would’ve been good.

Kathy:
Exactly. So those fundamentals we’ve carried, that’s really how we built our company and the foundation of look for those things, look for where the job growth is. And I don’t mean a little, I made the mistake and Dave knows, of following job growth to North Dakota during the oil boom. But I tell everybody, never invest in an area that’s dependent on one industry. Well, I did and then the rug got pulled out, oil prices crashed and I’m stuck with land in North Dakota. So when you go to other places, you look at, we really still like Florida, Orlando, Jacksonville, these areas have diversified employment centers now. They didn’t 10 years ago, it’s a different market today. So really sticking with those dynamics of job growth, population growth and affordability and infrastructure, I feel really comfortable even investing today and we are, we’re going big actually. We think there’s some amazing opportunities today.

Dave:
Can you tell us a little bit about, obviously not the specific opportunities if you don’t want to, but just the characteristics, what are the trends and the data points that get you excited about opportunities in this type of market?

Kathy:
Well, I like to see, like I said, I think the government controls a lot more than we realize, this is not your parents economy and is not your grandparents’ economy. This is a very manipulated economy and a lot of it is, we’re just the puppets of the puppeteers who control the levers. And right now those levers are saying we’re going to crash this economy. I mean, Jerome Powell just came right out last week. I was way more positive a month ago as you know, Dave.

Dave:
Same.

Kathy:
And then he comes out and he is like, “No, we’re going to kill it. We’re going to kill jobs.”

Dave:
He’s not messing around anymore, yeah. That was like, “Anyone thinks I’m messing around, I’m going to crush your dreams right now.”

Kathy:
Oh, he’s really totally fine with that.

Dave:
But honestly, as an investor it’s better, right? Now you know where we stand. It’s obviously not great for prices in the housing market, but personally, at least for me, especially if you’re trying to be defensive like we’re talking about today, it’s better to know what they’re intending to do rather than being in limbo.

Kathy:
Yeah, I really had this rosy belief that the central banking system wasn’t on a mission to make lives worse. And again, I know that bigger picture, maybe they don’t, maybe that’s not their intention. But for the Federal Reserve, which is the banking system, it is not a government entity, for them to just flood the market with so much money and buy mortgage backed securities to keep rates low for so long, to stimulate a housing market that was already stimulated, it didn’t need that help, to then just drive… Everybody knows if you keep rates low, it’s going to make prices higher, because payments are low, people can afford more. And you also know that when you pull that back, it’s going to do the opposite. So they’re the ones who flooded the market with money and kept rates low and now they’re like, “Oh, maybe we shouldn’t do that. We’re going to take all that away from you. Sorry, I gave you some candy, I’m going to have to take that back. You can’t keep that.” And you’re just like, I already maybe swallowed it.
Anyway, these are interesting times and I follow what the Fed says and I believe them. And this time we’ve got to be really defensive, way more defensive. I’m already defensive now, because I’m older and I think that my natural tendency is to dive in and just go for it. But as you get older and you’ve taken losses and you’ve had to start over and I’ve had to start over several times, once you get to my age, you don’t want to start over. So already I was being careful for the past decade, because it was really hard going through 2008, I never want to do that again. Anyone who did doesn’t want to do it again. So I was already staying low leverage. This is defensive to me, low leverage. I got sometimes no debt and sometimes super cheap debt, long term rates, 30 year fixed.
Rich and I would have these fights, I’d be like, “Honey, why don’t we just get a lower rate at a 10 year arm?” And he’s like, “No, the 30 years not that much more, just lock it in then you don’t have to worry, we’re old.” It’s basically what he is saying. So low leverage, long-term debt that’s fixed so you don’t have to worry about that variable. And lots of reserves on hand, lots of reserves and I personally either want to buy properties that are fixed up like new or brand new, because then you don’t have so much of those issues of repairs to worry about. And believe me, I bought plenty of old houses that cash flowed great until they didn’t, I guess plumbing broke and I spent 20 grand fixing it. So those are the keys to me in defensive investing. I’m not worried about this, because we’re super low leverage and have reserves and we’re in strong markets and in good properties in those markets that people want to live in.

Dave:
So David, I know you just went on a buying spree I think, I don’t know if that’s what you would call it, but it seems like it. What defensive tactics did you use to make sure that you were cushioning yourself against potential price declines?

David:
I’m still on that spree actually. It slowed down from where it was, but I put a property contract yesterday-

Dave:
Nice.

David:
That I’ve been working on for about a month and a half. And another one I’m really close on. So part of my strategy has been, rather than seeing a property and going after it with everything you have, that was the way you had to do it the last seven years. There was no light stepping around this thing, you couldn’t throw jabs, you had to throw in your offer a knockout punch and if you didn’t get the deal, you weren’t getting another chance. I look at it now I got a lot of lines in the water and I’ve got some sellers that are interested and I’m waiting as the news tips in my favor I guess there’s so much to say, I want to make sure I don’t just go in rabbit trails all over the place, because we’re talking about defensive tactics here.
But I guess one of them would be not falling in love with any one particular deal. I’ve got a lot of them that I’m interested in. They’re all A class properties, I probably never would’ve even had a chance to get in the last seven to eight years, because they got so much interest, everybody wanted it, that I can go after them now. And I’m not writing an offer with the intention of getting it accepted on the first try. I used to do the opposite, I would tell people, if you want that asset, if this is a good asset, give it everything you got, you one chance. You’re like Eminem in Eight Mile. This is your shot, do not miss your chance to blow. Now I really look at if an offer is a jab, I’m looking to see how my opponent reacts to that offer. I want to know what the seller does. If they accept my offer on the first one in the markets I’m investing, at least I went too aggressive, right? That was a mistake.
So I’m writing them low and I’m waiting to see who’s going to come back. And so this particular deal was listed at $1,175,000, it’s a 5,000 square foot cabin in a really, really good location in Blue Ridge, Georgia, which is where people in Atlanta would go to visit if they want to go to the mountains. A beautiful property, several acres of stream running through it. And it has a massive four car garage with a livable, two bedroom, one bathroom space above it, that garage can be converted in the living space and I basically could double the square footage of the house. It’s a really good borough opportunity, in a really good location, in incredible condition. Like what Kathy said, I don’t think that there’s one thing that I would need to fix about this property other than a couple mosquitoes that hang around that stream that seem to love me.
But I’m not just going in and writing a strong offer. They were listed at $1,175,000 and I wrote an offer at $1,000,050 and I asked for about $35,000 in closing cost credits and they said no. And so I waited and I waited and I waited and what do you know? Jerome Powell comes out and says, “Interest rates are going up, unemployment’s going to go up. The economy’s going to take a hit.” Fear courses through the entire seller’s market. This property and three others that I had offers in all came back that same day and said, “We’ll accept your offer that you wrote a month and a half ago.” So you have the combination of sellers sitting on the market realizing that their house isn’t selling, with this news coming out, that it’s going to be even worse. And then I’m in a position I can say, “Well, that was my offer a month and a half ago. Rates have gone up, their house has been sitting longer.”
I have my agents go back and try to negotiate it down. So instead of the $1,000,50, I ended up getting it at £1,000,025 with even more closing costs. So now I’m getting it a little bit under a million when it was originally listed a little under $1,200,000. And this is a property that is going to bring in a ton of short term rental. I’m going to double the size of it. The cash on cash return will not look incredible right off the bat, because short term rentals typically need a little bit of time to build up your client base. You have to get some tweaks, this one was currently not being used as a short term rental, so it doesn’t have reviews. But it’s in an area seven minutes from downtown that everybody wants to visit. Basically, I’ll almost double the revenue by taking that other structure and converting it into living space.
There’s a ton of things about it that I really like, but I just was patient. It’s like this aggressive defensiveness. I wrote a lot of offers, I wrote them aggressively, they said no. I said, “That’s fine, we’ll check in every week or two.” Sellers are sitting there marinating in their own juices right now. They’re worried, I would be too. No one’s buying houses like they used to be. Now I don’t want to go after the worst inventory. I don’t want to go after the same properties that all the rest of my competition going after, they’re still selling. I don’t want go buy a short-term rental that has 500 other cabins or properties that look just like it. Or buy into an area where I don’t think people are going to be continually vacationing into, or even worse an area where regulation laws could be impacted that would not let you use a short-term rental. So I’m going to safer spots, no one’s going to shut down short-term rentals in these vacation destinations, where everybody’s renting cabins and the whole economy is dependent upon tourism.
So right off the bat’s, that’s a little bit of a safer shot. And then I’m going after a bird deal that I can add a lot of value. I would imagine just based on the square footage in the area, I’m probably going to add close to $300,000 of equity to this property, putting $60,000 into the rehab. And then the last piece is just how many different offers I have out there. You can take your time, you can wait and see which seller is most motivated, frankly. And I really like this, if I’m going after grade A real estate. I don’t like this method as much if I’m trying to buy into C class areas or states or locations that people are not moving to.
Because even if you get the deal, it’s not a guarantee. It doesn’t have a big upside. You don’t know what’s going to happen. We might be in this situation for two to three more years before we lower rates. No one really knows what’s going to happen. So when there’s uncertainty like that, I want to follow the ancient principles of real estate, location, location, location. Where are people moving? Where are wages rising? Where is the highest demand going to be? And when I look backwards, what’s the property I’m going to say I’m so glad I own this, I love having this in my portfolio?

Dave:
That’s great, great tactical advice. I’d love to keep asking more questions about this, but we don’t have that much more time. And I have a couple other questions I definitely want to get to here. So Kathy, I’ll ask you this, in defensive investing, we’re talking about long term buying, but when we are potentially going to see increased unemployment, I mean, the Fed basically predict an increase in unemployment, we could be in a recession right now or we’re probably heading towards one. How do you square defensive investing with the fact that this might impact tenants and renters? Are you afraid that rents could soften or vacancies will go up? And is there any way that you can mitigate against that?

Kathy:
Yeah, I absolutely think there will be an uptick in foreclosures and in evictions, because again, it was Jerome Powell’s really, really harsh words of just last week that I think has everybody going, “Oh, he’s going to go for it.” So again, it just comes back to those fundamentals I said. If you’re in an area that has a big diversification of employment and different kinds of employers, so for example, we know that baby boomers are aging, so the medical industry is strong. I think it will continue to be strong. We are in a situation where we have a shortage of energy. So I really do believe that areas like Texas are going to stay strong. They’re not dependent on energy by any means, they’ve got every kind of employer is there, makes me feel comfortable. Florida, I’m comfortable there, because you have still a lot, like I said, these baby boomers and now younger people retiring, now they are retiring, they weren’t 10 years ago, now they are. And it’s a lot cheaper and it’s really pleasant in Florida and the Carolinas and Georgia and the southeast in general.
So a lot of demographic shifts happening in those areas. And diversification that wasn’t there 10 years ago in terms of employment. So first of all, stop underwriting as if you know that rents are going to go up, because you don’t know that. And when I see these multi-family deals come across my desk and they’re like, “Oh yeah, rents are going to go up.” Well, you know what? You could find yourself in a big problem if you’re wrong. And especially if you take an investor money and you’re wrong. So just underwrite things with the possibility that maybe rents will go down and that there could be evictions. And if you’re in an area where it’s hard to evict people, you need to keep that in mind too. I live in California where, and David you know, people can be very savvy and stay in your property for a year if they know what they’re doing.
So I want to be in an area like Texas or Florida where that’s not the case, where there are landlord laws and you do need to pay your rent and if you don’t, you have to leave. Don’t make the assumption that landlords can handle paying everybody’s rent, it’s not the case. So it’s all about the underwriting and making sure you’re in a landlord friendly area and that there’s huge job diversification and a big renter pool, because again, I try to keep my properties in the median price range of what the average person can afford. And so if you’re in a big market with a million renters and you’re in that median price range that the most people in that area can afford what you’re offering, again, I think you’re really setting yourself up defensively.

David:
I think you made a really good point as particularly about rents rising in the multi-family space. And I just want to highlight it, because the assumption if we say rents are rising, that would mean rents rise everywhere in the entire country over every asset class and that’s not how it works. Rents rise when demand grows higher than supply and wages increase to the point it can support a higher rent payment. Well, we’ve been having builders creating multifamily properties, particularly in inner city for years. I mean, if you were in any big city in the country, you saw these cranes all over the place creating multifamily housing in downtown areas. There’s a lot more supply in those spaces than demand. And so multifamily particularly is one asset that I think is exposed in more areas than single family, because we’ve been building more of those units. We haven’t been building as much single family housing in those same spaces.

Dave:
Yeah, I was actually looking at some data recently that showed that although construction permits and units are declining, David, that’s actually more in single family, they’re really starting to fall off. And the amounts of permits for multi-family units are pretty steady, probably because multifamily operators know it’s going to take them two or three years to build something and maybe we’ll be through the worst of this. But just something to note that more supply is continuing to come online there faster than single family homes.

David:
And when you hear us talk about rents are going up, that does not mean in every asset class everywhere, it’s highly localized.

Dave:
And it’s Kathy’s favorite saying, right? There is no national housing market. She’s completely right.

Kathy:
And there were boom markets that everyone just went frenzied over. So one example is Phoenix where there’s 19,000 new single family units coming online that may be able to be absorbed. But some areas didn’t get that action, where isn’t a lot of national builders going in. They don’t have that new inventory coming in. So always looking at permits and new starts versus job growth, I think is really important.

Dave:
That’s great advice. Well, we do have to wrap up here, but Kathy, do you have any last word about how to be defensive in this market?

Kathy:
Well, I know that people are probably really scared, but I really want to leave this saying, this is an exciting time to get in. As much as it might feel like, oh this is scary, when you look at headlines, you’ve got to look at, how do I interpret this? So if you are seeing prices go down, well who’s that good for? That’s good for the buyer. So if you’re just getting in and you’re a buyer, this is such a better time than last year when you had to overpay and get in line and not be able to negotiate, now you can, you don’t have competition. This is a wonderful time to get in. And you might even find that the metrics you’re searching for are the same, because if interest rates are up but prices are down, the cash flow might be the same as if prices were high and interest rates low. The difference is you’re getting the asset for less. So over time, if you’re able to re-fi at some point, whenever that day comes, when it makes sense to re-fi your cash flow increases even more.

Dave:
That’s great. That’s a great point. I mean, I didn’t experience the 2008 crash. I started buying in about 2010, but that was before the bottom of the market and it feels the same vibe. No one really knows what’s going to happen, but things when you look at them on paper, this makes sense. And you’re just looking around, everyone’s really nervous, but this is actually pencils out and it’s starting to feel like the same vibe, at least to me. David, any last words for you on this?

David:
I like Kathy’s point, if you had to choose between a high price and a low rate and a low rate and a high price, you’re better off getting it at a lower price. Your property taxes will be lower plus you have the ability to refinance in the future. And even though we’re all doom and gloom, because rates are high and the market has slowed down a little bit, still we all know that at a certain point rates are going to go back down. The Fed is purposely trying to raise them to slow the economy down and what’s going to happen to the price of assets when rates go back down? It’s not a shocker, we all know what’s going to happen.
And we will be talking about this moment in time, like, oh, I wish I had bought when I had the chance, that was a nice little window and now prices are high and all of these buyers are back in the game and there’s multiple offers and iBuyers and hedge funds are going to come right back in. It’s going to push out the mom and pop. So you can look at higher rates as a curse or you could look at it like a blessing, it’s a bit of both. But the key is when you’re following podcasts like this one, getting information like this, that you play your hand according to the cards that you’re dealt at the time. Right now we have higher rates, we have an opportunity to get houses at much less than I think what their inherent value would be. It won’t be that way forever. When rates do go back down these properties that we’re talking about buying right now, they’re going to be worth a lot more.

Dave:
All right. Great advice from both of you, thank you. I think this is super helpful. I mean, what you’re saying makes total sense, I notice more opportunity. Every single investor I speak to says there’s more opportunity right now. I think this is just a universal observation by people who are super active in the market. But at the same time, because there’s so much uncertainty, it makes very logical sense to be a defensively minded investor at this period of time. All right, so we’re going to move on to another segment. It’s a little bit different.
It’s not about real estate per se, but it’s about sort getting your mindset right to be a real estate investor. And we’re going to talk about time management. Both of you obviously very busy people, David, you host this podcast, Kathy, you’re on two podcasts, you’re both actively investing, running businesses, You speak at every conference in the country. Kathy, we’ll throw this to you first, could you give us a quick tip on how do you manage all this stuff? You’re doing so much stuff. How do you manage your time in a way that allows you to accomplish all your goals?

Kathy:
Well, have to look at leaders of large corporations and ask how do they get it all done? And they get it done, because they have good people. So that started 15 years ago when we started growing Real Wealth and my first person was a bookkeeper, because I was just like, I handed her box of stuff, I’m like, “I don’t do this part.” And that was like, “Oh my gosh, she does this better and she’s good at it.” So I was like, “What else can I offload?” And so that’s been the key to success, is getting people that are better than you at certain things you’re not good at. Instead of like, “Oh, I’m going to go hire my mom or my sister for this thing that they don’t know anything about.” I’ve done that a few times, not my mom, but friends. And it’s like, “No, get someone who’s really good at it, has done it before.” I wouldn’t want to hire a new bookkeeper who has never done that, I was going to get a really good one.
So I have a personal assistant, she handles my email, she handles my scheduling. We ended up hiring investment counselors to talk to investors, because there’s no way I could talk to thousands and they’re… So it’s good people. On a personal level, one of the big changes that Rich and I have made lately is your day starts the night before. It’s an interesting philosophy and I forget who said it or what book we read about that. But we were getting a little lazy, having a lot of wine at night and watching a movie and it was probably a COVID thing and up till midnight. But we both wake up naturally around five, so we weren’t getting enough sleep. We were a little hungover, I mean, not really, but even just a glass of wine affects me. So now we go to bed early, we don’t watch TV only on the weekends, don’t drink wine midweek. And get up early, fresh, able to focus, do some yoga, some meditation, exercise, and just start the day looking at the calendar, what do I have planned? Structure it properly and that works way better.

Dave:
That’s great. Still like those wine nights every once in a while.

Kathy:
Oh yeah, for sure.

Dave:
You got it, you still got to do it, but for the most part-

Kathy:
Weekends.

Dave:
You got to be disciplined.

Kathy:
Yeah.

Dave:
What about you, David? How do you manage this?

David:
All right, I’ve got four tips that I can share for time management.

Dave:
Ooh.

David:
So the first thing I’ll say is to be completely transparent, it is pretty much every day that I have 20 things to do and enough time to do 12. So part of my life is just accepting that eight of those things are not going to be done. So you have to figure out how you can get a little bit of progress done to buy yourself some time. Or prioritize what needs to be done or see what action can be done that might cover two of these things, because sometimes that’s the case too. Tip number one, don’t be reactive. This is how most people live their lives. They wait for something to come to them and they go, “Oh, there’s a fire I got to put out.” And they just jump right into it, okay? It’s very common for everyone else in the world to feel that whatever their issue is, should be as much of a priority to you as it is to them, even if it’s their own fault that they got into that mess.
So when someone comes and says, “Hey David, can you look at this? Can you do that? Can you fix this problem? This just happened, ah.” I immediately say, “This needs to be scheduled on the calendar. This is not a thing that I have to stop what I’m doing and jump into this, just because emotionally it would make you feel really good if I prioritize this over what I’m doing.” Which leads me to tip number two. Schedule everything. I have times in the day scheduled to bring me all of these problems that popped up that someone needs help with. I tend to tell the leaders in my company that they do this with me and then they also do it with the people that are subordinate to them. You don’t want someone texting you to say, “What do you do when a buyer does this? What do you do when the contractor says this?” You write that in a Google document.
You have a scheduled 15 minute meeting and you go over every bullet point that’s in that document that was written down, at one time as efficiently as possible. And then oftentimes we will share that document before the meeting. And so you can answer some of the stuff without even getting on a call. It’s much faster to type in an answer than it is to have a conversation where you get a bunch of background details, that don’t really matter. And a bunch of non-essentials when you’re just trying to solve a problem. So schedule everything that you do, if it’s not on your schedule, it doesn’t exist. Number three, you got to know what moves the needle. Not everything we do is the same. If you’re just a pure investor and you’re saying, “How do I find time to analyze deals?” If I sat and watched you analyze deals, you’re probably analyzing a deal that I would look at before you even started and say it will never work.
This is why we have rules of thumb, stuff like the 1% rule, stuff like buying in areas where you shouldn’t be buying, stuff like buying a property that’s already occupied by tenants and you’d be basically buying an eviction. There’s certain things that automatically disqualify a deal and just putting a little bit of effort before you jump into it will help you. I personally think people that like analyzing deals do it just because it’s fun. These are the high C’s on the DiSC profile, the analytical people, they will sit there. And I’ve had these buyers before that want to go over on a spreadsheet, all nine deals and look at every one of them in depth when they’ve already decided they don’t want to buy any of them. Stop doing that, if you’re not going to buy it, stop looking at it. And then the fourth one is use different muscles. So what I mean by that is, if you go to the gym and you are working out, there’s several different ways you’re burning energy.
So if I’m just doing bicep curls, I can only do it for so long before my bicep wears out. Well, I also have overall glucose in my bloodstream that I need to burn as energy to make that muscle contract. I could burn my bicep muscle out but still have glucose left over to work out another muscle system. And then I go do legs or I go do shoulders or something and all of a sudden I’m not fatigued and tired anymore, I can work out that muscle. When I run out of glucose, I’m completely done. So you have an amount of energy you can burn in a day that your attention can actually hold and focus on certain things and that’s going to determine when you’re done.
So you have to make sure you don’t go into a dead sprint and burn all of that by just getting into really tough meetings to start your day, with really difficult, problematic people. Got to be careful who you let into your life in the first place that burns all of your glucose to where you’re just done by lunchtime. “I just don’t even want to make money anymore. This is not worth it.” And the other thing is I break up my day by using different muscles. I don’t sit there and hammer the same muscle, because it wears out. I can’t write a book for 12 hours a day. I can’t be in meetings for 12 hours a day. I can’t solve difficult problems and I can’t review emails, I can’t do any of those one thing, because I’ll just get tired.
But I can break it up, so I will often record a podcast like this get done, use a different muscle by answering emails, use a different muscle by working on an outline for a book. Go step outside and take a walk while I call a couple people and talk. Get some sunshine, get some fresh air, come back in, grab a quick bite to eat, record the next piece of content I’m making. And basically, I don’t work out every muscle through the gym. I bounce around between the machines so that I can get more out of myself throughout the day.

Dave:
Wow, that’s great advice. I like that idea. Sometimes if you do two or three podcasts in a row, which I think we’re all doing today, it’s hard. I know people probably think, “Oh, they just talk on a podcast.” It’s like you have to pay a lot of attention, it’s exhausting. It’s nice to break it up a little bit.

David:
How about you, Dave? Do you have any tips?

Dave:
Yeah, I actually do. So one thing I think I do, I don’t know if I made this up, I’ve never heard anyone else do it, but I have something I consider my time budget. Everyone has a budget where they allocate dollars to certain things and they’re rigid about that. I have to confess, I’ve never had a financial budget in my whole life. But I do try to keep a time budget and I identify things that I want to do that are non-negotiable for me. So every item on my time budget has an amount of time I’m going to put towards it per week and then a priority level. So sleep, non-negotiable, got to do it. Time with my partner, got to do it. For me, I really like to exercise, so that’s something that’s nonnegotiable for me. But then everything else is a little bit below that.
And so for example, something that I had, some budgeting changes I had to make recently, is this year in 2022, I launched a podcast. Kathy’s on it, you guys have both been on it. And I also wrote a book and that’s on top of my full-time job at BiggerPockets. And so I had to look at my budget and say, “There are only so many hours in a week, how am I going to add to this?” And I basically decided no more active real estate deals. I’m only going to invest passively this year. And when I hear you guys talk about all your deals, I get a lot of FOMO.
But it’s a decision and a commitment I made to be able to do the other things I want to do in my life right now. And it helps you stay focused, at least for me, it helps me stay focused and not chase every opportunity, because ultimately, there is a lot of opportunity. And when you see markets like this, you guys are talking about, there’s a lot of different things. And I think you just need to be very intentional and deliberate about how you’re going to spend your time. And that gives you a better chance of achieving the fewer things that you decide to do. So I don’t know if anyone else does it, but it works for me.

David:
That’s pretty good.

Dave:
Well, thank you both for being here. This was a fun reunion. Kathy, we’re going to have to do this every Fall. We’re going to do a one year anniversary of BiggerNews. And so we appreciate you being here and looking forward to having you obviously on On the Market and seeing you both in San Diego. We’re filming this right before the conference, and we’ll see if one glass of wine really does it for Kathy.

Kathy:
Oh no, it’s going to be a weekend, I’m going to be drinking then.

Dave:
All right, great. Well, Kathy, where can people find you if they want to connect?

Kathy:
realwealth.com is our brokerage where we help people acquire investment properties nationwide. And then Grow Developments, growdevelopments.com is my syndication company.

Dave:
Awesome. And as if anyone listening to this doesn’t know where to find you, David, but what’s your Instagram and YouTube?

David:
It’s still not nearly as much as Brandon Turners. And even though he’s off the podcast, he’s still [inaudible 00:58:21].

Dave:
We got to get you up there, man.

David:
That’s what I’m saying, man.

Dave:
Yeah.

David:
I’ll take a pity follow. I’m not too proud to beg, not at all. I don’t want to have to grow a beard down to my belly button just to get attention like Brandon did. So please, if you like my content, go follow me at davidgreene24 and I’m on YouTube at David Greene Real Estate. And Dave, what about you?

Dave:
I am mostly on Instagram where you can find me at thedatadeli.

David:
All right. And last, for all of our listeners, please do us a favor, if you like this content, let us know in YouTube on the comments. We actually read those and we do take them seriously. So if you wish the show was longer, let us know. If you like the speed and the pace that we’re doing it at, the length, let us know that too. If you wish we had covered a certain point in depth more, let us know. We just may do a future show to satisfy your desires at a later date. Thank you guys, both Dave and Kathy for having me on and for sharing your knowledge. I think you both gave some really good, insightful things and I will get us out of here. This is David Greene for Kathy Real Wealth Fettke. And Dave, the Derek Jeter of Real Estate Meyers signing off.

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer, joined today by James Dainard. James, what’s going on man?

James:
Just grinding it out in the Pacific Northwest right now. We’re dealing with the market, shaking out, so just pivoting, changing things and keeping our nose down and getting things done.

Dave:
I mean, I guess I’m pretending asking you what’s going on. We’ve spent the whole day together, so I’ve talked to you a little bit. But maybe before we jump into the awesome interview we have today, what are you focusing on up there in the Pacific Northwest to keep your business moving during this very strange economic climate?

James:
A lot. We’ve made structural changes at every business. The way we’ve been doing the last 24 months we’ve thrown out the window, and we’ve replaced staff or reposition staff, and we’re just rebuilding the companies, because at the end of the day, every market is a different business and you just have to pivot, change and get things moving.
And as I’m seeing the market kind of slow down, I don’t want to wait until the very end, I want to do it right now. And so make your pivots, build your infrastructure out, and then start looking at the deals you’re going to be buying next.

Dave:
That’s great advice. We also have a great interview today that you dreamed up. This is someone you know. Can you tell us a little bit about Tommy, who’s going to be joining us in a little bit here?

James:
Yeah. I met Tommy actually two years ago, because we’re real estate brokers as sources investment properties. And they came to our town, Seattle, and they changed everything for a while. They came in heavily funded, very good clients, very good builders.
And the cool thing is they built a very high quality home and they spent a lot of time perfecting the layouts for the demographics that want to come in. And for us as brokers, it’s made us very easy to sell. But as an investor, it’s also made me be an admirer, because I’m like, “Hey, I need to kind of do what they’re doing because it’s working so well.”
But they’re a very sharp company, very great organization. They have very good systems in play. Their team is amazing. They build a great product. And the thing I like about him, he’s not just a home builder, he’s an investor guy.
He understands the whole game, he gets the whole big picture. He’s not just putting up two by fours and citing. They’re financially planning and expanding through every market, so it’s just a really exciting company to know in general.

Dave:
Oh, absolutely. It’s great. And I think if you’re thinking, “Oh, I’m not a builder. I’m not a developer,” you’re still going to want to listen to this, because Tommy has an incredible way of explaining how he uses data to find opportunities that’s applicable to people who invest pretty much in anything, particularly in real estate.
We get into a great conversation about how to find product market fit that is applicable to people who invest in any type of asset class. You’re definitely going to want to stick around and hear what Tommy has to say. Anything else you think our audience should listen out for in this interview?

James:
Just understanding the trends. And what I really enjoyed about the conversation was just it’s a simple business when you’re looking at deals. We’re going from a seller’s to a buyer’s market. The true investors like stable. And he wants a stable market, just like I want a stable market. And most of us just this transition is not a bad thing, it’s a good thing, and it allows you to actually grow your business a lot better.

Dave:
Right on. All right. We’re going to take a quick break, but after that we’re going to welcome Tommy Beadel, the CEO of Thomas James Holmes to On The Market. Tommy, welcome to On The Market. Thank you so much for joining us today.

Tom:
Yeah, thanks for having me.

Dave:
Could you start by telling our audience a little bit about how you got into real estate in the first place?

Tom:
How I got in real estate in the first place. Ah, gosh. How deep do you want me to go? I mean, I was sitting on my couch after a late night in college watching an infomercial about a guy who said, “Buy real estate, get rich with no money out of your pocket.” I ended up at a seminar at LAX Airport where they taught you how to leverage up your credit cards or ask for more balance on your credit card so you can go out and buy a home.
And I ended up buying my first home in Long Beach in 2001, 100% financing back when you could get that. I was a full income documentation earner at the time, so it wasn’t one of those crazy stated income loans. But bought a condo, rented one of the rooms out to my brother and my roommate, which functionally paid the entire mortgage payment, I was like, “I live for free. This is amazing. How do I buy more real estate?”
That was my first foray into real estate back then. Then I got into the mortgage business, did mortgages during the mortgage boom from 2001 till 2008. Had started Thomas James Capital, a mortgage company in ’06 was my first kind of foray of starting my own business. And started as a mortgage business and then have had to adapt over the last 16 years to where you can make money doing real estate, and have found myself into the new construction, single lot infill development business.

Dave:
I got to ask you, do you remember how much that seminar cost you back in 2001?

Tom:
It was free actually.

Dave:
What?

Tom:
It was free. I’m convinced though what they told you was ask for more limits on your credit cards because on day two we’re going to sell you the next seminar. Right? I didn’t buy the next seminar. I was like, “Ah, you just told me how to do it.” So no, never spent a dollar on the seminars.

Dave:
Wow. I was thinking to myself, “I’ve never interviewed anyone who has walked out of one of those seminars better off for it.” Congratulations on being someone who did. That’s awesome. Can you tell us a little bit about what you’re doing now and what your construction company does?

Tom:
Well, yeah. Thomas James Holmes, we’re the country’s largest single lot tear down home builder, where what we do is we go into a market and buy a old home in the best neighborhoods to live in. We call it the right home right where people want it. The neighborhoods where people want to live have really old homes.
And so we go and buy that home, tear it down and build a new home in its place. We’re currently operating in Southern California, both in Orange County, Newport Beach area and the west side of Los Angeles, as well as the Silicon Valley.
We’re in the greater neighborhoods of Seattle and the Seattle Market, Kirkland, Bellevue, et cetera. And then we’re in the city of Denver and also in the city of Phoenix. And so we’ve grown a business that enables us to replace functionally obsolete old homes in the best neighborhoods where people want to live.

Dave:
I want to get more into the specific markets that you operate in. But how did you come to settle on that niche of tear down homes, single lot building? What drew you to that niche of new construction?

Tom:
Listen, I would describe myself 16 years ago as a opportunistic real estate investor. Right? 16 years ago I was in the mortgage business because you could make a lot of money doing mortgages. And then in 2008 mortgages stopped and I started buying foreclosures. We were one of the larger foreclosure buyers at the LA County Auctions from 2008 to 2012.
But it’s opportunistic, because that was a finite period of time where there were inefficiencies in the foreclosure market that you could leverage and have an advantage from, but it’s not permanent. Right? The mortgage business where we could make a bunch of money from ’01 to 2006 was not a permanent stable business. The foreclosure business was again a moment in time. And what I found through all of this is businesses have cycles that exist, again, mortgages or foreclosures.
And even fixing and flipping homes, it’s this period of time where there’s a disparity between what you can buy and what you can sell for. What I saw in new construction was a permanent business. It was a business that there is supply of hundreds of thousands of old homes that ultimately need to be torn down. And there’s demand from a consumer for great homes in the neighborhoods where they want to live yet there’s no supply of that home stock in the market.
And when I look at the macro dynamics of the market, the big public builders can never play in those markets because there is no land. If you correlate what we do versus a Toll Brothers, or a NAR, or D.R. Horton, they develop land and they monetize that land through home building efforts. Right?
And what we do in the markets where we are, there is no land to then monetize. What we’re doing is we’re really playing on the arbitrage of square footage that is there and what can be there.
The housing stock that was built in this country in these prime neighborhoods 80 years ago on average was underbuilt for how today’s consumer lives. 80 years ago the consumer lived in a two bedroom, one bath, three bedroom, two bath, ranch style home with a detached garage, single story living, across the country at single story living.
And that you look at these major public master plan builders and they build on smaller lots, they build two story homes where today’s modern family lives in a call it a 2,500, 3000 square foot home with an attached garage in the front and your downstairs comes out to your backyard. It’s just very different the way construction is now 80 years later.
And so what I saw in this business was a resilient business that wasn’t dependent on a moment in time of a real estate market or an economic cycle, right? That there’s always a need or demand for high quality homes in the best neighborhoods and there’s always a supply of these old homes that ultimately need to be torn down in those markets. And so saw this real ability to scale a different type of business to meet the consumer demand in these marketplaces.

James:
Tommy, part of the reason that you went from trustee, or would you say that part of the reason you went from trustee sales to new construction was also the scalability factor? Because I know a lot of people that listen are the smaller flippers and they’re trying to scale their business, and it’s very difficult to scale a remodel flipping business because every house is so different and it’s harder to systemize the construction.
Is that kind of how you guys pivoted? Because I know we went from flipping to now we flip and build. We’re much smaller than you guys it. But the reason we like building is it’s so much easier to actually build a business around, whereas flipping every house is different no matter what systems you have in line. Was it just like the next step?
Because kind of what you described is you are the paperclip investor. You started with a seminar, you essentially did something the BiggerPockets called house hacking, getting your first deal, renting that out, growing it, going in a flipping and now you’re running a extremely large new construction company. I mean, do you think you did that just because you targeted more of the scaling or was it more the investment engine that grew up faster?

Tom:
I think ultimately what you’re saying I describe with the word predictable. And the difference between the different models is predictability. If I go back to how I got into new construction, because I think it’s kind of interesting, Dave, which answers your question, James, is that we were a conduit at the foreclosure sales for other wholesale investors. Right?
Most buyers during the foreclosure boom weren’t able to go to an auction regularly, understand the dynamics happening at the auction guarantee title, all of the things that go along with buying at a foreclosure auction. And so we were a conduit for the smaller investors at these auctions back then.
And I had a partner of ours that was utilizing our services to get access to the foreclosure market and he was buying in neighborhoods that I didn’t understand the value of the real estate. And I looked at only the improvement as the value. Right?
I would look at the property and say it’s a whatever, 2000 square foot home on an 8,000 square foot lot, was built in 1950. And how much will that 2000 foot home be worth if we fixed it up, a typical fix and flip type model? And this gentleman was buying in the valley of Los Angeles in the San Fernando Valley, like in Chino, Sherman Oaks, et cetera.
And I’ll never forget one time we were talking about a property in Sherman Oaks and he said, “I’ll pay a million dollars for it.” And I said, “I can’t lay my money out for you because that house isn’t worth a million dollars. I’m going to be on the hook.” I asked him, “What are you doing? I have to understand why I should feel comfortable.” He said, “Well I’m not buying the house, Tommy, I’m buying the land sitting underneath it,” and this light bulb went off, like, “What do you mean you’re buying the land?”
Well, there’s a math problem that exists to build a home on that lot. The math problem is how much square footage can I build an FAR over the lot area, and then how much does it cost to build that square foot, right? What you’re talking about James on the fix and flip model is one 1950s home versus another 1950s home. I could say it’s a hundred bucks to remodel, but I don’t know until I get in and do I see the foundation and the HVAC and all of these things.
But building a new home on a 10,000 foot lot in this neighborhood on a flat pad versus building a home on this one is the same. It’s predictable, right? And predictable leads to scalability. And so when you can look at a math equation … I mean, I look at real estate as a math equation, right? And when that math equation is simple, pay X scholars for the dirt, pay X dollars for construction, have revenue of Y dollars, that math translates everywhere.
It doesn’t translate to the actual piece of property, which is where you find scalable challenges. Right? When we were doing fix and flip, and we did hundreds and hundreds of these things from ’08 to 2012, you had wildly profitable deals and mediocre deals, and then some really bad apples that you didn’t know what the construction was going to be and they kind of all had a weighted average that was acceptable.
When you go into new construction, we think of it as every deal should be predictable because you go in knowing your cost of construction and knowing if you build that this is the value of what you will be building against. I think scale requires predictability. Scale requires capital. Capital wants predictable returns on their capital, and so that’s how we really push to scale the business.

James:
Got it. Because that makes sense. For us, we’ve been able to scale our … We built town homes has been a lot easier for us to scale that out. And as we’re purchasing, it’s just a simple math equation, which every house is a lot different.
But as you guys are expanding into different markets, how have you guys been able to predict those markets? Because every market is so different. The climate is different, how you build. The cost are different each market. And then also just the value of the market conditions can swing.
You guys are in a desert state, a rainy state in the Pacific Northwest, you get the sunshine in SoCal, and then you get both the perfect climate in Colorado in my opinion. What made you guys want to move into those markets and then whatever you guys had to change to scale around that?

Tom:
Again, we look at supply and demand characteristics in a market on a macro basis. What’s the absorption of real estate? What’s the supply of the land or the old real estate that we can build on? And do the macro trends provide for a market to build in? I can tell you we thought years ago that building homes between the different markets was drastically different in building costs. It’s really not. Right?
Building a home in Arizona is very similar to Seattle, is very similar to Denver. Like as I described to my teams, a two by four in Arizona is the same cost as a two by four in Denver is the same cost as in Seattle. The labor cost of building a home in those markets is also very similar. The labor force in this country is very similar. I mean, you’re going to get slight swings, but the cost of building homes is very similar.
Yes, you have to build different. Every house we build in Denver, the majority of the homes we build in Denver, they have basements because of the climate. The majority of homes we build in Arizona or Phoenix are single story. There’s nuances market to market, but in general the cost of construction is very similar as you build homes in each one of those markets.
And so it’s really then extrapolating that same math problem across into these different regions and looking at where the math equation works. What I love about real estate is the data is so rich. Right? I can see where is land selling at a price that I can pay, because I know what it’s going to cost to build and I know what I then can sell because the data tells me what you can sell homes for in that same zip code. And so we’ve been able to really study how the business works in these different environments very predictably.

Dave:
Tommy, what about the specific markets that you invested in attracted you to them? You said you look at macroeconomic data, and that’s something we focus a lot on this show. You mentioned absorption rates. Are there any other key data points that you look at that you recommend to other investors they look at if they’re trying to expand to new markets?

Tom:
It depends on what you’re looking for. I’m looking to build a business long term that does this compared to investing in an asset today that’s going to have a yield tomorrow or in the next six months. Where am I going to place my capital? I’m making a bet that these markets long term have the financial viability to be in.
It just depends on which investor you are. Right? If you are looking to grow your business into multiple markets, there’s a lot more factors that go into what’s the scalability of that marketplace. What are the job trends happening in that marketplace? What are the regulatory trends happening around densification or additional ability to grow and scale the model?
I think if you’re an investor looking at how do I place my money today, to me it all comes down to supply and demand. Right? I think, and we track this in every one of our markets and markets we’re going into, what is the supply and what’s the demand, right? How many months of inventory are there? How many weeks of inventory are there in these marketplaces?
And where you see supply, outpacing demand and supply growing, you have caution, right? It’s basic simple economic function of supply and demand. And I think that it’s so key that sometimes people forget that if I’m going to place my money here, they’re looking at the deal and the economic terms of that deal, but they’re forgetting that there’s a broader market that they’re competing with on that deal. Right?
There’s a lot of times where people will look at, well, I’m going to be new so I’m only going to compare to new. I think we forget so many times that what is the consumer? Who are we trying to attract? We’re trying to attract a dollar to buy our home. I mean, I correlate it to a car as an example. Take the luxury segment, say it’s a Mercedes, a BMW, an Audi or now a Tesla in that, and I’m trying to attract a customer that has $70,000 to spend on a car, I’m going to look at all my options, right?
Real estate is no different. If I have a million and a half dollars in Seattle, I’m going to say, “Where does my million and a half dollars go best?” Right? If my work center is Downtown Seattle or Bellevue, what’s my pattern to work? Where does the spouse work? And where does my million a half dollars go furthest? Do I get a great town? Do I get an old single family? Do I get a new single family in a more up and coming neighborhood?
Where does my million and a half dollars spend best? And so when you look at supply and demand, I have to say as an investor, what’s the demand for the dollars? The dollars that are out there that I’m trying to attract to the product, what’s the demand and what’s the supply that’s trying to attract those dollars?
And so many times we get very bead focused in a neighborhood and say, “Oh, well, yes, there’s nothing in this neighborhood. Okay, but there’s 10 things in the neighborhood next door, which is the same proximity to work centers as that.” And so again, Dave, I think it sounds more macro the way that I look at it.
We’re managing over a billion dollars worth of real estate in these markets, and so we have to look at these major trends compared to did I buy this singular deal correct? And where do I want to do that singular deal? It really depends on which investor you are and how you want to place that investment of capital into the marketplace.

James:
When you guys are reviewing these trends, I mean, do you guys dig deep into the demographics? With each state there’s a different demand for each type of buyer pool. I was telling Dave before is that you guys spend so much time. You can walk into one of your homes and it could be an 800 to 900 square foot house, but how it’s laid out, they’re so carefully laid out, they feel massive, which is what people are looking for.
They’re looking for space, especially in tight size units. Besides just the normal trends, which are absorption rates, days on market, a median home price, how deep with you guys scaling out are you going into the demographics and going to that next layer of data so you can plan accordingly? Because on a build too, it’s a 12 to 24 month plan a lot of times. How far are you going down the line by digging into even deeper into the data?

Tom:
Yeah, that’s one of the unique parts of only building new construction is we get to design something from scratch every time. We’re not limited by the existing house that we have to remodel. We get to really say what is it that consumers want? Who is our target profile that we’re looking at? Yes, absolutely, James.
We go very deep with that volume of real estate that we own of who are the buyers? What is the life stage of the buyers? Are they empty nesters? Are they young couples? Are they singles? Are they divorcees? What’s the ethnicity of a buyer? Because different ethnicities in different markets want different characteristics of a home, and the layouts of a home, the things that are important to those people.
We do consumer surveys to understand what they’re willing to pay more for or less for, where they’re valuing things that are in excess of the cost to build them. Is yard space more important than a rooftop deck, or just different characteristics of a home that a buyer wants? And really understanding who the consumer is in the market and then how you design the product for the consumer.
And it’s very similar across five markets. You get nuances of demographics, age and ethnicity depending on which market you are in. But the consumer profile is actually very similar. And so then the design to meet that consumer profile is very consistent.
So then once you know who the consumer is, what they value and what they’re willing to spend money on, then we use that data to engage our architects to really design the best home for the market. And so, yes, we definitely go that next step when we get into buying homes.

James:
And so Tommy, how important do you think that is? Obviously we’re going through a market transition right now. Cost of money has gone up, things are slowing down. And one thing that I know Thomas James Homes been able to do is still move a lot of units compared to a lot of builders that are sitting there.
And I do know most local home builders aren’t digging that deep into the demographics. They’re going for that surface level data. And our show is about going to that next level to where you can mitigate risk, protect yourself. Do you think that the extra layer of research on demographics and what people want is helping you guys move the product a little bit better than a lot of different builders?
At least in our local Pacific Northwest market You guys have been able to do that. How important do you think that is for investors to be digging to the extra layer right now as we kind of transition into different types of pricing across the board?

Tom:
Yeah, look, I think a big part of it depends on the volume you’re doing. If I had a few homes to sell at a certain price point, you’d price them correctly, move the inventory. We’ve taken market positions, like in Seattle where we developed those cottages. The cottages were developed very purposely for a very specific part of the market.
We knew that. That’s why we designed them for those. Right? We knew people wanted to not be in towns. The people that are buying our thousand square foot cottages are not town home buyers, because there’s plenty of town homes for those people to buy, but they want to live actually in smaller space, but on two stories compared to three or four stories.
And so we knew that was a void in the market, which is why we developed a product to meet that void. And then knowing that, knowing who we built it for, marketing to that customer, telling them why we built it, telling them what’s great about it for them really helps us be able to move that inventory.
If we went in and built these cottages and just said, “They’re for everybody,” well, they’re not. They were built very purposefully. And so yes, I think understanding our consumer segment is important because it allows us who to focus on to market the product and really tailor our message to the people correctly to show them why we built those homes for them.

Dave:
Tommy, I think this is a great lesson for everyone listening to this. I mean, what you’re describing really sounds like just making sure you find a good product market fit between the product that you’re building and what the demand is. And this is true of obviously pretty much every business out there, and real estate investing is no different.
Even if you’re not a builder like Tommy or James, but even if you are a buy and hold investor, it’s important to consider the properties that you’re buying and if the type of product that you’re buying in a particular market makes sense for the people who are living there. You don’t want to necessarily buy a huge single family really nice home in the middle of a young college town.
There’s just different products that are meant for different types of people. And I think Tommy you did a great job articulating that, but I want to make sure everyone understands that it’s not just for builders here, this is for every type of investor should be thinking about who ultimately is going to be either renting or buying the property that you’re investing in.

Tom:
Well, look, Dave, real estate is an inefficient business real estate. That’s why people can make money in it. Where you get up to these big, huge commercial multi-family type projects, that’s where the efficiencies are gained and you have all the large Wall Street type money going after those things, because there’s no inefficiencies.
What you’re really describing is find the inefficiencies, understand them and beat them. As you were saying that I thought of a rental property. It’s funny, my wife and I actually bought a rental property here in Orange County a few months ago because I saw inefficiencies. I saw that there’s nothing nice and new in the market and there’s demand for somebody to have a nice new single family home and where the disparity of rent people will pay to have something new is.
And so we bought this home, remodeled it, made it beautiful and rented it in 10 days for $5 per square foot when the average in the market is like 350 a foot, because people will pay for that something that’s nice. And so that’s an inefficiency that’s found in the marketplace. And ultimately what I’ve done with new construction is found the largest inefficiency that exists and then taken advantage of that inefficiency in the marketplace for single family new construction.
We actually build rentals in Los Angeles for the same reason. I have about a hundred rental properties with a venture where we build brand new construction rentals in the marketplace for this investor that wants to own that disparity of where there’s demand for new construction living and people want out of a condo or out of a multi-family apartment building, they really want to live in a single family type home. It’s really understanding those different inefficiencies and seeing if there’s an ability to capitalize on them.

Dave:
Tommy, you mentioned earlier that one of the things you look at is of course absorption rate and months of supply. Those have been going up a lot, especially in the new construction market. How is that impacting your outlook over the next couple of years?

Tom:
Without getting into the specific data we track, we all saw what happened when the stock market kind of bottomed in the middle of June and interest rates started to run up, the supply started out pacing the demand for homes. And so what we’re tracking, is that a trend that’s going to continue or is that a trend that comes off?
Well, it’s a trend that happened through July and that trend has come off slightly in terms of supply of new construction homes or the price points where people are selling. And what we’re really tracking is months of absorption or weeks of absorption in the marketplace.
If there’s 70 available homes at the price point you’re trying to sell, and there’s seven selling a week, there’s 10 weeks of absorption in that product. I think what it’s helped us do is really on the buying side as well is where you’re seeing more supply of the input.
The input for us is land. And so if we go into a marketplace saying we’re going to pay a million dollars in this market for land, if we see the weeks of supply going from three weeks to six weeks to 10 weeks, that tells me that land will be cheaper in the coming months. And so then you slow down and you buy correctly, because the land will come down. Right?
It may not come down today, but when we buy a property we’re going to hold them for 18 months or longer. And so it’s really understanding how do we get in at the right basis. And what you really want to track is … I love a market that’s not a buyer’s market and it’s not a seller’s market but it’s just a market. And I feel like where we are right now is just a market.
Five months ago it was a seller’s market. We could demand anything. Through the middle of the summer, it was trending towards a buyer’s market, but that’s come off. And so I just want a normalized market where there’s constant supply of inventory and constant absorption of that same inventory.
The swings is what really causes in both ways. Look, as a seller, I’d love a seller’s market for my inventory, but I don’t want to buy inventory in a seller’s market to build new homes on. We just want a good constant market. And we track these trends by each neighborhood we’re in, by the major metros and across all the metros simultaneously to really see how should we be making decisions on selling homes and then buying new inventory.

James:
As you guys are tracking the data and the absorption rates, one thing that we’ve noticed, especially over the last 90 days or since June, is builders appetites have really backed out. They’re being very, very aggressive. The last 12 to 24 months they’ve calmed down. And then we’ve seen a dramatic drop in building permits and applications over the last 90 days.
I think nationally building permits are down 1.3%, or for single family housing they’re down 5% from last year. Do you see that more is a concern that the builder market is pulling back or more a good opportunity because there is such low supply that there could be this void in the market to where new construction could become this premium product that is expensive just because there’s just not a lot to cover?
I know for us as investors, whether we’re flippers or developers or buy and hold, we’re looking for the gaps. Where are people not kind of playing in? And as people pull back on permits, there is going to be less inventory coming, which for me, I like selling the product that nobody else has. Are you guys looking at that more as something to be cautious of or more something that you’re getting exciting on?

Tom:
Look, the challenge with new construction is we’re buying something today that we’re not going to sell for another year and a half. You’re trying to predict what the absorption of real estate will be at the end of 2023 going into ’24 with your buying patterns today. That you almost need a crystal ball for.
However, what we see is this demand that is not stopping. Right? Has the demand slowed slightly. Sure. But there’s demand for real estate in the markets. And I think it’s hard for me, James, because I have a very myopic view, because the only thing I understand is brand new homes in the best markets. When you look at flipping homes, it’s very hard for me to tell you what that real estate trend will be doing or new construction.
I only look at new construction in the best neighborhoods of Seattle. Seattle versus Tacoma, very different real estate trends. Because the demand in the prime neighborhoods, Northeast Ballard, Queen Anne, et cetera, of Seattle, it’s kind of hard to compare that to the overall global new construction building permits.
My view becomes very myopic in what is new construction in the best marketplaces. If permits in the markets where I am slows, investors are slowing down their buying, it provides more opportunities for me to buy and buy less expensively. But when I get to the back, 18 months from now I’m going to have less competition.
Because if I’m the one buying today, if six months ago we were buying five pieces of inventory to build new, and now I’m the one buying three pieces of inventory and the others have not bought the other two pieces, 18 months from now I’m going to own the only supply in the marketplace.
I kind of like that trend, but I also understand investors, right? I’m a very different investor, more of an institutional investor, invest in capital that is here to play through all market cycles compared to the smaller guy who’s investing friends and family money personally guaranteed on loans. There’s a lot more market factors in play when you’re making those very close to home personal decisions.

James:
And are you guys tracking that in every market that you’re in, like how many building permits are going through? And have you seen any trends stick out more? Because again, you’re in four different types of market, all good markets but different. They have different types of business sectors. Have you seen any drop more than others?

Tom:
Yeah, I’d love if you could share with me the way to track building permits because we have a very hard time tracking new construction building permits. They kind of are all lumped together. And so there’s not a good clean way to aggregate and track that data. Where we’re tracking it more is who’s buying the real estate that we’re not buying and what are they doing with it?
If we have a property that we don’t buy, are they remodeling it? Are they living in it or are they really going in and building a new home? Our number one competitor that we compete with across all five markets that we’re in are actually not other builders.
They’re homeowners buying the real estate to own and live in, or remodel and live in. There’s less development than there is I want that piece of property to own in the marketplace.

James:
Got it. I mean, that makes sense.

Dave:
One thing I wanted to ask you, Tommy, before we let you go is about material costs. It’s something that we’ve been trying to keep track of and I know has scared away some people from flipping, or getting into new construction or development. Have you seen material costs stabilize over the last couple of months or are you still seeing rapid rise … Well, I guess I should ask you, are you seeing rapid rises and sort of what are you seeing in the material costs?

Tom:
No, look, we’ve definitely seen a stabilization in materials. Lumber has come back down. We’re actually seeing a reduction in lumber costs across every market right now. You’re still have inflation. There’s certain cost codes that are inflating along with inflation trends, light fixtures, tile.
There’s a lot of materials that go into building a home that are dependent on oil. And so as oil costs went up, you saw much larger increases in oil cost. The markets that we build in require the labor force to come from outside the area. As oil was up and gas prices were up, you saw a larger influx in your labor cost because the labor had to move themselves to these job sites.
We’ve seen with fuel costs coming back down and lumber coming back down a stabilization, but we still have cost inflation pressures like anyone else does in the market. You got to keep in mind, 40, 50% of every cost to build, whether I think you’re remodeling or building new is labor. And that labor is paying more for their rent, they’re paying more for their groceries, they’re paying more for the fuel and their car, for the clothes that they’re wearing.
And so how do they pay for that? They have to charge more for their labor cost. And so 50% of the cost of construction is really affected by labor. And as a general term, the labor is being affected by CPI index like anybody else. Only about half of it is material cost and that material cost can be all over the place.
But the other major influence is really on labor. What I do think is good is we’re not seeing these drastic spikes anymore. I think we’ve gotten back to some sort of normalization, although now I hear that there’s so many products sitting in warehouses in the US that maybe some of the materials will actually come down over time because we overreacted to the short supply of supply chain issues and filled a bunch of warehouses with stuff here in the US that we need.
We’ll see if we really get cost reductions, I’m not counting on it. And we expect constant inflation due to labor. We just would hope it gets back more normalized than high 8% CPI or inflation index ,and gets back down into the threes and fours, which is pretty normal in construction costs.

James:
Are you guys accounting for more of this in your upfront underwriting, or what have you guys had to do over the last 12 months to kind of battle that labor? I know for us we’ve had to bring in people on staff. We just brought our labor in-house, because it was a way for us to control the cost more. Have you guys had to pivot that way at all or change your systems, or is it more just, “Hey, we got to account for this, build it into the proforma and put the plan in motion.”?

Tom:
Yeah, I think the biggest part for us is having the feedback loop of what it’s costing us to build today. We’re underwriting a new deal based upon our cost today. And so you’re always trying to maintain that feedback loop. If my HVAC is going up today in September, then I know I need to start budgeting more for the jobs that I’m buying that I’ll be putting HVAC in six, seven months from now.
We’re trying to constantly maintain that feedback loop of what’s the cost today and how’s that going to translate when we incur that cost down the road, because there’s a lag time when we buy a new project. The nice part is we don’t buy 400 lots, or buy a big master plan community and cut into foreign lots and locked into our land basis.
We’re always buying new land. And so we are always able to update our underwriting based upon what our current costs are. And so it’s really trying to maintain that feedback loop of different cost codes and where the changes are happening so that you don’t get surprised by them the next time you’re building that home.

Dave:
All right, Tommy, thank you so much. This has been super helpful. Is there anything else you think our audience of new, aspiring and existing real estate investors should know about how to navigate current market conditions or anything else you’d like to share?

Tom:
Yeah, no, look, it just takes taking a little bit of chance and hedging your risk as an investor. I mean, I’m sure some of your investors were like me 15 years ago when you were putting everything into a real estate deal and betting a lot on that.
Sometimes you have to make big bets to go to where you want, and you really have to figure out what it is you are doing. I’ll just share the last thing with you, Dave and James, is that I think you got to figure out as an investor what your goals are and what you’re ultimately trying to accomplish.
Are you trying to build a business? Are you trying to take advantage of a moment in time in a real estate arbitrage? And if you’re going to really build a business and invest capital and take risk, personal, professional, et cetera, why are you doing it? Right?
What’s the bigger, greater goal? If it’s just another dollar, that could be the greater goal. Right? But I love what Simon Sinek says, is, “Figure out your why and the what becomes way easier.” There’s a great YouTube video about it. But as these investors are out there taking risk, going out on a limb, doing deals, building businesses, why are you ultimately doing it at the end of the day?
And figuring out why you’re doing it really helps kind of alleviate all the stress that comes along with the risk that you’re taking in the marketplace. I hope that helps. But Dave and James, appreciate you guys having me on your show today. I really enjoy sharing with you, and hopefully your users learn something from me, and that is don’t pay for real estate seminars at the LAX Airport.

Dave:
Just go to the first day.

Tom:
There you go. There you go.

Dave:
And Tommy, if people want to connect with you, where can they do that?

Tom:
You can message me through LinkedIn, Tommy Beadel, B-E-A-D-E-L. You guys have it spelled L-E, but it’s E-L at the top there. Appreciate any messages you want to send.

James:
If you guys are any deal guys in those markets, look them up. They are great people to work with, a great company to work with. If you got deals, Colorado, Phoenix, Seattle, SoCal, all the new wholesalers out there, reach out to them.

Tom:
Thanks, James. Yes, no, we always like to buy new real estate deals. As a realtor asked me last week, “How do you feel about the market?” And I said, “I can’t find enough land to buy.” And they said, “No, no, but how do you feel about the market?” And I said, “I just said. I can’t find enough land to buy,” which means I feel good about the market. All right guys. Thanks so much. Thanks for having me. See you.

Dave:
All right, take care. All right, James, what’d you think?

James:
Oh, I thought that was awesome. For me as an investor, I’m always looking at how do you scale, how do you kind of move and grow and just … I mean, the fact that these guys can build on all four different areas pretty rapidly in a short amount of time, it really goes back to why people should watch our podcast.
Track the trends, learn what’s going on, and then you can build a business around those trends, not just about your gut feelings. I mean, he’s just taking data, analyzing it, and then putting his motion in play. And I did relate with a lot of what he said.
Scaling as an investor is just, it’s about having the right system, not just the right vision going, “Can I scale this and grow this down the road?” Because that is the hardest part of our business. We start with a certain amount of capital. How do you grow as fast as possible? But it shows that all those house hackers out there, you can go from house hacking to being the largest spot lot builder in the whole nation.

Dave:
Yeah, that was an incredible story. I loved his personal story. What he was talking about in terms of the data was fascinating to me, because we look at a lot of macroeconomic trends, looking at absorption rates, inventory, this sort of stuff makes a lot of sense to me.
What he talked about that I wish I was better at and could do more of is getting that data about what people want, what the consumer is buying. Because I love what he was saying about, generally speaking just about product market fit, and thinking about exactly who the intended buyer is.
But even if you’re a buy and hold investor, think about who the renter is going to be. And is the product that you are buying going to be appealing to the people who live in that area and who want to live in that type of building?
I got to find a better way to find that data. I wonder if he’s just doing like, I should have asked him, surveys or talking to agents. Or do you have any thoughts on how you get that kind of data about what layouts people want, what kind of architecture they want? I’ve never seen anything like that.

James:
Yeah, there’s some cool stuff out there you can do with … We do it actually for off-market tracking, like when we’re more targeting sellers, like who is the demographic that is most likely to sell? You can do the same thing. There’s a lot of different data scientists and analytics companies out there that for us as a wholesaling company we actually hire them, they go through our data and they give us our top list to go off of, and I think they do the same thing.

Dave:
Oh, really?

James:
Oh, yeah. It is not cheap. It’s expensive, but it makes your conversion rate substantially higher. And again, going back to his point, by them taking that extra layer of research and not going off your gut or just the surface to analytics, they’ve been able to sell a lot of units too.
Just like we can get our conversion rate by going to that demographics likeliness to sell or likeliness to buy, you can really kind of plan ahead and not be the odd man out. Because as the market’s transitioning right now, the last thing you want is to be the odd man out property. You don’t want to be the weird rental. You don’t want to be the weird remodeled flip.

Dave:
Totally.

James:
You don’t want to be the new construction lot with a negative impact, and that’s what makes your deal move right now.

Dave:
Yeah, that’s really good advice. I mean, I don’t know if that’s something applicable to our audience if it’s super expensive to buy it, but I mean, maybe it’s as simple as just talking to agents in your area too, just figuring out what type of things people want.
I know when I talk to my agent in Denver, he can always just tell me off the top of his head, “People want ranches right now. People are really digging detached garages,” or, “Renters are looking for this.” Try and gather that data some way. I wish I had some better advice from you other than paying a lot of money. But if you can get it, you’ll definitely have an advantage in the market.

James:
And there is one I do know of that’s not very expensive. It’s called NeighborhoodScout.

Dave:
Oh, yeah.

James:
Yeah. You can pull up every little neighborhood. And they show you the demographics moving in, the demographics moving out. And it’s actually super handy. It does not cost thousands of dollars. And you can buy it just for the little area that you’re in.

Dave:
Oh, perfect. That’s awesome. Thank you. Well, yeah, I’ve used that in the past. I’ve never used it for that purpose, but that’s great advice. Check out NeighborhoodScout if you want to get this kind of data. All right, James, thanks so much. I mean, it’s been a fun day. We’ve been together all day and hopefully I guess we’re going to be together in person real soon.

James:
I’m so excited for BPCON. I think it’s going to be a special one.

Dave:
Yeah. I mean, I feel like we’ve been talking about this for a really long time and now it’s finally here. I’m looking forward to seeing you in a week and a half.

James:
This is my first BiggerPockets conference too.

Dave:
Oh, really? You haven’t been?

James:
Yeah. No, I couldn’t make the last couple because of kids, kid commitment.

Dave:
Oh. Sweet man. Well, we’ll have a great time. And hopefully some of our listeners will be there. But if not, we’ll definitely be posting a lot. We’re going to do a podcast there that we will release so people can hear it.
And yeah, if you want to connect with me at any point about this episode or anything, you could do that on Instagram where I’m @thedatadeli. You can also follow BPCON there. James, what’s your Instagram handle or where should people connect with you?

James:
Yeah, the easiest way to connect with me is definitely on Instagram @jdainflips or our YouTube channel at Project Re. And definitely reach out. I know I’ll be around. And if you catch me at a conference, one thing you do know is I won’t stop talking. Come up, ask me questions, you will get answers. I’m very friendly.

Dave:
That’s a dangerous thing to start telling people.

James:
It’s terrible. I’ll go for eight hours straight. It’s bad.

Dave:
You’re going to be drinking those Rockstars and up till 5:00 in the morning.

James:
Sales juice. Sales juice.

Dave:
All right, thanks man, for being here. And everyone listening, thank you so much for being here and listening to us. Hope you learned a lot today like I did. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett. Editing by Joel Esparza 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.

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