December 2022

Last week, the Fed raised its benchmark interest rate by half a percentage point, a slowdown from previous sprints. Still, the federal funds rate is at its highest since 2007. While traders are betting the Fed will begin reducing the federal funds rate in the second half of 2023, historical trends suggest a different timeline. And while economists from major firms are split on where and when rates will peak, Fed policymakers have signaled that rates will likely remain elevated until 2024. 

Why the varying estimates? No one is certain how long it will take for high-interest rates to impact the job market or whether we will enter a recession. Inflation has been stubborn (albeit declining) largely due to low unemployment and supply chain issues, experts say.  

When Has the Fed Cut Interest Rates Historically?

Interest rates have peaked for an average of 11 months over the last five cycles. In past rate hike cycles, however, the Fed acted earlier to tame inflation and gradually raised rates.

Since high inflation in 2022 was initially thought to be a temporary, “transitory” result of the global pandemic, inflation was allowed to exceed target for 12 months before the Fed took action. This led to the fastest rate hike cycle, a rise of more than two percentage points in only six months. With inflation stickier than in the past, a longer-than-average holding period may also be required. 

Fed policymakers forecast additional increases in 2023 to a range of 5%-5.25%. Rate cuts are not expected to happen before 2024. But that’s not set in stone. The Fed’s own forecast clashes with trader expectations, while history seems to support the Fed’s timeline. Still, a sooner decrease is possible if a deep recession takes hold, analysts say. 

What Are Economists Expecting This Time Around?

Financial firm Morningstar expects inflation to turn around faster than the Fed currently forecasts, predicting rate cuts in the second half of 2023 that continue into 2024. The firm contends that the Fed is attempting to “talk” the market in the direction of maintaining tight financial conditions while dropping bond yields over the last two months and slowing economic growth, suggesting the fight to control inflation will end in 2023. 

Barclays initially expected rates to come down in the third quarter of 2023 as well but has pushed back the forecast to November of 2023 due to the resilience of inflation. But the firm’s estimates remain ahead of the Fed’s schedule due to a high likelihood of an upcoming recession. And Morgan Stanley continues to predict the first cut happening in December of 2023. Researchers at JPMorgan Chase say the Fed could cut rates next year as well—but only if factors like increasing unemployment, lower inflation, and weakening economic activity converge in time. 

Meanwhile, most of the investors the bank surveyed don’t expect rates to fall until 2024. Economists at Goldman Sachs agree. Chief Economist Jan Hatzius says inflation has been more persistent than expected and doesn’t expect rate cuts until 2024. 

Still, Bloomberg Economics is nearly certain a recession will take hold within a year, and most economists agree. Some say if unemployment rises enough, the Fed may rest its attempts to hit the target inflation rate of 2% since there are signs the inflation rate will remain above that target for the foreseeable future. In any case, future rate increases into 2023 are probable, which will impact mortgage rates as well. Even in a best-case scenario, most experts don’t expect mortgage rates to come down until the end of 2023, and they could stay elevated into 2024 if a resilient economy requires the Fed to be more aggressive. 

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

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer. Joined today by the full panel. We have Kathy Fettke, James Dainard, Henry Washington and Jamil Damji joining us. And all four of you just got back from what looked like a very fun party that I’m very sad to miss to celebrate Jamil. Jamil, congratulations. Can you tell everyone what you were celebrating?

Jamil:
Absolutely. Thank you for the shout-out. We had the premiere of season two of Triple Digit Flip and my brothers and sisters were all in attendance. Other than you, Dave, we missed you. But we had you there in spirit. It was a phenomenal premiere, super fun show and the network executives came out.
We had The Outlaws from Tupac and The Outlaws performance, like are childhood heroes of mine and just got to live up a night that I’ll never forget. It was super fun.

Dave:
That’s awesome, man. Well, congratulations. It’s a great show and you definitely deserve to celebrate all of your success there.

Jamil:
Thank you, bro.

Dave:
Henry, what was the most compromising thing you saw or learned about Jamil during the party?

Jamil:
Great question.

Henry:
Well, it’s funny is when I showed up, he made me sign an NDA. So I can’t really disclose what I did or didn’t see. All I can say is that it was a night definitely to remember.
In all seriousness, what I love about hanging out with Jamil is that his warm, inviting and comforting nature is reflected in everybody that’s around him. We’re in a room full of hundreds of people and everybody is just having a good time, sharing information with each other, loving on each other, and to be able to create a community like that is not only a testament to his success but a testament to him as a person.
Thank you for letting me be there.

Jamil:
Thank you, man.

Dave:
Wow, awesome. Kathy, why, do you have something mean to say?

Kathy:
I was going to say no, no. I agree so much. Jamil and Pace are changing so many lives that the room was just full of hope and happiness and optimism of people who were learning how to invest and how to change their lives and their future that way. And it was just so much love in the room. And I got to see Jamil do some attempt at break dancing maybe.

Jamil:
You mean break necking?

Kathy:
Break necking.

Henry:
That was a really cool full circle moment for me. I had posted a video about it I think yesterday, but a guy came up to me who recognized me and said that he saw one of my videos about a challenge I was having a long time ago, and when I just started investing and me talking about that challenging experience changed his life, his perspective and he knew at that point he was going to be successful.
He then ended up connecting with Pace’s group. And while his mom was battling stage four cancer, he was able to go from where he was to make $90,000 in a year. And it was just cool to know that something that I said sparked this guy to get started.
He then works with Pace. I didn’t know Pace at the time. He probably started to connect with me. And then now we’re all in the same room together at the same time seeing his success. That’s the impact that sharing this information about real estate can have on people. And the world is smaller than we think it is.

Jamil:
Man.

Dave:
That’s awesome. That’s awesome. Wow, that’s super cool. And congrats on the community that you’ve created there, Jamil.

Jamil:
Thank you, man. It’s been a phenomenal experience and it’s just getting started. I see this as our life pursuit and I’m excited to do this until they tell me to stop.

Henry:
Amen.

James:
I hope you do. The parties are fun.

Dave:
James is like yeah, community. Whatever. I don’t know. Let’s have more parties.

Jamil:
James had one of the best outfits on ever. It was like we did a ’90s hip hop theme because it was so good.

James:
I will say the community is awesome. I lost my credit card in the bathroom somehow and someone had tracked me down somehow and handed me the card. I literally had just canceled it. He’s like, “James. I’ve got your credit card.” And I was like, “Oh, wow!” It was-

Jamil:
Wow.

James:
Talk about a good community.

Dave:
I just bought a boat on it.

James:
Yeah, I know. I need it for the boat repairs.

Jamil:
That’s so cool.

Dave:
All right, well I’m glad you guys had such a good time. Hopefully I could be there for next year. Let’s get into today’s show. We’re going to be doing one of our, I guess, repeat formats now, which is a correspondence show where we can… Each one of our panelists will bring a story that they are finding interesting that they think are important for our listeners to pay attention to.
We’ll get to that in just a minute. But first, we’re going to take a quick break. All right, Jamil. You’re the man of the hour. So let’s start with you. What story did you bring for us today?

Jamil:
Well, I wanted to look at this from a slightly different angle and perspective because as we have seen the real estate market shift and as investors, we all have a specific point of view and our point of views differ for sure. But we’re really looking at it from the bottom line of our perspective. Are we going to be paying more money for our houses? Are we going to be able to cash flow? Is the BRRRR still working so many different things? Is real estate going to correct? Overcorrect? There’s just a lot of tension and things that we as investors care about and think about and talk about.
Yesterday, however, I’m doing a popup meetup at my office and a lady who follows me on YouTube comes in and gives me a big hug and says, “I just want you to know that I’ve been watching you on YouTube and I was able to do my first deal. It was a small deal. I made $2,000 and it allowed me to sustain life for a little while longer and living in my car.” And I was like, “Hold on a second. What? You came to a meetup and you’ve done your first deal, you made 2,000 bucks, but you live in your car?”
And she said, “Yeah, I live in my car. Housing is just way too expensive and I can’t figure it out. I can’t figure this out.” Right there, I just had this moment where I thought, this perspective is so important to understand and at least talk about. And so lo and behold, I’m looking at articles and I see an article by AZ Big Media and it’s titled Why Experts in Arizona Say The Growing Housing Crisis is a Growing Cancer.
And I needed to understand what this is talking about. And so again, we’re looking at this from the different angle, a different perspective. Homelessness here in Phoenix, Arizona has become a massive, massive problem. We’ve got tent cities popping up all over the spots. In every neighborhood you go, there’s homelessness. It’s just regular people. It’s not just people with mental illness or addictions that you’re seeing where you’re like, “I understand there’s a lot of greater social problem or a greater mental or health problem here that’s causing some of this difficulty.” But this is like moms, dads just families and just regular folks having hardship, not being able to pay rent.
And as I see this and I think okay, we’re walking into or we’re in the middle of a correction and housing pricing, is there any way that this gets better for the little guy? As I read the article, I see it’s not getting any better for the little guy because what happens is right now, especially as we see rates increasing and demand slowing, days on market in Arizona or Phoenix especially, is still 33 days.
33 days on market, which means that there’s still demand. There’s still demand. People are still buying. Yes, prices are depressing. We’re already at over 10% correction and price, but that has not stopped trading. That has not stopped investors from buying, buy and hold investors from buying, large hedge funds and private equity groups from buying. That has not stopped, Ma and Pa Landlords from buying. We’re just getting everything cheaper right now. That’s it.
Because we’re getting everything cheaper, when you have people looking at opportunities now, because now you’ve got the little guy who can come in and actually purchase a home, albeit they can purchase a lot less home than they could have purchased say six months ago. But now they’re at the table and they’re trying. Their offer, even though it’s probably significantly higher than my offer, my offer’s cash, my offer is safe, my offer closes and it’s guaranteed and I’m still winning.
I’m still winning at the negotiation table even though I’m coming in significantly lower. That is creating more of a situation. It’s creating more of a homeless situation. It’s still sucking inventory away and rents are not following the housing situation. Pricing right now is correcting 10% or greater in Phoenix, Arizona. Rents have not changed. They’re still going up. It’s that whole… Is there a trickle down here? Is there a reprieve for the little guy? I need to take the perspective because again, we all, as a community of people, investors, we are all in this together. And there is a greater conversation that we need to have because what they’re proposing in this article is legislation.
They’re proposing that there is no fair market situation here. The market is not going to correct itself. The market is not going to allow opportunity for smaller people or the retail buyer to come in and participate. It won’t because we don’t play by the same rules because what that buyer has to qualify for, show for income, show for credit, I never have to do that.
I don’t have to play by those rules because I come in with cash and I’m going to best them every single time. They’re proposing legislation. They’re proposing legislation on rent control, they’re proposing on legislation on how many houses a specific LLC or a corporation can buy. They’re really wanting to create, in my opinion, some regulations that are going to take the fair market or the natural capitalistic market conditions that we all or many people believe need to be there off the table.
When you see Arizona has flipped from a red state to a blue state. We’ve all seen it happen. I believe that legislation like this is going to become the conversation. I want to talk about it. I want to hear perspectives. I want to understand, well, what do we think as investors about this? What about the perspective of the lady who came to my meetup who is living in her car right now, who is participating in real estate and doing deals and is a part of maybe the problem. That’s the article. That’s the thought.

Kathy:
I would love to comment on that, Jamil, I remember in the ’70s, I know many of you were not born, but I was young, very young. And we were sitting at the dinner table, and it was in 1971 when Nixon took us off the gold standard. And my father said, “This is going to be really bad. This is going to create separation between the haves and the have-nots because this will allow more creation of money without anything to tie it to.” Which at the time had been gold.
We know that politicians like to spend money. So inflation and the printing of money is a silent tax. It’s a tax that people don’t understand and don’t know about. And that tax is most felt by those who have less money because they have a finite budget. When things cost more, there’s no room for that.
Printing money and inflation hurts the lower class and creates more of a lower income class because more money is going to pay for goods because more money is being printed instead of taxing people. It always falls, the culprit always falls on the investor or often on the investor. In my opinion, what needs to be regulated, which may never be regulated, is the Federal Reserve that creates that money and politicians who want that money to stay in office because they keep offering things.
I have a very strong opinion on this. It always falls on the landlords. But if you look at it this way, if you’re throwing trillions of dollars out of a helicopter, let’s say, and the people who pick up those dollars because they’re fast at getting them or they’re doing something with them, those are the ones that get blamed when what they’ve really done is just picked up the dollars that were thrown out.
The regulation is going to come and that’s what my story is about. And we’ll talk about that when we get there. But I do hope that people really look at the systemic issues versus the bad naughty investors. Because at the end of the day, rentals are very important too. If we look back to the ’70s, again when we’re talking about this, home ownership rate was much lower. It was 63%. In the ’60s, it was 66% home ownership in the ’70s. Today it’s higher. It’s about 65%.

Dave:
Right there, 66%. Yeah, it’s gone up the last two quarters. Just for everyone says that it’s returning to a renter nation.

Kathy:
Yeah. More people are owning homes. It’s not that different. It’s better than the ’70s, ’80s and ’90s. And of course when regulation came in to stimulate housing and get more people buying, that’s when things went crazy with more regulation because of course we know that that’s when loans got too easy and it became too easy to buy a home. Home ownership for everybody. But people, all people do need a home unless they like to live in their car, which some people do.
I’ve got nephews who love living in their vans. That’s their choice. But otherwise, if you want a home, you’re either going to rent it or you’re going to own it. There has been typically 30-40% of people who choose to rent for whatever reason or who are renting. So again, I know that regulation is coming, but I do hope that we’re able to get the message out there of what the real problem is.

Jamil:
You’re talking about treating the disease instead of blaming the symptoms?

Kathy:
The disease is money printing and where does that money go? And when people really dive in and look where that money goes, I think they will probably be more upset than with a bunch of institutional investors providing rental homes.

James:
To piggyback on Kathy, I’m in the Seattle market where there is a lot of regulation that has been passed over the last three to four years. One thing about the news articles is I will say they start hyping up the regulation a little bit more than what it actually is. But the issue is if it becomes this fight, investors versus politicians and it doesn’t need to be a fight, it should be a common solution. There’s so many different things that could happen that could make homes more affordable.
You could subsidize the builders, the investors on their construction costs. You could get them their permits quicker. If the city came to me and said, “Hey look, we want you to cap on rent, but we’re going to forgive you all, maybe some tax relief, some utility relief and we’re going to give you your permits in two weeks.”
That would be a negotiation that’s a fair trade at that point. But the issues there is a lot of times is the cities, they kind of put up roadblocks all the way through with these investors. The permitting, the construction costs, the fees. We got a new tax that was put on us two years ago. We call it the developer tax in Seattle, where they charge us roughly to $2-3 per square foot on any permit that we’re pulling for new construction. Then that’s supposed to be going back into the community to help out. The problem is it never makes it to that community.
And then all that did wasn’t affect us as developers. That just meant we have to pay less now. It just affected this seller that’s trying to sell their property and then move into another… Whether it’s on their next phase of their life. And so I wish there was more community and brainstorming because there’s so many different solutions out there that could keep actually homes more affordable. We saw a construction cost went up by 20-35% over the last 24 months. The replacement costs are really high. If you can get those costs down, you can charge less for rent. Hopefully, at some point in the future, people will come up with solutions that help everybody because that’s how you fix the issue. You don’t overcorrect here and overcorrect here.

Henry:
Yeah, I want to piggyback on that because James is making a phenomenal point. I think we’ve gotten too comfortable in this country of playing this us versus them mentality. There’s the right and the left, the Democrats, the Republicans, the conservatives, the liberals, the landlords and the investors versus the regular guy. James is 100% right. Us versus them doesn’t solve the problems. I think when you look at this legislation, you have to understand what is the motive behind it.
Not what they’re saying the motive is because they’re saying the motive is let’s help the little guy. But that’s not the motive. The motive is I want to do the things that my party thinks is good so that I get more votes reelected, can continue to live the life and do the things that I want to do. If the true reason is to solve the problem, then it has to be together.
Nothing gets solved with us versus them. Things truly get fixed. The wound truly starts to heal when we work together. I had the exact same conversation that James is talking about. I spoke at an event about affordable housing and they invited me because I’m the dirty landlord and they wanted to talk about affordable housing. That’s exactly what I said to them is, “I do have property that I can and will take less rent on, but I still have to pay for that.”
And so if we can work with the city and come up with a way for the city to say, “Hey, if you can charge less rent for these types of properties, we can do this for you.” If we can go and then we work with the builders and do the same thing and say, “Hey, if you will build this type of property in this neighborhoods, we can give you these types of breaks or credits or…”
So that everybody is doing something that helps each other out. And then we heal the wound. That way, we’re not just treating the symptoms just like it. And it’s got to be that way with everything that we’re facing as a country right now, we’ve got to stop fighting each other. We’ve got to stop talking about, “Well, this person or this group of people is bad and my group of people is right.”
It’s not about that. We’re all on this planet together sharing these resources that we have and we all want to live the best lives that we possibly can. And so the only way that happens is if we start to have some empathy to other situations. That’s why I love that Jamil brought this story up. He brought the story up. He’s on the opposite side, he’s on the investor side, but he has empathy and understanding for what the regular person is going through and he’s able to listen to what their struggles are.
And so now maybe on a small scale, you and [inaudible 00:20:39] come to some sort of way to improve each other’s lives. But without each of you being willing to understand where the other person is coming from, what the other person has to deal with and then being able to talk about that in a way that it’s constructive and not combative, you get to real solutions. We’ve got to understand that for any of this to change landlords, cities and municipalities and local governments and national governments all need to sit down and try to figure out what can we all do collectively to fix the problem. Not what can I do on my side that my people like.

Kathy:
Amen.

Henry:
Yeah man.

Dave:
Well said. Well all of you, very good points. Jamil, I agree. Thank you for bringing up this important topic. It’s a really pressing issue right now. It sounds like we all agree that this is a problem. Affordability, I think in terms of housing is at a 40-year low hardest.
It’s the hardest time since the ’80s for people to buy a home. Even though as Kathy said, home ownership is up and is going up, that is sort of under threat if we remain at these levels of affordability. Rent is going up. This is just both a moral and societal economic imperative to fix, in my opinion, at least.
Jamil, to your point, something is wrong if people are hustling and working hard and they’re living out of their car. That’s a problem. But to your point, we also need to consider what solutions actually work. I actually just listened to a really good podcast on Freakonomics. I don’t know if you guys listened to this.

Jamil:
Yeah, great. I love that podcast.

Dave:
It’s great. Yeah, about rent control. I really recommend anyone listen to it. It’s a really good, well-balanced, unbiased perspective on what happens with rent control. And a lot of the times it doesn’t work. It actually leads to higher rent. And I won’t get into the details with that there, but I think it’s really important in solving this issue to not just be reactionary and look into say like okay, let’s cap rent. It makes sense on a logical level, but evidence-based, evidence-wise, it doesn’t actually do what anyone really wants it to.
I’m curious, Kathy, you mentioned that your story was about some regulation that is potentially coming, I don’t know if it’s on a national level in California, but can you tell us a little bit more about what some of the proposed regulations are to try to address this issue?

Kathy:
Yeah, it’s three Democrats from California who just came out with a new house bill in October. It’s called Stop Wall Street Landlords Act. This is an article from Vox, it is called, if you want to look it up, Democrats Eye New Legislation to Reign in Wall Street Landlords. I remember in 2012 right before Warren Buffet said, “Oh, if I could buy a few hundred thousand homes, I would.” That’s when Wall Street did jump in because they listened to what he says and they did find a way to manage the properties and jump in.
It was right around that time that of course prices were so low and interest rates were pretty low. I told all of my friends, you have got to buy something right now. Anybody in California who didn’t own real estate at that time, I was like, “Do it now because this is going to be your chance.”
Well, they tried and because they had FHA loans and any kind of loans that they were bid out, it changed like this. It was in a matter of weeks. Warren Buffett said his thing, funds jumped in and it was crazy. My friends and family who were making offers with loans were losing out every time because what seller is going to want to sell to a first time buyer with an FHA loan that may or may not close when they could get a cash offer from a Wall Street firm for much more.
There’s always two sides or three sides or four sides to any story when you talk about regulation. Personally back then, I would’ve loved to see some regulation back then because it was an incredible time for homeowners to be able to lock in low home prices, but they couldn’t compete.
That would’ve been a great time to maybe do something where you get 30 days to see for a first time buyer to see if your loan closes for what the institutional investor would pay. So the seller is still going to get the deal. The investor can be on the sidelines if the first time home buyer doesn’t close, then the investor can come in. I mean, some kind of regulation I really think would’ve been nice because I now see my friends 10 years later who never were able to get into the market and they can barely survive.
And some of them are in their 60s and they’re still renting and are getting priced out. So it is a very serious issue, has been for a long time. Regulation has not come in. Probably, it’s kind of late basically. We’ve got to remember that the Fed was subsidizing housing until this year, until March.
Keeping interest rates low, which drove prices up. This article is again, it’s basically saying we’ve got to stop Wall Street landlords, even though they only represented 3% of home sales and that would be funds that own a hundred homes or more. Between 2021 and 2022, it was only 3%. They’re not as bad as people think. They own about a little over 1% of rental properties that are out there. But in certain markets they’re really active and it’s in those markets and I’ll mention some of them, Atlanta, Jacksonville, Charlotte, Phoenix, Miami, and those markets, they have made it really hard for homeowners to get in.
With this act, I kind of like… I like the proposal in the sense that they’re basically saying maybe we don’t give the investors the same tax deductions that a home-owner would get. Maybe there’s a transfer tax or there’s a different kind of tax if you’re an institutional investor, they also recognize that really the real issue is supply and that maybe the better regulation or incentive would be tax credits.
This to me is super obvious, of course. Tax credits to people who will bring in affordable housing. Because anytime you give any kind of tax incentive, that’s where the money goes. So I do think it’s a somewhat balanced proposal. I didn’t read the whole thing and the article just talks about it or may not or may not go through. But I do know that other countries charge more to an investor than a homeowner in taxes. The property taxes going to be higher, there’s going to be potentially a transfer tax. So this isn’t something new or unusual and I don’t see that as a bad thing at all to… I’m a fund manager. This would not be good for me.
We have a fund. We’re buying aggressively. I just got back from Dallas and we just tied up homes for about 120,000 that don’t need… Well, they probably need 20 to 30,000 in rehab and the ARV is going to be about 220 for our fund at Grow Developments.
I can tell you from a fund manager perspective, a first time buyer wouldn’t want that home. You guys know that. We fix homes. To put a first time home buyer who’s barely able to afford the home to begin with maybe doing a 3% down FHA loan, now they got a house that it is barely livable? Investors are needed. I think that voice has to be out there too, that investors like me come in, take these old houses up and pick them up. We have the capital because we’re raising that capital to buy it, fix it and make it a really nice clean, safe place for a rental. There are people who need that rental.

Jamil:
And you need to be incentivized.

Kathy:
You need to be incentivized. So if we were taxed too much and if there were too high a transfer taxes, we probably wouldn’t do it because quite honestly, a single family rental fund, there’s not a huge spread there anyway. It’s not 20, 30, 40% returns that you’re seeing. I don’t know if you’re seeing that anywhere, but flippers are going to make more money.
The buy and hold investor funds, the margins are pretty thin. If you want companies like mine, mine’s definitely smaller than these big ones. There does have to be incentive to be able to create this clean, safe housing. Housing gets old. Somebody was saying the earth likes to eat housing. If you leave a house for very long, it will fall into the ground and Mother Nature will eat it. It will. After 20, 30, 40 years, those homes don’t do so well. They need constant investment.

Dave:
27.5, right?

Kathy:
Yeah. Appreciation. It’s an interesting article. I would definitely read it and check it out. One other thing I do agree with is that you shouldn’t be subsidizing the investor if it’s not needed. Like I said okay, subsidize the investor for trying to bring on affordable housing. I think I told you guys in our Park City project, we had to bring in 30% affordable and we’re super happy to do it.
But when costs went up and it costs twice the price to build that house, they’re not letting us sell it for more because it has to stay in the affordable. We’re losing about $400,000 per property of what it’s costing us to build this affordable housing. Why should I have to do that? That seems like it should be a… They’re a government incentive for that because it’s hurting our investors too. If prices go up, we have to eat that.

Dave:
I think that’s a really good point and agree with a lot of what you’re saying. But just to extrapolate that and how this has an impact on, in the long term, if the requirement that developers have affordable housing makes sense to a lot of people, myself included at the surface level.
But then you have to think about you’re in this conundrum now and unfortunately you’re losing money, your investors are going to be hurt by this. It means that you are probably less likely to do something like this in the future. And so it has this way of, even though the government is trying to create more affordable housing, if it’s not done in a tactful way where there’s some flexibility and into James’s point where you’re actually working together as partners to make something actually work long term, it could actually have some of the adverse effects and sort of the opposite of what is intended.

Kathy:
I could not agree more. We will never do this again because who could have predicted, who could have… The government’s telling us we can’t send our workers to work yet we’re still paying the overhead and then costs go up double and we go to the county and say, “You told us we could only sell these homes for $350,000. They’re costing us 800,000 to build. Is there any flexibility?” And the answer is no. They won’t do it.

James:
The only answer is don’t build it.

Dave:
Yeah.

James:
It’s just like, all right. This turns into a parking lot at this point.

Kathy:
And that’s not going to help the firefighters and teachers that need that.

Henry:
And then we’re charging rent for parking.

James:
One thing I want to mention is when I read these articles I hear this, how about these hedge funds that have bought a lot of homes and I’ve sold a lot of hedge funds’ properties and hedge funds did not take inventory from the first time home buyer. They did not take inventory from any home buyer and especially with a low down home buyer because they needed so much work.
They’re creating inventory. They’re carcasses. They’re homes that are not livable. They require capital to fix them. And no homeowner is going to go… The government needs to, if that’s what they want to do, then they need to come in with some construction teams and some zero down programs and some construction financing and then you government fix the properties.
Because it’s not inventory. The inventory’s not leaving because it was never inventory.

Jamil:
Good point.

James:
It’s being created by these investment companies and everyone’s complaining about them eating up all of the product right now or over the last two years. We needed those buyers in 2008, ’09, ’10, ’11. The inventory was massive and it was unconsumable at the time. And the only reason it got consumed up is because these big funds came into the markets and they bought the dirtiest of the dirt and they restored these properties.
We don’t know what would’ve happened to that market and how long we would’ve been bottomed out if it wasn’t for these companies. There’s always give and takes at both times, but I think it’s shortsighted because they’re creating inventory and housing. It’s a matter of how do we control the cost and that’s just policy at that point.

Kathy:
Yeah. I’m curious what you guys think because one of the comments made in this article was at a minimum, investors shouldn’t be subsidized for rental housing. What I mean by that is a lot of these big funds got Fanny and Freddy backed low interest rate loans.
These are government loans. Fanny and Freddy were created to help people, individuals, low income individuals buy homes. That’s why we have government backed loans. Why were these hedge funds getting those? So I can agree. Again, I love what Henry said, let’s work together towards a common goal. I think nobody wants families living in their cars unless… Again, unless they want to. Like I said, my nephews make good money and they love living in their van. Again, unless they want to.

Dave:
All right. Well this is a great conversation everyone. Thank you. It’s an important topic and probably one that’s going to come up more in the near future. I’ll definitely be reading up more on this. Thank you Jamil and Kathy for sharing these stories with us. All right, let’s move on to a different conversation about the housing market. Henry, it sounds like you brought a different type of story for us. What have you got?

Henry:
Yeah, I like this article because the article itself kind of mirrors what’s happening in real life. So the headline is, economists say a US housing recession has already arrived, it’s already here. And what they’re saying is that the housing market index is basically telling us that it’s declined to 33 and anything under 50 spells trouble because it’s on a hundred point scale. And so what they’re saying is based on this housing market index, that the housing market is already in recession. It’s been in a recession since mid-summer.
But this and the index has declined for 11 straight months. So the article itself is a scary headline, but at the end of the day, this index was based on what home builders are saying. And the market for a home builder has been different than the market for a traditional investor or the market for a first time home buyer, somebody who’s not looking to buy to invest but to buy to live.
It then goes on to talk about, well the interest rates are high and the same home now is going to cost you a $1,000 more a month than it was three months ago, which is very true. But then it also goes to say, well interest rates pass 7%, but they’ve come back down a little bit to around 6.3% this month. And so this article in itself feels like a rollercoaster ride. When I read the article, I’m not quite sure how to feel, I just feel like I’m going up and down. So this is good and this is bad and this is good and this is bad. It’s such a reflection of what the first time investor, the new investor, the first time home buyer is all feeling right now. Because they’re like, “Do I get in?” “No, I don’t get in.”
This is high. What I want people to understand is that we can really only make decisions right now based on what we currently know. But what I know as an investor is that the real estate market is a cycle. There’s going to be a time to get in when prices are really low like right now. You’re able to negotiate a lower price. That goes for the first time home buyer and the investor because there are less buyers than there were a few months ago. That gives you an opportunity to buy at a lower cost, but there’s also going to be a time in the market where the prices are high, but maybe the cost to borrow the money is lower, meaning A, that you can afford more and B… So it’s easier for you to get in there and to buy something and be able to afford a home maybe at a higher price.
What’s important is understanding what the market is giving you right now, I think I’ve used this analogy before, but in sports they say you take what the defense gives you. There’s always going to be an opportunity no matter what type of market cycle that we are in. If you look at what’s currently happening right now, I want people to be able to focus on okay, what is this market giving me as an opportunity?
Is that opportunity something that fits my financial goals? If your financial goal is to buy property and hold it for the long term so that you’re creating cash flow and building wealth through equity, it’s a phenomenal time to buy a property at a discount. Yes, the money costs more, but you’re getting a deeper discount. So it somewhat offsets itself depending on the discount. If that’s your strategy, it’s great.
If your strategy is to trade, to buy a property, fix it up and then sell it in a short period of time, the market isn’t really giving you that if you’re inexperienced. If you’re experienced and you have processes and systems in place to help you find those discounted properties, to help you get them renovated very quickly and back on the market and sold very quickly, then you can probably do that strategy.
But if you’re just the normal investor doing this first, second, third, fourth, fifth deal, trading isn’t as easy right now. It’s better for a more experienced investor. So you just have to understand what is the market telling me right now that is an opportunity and does that opportunity fit my financial goals?

Kathy:
I could not agree more, Henry. That was such good points. As you know, I just got back from Phoenix and there was the IMN single family rental conference. It’s their 10th year and you had all kinds of buy and hold investors there. In the opening session, they gave these really good stats from John Burns that I just want to share that supports what you said. They said that right now, there’s a 57% decline in iBuyers. So if iBuyers were bugging you, there’s 57% less.
That’s huge in itself. There’s a 27% decline in purchases from the funds that are the big ones, a hundred homes or more. And what was super interesting and they said they didn’t really know why, but they think they know why. But in the kind of 9-100 units that they have not declined, they’re buying and then the newbies, there’s a 22% decline because maybe they don’t have the experience like you said and aren’t sure how to get the deals.
The interpretation was these big funds, these big investors, they’re kind of struggling right now because a lot of them pivoted into building new home build to rent. Huge developments of new homes and the terms have changed. Their construction costs have gone up as I know and as you guys know. Their cost to borrow has gone up and then the end financing has gone up. So their plans are not working out as expected. So there’s expected to be quite a bit of fallout in that regard. And then those who would buy scattered lots like we’re doing or scattered homes, just buying homes and basically a BRRR fund model, buying, fixing, getting our money back and doing it again in the fund, you have to be nimble. You have to really know your market. You have to be a really expert investor.
You can’t be a white-gloved Wall Street investor and do that. This is the time. I can’t emphasize enough what Henry just said, that this is the time for us, for the people that can be nimble and can go in there and buy what nobody else wants and fix it up and still keep it affordable for somebody and provide safe, affordable housing. This is our turn, it’s our game. The big players are out because they don’t know how to manage a game like that.

James:
The big guys have… They can’t adjust and that’s…

Jamil:
They move too slow.

James:
They move too slow, their staff is too heavy. Even us, and we’re not big by any means compared to funds, but as you grow your businesses out, as the market has transitioned, we’ve had to shrink this back and get nimble. We can’t have… The more bodies you have and the more people you have doesn’t mean it’s more efficient. It just means it kind of gets more process orientated. But that doesn’t mean that your processes are, like you said, nimble, where you’ve got to cut cost.
Flipping homes is not an easy thing. It is not something… You can build a home a lot easier than you can flip a house. With building a home, you get plans, you’re working with professional subcontractors, they bid the plans and then you can schedule it accordingly. These old homes you rip, rip into and all of a sudden you got rotted walls, things fall, you got dead bodies in the… Who knows what happens inside these walls. And you have to be able to pivot.

Henry:
Dead bodies everywhere.

Jamil:
Only in the Pacific Northwest by the way, guys.

James:
Things happen and that’s what happens is they can’t adjust. And then that’s where I do think we might see a graveyard of investment property coming up. I keep coming back to that because if you can’t adjust and you can’t control your cost, if you’re 10% off on your construction, your values and your whole times, that turns into a big number if it’s a large property. And you have to be able to adjust and adapt. I know I’ve switched all my businesses to where we are way more nimble, way smaller, way more ninja get in, get out. On whatever business it is, we’re getting in and out. You have to do that by being nimble.

Jamil:
What’s interesting is from my company, Keyglee, we’re a national wholesaler, so I get to see what this looks like from the investor standpoint and what the volume of trades are happening and how much demand is there. Now, what’s funny is that a lot of my competitors, when the big funds were buying a lot of homes, the iBuyers, the institutions that have a hundred or more homes were buying most of my competition focused right on them.
They said, “Oh, these little mom-and-pop investors that are buying hold guys fixing flippers, they’re not paying us enough. They’re not closing fast enough, they’re not overpaying. So let’s just focus on these institutions.” And they failed to create relationships or maintain relationships with the small ma-and-pa guy. Our business model never shifted.
We stayed with the small ma-and-pa guy all the way through right now, when you look at our volume of trading, I’m looking at wholesalers and there’s a graveyard of wholesalers out there because they all screwed up shifting their business to the funds where we stayed with the man-and-pa guy and our volume, although we did take a dip, we had a couple of months where things were a little bit… We had to pivot and understand. But again, being nimble and being able to adjust, our volumes have picked right up and we’re crushing it.
You can see that this demand that you know guys are talking about when Kathy says it’s our time, it is our time and the people who are in the know who understand it, they’re getting in and they’re making it happen.

Dave:
All right. Well great conversation. This has been really fascinating. Thank you for bringing that Henry. James, what did you bring for us?

James:
I pulled an article because I think it’s important to kind of look at these types of click baby articles, but it says from Fortune, 20% price decline, seven forecast models are leaning towards crash. Here’s what the other 13 models, the 2023 market are going. The reason I do like the article is it gives you a good perspective from all different kind of sectors. It’s talking about Wells Fargo, J.P. Morgan, they’re giving their predictions. There’s Moody Analytics in there with John Burns.
They have their predictions and then you have the Zillows and the Redfins are all in there too. And in this article you can click through each one and read their perspective on how they came up with the analytics. The one thing I don’t like about it is this click bait, right? People are trying to get people to download stuff, 20% drop. That’s fear. If you really read through the whole article, there’s only two people that even referenced that number. Most of them are substantially lower in the 5-10% range on the decline.

Dave:
Can I guess who the 20% are?

James:
Yeah. Who do you think?

Dave:
Ivy Zelman?

James:
No, that wasn’t one of them.

Dave:
Ivy Zelman and Moody Analytics

James:
Actually no, no. Moody was not. John Burns was the most negative. 22% actually.

Dave:
Yeah, they’re pretty bearish.

James:
Yes. Moody was around 10%.

Dave:
John Burns is a smart guy.

Kathy:
And he’s usually right.

James:
I know.

Dave:
You might want to take that one seriously.

James:
And I might agree with him because there’s this one stat that just… Sometimes I’ve got to remember common sense. There’s all this data out there, there’s all these opinions, like Henry was saying too, this roller coaster of a ride, but sometimes just comes down the straight common sense. It says 20% peak through drop.
Home prices will be back to October 21 levels with a 10% drop. They’ll be at a 20% drop will still be at 2021 levels in the late February. It’s all about that massive run. And so it’s like most of the gains were done in 2021 are a big chunk of them. And so what the article’s really referencing is we’re not going into 2008 because they don’t think that there’s going to be this mortgage crisis and all these things going on with the economy. They just think everything’s deflating backwards.
Right now, I firmly believe that. I don’t think we’re going into a tailspin of 2008. 2008 was the lights went out and we were all sitting in the dark for a year going, how do we get this back on? This is just going to be deflating things down and it is going to hurt a little bit on the way on the door from stuff that you bought in 2021 or in ’22. But it will get better and you just have to kind of adjust.
The reason I like digging into all these stats and all these predictions is we’re building this into our underwriting. We can still buy very safely if we’re not… There’s nothing wrong with predicting the market might go down a little bit, but you have to do it in an intelligent way because I’m an active investor, I can’t get spooked. That’s unrealistic.
A lot of the 20% drop, I think a bit, we’ve already seen a lot of that drop and I think that we’re probably another 5% skid from where we are because we’ve already seen this 10. I know in Seattle I’ve seen 20% and that’s just what it’s been. But it allows me to continue to purchase. I can build that into my analytics as I’m underwriting, I’m looking at things. I’m going, “Okay, if I think the market’s still a little bit risky, I’m just not pushing the values.” There’s nothing wrong with that. And you can still get those buys and close the deals.
I think it’s really important that investors establish what they think personally. What I think is going to be different than Henry, Kathy and Jamil, we’re going to buy differently. We’re going to do our businesses differently but we are doing the right research off all our experience and we’re building that into what we’re doing in our specific market.
Because Jamil’s in Phoenix, I’m in Seattle, these are different markets. We’re also doing different things. And so you have to really narrow down to what do you want to do in this transitionary market? Then research that information and you can protect yourself. There’s a lot of really good buys right now. I don’t really mind these articles because it does spook people. We are buying a lot of… We’ve bought more property and it’s been way different type of property, but we bought more volume of property in the last 90 days than we did in the first six months of the year.
It’s completely different product. But the opportunities are out there just really you have to, as an investor, listen to everyone but then, and you got to kind of interpret it and really figure out what you want to go with. One of them is Redfin was, or I think it was Zillow, was predicting a 0.1 drop. And so based on what I know about the iBuyers, I go the opposite direction or whatever they’re recommending. If they’re saying 1%, I’m thinking it’s five to 6%. But I think it’s really important that people kind of interpret this information and then build it into your own day-to-day practice into your market. Cause every market’s different thing you’re doing is changing. And so just because housing could drop 20%, that might not be affect you at all. So just really pay attention to these news headlines and dig in. Don’t just pay attention to the scary click

Dave:
Bait. Yeah, I mean when it comes down to forecasting, I feel like there’s basically two things you should be considering when you read this stuff. First is what’s the business model of the people forecasting? Are you Zillow or Redfin or the Mortgage Bankers Association? Because you probably have a vested interest in predicting things one way. But I think there’s a lot of really good reputable forecasts out there. To me, it all just hinges on mortgage rates. If you think mortgage rates are going to stay above 7%, prices could fall 20%. I don’t personally believe mortgage rates are going to stay that high.
I think it, there’s a different group of people who are saying mortgage rates are going to be in the high fives, low sixes next year, and then you’re probably seeing single digit declines. I’m personally in that camp, we’ve all probably talked about this at length, but I think that’s a lot of why you see these differentiating things.
Because if mortgage rates stay high or go like seven to 8%, there is going to be a crash, in my opinion, like 20%. But we’ve already seen mortgage rates come down to 6.3%. Bond yields continue to fall. If they stay where they are right now, mortgage rates will be in the fives next year. So I think those are just things that you should keep an eye on. If you want to understand who’s correct here, just look at mortgage rates and the higher they go, the higher chance of a crash. Any last thoughts? Jamil, Henry, Kathy?

Kathy:
Just last thoughts from IMN were that renting is 30% more affordable in most places than owning the same home. So the fundamentals are really strong for being a landlord right now.

Dave:
Yep. Awesome. I like that tidbit. Put that on Instagram. All right. Well, thank you all so much for being here. We appreciate it. I had a lot of fun. And we’ll see you guys next time.
If you are listening to this, we always appreciate a great review or sharing this content. If you also think this was one of the best shows of the year, tell everyone you know on Instagram or just in the street. Tell everyone that this was the best episode and that they should go listen to it. Thank you all so much for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal and a big thanks to the entire Bigger Pockets team. Well, content on the show on the market are opinions only. All listeners should independently verify data points, opinions and investment strategies.

David:
This is the BiggerPockets Podcast Show 702.
I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans, and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, here today with a special edition Seeing Greene episode. What makes it special you ask? Well, because it’s a Seeing Greene episode.
In these shows, if you haven’t listened to one before, we take questions from you, our audience, asking specific things about situations they’re in or general questions about the market and what’s going on. And I do my best to give them the most sound advice possible based off of my experience with the portfolio of properties that I own myself. These are some of our most popular episodes, so I really hope that you like this one.
You’ll notice that the light is green right now, letting you know it’s a Seeing Greene episode, but I forgot and it was blue when I was actually recording the content. So don’t be surprised if you’re watching this on YouTube when the light turns to green to blue. That’s just me making a mistake, but instead of doing the whole thing again, I left it in there so you could see that me just like you is not perfect and I make mistakes also.
Today’s episode is awesome and we get into some very cool stuff, including if somebody should buy a house when renting actually is cheaper in the short term. This was a really fun one that we got into. If a 30-year loan or a 40-year loan with 10 years of interest-only payments is the better option. And how to make a decision between focusing on relationships or real estate when you feel that you got to make a choice and make a decision there.
This was a fantastic episode with some of the best questions we’ve ever received. I want to thank you all, give you a big shout-out for asking great questions and continuing to support the show by asking them.
Before we get into the show today’s quick tip brought to you in the Batman voice is consider that investing in today’s market is different than investing in a market even as short as six months to a year ago. Things are changing very, very quickly and that’s why you need to be listening to podcasts to get new information.
My personal strategy, the way that I’ve adjusted is I’m focused more on building a financial fortress than I am on just expanding as quick as I can. When I’m making investing decisions, I’m thinking about defense and how I can protect my wealth, not just offense and how I can grow it.
Most wealth will grow on its own over time if you make wise decisions. So you don’t have to focus on that, but you do need to focus on protecting what you have, especially as things change. So always ask yourself the question, what will I do if things go poorly?
All right, I hope you enjoy today’s show. Let’s get to our first question.

Collin:
Hey David, hope all is well. I am reaching out with a question for you on the house hacking strategy. So I’m currently looking to relocate to Boston, which is a fairly expensive market, and as I’ve started to crunch the numbers on the properties that I’m looking at, which are mainly three units, I’ve found that in many cases my out-of-pocket cost on a monthly basis would be more than if I rented.
And so what I’m trying to figure out now is if it makes sense to pay a little bit more every month than what I would pay if I rented so that I can get into a property earlier and start building up equity, building up my wealth, which is my ultimate goal, or whether I should focus in the short term on renting, paying as little as I can every month, saving as much money as I can and then getting into properties down the road.
Would love to hear your thoughts on this. Thanks so much as always for your time.

David:
All right, Collin, thank you for that. This is a good question. What do we do when we can actually rent for less than what it costs to own?
Well, there’s a few factors that I think you should take into this decision. You kind of hit on it at the very end there, so I know you’re thinking the right way. You’re asking, should I be trying to build equity or should I not and try to save a little bit of money? Because when you own a home, you pay for more than just the mortgage, the tax, the insurance. There are capital expenditures, there is maintenance. There are other things that are going to go into owning a home.
So the question here is really what do you want your future to look like? 30 years down the road, 20 years down the road, 10 years down the road, what kind of a position do you want to be in? Because while rent may be cheaper right now, it tends to not stay that way. Rent tends to not go down or even stay the same, it tends to go up.
And when you have inflation, rent goes up quickly, especially when you have a shortage of housing, which we have in most cities. Not everywhere of course, there’s some places where more people are leaving than are moving in, but man, if you’re in one of those areas that people are moving to and you’re not having increasing supply, rents can get out of hand very, very quickly.
The other thing is you’re talking about Boston. That is a high appreciating market and appreciation doesn’t just affect the value of the property, it affects what the rents are as well. So if you were asking this question and you were somewhere where you’re talking about a $65,000 house and rents are $400 a month, I don’t think there’s as much at stake there. That would be okay to continue renting.
But for you talking about being in a major metro area where prices are going to be going up, especially when rates come back down, where rents are going to continue to increase as wages increase and inflation increases, it becomes exponentially more expensive to continue renting in a market like that long term.
So one of the mistakes I see people make is they look at the rent right now versus the cost of home ownership right now, and it’s almost always cheaper to rent. In fact, I bet if you went back and studied the housing market over the last 50 years at almost every single point in that 50 years at the time you bought the house, it would’ve been cheaper to rent than to own. But if you go back to any of those points 20 years ago, 30 years ago, 40 years ago, and you compare it to now, owning is much cheaper than renting.
So do your best to face your fears and get away from this idea of what’s cheaper right now and think about the future. 10 years of paying that place down, of rents going up, but your mortgage being locked in place, pretty significant.
And with house hacking, I say this all the time, it’s not just that you’re saving in the rent you would’ve been paying going up, you’re also charging more rent to the people that are renting from you. So it’s a double whammy, so to speak.
In that case, it sounds like it would be better for you to buy right now, even though it might be a little bit more expensive than renting and own a home instead of paying somebody else. In 10 years, you’re not going to regret it.
Now, if you can repeat this process with a new home every year for 10 years, you’re probably going to be a millionaire. And this question of, well, should I have saved money on rent instead of buying isn’t even going to be in your mind.
All right, our next question comes from Adam Quinonez in SoCal. Is doing a HELOC on my primary residence wise for my first investment deal? Also, if yes, would it be a better strategy to use the BRRRR method to recoup the initial cost? Thank you.
Well, Adam, I can’t say for sure if you should use a HELOC on your primary residence to buy your first investment property because I don’t know what your financial situation is like, but I know that if it’s a good deal that usually ends up working well. If it’s not a good deal though, it can hurt you twice because now you’re saddled with extra debt and you have a property where you’re losing money on. This is where I don’t have enough information about your specific situation to get into this and this is where having more specific information about your situation would allow me to give you better advice.
The concern here is that because you haven’t bought a property before, you’re probably not going to make a great decision on your very first home. So now you’re increasing your risk factors and you’re increasing the likelihood that the deal you buy goes bad. Throwing a HELOC on top of it, you actually needed to do extra good to be able to pay for the extra money that comes out of the HELOC. So in some cases this could work out, in other cases it might not.
I would say I would not recommend that you go forward with this strategy unless you have enough money and reserves and you make a decent enough income that if you do lose money on the investment property, it’s not going to bankrupt you. It’s okay, everybody, to lose some money the first year, the first two years of owning an investment property. It’s okay to lose money in real estate, believe it or not, in the short term. It’s not okay to lose money in the long term and it’s not okay to lose money if you cannot afford to lose money in real estate.
That’s a really key point I want to make. This is why I’m always saying to save reserves, to continue working, to increase your income everywhere you can, to be a great employee, to work hard to push yourself because you want more money coming in to cover up for the inevitable risk of investing in real estate. It’s like everything else. There’s going to be times where you lose money.
Now to the question of should I use the BRRRR method? Yeah, that’s ideal because you’re giving a loan to yourself with this HELOC. You’d like to be able to pay that back after you refinance, but you just can’t assume that every BRRRR’s going to recoup a hundred percent of the money. In fact, oftentimes they don’t recoup a hundred percent of the money. That’s actually rare when that does happen. So you don’t want to depend on that.
And an alternative to BRRRR is house hacking. Look, if you go invest money in a BRRRR and you pull out 90% of it, you only left 10% of the deal. That’s a win, that’s better than 20 or 25% if you bought it traditionally. But you can house hack and put 5% down or three and a half percent down and when you do that, you don’t even have to BRRRR.
If this is your first deal, I’d much rather see you take the HELOC on the property and buy another primary residence to move into to house hack and get your housing expenses lower. Take the place you have now and make that a rental. Then I would want to see you go try to take on a rehab project, something big like a BRRRR that could go bad, if you’re having to borrow money from your HELOC to pay for it.
Again, you know your financial situation much more than I do. I didn’t have a ton of information to go off of here. But in general, if this is your first investment property, I don’t love you having to use a HELOC unless you have a great deal.

Drew:
Hey, what’s up BiggerPockets? First of all, really want to thank Dave and Rob. They’ve been extremely impactful to me in my journey for financial freedom. Thank you guys so much.
A little bit about me, my fiancée and I did a live and flip three years ago that just recently netted us 130K. We put all of that into a house hack, a one bedroom STR house hack that’s going to cash flow us 4K this month and should average over 2K cash flow per month.
I also just recently started a co-hosting company that’s allowed me to develop a lot of the systems I need to scale my portfolio while also helping other hosts be able to grow their business and increase their revenue and essentially pay for myself while managing their business for them.
I consume most of the content out there on Airbnb optimization, arbitrage, acquisition, how to scale my Airbnb business. And right now I’ve opened some HELOCs one on my house and one on my mom’s house, which should give us access to about 250K in capital. My goal is to become financially free via cash flow and then start building wealth.
So most of my cash is being saved right now and I want to start leveraging some of this debt. So how do I spend it? Should I primarily focus on, one, networking, content, social media and marketing? This would grow my co-hosting business and my fundraising credibility, capability. Two, acquiring my next STRs via arbitrage or purchase through the HELOCs to grow my cash flow and add to my visible co-hosting portfolio. Or three, investments in high level education on sales or content creation, which I consider to be my weak points right now.
I’ll be doing all three, so I guess you could say I’m in a bit of analysis paralysis in terms of how to take the next big step. Thanks again so much. You guys have truly changed my life. I appreciate it.

David:
All right, thank you Drew, and thank you for the kind words. Excited to answer your question here, and thanks for asking it. If any of you would like to have your questions submitted here, just go to biggerpockets.com/david. You can submit a question just like Drew did.
All right, Drew, if I remember correctly, it sounds like you got three options that you can put this money into. You can either invest into the business that you created to try to get more clients coming in to earn more revenue. You could invest into more short-term rentals or you could invest into education to try to improve yourself.
I don’t know enough of the numbers for how your business is doing, how much time you want to put into this to be able to tell where the best ROI is going to be. But I do remember you saying that you recently started this business and you only own one short-term rental right now.
I don’t think it’s super wise to try to scale a huge business teaching other people how to run short-term rentals when you only have one. You can’t know some of the problems that are going to pop up when you only have one property. Sometimes you hit it lucky and you get an easier one and as you get more and more, stuff pops up that you wouldn’t have known could go wrong.
You’re basically not going to be an incredibly well-rounded educator until you get several properties and you see things going wrong that you couldn’t have anticipated and you adapt to that. That’s why people pay a coach. That’s why people listen to a podcast like this. It’s not all the stuff I can tell someone that can go well. It’s all of the anticipation I have for things that can go wrong and how I prepare them to get ahead of those problems before they happen.
You also mentioned that you’ve been building out some systems. I don’t think you want to be coaching and training other people until you have well established systems that, like I said, help prevent mistakes from going wrong.
So right off the bat, I think it’s cool that you’re doing some coaching and you’re helping some people, but I wouldn’t want to see you dump a ton of gasoline on that fire because it’s still so small. You just got a little bit of kindling, you’ve been rubbing the sticks together, you got a little bit of smoke coming out. You don’t want to dump gas onto a fire until it’s a big healthy raging bonfire. Once you’ve got the solid base of wood that’s in there and the flames are hot, then yeah, dump your gasoline on it.
But if you try to dump too much marketing money onto a business that’s new, has barely got started, you don’t have systems, you don’t have support, you don’t have employees, you don’t understand how to do it, sometimes rather than the gasoline making the fire go bigger, it actually snuffs it out and you lose what you even have right now.
Now that brings us to option number two, should you buy more short term rentals? I’m leaning towards this. If you’ve got the one and it’s going to average 2K a month, I would lean towards you should get another one, because you’re going to have increasing returns on your time.
You’re not going to have to build a new system from the ground up getting a new short term rental, especially if it’s in the same market as the one that you have right now. You’ll actually be able to benefit from economies of scale, buying a second property in the same area, using the same systems, using the same software, and using the same knowledge. You’ll make a lot less mistakes. This is very synergistically sound.
Your third option was to invest in training, which you say is a weakness of yours or more courses. That could be good, but I think if you’re already managing a rental, it’s probably not necessary. I’d rather see you get a couple of them and hit a ceiling.
Let’s say you get three or four short-term rentals and you’re like, “Man, I don’t know how to keep up with customer complaints. I don’t know how to keep up with managing the cleaners.” At that point, you see what your own limitations and your flaws are. That’s when I would invest the money into the coaching.
Right now they’re going to be teaching you a bunch of stuff that isn’t even a problem in your business because you’re only running one and some of that money could be wasted. You won’t get as much value out of it.
So on one hand you’ve got your marketing company, on the other hand you’ve got investing in yourself, and then the other you’ve got the actual real estate. I’d buy the real estate and once I had enough of the real estate, I would invest in the coaching. And once I had some of the knowledge from the coaching and the real estate portfolio to back it up, then I would dump money onto the business you’re trying to create to show other people how to do the same as you. And at that point you should have a well-oiled machine and be well on your way to doing great financially.
Thank you for asking this question, Drew. I like that I got to dissect that and give you some advice. And make sure you keep in touch with us and let us know how it’s going.
All right, at this part of the show I like to read comments that y’all have left on YouTube from previous shows. This is one of my favorite segments of the show because sometimes you guys say some funny or some insightful stuff and I get to share it with the rest of the audience.
Our first YouTube comment comes from episode 687 and it’s from Laila Atallah. I love you’re Seeing Greene episodes, David. This episode was jam-packed with gems and it was intriguing to hear a bit of what’s going on your computer screen all day as you manage your businesses.
Yes, please do a lot more episodes where you and other investors share all the details start to finish and the dollar amounts and other relevant metrics of the deal, rehab, ongoing management costs, big repairs, cash flow, cash on cash return, et cetera. Also, please share a bunch of stories of people’s different real estate failures with all of the numbers of what exactly went wrong and the lessons we all can learn.
Well, I can see that Laila is definitely a stickler for details and she wants all the details. So we will keep that in mind and we’ll look for more people to come in and share specific numbers in the future.
Our next comment comes from Lorena Zaragoza. OMG, David, when do you sleep? Side note here, are you supposed to say OMG or oh my God? I’ve always read it as OMG when somebody texts that. I don’t ever actually read out loud oh my God. Same for WTF, which is why I think it’s funny that people send that because how much time are you really spending? But I don’t know. Let me know in the comments. Are you supposed to pronounce this OMG or oh my gosh?
OMG David, when do you sleep? I’m going through a divorce and I’m getting myself positioned to not only survive but thrive going from two incomes to just mine. Sold the marital home and used part of my portion as down payment on my home. Reserved money to build a 700 square foot ADU, fully stocked and furnished to rent out. I’m renting my master on Furnish Finder and will also list my ADU on Furnish Finder once it’s built.
If all goes well, I will have replaced 75% of my ex-spouse’s take home in just over a year. Please have an episode for people going through a divorce. I’m 50 years old and using my energy and resources to launch forward into my real estate investing journey. Thank you.
Well, I’m sorry to hear about the divorce there Lorena, but I’m glad to know that you are taking that negative energy and turning it into something positive by investing into real estate. So thank you for your comment and all the detail there and I do wish you the best.
Our next comment comes from TJ. I always look forward to Seeing Greene episodes. I like the format of having different personalities answering questions. This is a great episode. I learned a lot. Thank you.
Well, thank you TJ. We appreciate you guys being here. And we can’t make these shows without you, so go to biggerpockets.com/david and submit me your trickiest, your craziest or your most practical question. I don’t care what it is, I just want to be able to help other people by getting it out there and letting them hear.
All right, if you guys don’t mind before moving on, please take a second to like, share and subscribe this and then leave your own comment on YouTube telling me what you think of this episode. Anything funny, entertaining, insightful, profound, whatever you can think of. I love it.
Our next video question comes from Colin Higgins in Titusville, Florida.

Colin:
Hi David, my name’s Colin Higgins and I’m a realtor here in Titusville, Florida. Right now I’m reading one of your books. I’m actually listening to the audio book which is Sold. And it’s filled with tons of great information, but I did have a question about some things that you mentioned in chapter four.
In chapter four, you’re talking about things that you can bring to the table that help close the deal both on the buyer’s behalf or the seller’s behalf, what have you. And one of the things mentioned, which is offering the sellers a free or reduced cost renter buyback agreement in circumstances where the buyers would have to break their lease in order to move into the new home.
Now this is interesting to me because when I’ve heard of rent buyback agreements, I’ve always heard of them pertaining towards the sellers, so the sellers can figure out where they’re going to move next and that buys them some time. I’ve never heard it pertain to the buyers and I’m just curious what this exactly means.
Is it that they’re getting their lease bought out so that they can move in? How does this pertain to the buyers, if you could clarify that. But anyways, thanks for taking my question. I’m a fan of the show. I know this will help myself, it’ll help my clients and it’ll help everyone else on BiggerPockets and YouTube.

David:
Thank you for that, Colin. I appreciate your question and it’s going to be cool to get to share with other people what goes on behind the curtains in the real estate world of negotiating deals. Here’s the gist of what we’re getting at here.
When negotiating, my mind always looks for a way that I can give something up to the other side, that my side doesn’t care about or value. You don’t want to give up the things that your side really, really cares about, like the price of the home. That matters a lot to the buyer. You don’t want to have to give up by paying more because that’s going to hurt your buyer.
But there may be a situation where the buyer says, “I’m in no rush to actually move into the house. If the seller accepts my offer, I’m happy to let them stay there and rent the house back from me.” Well, sometimes your client can’t do that. Sometimes they got to move in right away. And so offering the seller rent back hurts your clients, but other times your clients don’t care, and in other cases it actually benefits your client to do that.
So I would frequently have people come and say, “Hey David, we want to buy a house.” By the way, if you guys are in my area, if you’re in California and you want to buy a house, please reach out to me. I am never too busy to help you become a homeowner or sell your house. I would love it if you do that.
So this person comes and they say, “Hey David, I want to buy a house, but I’m stuck in my lease for another three months.” Everyone thinks in their mind because they’re in a lease, they just can’t get out of it. Now, when the market was hot, I had many of these clients go to their landlord and say, “Will you let me out of the lease?”
And the majority of the time the landlord said, “Yes, I can rent it for way more than you’re paying right now. Give me a month to advertise it. When I find a new tenant, you can move out and they’ll move in.” And boom, the lease issue isn’t an issue at all, just no one thought to ask.
Well, in other situations the landlord may have said no, or you could have a situation like right now where rents probably won’t be higher than what your client is paying. So landlords aren’t going to just want to let them out for free. There’s going to be a penalty that your client doesn’t want to pay.
So in those situations, this is especially crucial in January, February, March where spring is coming and they’re going to get out of their lease in May or June, and I’m trying to avoid my buyer having to go into the market when it’s the hottest and the hardest to get a house. Well, if it’s wintertime, they’re at an advantage as a buyer.
So instead of waiting until springtime when their lease is over, I would say, what if we look for a home and we write offers on homes, but we say that the seller can rent it back for three months. What you do is you write the offers saying the seller’s going to rent the house back for whatever period of time it is that they need, and their rent is going to be whatever your client’s principal interest tax and insurance is.
Okay, so basically your client is paying the mortgage, but they’re receiving the equivalent from the seller of whatever that mortgage is so they’re not actually losing money. And when this works out, well, you’re shopping for a house in February, you get it at a better deal than you would’ve got it at in the spring, but your client doesn’t have to move in right away.
The sellers keep that, they stay in the home even though the title transfers to the buyers. The sellers stay there, which gives them more time to find their next house, which made them more likely to accept your client’s offer, which meant you could write an offer that was better for the buyer than the seller because the seller’s getting that flexibility. This also benefits the buyer because they don’t have to move into the property right away and they don’t have to worry about the expense of breaking their lease.
These win-wins are what negotiation is all about. It’s not about dominating the other side, putting your boot on their neck and forcing them to bow because you have the power. That’s the wrong way to look at negotiating. It’s about the agent being clever and creative, and that’s why I gave an example in the book.
Agents don’t even ask these questions. They don’t even ask the question of, if a client says, “Well, I’m in a lease right now.” Okay, well come to me in three months when you’re ready. Houses are a lot more expensive in the springtime than they would be.
Or what if they just start looking now, and if you don’t find anything you like, we don’t write an offer, but if you do, we write an offer telling the seller they can rent it back and if the seller doesn’t need to rent it back, we just move on from that house, we don’t buy it. There’s lots of creative options and as the agent, I really believe they need to do a better job of looking for ways to structure deals that benefit the clients they’re representing.
So thank you for asking that question, Colin. I am very pleased to see that you’re reading this book, that you’re caring about being a better agent, that you’re trying to represent your clients a bit more. We need more people like you in the BiggerPockets community that are taking this approach and actually educating themselves on how to do a better job. Real estate is very difficult and having a good agent can make it much easier.
If any of you are real estate agents and you want to hear more tips like this, go check out my other books. You can go to biggerpockets.com/store and you’re going to look for Sold, Skill, or my next book Scale, which will be coming out, all written for real estate agents to help them be better at their jobs.
Our next question comes from Dennis Robinson in Orange County. On one of the duplexes that I own that’s valued at 900,000, I have a 40-year fixed rate mortgage. The first 10 years is interest only at three quarters of a percent higher than my other identical duplex, which has a traditional 30-year loan.
While I’m enjoying the extra $1,000 per month cash flow on the 40-year loan, but I’m concerned that I’ll regret this decision in 10 years if I want to refi and no principal has been paid down. I’m 41 years old, so I feel like I’m just getting started in my investing career and I’m equally concerned about my long-term outlook as well as having a little extra cash to enjoy life, especially while my kids are young. Which loan would you consider a better choice in my situation?
Great question here, Dennis. All right, before I answer it, I want to give a highlight here. I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
Now, I’m not against the 40-year loan in a situation where you already own the house, but you’re refinancing it because you’re not paying more, you’re just getting a lower payment, stretching it out over 40 years. The same is true of interest-only payments. I’m a fan of interest-only payments, but not if the reason you’re doing it is you couldn’t afford the payment that also had principal.
All right, moving on to the next part of your question, should you go for the 30-year payment or the 40 year with 10 years interest only? It sounds like your concern here, my man, is that if you go with the 40-year interest only, you’re not going to pay your principal down enough over 10 years. Glad you asked that question because now we get to talk about amortization, which is a fancy word to describe the process of paying down a loan.
You said that the duplex is valued at 900,000. All right, now I’m sure that you don’t owe the full 900,000, but you didn’t mention how much you do owe. Let’s assume that you put 20% down just so I can do some math here. Okay, so it’s worth 900, you put 180 down, meaning that you owe $720,000.
Now assuming an interest rate of 7%, again, I don’t know exactly what your interest rate is, your principal and interest would be $4,790. But of that only $590 of that first payment would be going towards paying down the principal. So if we fast forward this 10 years, because you’re talking about a 10-year interest-only period, that’s 120 months. At that time, your loan balance would be $618,000 where you started off at 719,000. So it’s about a $100,000 is what you’d pay off over 10 years.
It’s not as much as you would think. And that’s because at the beginning of loans being paid off, a higher percentage goes to the interest than the principal. So you’re not paying off an even amount. A lot of people think like, oh, if I’m making a $4,000 a month payment, I’m paying $4,000 off of my balance. You’re not.
In this case, your payment was 4,790 and your first payment only paid off $590. And at the end of your first year, your 13th payment went up to 630, barely anything. It’s like a $30 difference in this case, $40 difference. So if you’re thinking that you’re paying massive amounts down on your mortgage because you’re making a $4,790 payment, you’re not paying off $4,800 a month, you’re paying off 5 or $600 a month and it slowly goes up.
Over 10 years, you’ve only paid off a 100 grand, but the payments you’ll have made over 10 years, let’s figure that out right now, if we take 4,790 times 12. So every year you’re paying 57,480 and then you multiply that times 10 years, you’ll have paid the bank $574,800 only to have paid off a 100 grand. You’re not paying off the full $574,800.
And that’s why interest-only loans are not as bad as what you might think. You’re not eliminating as much principal as people think, and over 10 years I imagine it’s going to be appreciating also probably more than a $100,000 that you didn’t pay off.
Okay, so for your specific situation, I think your 40-year loan with a 10 years interest only is a better financial choice for you. Take that $1,000 a month, save the majority of it just in case something terrible happens. Don’t just live off of that $1,000 a month. Maybe live off a couple hundred of it.
Put the other 7 or $800 off to the side, so if in 10 years when you got to refinance or whenever you got to refinance, if you haven’t paid off that principal, instead you’ve saved all that money that you could put towards the principal in a worst case scenario. I always plan for the worst case scenario.
Hope I didn’t confuse you too much with all this math talk and calculators here, but I appreciate you asking that question, Dennis, because our whole audience got to hear how not as much of a loan is being paid off as most people think.
All right, our next question comes from Lincoln in the Dallas, Texas area. I have cash savings of about $500,000. I bought my first single family house three months ago with $250,000 cash and now I’m waiting for the six months to get a loan and pull 200,000 of that out. A typical single family house in the area is 3 to 400,000.
Should I continue the practice of buying with cash to hopefully get a better deal? I’m assuming this is true, and then wait to refi and pull out the 80% or should I use the 500K as down payments on several properties all at once? Ooh, this is a good question here, Lincoln.
All right, first thing is there’s a fallacy that you’re getting a better deal when you pay cash. It’s not guaranteed. Sometimes it does help. I don’t think that’s wise. What I’d probably do is I’d write the offer with financing. Like let’s say that you want to buy a house that’s 400,000 and you write the offer for 350. Write it with financing, and if they say no, say fine, what if I give you all cash?
If they say yes to the cash when they said no to the financing, you did get a better deal and that’s going to work out good for you. But oftentimes they’ll say yes to the offer that you wrote of financing, so you didn’t actually get it at a better deal with cash.
Cash closes tend to be more advantageous when the seller is in distress and time is of the essence, when they’re headed to foreclosure, when they’ve got a notice of default, when they need a quick sale, yes, a cash purchase can help you because you don’t have to wait for the loan to fund.
But my mortgage company frequently funds loans in 14 days or 16 days, and most cash offers are like a two-week close. It’s the same freaking thing. So don’t get too caught up in thinking that cash is getting you a better deal.
Another thing to consider, what if rates are worse right now than they’re going to be in the future? If you think rates are going to get better, paying cash right now and then refinancing into a better rate in six months would help you. But what if it goes the other way? What if you could get a 7% interest rate today, but six-month rates are at 9%?
In that case, any benefit you thought you got from buying cash is erased because now you have a higher interest rate when you actually go in there to refi it. So you have to follow what’s going on with interest rates and how things are trending before you can make that decision.
There’s also the fact that home prices could continue going down, which I don’t know is guaranteed, but I think that it’s probably more likely that they’re going to stay the same or dip a little bit than it is that they’re going to go up. And I’m basing this off the fact that I don’t think that they’re going to go back up again until rates go down and we don’t have any reason to think that rates are going down in the next six months.
So I don’t think buying a whole bunch of properties right now is in your best interest because the market could be softening up in a lot of different places. What I would prefer to see is that you buy properties with financing right now and if the seller says no, try to get a better deal with your cash and then refinance.
Thank you for asking the question here, Lincoln. This was very well thought out and it gave me a chance to answer a pretty tricky dilemma that I think a lot of people are facing that have stacked up cash and waiting for an opportunity like this.
All right, we have time for one more question and this is going to be a video question that comes from Wyatt Johnson in Billings, Montana.

Wyatt:
David, what’s up? My name’s Wyatt Johnson. I’m an electrician up here in Billings, Montana. A little bit of background on me. I’m 25, got three properties, should be closing on the next one here in January. But I’ve noticed that I’ve always put my work life above my social life, especially relationships and it sucks because I feel like a loser when I’m not hanging out with women and working too much, but then I feel like a loser when I’m hanging out with women because I’m not working as much as I think I should be.
So I was wondering if you had any advice on how to avoid that mindset and also be more effective at juggling the two things. Really appreciate you taking my question. Appreciate everything you guys put out there. My life would look a lot different if I didn’t have you to listen to every week. Thanks.

David:
Wyatt, what an excellent question you’re asking here. This might be my favorite question someone’s asked at least off the top of my head in a very long time. I love that you asked it. And you’re summing something up that I think a lot of people go through, especially if you’re someone who values yourself based on how productive you are. There’s personality tests that people can take that will determine how much they value productivity. This is a great question to ask me because mine’s about as high as it could be. If I’m not being productive, I don’t feel good about myself.
Now productivity comes in many different ways. It doesn’t just mean making money because that’s always what the people who don’t value money jump in, there’s more to life than money. They can’t wait to come in and say that. I know, calm down.
You could be productive with health and fitness. Spending time at the gym is productive, if you’re working out really hard. You could be productive with meal prepping, right? If you’re at the grocery store shopping for good food and then you’re putting it into your fridge to eat healthy, that’s productive.
You could be productive in your relationship, right? I’ve never really been in a significant long-term relationship that was stable. So I can’t speak on this 100%, but I know the people that have, they always say it’s work, it’s work. Well, I think what they mean when they say it’s work is that it requires you to challenge your own natural self, like your personality tendencies that you need to hold with a loose hand.
And they’re also saying it’s an investment. You are constantly investing in your significant others’ wellbeing. You’re investing in the relationship showing that you value. You never get away from that. So there’s many ways to be productive is the first thing I’m getting at, but I love being productive.
If I’m having a conversation with a friend or in a relationship, I don’t want to talk about the weather and sports. I want to get into significant things that matter. To me that’s being productive.
Now you’re posing this question of when I’m working all the time, I feel like a loser because I’m not enjoying all the fruits of my labor. I could be out there talking to some fly mamacitas and having a good time and being respected for all the work that I did, feeling good about myself. But when I’m doing that, I feel like I’m leaving something on the table and I could be working.
All right, I’m going to ask you to reframe the way that you’re looking at the situation. Don’t look at spending time with women as generally speaking, being productive. It’s the relationship that matters. It’s the woman that matters. If you’ve got a woman that you love that you can see I could spend the rest of my time with her, or you’re not sure, but that’s a possibility, the time that you put into them is an investment, if it’s for the purpose of figuring out could I marry them, could I be with this person?
And then once you realize that it’s not the right person, you invested time in getting to the answer, you’ve got your win, get out, get back to work, get back to the goals that you have and wait for the next person to come along to invest in.
If you’ve done that and you’ve got to the point that you’re like, I think this is one that I could spend the rest of my life with, you’re not wasting time spending time with that person. You are investing into a future with that person that should be paying off dividends.
Now, if that person sees you the same way, they’re not going to resent you going to work. They’re not going to resent you making money. They’re not going to resent you practicing a craft because they’re going to benefit for the rest of their life by the work you’re doing, the financials that you’re building and the empire you’re creating as an electrician. They’re actually going to invest into you because they want you to do that.
So when you find somebody that’s resentful that you’re not spending all your time with them or they’re not the number one priority a hundred percent of the time, or you’re not giving them enough attention, that’s a sign this is the wrong person because they’re not seeing you as a future. If they saw you as a future, they’d be investing into where you’re going, which is your job and your real estate investing because that’s part of their life. They’re going to benefit from all that stuff too.
If they’re seeing you as someone who just wants all your attention, all the resources that you have, but they don’t want to help you build more of those resources, that is a sure sign that this person is using you. They’re looking for something that they can take from you, not necessarily something they could give.
And maybe this is a lesson for all of us to learn, when you find the person who sees you as a potential person they could have in their future, they invest in you because a future with somebody, a partnership like that is something you share together. So investing in the other person is investing in yourself.
So to sum all this up, if you’re with a girl that you really, really like, you’re not wasting time and not being productive, you’re investing in your future. If you’re with girls that you don’t really like and you don’t see going anywhere, you are wasting your time and you’re not investing in your future.
And when you’re trying to figure out if that’s the right girl for you, use the same metric based on them. Is she investing into your future? Is she building you up and supporting you and encouraging you to do more, even if it comes at the expense of her own immediate gratification, the attention that she’s looking to get from you?
Or is she just trying to get your money and your time and your attention and your resources and she doesn’t care about if they’re ever going to run out because when they do run out, she’s going to move on to the next person?
I think this is something we all could benefit from learning and focusing on and I want to commend you for having the guts to ask this question. I don’t know if it answered exactly what you’re going for, but if it didn’t, make sure you send us another question with a beautiful background like you have in this one so that I can answer it again.
All right, that was our show for today. I hope you guys enjoyed a Seeing Greene episode where I just remembered I forgot to turn the light green behind me and it’s been blue this whole time. So I’m sorry if that confused you. I do get complaints about this. How am I supposed to know it’s a Seeing Greene when the light is blue? I realize that. Hopefully the title, calling it a Seeing Greene, me introducing it as a Seeing Greene and me talking the entire time without a co-host was enough for you to realize that was the case. I’m going to record another one pretty soon here and I’m going to have to remember to turn that light green.
Thank you guys all for your attention, for following us here. If you want to learn more about me, you could follow me anywhere online, @davidgreene24, that’s my handle on all social media. You could also check out my website, davidgreene24.com, which is new, but is being remade right now. So let me know what you think of it. You find a lot about what I’m doing, where I’m going, what I’m reading, what I’m buying, more stuff about me there.
Last but not least, please go to wherever you listen to your podcast, Apple Podcasts, Spotify, whatever it is and leave us a five-star review. Those help us a ton and we want to stay the top real estate investing podcast in the world. All right, thanks, you guys. If you have time, watch another video and I will see you on the next one.

Mindy:
Welcome to the Bigger Pockets Money Podcast Finance Friday edition, where we interview Richard and talk about increasing income, the pros and cons of the public service student loan forgiveness plan, and investing from a position of strength.

Richard:
For me, it’s weighing out the nice, happy lifestyle that I have, working from home 100%, get a lot of time off, spend a lot of time with my wife and my pets. It’s very happy on this side, and I still have something, I still have a good, in my opinion, I can still save about 20% of my income as long as I’m not paying off the credit card. But you’re right, I do think about that often, leaving the government for the private sector.

Mindy:
Hello, hello, hello, my name is Mindy Jensen and with me as always is my big thinking co-host Scott Trench.

Scott:
Always another scalable opportunity to chat with you about money today, Mindy.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in NASAs like real estate. Start your own business, buy businesses, become president or live in a castle. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, I’m super excited to talk to Richard today because he has a lot of opportunity ahead of him. He’s also got some pretty big, let’s see, challenges ahead and some things to think about.

Scott:
Yeah, I think what’s awesome about the show today is Richard has some pretty clear dreams and some pretty clear goals in his life that he wants to achieve, and what he’s missing is a foundation that is suitable from which to pursue those goals in a way that is responsible and high probability, and that’s what he needs to pour over the next couple of years. And I hope that the advice we gave him is motivating in that yes, you should and can go after these dreams. You can’t go after them now responsibly in some ways, but within 1, 2, 3, 4 years, meaningful steps towards those dreams should be realistic and probable.

Mindy:
Absolutely. Before we bring in Richard, I need to tell you that the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I nor Bigger Pockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. Richard is newly married and his wife just started her job this week. They live in a high cost of living area and are looking for help with budgeting, saving and investing. Richard, welcome to the Bigger Pockets Money podcast. I’m super excited to talk to you today.

Richard:
Howdy? Very happy to be here.

Mindy:
Let’s jump into your numbers. I see income at 4479 hitting your bank account as your monthly net with an additional income of $240 from strength training class and $80 a month as personal training for a total of 4799. And as we just mentioned, that’ll be going up once your wife starts receiving a steady paycheck. I have monthly expenses, a total of $3,700 a month, which really isn’t so bad since you’re in such a high cost of living area. The only expense I want to call out is your rent of 2279. Again, that’s the high cost of living area. I don’t know what you could do to lower that, but that’s really the only expense I see that jumps out as like, wow, this is a lot. We have debts of student loans, $108,000 at interest rates between 3.4% and 7% currently in the Covid forbearance. So you’re paying $0 on those right now.

Richard:
Correct.

Mindy:
I see a car loan of $15,000 at 3.75%, and you had a terrible situation in the past with an old car. It died and you had to roll in $9,000 from that car loan into this one. So you’re essentially paying off two cars when you only have one. That stinks, but it is what it is. Credit card at zero, yay, you just paid that off. Congratulations. And a TSP loan of $1,100 and you’re paying off $200 biweekly. The original loan amount was 5,000, so you could pay off the credit card earlier. I think that makes sense because this has a much lower interest rate than those ridiculous credit card loans. Total debt is $125,000 with of course the bulk of that being the student loans, which will at some point come back do. So investments, I show approximately $22,000 in your TSP. So Richard, how could we help you today? Can you give us a brief overview of your money story and then talk about some of your pain points?

Richard:
I think my money story really starts right around the end of college. I was thinking about what I wanted to do. I was graduating with Business Management degree. And I thought about what I like to do and long story short, I was trying to find out what kind of leadership position I would want one day, and I think pretty lofty goals, and I know it sounds silly, but I thought maybe I want to be President of the United States. Let’s go with that. That one single thought five years ago led me to where I’m at now in Washington DC or at least the metro area. And it led me to search what presidents are like and then I found out most of them were millionaires and I found a lot of them became millionaires because of real estate. And that led into the great rabbit hole that I think we’re all familiar with of books, podcasts, YouTubers, and now we’re about five years down the line and I’ve read a lot, watched a lot, listened a lot.

Scott:
Awesome. And can you walk us through any of the money buildup? It sounds like the most of your position is these student loans and then there’s a little bit of money in the TSP.

Richard:
Correct.

Scott:
Any insight into your savings or investing approaches?

Richard:
Took me a little while to realize ETFs Index Funds were the way to go. Of course when Robert Hood came out, at first everyone was all about it. I was one of those guys, spent a little bit of time trading, but then quickly realized that just long-term investing was the right idea. But once I got my full-time job here in the Washington DC area, I just set my contribution to the Roth TSP and the match rate, which is at 5%, which isn’t great, isn’t bad, but I set it there and don’t touch it ever. Either than that TSP loan, which really helped me out, get rid of high interest credit card debt and put that into the TSP, which is a 1% interest and pays back to me anyways, not to a bank or anything. As Mindy mentioned earlier, my car, I had a truck back when I lived in Texas and it was a bad truck.
I do not buy Fords anymore, and it had about $9,000 on it and I had to wrap that up after it died into a loan for a Toyota Camry. So that makes up the rest or more debt. I think the student loans, that is troublesome, but it’s also one of the reasons why I got into the Federal Government, the public service, because we do have really great forgiveness on that after a certain amount of payments. And I actually looked out on how that forgiveness is going to work out for me, mainly because all these $0 payments still count towards my qualified payments. But that’s the story right now. I had a car loan, I got my student debt, I’ve got my full-time job working and so far I’ve just been putting towards my TSP Roth. That’s really the only investments that I’ve made.
And the main trouble, my main pain points is building up the savings and keeping it, I think I’m a pretty disciplined person, but for the past several years it’s been hard to keep that, hold onto it. Something usually happens, something big or something that seems big and it disappears, falls away, then I’m back to zero. You get a little bit of that shame that you feel like, man, I had all that money and I let it go. And then you get into some comfort spending and now you’re back in credit card debt and it’s a vicious cycle, but now I’m back to zero, so that’s why I wanted to talk to you all.

Scott:
Awesome. Well, Richard, what do you do for a living? What is your job?

Richard:
My official title is Operations Research Analyst. What I’m really doing is data science, lots of computer programming type stuff, Python, Sequel, data management, predictive analyses, things like that.

Scott:
Great. And you said you make $106,000 a year?

Richard:
Right, approximately.

Scott:
And what are you withholding from that paycheck? Do you max out your 401K or TSP?

Richard:
I don’t max out the TSP. So it is a TSP. I don’t max that out, I just contribute to the match. And one of my reasons for that was I wanted to try to save up an emergency fund before I started maxing that out. But that’s been one of the challenges is keeping that built up savings fund.

Scott:
Great. And you live in the city limits of DC?

Richard:
Not the DC proper, so sorry to any DC folks that live over there. I’m in Arlington, Virginia. I can see the monuments from my apartment, but I’m not technically in DC.

Mindy:
So taxation with representation?

Richard:
Yes, correct. Yes, I’m in Virginia.

Scott:
Awesome. I know the area, it’s very expensive. Very expensive to live there.

Mindy:
Yes. I have several questions. You talk about your savings and you save up and then something happens and you need to spend that. That sounds like an emergency fund to me. Do you have an emergency fund or is it just this savings account?

Richard:
So currently I don’t have an emergency fund. That was something that I put off until I paid all my credit card debt. I was going to ask you all about this back when I applied, but now that the credit card’s all paid off, it’s a little moot. But I wanted to put off saving anything until all of my credit card debt was gone. Just putting everything to that made me feel better as I watched it chunk away over the months. But then again, I don’t know how wise that decision was, but because now I’m zero credit card, but I also have zero savings. So that’s where I’m at with my savings right now.

Mindy:
And have you thought about changing jobs or have you explored the private sector job market? The government security is awesome, but they don’t pay that well, whereas data, what did, data…?

Richard:
Data Scientists.

Mindy:
Yeah, data scientists can make a lot of money. Data programming, you could make a lot more money in the private sector. You could even go out, do you have a security clearance?

Richard:
I have not the top secret, I am just the normal secret. So I do have a security clearance.

Mindy:
So that’s a perk. Those are expensive to get. And having one, how long does your security clearance last?

Richard:
That I’m not sure about.

Mindy:
Having that, it’s a lot easier to renew it than it is to just get it brand new and it’s a lot cheaper to renew as well. So having that and going out and looking in the job field in the private sector could get you contract jobs with the government and could get you a lot more money. So I would first encourage you to look within and see if there’s any opportunities internally, but if there aren’t, look at the private sector jobs and see what’s available. That doesn’t mean you have to switch, but if you’re making a 100 with the government and you look, you’re like, oh, data scientists make 250 in the private sector, that makes it a lot easier to switch jobs.
And the 5% match is super awesome, but if you’re getting $150,000 rates, and I’m just making that up, I don’t know what data scientists make, but I know they make a lot of money. So you could be, what is the phrase? Jumping over dollars to save pennies by staying for the match if that’s why you’re staying. There’s a lot of other perks for working for the government, but there’s a lot of perks for working for the private sector called dollars. So I would encourage you to look and just explore. That doesn’t mean you have to change, but just see what’s out there and see if it’s worth it.

Richard:
I do have a response to that. And that is one thing that I did think about for a long time, especially earlier this year. I, earlier this year, got a promotion to the 106. I was previously, first half of this year, making about 86. And I was looking at going to the private sector because I had just graduated another basically certificate program from Georgetown University for Data Science. And my professors there told me the same thing, you don’t have to stay with the government, you can go and find something that pays way more. Around that time though, that’s when the tech layoffs started and it was also really hard to find people that wanted to hire another data scientist.
So that’s when I did look internally and I said, if I can’t leave, let’s look internally. And I did find that promotion. So that’s been nice and I totally hear you. It’s something that I’ve thought about and for me, it’s weighing out the nice, happy lifestyle that I have working from home 100%, get a lot of time off, spend a lot of time with my wife and my pets. It’s very happy on this side and I still have something, I still have a good, in my opinion, I can still save about 20% of my income as long as I’m not paying off the credit card. But you’re right, I do think about that often leaving the government for the private sector.

Mindy:
Well, let’s go to the other elephant in your financial situation and that is the student loans currently in $0, you’re eligible for public service loan forgiveness?

Richard:
Yes.

Mindy:
How much longer do you have in your public service to get the loan forgiveness?

Richard:
I started in 2019. I believe I should have about six more years by the time I actually have to start paying actual dollars. So to explain that a little further, when I first got this job and certified my income for the public service loan forgiveness, they go off of your most recent tax return. It just so happened to be that the last tax return I got was under the income limit for me to make a payment. So they gave me a year of $0 payments that all count towards my forgiveness. Each one of those might be zero, but they still count towards the total 120.
That following year was 2020 and Covid hit, and then the forbearance started and they kept everything at $0. To make a complicated and long story short, I’ve had about three to four years of $0 payments that all count towards the total 120 versus the past four years of me actually having to pay something forward. So I do have about, by the time I have to start paying an actual payment next year, when I have to re-certify my income, I would already have four years done and I haven’t paid a cent. And then by the end of the six years they’ll forgive the rest.

Mindy:
They forgive the entire amount?

Richard:
Yeah, after 120 payments within the limits of the rules.

Mindy:
And so you have to stay working for the government in order to get this, is that correct?

Richard:
Correct. But they don’t have to be consecutive. I could leave and come back and continue those payments, but say if I go to the private sector and work there for a year, the payments that I would make there, even if they are under the income based payment plan, those won’t count because I’m not full-time for the government. You have to be full-time for a government organization or a nonprofit.

Scott:
What are the biggest pain points right now and things that we can help you with? Where do you want to be in three to five years? Where do you want to be at the end of this year? What can we help you with?

Richard:
So I think there’s two things that will help me in the short term and then will eventually build up and walk me into the long term. One is maybe something that Mindy has a lot of experience with, given that you’ve been tracking your budgeting a lot is maybe better ways to really effectively track my budget, even if it’s real time. Because what I have a problem with through the months is that I make a budget, I write everything down, I take the exact amounts, I allocate dollars to a specific group of type of spend. But it’s pretty hard sometimes to track that throughout the month in real time and it gets away from you sometimes. So do you have any tips on how to track that in real time or more effectively?

Mindy:
Yes, I do. You sound like the perfect candidate for a product called Qube, which is a digital cash envelope system. It’s QUBE. You put a certain amount of money into your bank account, it is a debit card attached to an app on your phone and in the app you allocate so much money for each category. Groceries are 300, car payment is 249, cell phone is 113. And then when you’re at the grocery store, there’s no money on your debit card. You have to take on the app from the grocery budget and put it onto the card. I’m about to spend this much money and if your grocery budget is 300, but you’re about to buy $400 worth of groceries, it won’t go through because there’s only 300 in there. So in real time you have to readjust your budget and take the money and put it from a different category into the groceries so you can buy the groceries.
Of course, you could cheat and swipe a credit card and be done with it, but that helps you track without tracking where your money’s going and being more conscious of it in real time. Because I love the waffles on Wednesday spending tracker, but I also had time for a while to track my expenses as I’m spending money. And then after a while it got to be daunting because it was a lot. And as you can tell, I’ve stopped tracking my spending in real time, but I’ve got other things going on right now. So that could be a great way to do it. You’ve got some like… Gasoline is a great way to, that’s another, animal supplies, home utilities, maybe, maybe not, but it’ll help you with everything that you’re swiping your debit card for and then you can see, oh wow, I’m really not spending only $55 in gas. It’s actually much more. Or I’ve got accounts that I don’t have allocated in my cash envelope system. I’m actually spending way more money than I thought I was.

Scott:
And I think in addition to the great points Mindy’s making about Qube, I will say this, I’m just doing some simple math here. We say rent’s 2279, groceries are $300, that’s preposterously low. Car payments 249, cell phones 115, Wi-Fi is 103, car insurance is a 100. Just the fixed items there is $2,800 a month. So that leaves you with $900 for groceries, all your fun, all the rest of life is $800 in Arlington, Virginia. No way, man. It’s just not reality. You’re going to hop on an airplane a handful of times a year, right? You have family that’s not near Arlington, I imagine? So those things are not accounted for in your budget. So I think you need to go back for 12 or 18 months and say, no, no, no, what’s actually happening in my budget on an overall basis?
And if you’re not setting aside money for those other categories, like again, airfare, these larger items that come up less frequently. And I would put in a $500 miscellaneous budget per month because life happens and you need to repair the car or whatever it is. And so you’re not planning for those expenses and that’s why your budget is evaporating on you on a regular basis is because that’s not mentally accounted for. In addition to the system that Mindy just outlined here, which will help you actually get a really firm grip on that and control those expenses.

Richard:
That helps.

Scott:
You’re going to be in a negative feedback loop here because of the way you’ve set up your budget. You’re going to say, oh, I should be living off of $800 a month aside from my fixed overhead here. You’re going to be absolutely miserable and you’re going to whiff every month on that budget, would be my guess.

Richard:
And I think that’s what sounds like is the problems because a lot of the times it is things that you just said, like the car thing or the dog gets sick and you got to go and it’s a $1,500 bill. So it is those kinds of things and I think that is going to seriously help me if I can go back and add those in to my plans. Would you say to I guess, small percentages of those things where I, kind of calculating cap X or something like that, but putting a certain amount aside, you see my budget there. So would you suggest, you said, 500 as a [inaudible 00:23:22]?

Scott:
There’s probably three approaches to this. One is do your very detailed thing, think of all the possible things and start allocating money in buckets for them. The car breaking down, the dog getting sick, whatever, trip home for Thanksgiving, whatever those things are and make sure you plan for them throughout the year. The other would be to, and I’m lazy, so I would just say probably personally, oh all right, I’m going to bucket 500 bucks a month for that stuff. That’s six grand a year. I have not on average experienced more than $6,000 in nasty surprises over the course of a year. So that’s going to work for me.

Richard:
That makes a lot of sense and that really helps me out. I think the next follow-up question, I know I’m starting off with super beginner things, but I am in that very first stage of my financial journey I would say. And I’m trying to get to that second step, but for me it’s keeping the savings held onto. I keep getting out of credit card debt and then having a great plan. The emergency savings starts building up and then something happens. Do you all have any strategies I could use to ensure I don’t spend those savings? Do you all have any fail safes or anything like that? Do you think that will help?

Scott:
So I think Mindy’s got some things, but I just want to echo this is directly related to the point we just discussed. You got to plan. You’re building an emergency reserve, you’re not really building an emergency reserve. You’re saving just enough to not fall behind. When these unexpected things come up, you’re not actually saving because you have to account for these things in your budget. So I think that they’re directly related. So once you’ve accounted for those, the money on top of that, the money you’re saving plus the $500 you’re setting aside for life is actually what would be going towards an emergency reserve that would be able to handle a true emergency. Something that’s not day-to-day or month-to-month expenses.

Mindy:
That was going to be my suggestion is create an emergency reserve account and a savings account and your emergency reserve account needs to be built up. And this is for emergencies, this is when your car breaks down or your furnace goes out or whatever while you’re renting. So it’s not for when your furnace goes out, but it’s for true emergencies. And then have a savings account. And your savings account is for savings and they are different accounts. At your financial position right now you need to have two different accounts. But again, going back to the income, I think your biggest lever is the private sector income and the PSLF, the private…

Richard:
The Public Service Loan Forgiveness, PSLF.

Mindy:
Public Service Loan Forgiveness. That’s what I wanted to talk about. You haven’t wasted that because you haven’t paid anything into it. That’s $0 that you have paid for four years. That still counts. But if you could take a job that doubled your income, you could live on your current income and throw every extra dollar at those student loans and be done in a year or two and then go on and do everything else that you’re doing. Have your emergency fund, have these student loans and when you’re paying them off, when the interest is still zero and zero is due, all of that money goes right to the principle.
If you love your job, that’s different, but if you could make so much more in the private sector, then maybe that’s the better option. Another thing you could do is look for private sector contracts that you could do in the off. You just got married. Do you have children?

Richard:
No.

Mindy:
So yes, you just got married and you want to spend time with your new wife, but you could do a short term contract, make a bunch of money, throw it at the student loan debt. While still working your government job and growing your student loan forgiveness or throw it into an investment account or throw it into your savings account, your emergency fund, and then check out where you are when you’ve saved up $108,000. And say, “Hmm, now I can pay this off, quit my job and move on.” Or now I’m almost there at, if you were nine years into a 10-year plan that’s different than four years into a 10-year plan making, I would say significantly less than what you could in the private sector.

Richard:
Definitely. And unfortunately I can’t do the contract work while I work for the government. There’s a pretty strict non-compete there that the government won’t let me do that same work. But I hear you in that the lever that I can pull is increasing my income and that’s something that I’ve thought about for a while.

Scott:
What does your wife do and what will she do and how much will that bring in?

Richard:
So she just got a job as a Biomedical Equipment Technician. So she’s a Biomedical Engineer. She fixes hospital machines and devices. So that is a very technical job as well and has the potential to rise a lot and looking forward to seeing her first paychecks as well because that’s going to seriously help me covering these bills because a lot of it is all me.

Scott:
Great. And how much will she bring in?

Richard:
So she’s going to bring in 52,000 a year and if you want to say gross a month, that might be 4,300 maybe after taxes. The taxes around here can go up and they can be high, but we’re expecting that she brings in around somewhere between 2000 to 3000 net a month.

Scott:
That is all going to be gravy if you are able to. So right now the picture that’s forming in my head of about your situation is you are treading water. You’re not getting ahead, but you’re also not really falling behind at this point in time. You don’t really have a lot of consumer debt. You have small amounts that you’re about to finish off here in the TSP loan and you have the car payment perfectly normal of 15 grand and then it’s the student loans. But you’re not getting ahead and you’re not accumulating more consumer debt.

Richard:
Exactly.

Scott:
So your wife’s job is going to put you in the black. 25, $30,000 a year, as long as nothing changes and you don’t start spending more, you don’t have more to spend. You’ve been treading water, presumably waiting for this opportunity for your wife to start earning income. Now do you guys plan to start a family in the next couple years?

Richard:
Nope.

Scott:
So this is going to continue on an ongoing basis. So what you should do now is you should go back and revise your budget and say it’s nice that you presented these numbers to us, but they’re not the reality of your spending. Your spending is probably about a thousand dollars a month higher than what you currently have, what you presented to us. You should reflect that in the reality and say, great, when your wife’s income comes in, you’re going to put two or $3,000 to that emergency reserve every month for the next six to 12 months. And you’re going to come out with a 15, 20, whatever you think is a comfortable amount, 15, 20,000 probably in that ballpark is going to be great. And you’re going to be really secure at that point because now you’re actually getting ahead compared to what you expected, because your numbers are realistic and you can actually meet them on a monthly basis and you’re going to actually have some cash in the bank.
After that, now we begin to think about investing and asset allocation. I think Mindy’s completely correct and there is a great thing to think about. Can I earn way more money as a data scientist in the private sector and pause this… Your situation makes me anxious to a certain degree around the student loans because you’ve got six more years left before you get forgiveness. That feels like a trap, a mental trap. I can see how that’s just, and if it was 20 years, I would say, okay, let’s just forget that even exists. That’s not even a part of this lifetime. Let’s go pay it off and crush the debt. If you said it was next year, I would say, okay, let’s push through the next year. Six years is long enough that you can completely change your trajectory and get close to a net worth of a million dollars in your situation. If you wanted to make a couple of reasonable bets that were significant like a house hack or something like that from a property perspective and make a couple of job changes and invest aggressively.
But it’s also close enough around the corner where, okay, 10% of that, if you believe me that you get to a million dollars or 20% if you only believe you can get to 500,000 in net worth over six years is going to be this student loan forgiveness component. And so sticking it out to get that could make sense. My lean is that if you’re willing to get aggressive and really lean into personal finance, you want to be a millionaire fairly quickly and be self-made. So that helps your aspirations for the US presidency in a few years, that I would start thinking about, I would just forget, okay, that’s nice that the student loan thing exists, but my potential is worth many multiples of that and that potential can be unlocked by aggressively pursuing other alternate opportunities with this. What’s your reaction to that assessment of the situation at high level?

Richard:
I do actually have a really great reaction to that because it’s something that I’ve thought about specifically on the aggressive investing side. I have a very aggressive want to not just be, okay millionaire, I want to really achieve a high net worth. That’s why I really want to go into business acquisition. I would love to own not just one, but multiple businesses. To me that’s extremely attractive. And I guess I could say my goal materialistically or just vision wise, I know this sounds silly, but I want to live in a castle. I grew up as the nerdy kid that loved Knights and Dragons and stuff.
So for my personal finance goal, I always told myself specifically was let’s go get a castle. And then I started looking at how much that was and I thought, well, I’m going to need a lot of money, so how do I make a lot of money? And now I’m here, like you said, I’m not really getting ahead and that’s what I’m trying to do. So I’m trying to find that path forward that’s aggressive, that’s realistic, but I need the change. I’m still here trying to make savings happen and I’m not making them happen. So for me, I’m all on board with going aggressively.

Scott:
Just to be clear, you have paid four years of dues towards the student loans and you have six more to go for a total of 10. Is that correct? To get to the forgiveness.

Richard:
To get to the forgiveness. Correct.

Scott:
Great. No, I think this is great. Look, that’s a big vision. I love it. Live in a castle. Let’s back into something that allows you more flexibility and let’s start with an obvious truth. You’re not going to live in a castle and be a millionaire a couple times over with several different private businesses working at a government job making $106,000 a year, spending the next six years of your prime potential. Letting the student loan forgiveness accrue slowly. That is a trap that you’re about to fall into relative to the vision that you have outlined. So you can’t do that if you want to get there in the next 10 or 15 or 20 years. You can’t just like wait six more years to delay that. You got to start taking some, and this is compounding, so you’re not going to get there overnight, but you got to make the first 10% of progress towards that vision in the next year or something like that. So that involves a large amount of self-education on how to run businesses. Do you know anything about running business?

Richard:
Surprisingly, I do. Before I worked in the government, I had small business experience. Of course, I have a degree, but honestly a degree’s not going to really put you in the position to run a team of people, be in charge of everything, both on HR, accounting and staffing, just everything that goes into running a business. But I do have some experience. So yeah, I do. And what you’re saying I 100% agree with, this is why I’m actively, and I guess the word is aggressively looking to acquire a business versus real estate. So that’s another thing that we could talk about. I’ve done quite a lot of research and reading and things like that on business acquisition as well. And I’ve started a pretty good network.

Scott:
What kind of business would you like to acquire?

Richard:
So there’s two kinds and they are very, very different from each other only because that’s where my networking has led me to. One, which is the most obvious would be tech or IT consulting. There’s a lot of those that are out there for sale, they’re much more expensive and you would need investors backing you. There’s things like search funds, angel investors, not really, but search funds are basically a group of investors that find an operator that has experience in that industry and they’ll back the acquisition and put you in with a small percentage of ownership. So that’s one avenue that I’ve considered and thought about and made some connections with given the IT route. There was another route though that when me and my wife were talking about it, it’s completely different, but it’s something I’ve always talked about in my spare time.
I’ve talked to her about one day owning a winery. It was just this one thing that I always said, I would love to own the land, grow the grapes, make the wine, of course, hire the right people. But I had said it all the time. So she said, why don’t you look for that instead of all this IT stuff? Because that’s what you seem more passionate about. So I did. I actually got in contact with a owner of a winery that was selling his winery. I couldn’t make a deal happen. But right now we’re actually looking at helping him expand into a remote tasting room. So there’s connections there and those are the two industries which are obviously completely different. But right now for me it was more of a let’s get out there and learn and talk to people and just see what’s possible.

Scott:
If I was starting over today, or let’s say that I get fired, I don’t want to get fired. I like my job. Please don’t fire me anybody if you’re listening to this. But what I would do is I would be looking in the small business space, I’d be looking at services based businesses. So these are janitorial businesses, carpet cleaning businesses, those types.

Richard:
Home remodeling. Landscaping.

Scott:
Home remodeling, landscaping. Exactly. These are businesses that in many cases have been run for 20, 30 years by the same individual. Don’t have a website, don’t have employee management protocols. Generate 300 to $500,000 a year in free cash flow. In many cases a good living but are not scaling, they’re not looking for other opportunities. These are businesses with no one to buy them. Lots of baby boom reserve retiring and there’s nobody lining up to buy these businesses. There’s more than just financial considerations for the seller. This is their life’s work. They know their employees. They don’t want to give up on the business and have their employees who they know, who are part of the family be let go or not have a place to work. They’re moving the owners from Denver to Florida. I know some folks that fit that profile, for example, great.
So you can buy these businesses for one and a half, two times cash flow. You aggregate them. If you buy three or four, for example, over a five-year period, each one expands operations a little bit. You’re looking at a three or to 5 million EBITDA or profitable business. That’s a business you can sell to, for example, private equity for three, four or five times cash flow. That’s really good arbitrage. That’s a really compelling investment thesis. I would want to hear that. It doesn’t have to be that thesis, but a thesis like that from you, if you’re going to seriously consider leaving a six figure career to go and pursue something like that and say, okay, that’s something that we can do there. I think that a search fund or looking for investors is great, but what’s way better is bringing 50 or a 100 or $150,000 to the table as part of that and saying, the last three years I have spent reading up on how to run businesses.
I have taken this internship or done this on the side in order to hone my skills. I also scrimped saved, hustled my way to saving $150,000 in cash. I’d like to buy your business. Here’s the partner, friend, family, whatever that’s going to go in with me and bring the other 300,000. I’d like you to carry a hundred or $200,000 in the note and I’m going to use a small business loan to finance the rest of it. Now we’ve got a really compelling case. I don’t know what you would’ve said to the winery salesperson, but you’re not a serious buyer in the current situation.
Because you can’t tell that story and then come to the table with $150,000 in cash or a 100 or some amount that says, I’m serious and this is a big percentage of my net worth and I’m going to go in with whoever is willing to take a shot on me as an investor, be that friend, family member or the person. So I think that’s a great path forward. I would love folks that are interested in going after something like that because I think it’s a phenomenal opportunity and it’s one of the best asset classes and opportunities that exist in America right now. But I think that that’s something that you need to consider getting in.

Richard:
Well, I totally agree with you. I had a similar thesis somewhat with the winery owner. I explained to him what my plan would be for growth in terms of acquiring other smaller wineries since his is a slightly larger. And that same thesis can be really applied to a lot of different kinds of businesses, is that you find that platform business, you grow through acquisition of other similar type businesses and then you can have an exit. So I explained that similar logic to him. Of course, I didn’t have any money to bring to him, but I did say, let me go find investors and see if we can make this happen. That just got me with a lot of SBA lenders, a lot of other kinds of folks. But either way, you’re totally right. That is the path and that is the kinds of thesis that I am trying to build, but it’s going to be way, way, way more powerful and I think, not easier, but…
It’s going to be better if I have that 150,000 or so capital on hand to actually invest into it. And that’s one of the main reasons why my pain point is getting an emergency savings, getting a savings and building it up and stop letting it disappeared because that is the goal that I have. Instead of getting a house hack or getting a rental, I want to get a business and I want to go into that and I read this book. I know we’re going to talk, have the favorite book, but The Buy Then Build. This happened in my little rabbit hole. This is by Walker Deeble that came somewhere after Richest Man in Babylon, Millionaire Next Door. That one popped up on the suggestions and I read, blew my mind. It totally opened me up to everything that you just talked about. And I realized that’s the path that I want to go on. But I need to take the first steps of how do I get to that point where I can make that kind of deal happen.

Scott:
Here’s the homework, if you will, that I would assign you right. First, we got a big set of visions here. You should write down on a piece of paper. The reality you want to see yourself in three years, five years, or seven years. I do not think a castle is likely in that three, five or even seven year vision at this point. It could be in your 20-year vision. I also do not think the US presidency, but I think it doesn’t sound like you’re aspiring to be president any longer at this point.

Richard:
Not too much. It was just a starting off point.

Scott:
Great. Well, I love it. I would put together a vision and put it on paper and look at it because you got some big ideas and you need something that you actually believe you can achieve in three years, let’s call it. And life can be pretty good in three years if you make some moves. Second, you got to make a move on the career front at some point. Your career is fine. There’s nothing wrong with it. It’s just not going to get you to the vision you just articulated. You’re going to be sitting back in five, 10 years saying for you that wasn’t good enough. It’s good enough for a lot of people, but that’s what I’m hearing you say. So you’re not going to be comfortable with yourself if you don’t take a shot. You’re also not in position to take a shot right now. You have no cash savings.

Richard:
Exactly.

Scott:
You are treading water from an expense standpoint. You need to make some changes here. One of those could be switching a job in the short run to increase the income. The other is simply building the emergency reserve, which should be very achievable for you guys now that your wife is working. And you can also consider some things on the expense front. Can you move farther away? For example, if you’re working mostly from home, I know there are cheaper areas in Maryland and Virginia where you could bring that rent down by a few hundred bucks a month pretty easily. So those would be some tactical things in the short run. Understand that those are building blocks to the first six, 12 months of emergency reserve, which in your situation, emergency reserve is probably better than a formal investing approach.
You plan to buy businesses, or at least that’s where you think you are right now. So why would you put the money in stocks if you think you’re going to earn a 30, 40% return on a business that you buy and learn over a period of time? And then last, you need a business thesis. And with that thesis, very few people are probably going to go in and invest with you on one of those businesses in the near term. So you need to say, how do I increase the power of the story that I want to tell to a potential investor or a seller of a business who I hope will sell or finance portions of that business over the next year or two. I’m going to read these 15 or 20 books on being a CEO. I’m going to have a written investment thesis that establishes that.
I’m going to bring together financial returns, social good, the wellbeing of the employees, the wellbeing of the seller, all those things into one pot. Make everybody money, make everybody happy in this and demonstrate that skillset. I’m going to bring in this coach or this mentor to help me with that. All right. Put together some sort of plan that makes that story believable so that a year from now you’re actually reasonably close. I could, if I wanted to bring $30,000 to a purchase, and I’ve got a bunch of books and I’ve got a network of these things. I’ve talked to business brokers in the area. I’ve actually analyzed a few businesses and deals with this. So those would be some of the things that I would provide as next steps here.
And a year from now, again, you could be sitting on $30,000 in cash and progress along the journey here so that you’re not coming onto a seller and saying something that sounds pie in the sky, but perhaps it’s [inaudible 00:48:32] to the winery seller. You’re coming in with something that sounds okay, maybe here. And then two years or three years, you’re a no-brainer. You’re going to win. You have a serious chance to win at a couple of these things. So that would be my advice to you in a nutshell, is make that story compelling. Have hard evidence in a year or two or three of slog behind that, that demonstrates your credentials that are beginning to compound behind you and make the story go from impossible to inevitable, which I think is a book title. Someone…

Richard:
Sounds like a good one. If it’s not written, get to it. Well, that sounds fantastic. And that’s the advice I was hoping to hear.

Scott:
Is your wife on board with all of this?

Richard:
Absolutely. That was one of the main points I think I looked for before I married her. I listened to you all’s money dates and also the prenup episode and all of those things. And we did not get a prenup, but we did listen to the episode. And then pretty much anything that we could find that was on marriage, finances, and really sat down and talked about how we want to do it. And she’s also very business minded too. She wants to have a business one day as well, but hers is in the medical equipment industry where she wants to invest in medical equipment and rent them out to hospitals. So we both have that same mindset and we’re both on the same page with what we want to do.

Scott:
Awesome. Well, I look forward to hearing what you do next from a story standpoint. And when you do move into that castle, please send us a picture because that’s awesome. I love that. I love a big vision like that.

Richard:
Thanks. Absolutely. We’ll do. Maybe you all can come by and check it out.

Scott:
For sure.

Richard:
Airbnb at a tower or something.

Scott:
That would be a fast way to get to your castle, right?

Richard:
Yeah.

Scott:
If you could find a way to, if it’s a great vacation rental.

Richard:
Exactly. That sounds like a really awesome, I would take that Airbnb or Vrbo.

Scott:
Well, awesome. Anything else we can help you with before we head out, Richard?

Richard:
No, I’ve got a lot of information and homework that I can do that I believe is going to help me. And I think it’s just fantastic that you all brought me on because I’m such a beginner. But I do think there’s just a lot of people out there in my circle at least, that listen to you all’s show, but they’re in the same place as I am. We’re okay, but we’re not getting ahead and we would like to get ahead and I really think this episode gave me those really small but important fundamentals that are going to get me moving forward and achieve those financial goals that I’ve set for myself.

Scott:
Well, I’ll leave you with one last one thing there then, which is if you want to set a big goal for this next year, because it’s going to be an incremental year. You got to save up the emergency fund and begin pouring a foundation to get there. Best way to do that. The big goal would be read 50 books, pull out a book a week, get a shelf in your house, and pile up 50 on it over the course of the year that are relevant to this. And you won’t be a beginner anymore from your frameworks, and you’ll figure out what you need to do.

Richard:
Well, I’m an active reader. I’ve probably read 50 books this year or more, but half of them fiction, but I think I hear you, 50 books within that same field of knowledge.

Scott:
50 books that move you towards your goal.

Richard:
Cool. It’s going to happen.

Scott:
Richard, great to meet you. Thanks so much for coming on the show.

Richard:
Thank you, Scott. Thank you, Mindy. I really appreciate it. Had a great time.

Mindy:
Thank you, Richard. We’ll talk to you soon.

Richard:
Bye-bye.

Mindy:
All right, Scott, that was Richard, and those were some pretty lofty goals. What did you call them? Well, that’s a big vision. That is a big vision, and I like that he is thinking long-term and thinking large, but I also think that we gave him some pretty good things to think about, including increasing his income and diving into that public service student loan forgiveness plan to make sure that that’s really truly the path that he wants to go on. I think that, I would look into that a lot further if I were in his position and really run the numbers and see does it make sense to forego the extra income to get that $100,000 wiped out? And honestly, I don’t think it is.

Scott:
I think that it is a big vision. I love it. I think that it’s great, and I know I’d love to see more people with huge visions like that. I want to live in a castle. That’s awesome. Let’s do it. And I want to own multiple, medium to large businesses. That’s what I heard. We want to do that. Let’s get started and understand that that’s not a 40 hour a week vision. That’s a 80 to a 100 hour a week vision. That’s a, I’m going to work all day. I’m going to spend very little, I’m going to read a book every single week for a year that’s directly relevant to those goals. I’m going to be going to bed, and dreaming about this vision at night. I’m going to save every dollar I can. Find every development opportunity I can. Take a significant risk from a reasonable position of strength at the earliest possible opportunity.
Be serious and go after it. Richard is not yet doing the things necessary to make that vision come to pass, and he’ll have to decide if he’s willing to do that. A lot of people are not willing to do that, and a lot of people can become financially independent and build a significant net worth within the next six years by sticking out a job that pays $106,000 a year with their spouse making 50 and saving up a good income, even in a higher cost of living area, like DC. He could become moderately wealthy and on a path to financial freedom if he wanted to do that, but if he wants to achieve that vision, serious, serious steps on multiple fronts need to be taken in multiple directions.

Mindy:
Absolutely agree, Scott. Should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench, and I am Mindy Jensen saying, let’s jam Sam.

Ashley:
This is Real Estate Rookie episode 244.

Tony:
If your partner is just bringing the capital, if all they’re doing is bringing the capital and you are doing literally everything else, you’re sourcing the deal, you’re managing the rehab, or doing the work yourself, managing the tenants long-term, finding those tenants, maybe you deserve more than 50%, but it’s all going to depend on how much work is moving into that deal.

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

Tony:
And welcome to the Real Estate Rookie Podcast where twice a week we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I want to start today’s episode by shouting out someone who’d love to see five star review on Apple Podcast. They go by the username Real-A States. So I like the name, but they say, “Thank you guys so much for the info and for the inspiration. This is definitely the best and most engaging/addictive podcast that has helped change my mindset and my path towards financial freedom.” We appreciate you username Real-A States, and if you haven’t yet left us an honest rating review on Apple Podcast or Spotify, please do. The more reviews we get, the more folks are able to help and helping people is our goal.
So Ashley Kehr, I got to start by saying a very happy belated birthday to you. You turned another year older and wiser this past week and I hope you enjoyed yourself. I know you were a little under the weather, but hopefully you still got to enjoy yourself a little bit.

Ashley:
Yeah, I was. So I didn’t really do much. So I stayed in my celebration for the weekend. We had a huge snowstorm hit Buffalo, where 10 minutes from me, they got 80 inches. We were lucky we didn’t get quite that much, but there was the Bills game this weekend, which was supposed to be a home game and it got pounded the snow and there’s just nowhere to put any of the snow to clear it out of the stadium or the parking lots for all the tailgaters. So I ended up packing up my Wagoneer with seven people and we drove out to Detroit Saturday, spent the night and then Sunday went to the Bills game in Detroit where it was moved and that was a lot of fun. The best part about it, I think is we got club seats for $30 each. When is that ever going to happen again?
So that was considered my birthday celebration I guess. So that was fun. Something spontaneous and if you guys follow me on Instagram and listen to the podcast for a while that my why is so that I can be spontaneous and I got to take my middle child to his first Bills game. So he loved it and it was just a great experience overall.

Tony:
That’s awesome. Well, I’m glad you enjoyed yourself and I’m glad you’re feeling better.

Ashley:
Thank you. And to Tony, happy anniversary, your wedding anniversary, it was yesterday.

Tony:
Thank you. Yeah, it’s been crazy. Sarah and I have been dating for 14 years. We’ve been married for two and it’s crazy to think now literally almost half of my life we’ve been together. So it’s been a great journey together. So we’re grateful and we’re excited for what’s coming next.

Ashley:
I saw on her Instagram story, so for those of you that don’t know that want to do some digging one night when you can’t sleep. Tony has a music video out on YouTube and so Sarah had told us before how she had gone and she would stand with Tony and pass out CDs. So this already shows you how much of a hustler Tony was, even at a young age when he was a teenager passing out his mixtapes. And Sarah would go with him and she showed a story and saying that all those years of passing out mixtapes paid off because she finally has a sugar daddy and showed the video of the store of Tony taking her out shopping. So I just thought that was so awesome and true.

Tony:
Yeah, she deserved every minute of it. Hang up with me on my crazy ideas.

Ashley:
Yeah. Well, today we are going to be going over four rookie reply questions. The first one is going to talk about your reserves and how you actually track your reserves. Should you just keep them in one bank account? Should you have separate bank accounts? The next question is about investing in a burr and estimating the rehab cost. So how, especially if you’re investing out of state, you can’t even be physically in the property. How are people figuring out how much a rehab will cost before they put in their offer? Our next question is talking about structuring a deal with partners. Tony and I always love the partnership questions, so we’ll go into what our thoughts are on partnership and putting 50% of the money from each partner into the deal.
And then lastly, it’s about that time everybody should be meeting with their CPAs to do their tax planning if you haven’t already, and how to screen a CPA. So we go through some tactics and questions that you can actually ask somebody when you’re trying to find a real estate specific tax advisor.
Okay. Tony, our first question today comes from Cameron Burnett in regards to organizing and separating finances from rental units i.e. vacancy expenses, capital X savings and the money received from rent. Do you guys recommend setting up a separate checking saving account for those things, or what is the best method you have found? Also in regards to repairs, do you use a separate credit card? Is that what you use for day-to-day? Thanks.
Okay, so the first thing I think of is it’s going to be on what is going to work best for you. And I put this in a personal finance perspective. If you have always been somebody that can easily save money, you’re not racking up credit cards, you could have a lot of money in your bank account and you are not just going and spending it because you have it, keep that money just in one checking account. There’s no need to actually separate it. But if you are someone that has money in account and you have a very hard time not spending that money or thinking it’s available and you need that out of sight, out of mind money, then go ahead and put that into a separate savings account.
I have seen where people even put it into a separate account for vacancy, a separate checking account for capital expenditures, maybe another one for repairs of maintenance, all these different savings account that they have. And you also see this very common in the personal finance community when people are budgeting where maybe they’ll have their Dave Ramsey envelopes where, okay, this month these are how much money I have to spend for each of these things. You could also do that for your properties if you think that will give you a better overall picture of what your finances look for the property and help you save and figure out what you can take as cash flow for yourself by separating those things out.
Or you can just simply create an Excel spreadsheet and say, “Okay. I have $5,000 in this bank account, 2000 of that is something I’m saving for capital expenditures. A thousand of that is, I’m saving in case there is a vacancy. And the rest of that maybe is cash flow or your three to six month savings for your mortgage in case it does become vacant.” So I think it really depends on what will help you the best and which will help you stay more diligent in not spending that money.

Tony:
Yeah. I think that last statement Ashley is perfect. It’s about what is the system that works best for you? And in my personal finance life, I don’t do this as much anymore. When I was working my W2 job, I had 24 separate checking accounts. So when I got paid, my direct deposit would get dispersed between all these different accounts. It was like my car payments, my mortgage, my insurance costs, my groceries, my clothing expense. I had a different checking account for every major spinning category. And for me that was an easy way for me to budget my money without having to put too much thought into it.
And even in our real estate business, we have not to that extent, but we have a separate account for taxes. Every property has its own reserves account. And then we use our operating expense accounts to cover things like vacancy and the short-term rental space need to repairs and maintenance. So I do like to separate it out just so that there is some not to touch that money. If you want to go buy a new bed frame or you want to buy a new appliance or whatever it is that you’re not dipping into the money that needs to be set aside for something else. So I do like the idea of separating those things out.

Ashley:
In regards to that, don’t be super strict on, “You know what? I need money to buy a new HVAC, but I don’t have enough in my capital expenditures account.” Sometimes you will have to take money that you’re saving for your rainy day fund or that you are saving for to cover vacancies, things like that, you will have to pull money. So if you do have the money all in one account might have to use a large chunk of that for one thing and then rebuild it with cashflow over the next couple months. So even if it is separated, there may become a time where you have an expense or you need to cover a mortgage payment where you’ll need to draw from several of those accounts.
So it’s not what each individual thing is you’re saving for. What matters is the amount or the total dollar amount that you have, saving that percentage that you’re saving for in. We like to recommend three to six months, definitely more towards the six month side, especially as you’re first getting started. And then as you’re building your portfolio, you can decrease that because you have built up this large chunk of money as your reserves that the chances of every single property needing a new roof most likely is not going to happen. So just think about that too when you’re making your decision. And also, who’s keeping track of all this, do you have time to actually track all these different individual accounts too?

Tony:
So the second part of that question is do you use a separate credit card for your day-to-day expenses? So we do have one general business credit card that we use for a lot of things, but then we use the property specific account to pay off that credit card. So I’ll usually go in a couple times a week and say, “Okay. I’ll order new charges we built against the credit card,” and then I’ll say, “Okay. For this property, this is for that property,” and then I’ll make a payment to the credit card from each property specific account. So that’s how we do it and honestly we don’t have to do it that way. I just like to get the points and we spend so much with our business that it will be crazy for us not to do that. But that’s what worked for us. What about you Ash?

Ashley:
Yeah, I think the biggest thing is if you have the properties in an LLC or not, you want to make sure that your credit card is in the LLC and that you’re making payments from the LLC account to pay off the credit card. But yeah, I agree with Tony with taking those points, those sign up bonuses have gotten me lots of vacations for sure. So anything and everything I can pay with a credit card, I do and I do keep it separate. And then I have it linked to my QuickBooks. So my QuickBooks is pulling information from… So right now I’m using Chase in Wells Fargo, it’s pulling the statements in the charges from those accounts directly. And then also I can use ScanSnap right in my QuickBooks app and I can take a picture of the receipt and we’ll link to that transaction. You can use this with Tessa too, that we always recommend.
So I think having that separate credit card is great just for bookkeeping purposes too. And then you’re not having to go through and actually like separate, okay, this was for a personal expense, this was for the business, this was for this property. And I also have different credit cards for different LLCs too, which make it easier so that this charge I know is for a property in this LLC.

Tony:
I love that last point. Literally, I was telling Sarah, my wife this the other day that we need to probably add a couple more credit cards because we have our flips, we have our short-term rentals, we have our events. There’s so many different things we’re spending on, it becomes a bit of a pain trying to pay everything off at the end of the month, which is why I usually go in there honestly, once is a week at least. But the idea of having a different credit card for different parts of your business makes a ton of sense too.

Ashley:
And there’s certain times where it comes up like, “I need to buy something at Lowe’s for three different properties that are in different LLCs.” So what we try to do then too is even just do check out three different times so it has those three different receipts instead of like, “We need to go through this receipt and break it down line-by-line.” So that has helped too. And the rare circumstances that happens. So Tony, with the business credit cards and the personal credit cards, there is a difference with them too. So when you get a personal credit card, it’s going to show up on your personal credit report.
So for example, I got a 0% interest credit card a couple years ago. Actually opened it in my husband’s name and my debt’s income because he had nothing on his credit at that time. So I did it in his name. So it ended up like we did 0% so that we could do our rehab and put our things on that. Well, it reported that balance to the credit reporting agency. So it showed on his credit report that he had this balance on a credit card, even though it was 0% interest, he still owes that money. So it shows up on that.
I think the minimum payment on that was $35. So it’s not really killing his debt of income because of that low monthly payment. But still that’s something to be very cautious of that if you are using a personal credit card, you’re not paying it off if you’re getting that 0% and hopefully if you have anything over a 0% credit card, you are paying it off every single month and so it’s not accruing and putting a balance on your debts income.
So there are credit card companies that have a limit, and this is why at the time I have been huge into travel hacking. So it’s called the Chase five where you can only open five Chase credit cards within 24 months, I think it is. So I had already reached that Max getting these signup bonuses to get us this great free vacation in Hawaii. So I opened the other one in his name. So be cautious of those things too, that doing in your personal name, there do become limits as to how many credit cards you can open into your name with certain companies.
If you go on the business side and opening your LLC… I have a lot of people ask, should I open a business credit card just to establish credit for my LLC? First of all, I’ve never had anyone ask what my credit is for my LLC. I’ve never run into a situation where that’s been an issue. So I don’t even know a circumstance where somebody would look up my LLC credit. I’ve been able to get a business credit card anytime I’ve opened a new LLC without even showing any income or anything yet. They’ll ask what the annual income is and I’ll put in projected based off of what the rent is coming in currently.
So with that, it usually does not report to your personal credit report. There is one company, I can’t think of it offhand if it’s Chase or Capital One, but one of them, if you have a business credit card, it will actually still report to your personal credit showing that you have those accounts too. So that’s just something to play the game with is if you want to go the business route or go the personal route.

Tony:
Yeah. We do have a business credit card actually through Capital One, but we very rarely use it just because the limit is so low and honestly the points aren’t as good. We have a Chase Sapphire reserve or preserve, one of the Chase Sapphire cards and I love that one and it’s a personal card, but we only use it for business expenses. So we still get the benefit of it being a business credit card even though it’s not. And then just like you said, Ashley, we pay it off. It never carries a balance from one month to the next. I’m literally going in once a week probably and paying the balance down to zero. So yeah. Anything else on that one?

Ashley:
No, I don’t think so. Let’s go on to our next question. So the next question is from John Mazzella. Hey everyone. I am planning on doing a bird from a distance. I’m going to use a realtor chart to find the property and provide the ARV with comps. Remember the ARV is the after repair value. My concern is how can I estimate rehab costs to know how much to offer on a house? I don’t think it makes sense to drag the contractor around with me all day while I look at properties I might not buy. I’m very comfortable running the numbers but missing the piece of estimating the rehabs. Any and all suggestions welcome. Thank you. So Tony, when you’re looking at flips, how are you estimating the rehab?

Tony:
Yeah. So John, I mean I can sympathize with your situation. So when I first started investing, I live in Southern California and I started investing in long-term rentals in Louisiana. And just like I was targeting properties that needed rehab and I was struggling with that same thing like, “Oh my God, how do I get to these rehab estimates without me being there? Without me knowing really what things cost?” So there was a few things that I did. Okay. First, I found properties that represented what I wanted that property to look like after the rehab. So I found my own comp. Say, “Hey, once this rehab is complete, here’s what I want it to look like.” And I found a few contractor contacts, mostly through my agent and through my bank. And I said, “Hey, I’m looking at purchasing this property, here are some photos of what I want it to look like post rehab, can you give me a ballpark of what this might cost?”
So that was one way of showing them, hey, here are the before photos, here are the after photos. I just need a ballpark on what that might cost me. The second thing I did was I asked them to give me… I said, “Hey, for properties that are similar to this, for projects you’ve recently completed, what was the cost per square foot on those rehabs?” So now I have a ballpark number for this property, but that cost per square foot. Now I have something that I can apply to future projects as well. So if I find another property and I know that it was whatever, how much per square foot, now I can go and apply that to this next property I’m looking at without needing to reach back out to that general contractor.
And the third thing I did was I offered to pay them. I said, “Hey, here’s one that I’m serious about. I’ll pay you for your time if you just go and walk this and give me a bid.” Now, honestly, I think I only ended up paying one of those contractors, but the majority of the properties I looked at, the contractor was willing to walk for free just because they wanted to work. They were willing to walk it just as part of their bidding process. So those are three steps that I took. So showing the photos of what I want the ARV to look like and ask them for a ballpark, asking them for price per square foot on their previous jobs that were similar to mine. And then the third was offering to pay them for their time to actually go out there and walk it for me. Give me a rehab estimate.

Ashley:
Yeah. I think seeing this is you haven’t even put in an offer yet. So when you put in your offer, even if you don’t have somebody come in and estimate the rehab for you yet and you are not sure, you can build in that inspection period, that due diligence period where you can go ahead and put it under contract and then you have the contractor walk through it. You can let them know, I have this property under contract, my intent is to purchase it and go through with it. I just wanted to know that it makes sense. And then if the numbers don’t make sense, you go back and renegotiate with the seller showing them that you had somebody bid out the property and Tony made a great point about paying somebody, offer them to pay them for their time to go and walk through the property.
And this also gives you more of a time period. The market is definitely shifting where the minute they become listed, you’re not having to make an offer. There more of a cushion period now so that you could have somebody walk through the property. But also if you build that in that inspection, that due diligence period into your contract, you’ll have more time to coordinate with the contractor to get them into the property. So you’re planning to in invest long distance, you’re not going to be at the property to really look at it. And I think finding somebody local to go through the property is going to even just be an advantage of itself to even if you’re having to pay them, just so that you get an idea yourself of what the property is looking like, instead of just relying on photos off of the MLS or maybe you even do have a great real estate agent who’s taking video for you, FaceTiming you through the property.
The last thing that I would do is, this will be time consuming but if you want to keep investing in this market, and if you want to get a safe and sound investment, you want to do your research and do your homework. So you can also reach out to contractors and ask them, “What do you charge to install a toilet? What is your price per square foot to paint a property? What is your price per square foot to install flooring?” And you can build yourself out a template. And this is what James Denyer does. He gets prices from his contractors and he uses his template to do his estimate. And then that’s how he creates his offer based on these estimates of what his contractors have been charging him.
And since this is your first property, or even if it’s only maybe your second or third property, you still may not have a great idea of what rehab cost, but you can go through and you can look up, go to lowes.com, homedepot.com, get an idea of, okay, this is the size of the kitchen, this is how much cabinets would cost for this. This is how much the price per square foot is for a decent luxury vinyl plank flooring. And then you can find out what it costs to install. I mean even Lowes and Home Depot, they do a ton of installation services where they’re actually contracting with a lot of the local vendors to do their installs for them.
So you can get an idea of how much that is just by going on their website or calling the pro service desk too at your local hardware store and asking them, “What is your current price right now to have carpet installed, have flooring installed, have cabinets installed, anything like that too? And you can get an idea. I mean, you can get real nitty gritty, watch a YouTube video of how to install a toilet and you can see, okay, you need a wax ring, you need the toilet, you need the hose, all these things that you need. And then you can say, “Okay. I’m going to go on Lowes and I’m going to link each of these items into an Excel spreadsheet and build out your material list.” Okay. You’re going to do tile, you need the tile, you need the grout, you need the mortar, you need the tile spacers, all these different things.
And then you have this going forward. So there’s multiple ways of estimating the rehab, but give yourself that buffer, so James Nana. Experienced flipper, I mean I’ve done over 500, maybe even be a thousand homes. He still adds in, I think it’s a 20% rehab buffer for his estimates, for things that maybe change orders, things that you couldn’t see until you ripped open the walls or for changing in material costs, things like that. So always add in that buffer, that percentage too.
Before we move on to the next question, Tony, I want to hit on when we head on Celine too, on episode 241, he talked about mistakes he made with contractors too, because it’s not only estimating the rehab, but you’re learning how to deal and manage contractors and sometimes the lowest price isn’t always the best price, or the best quality and the best thing for your…

Tony:
Best value.

Ashley:
Yeah, the best value. So if you go and listen to his episode, he’ll tell you about a couple mistakes he made and that was episode 241. Okay, our next question is from Jesse Uniraff, how does everyone go about structuring a deal with a partner? Do you both put 50% of the money in for the down payment, even when one is doing the bookwork, brought the deal, et cetera?

Tony:
It’s a loaded question. It’s something that I feel like comes up all the time. It’s a great question, Jesse, and I think Ash and I both are super passionate about partnerships because we both use them quite a bit and scaling our current portfolios. First, I’ll say is there’s two types of partnerships. You have debt partnerships, you have equity partnerships. A debt partnership would be more so like a private money lender type situation where that person isn’t retaining any equity in the deal, but they do have a guaranteed repayment of their money at some predetermined period of time. But I think what most people think about when they think about partnerships and probably what you’re leaning towards is an equity partnership, Jesse. And the first thing that we’ll say, and Ashley and I have said this a million times over, is that there is no right or wrong way to structure a partnership on the equity side.
Some things to consider though are who is doing the hard work, who’s bringing the labor? If you guys are buying a real estate deal, someone has to source the deals. Someone maybe has to set up transaction coordinating the closing process. Someone once you actually close probably needs to manage that property on a long term basis. Maybe if there’s a rehab, someone needs to manage a rehab or actually do the rehab work. Think about all the different things that need to be done to get this deal completed. And ask yourself, is one person doing this? Are you guys sharing those responsibilities equally? Or is one person doing 75%, the other person doing 25%? So I think the first thing to look at is the sweat equity component, the labor component.
And the second piece, and this is what I think most people think about is the capital side. Who’s bringing the money for the down payments and the closing costs? If there are any rehab costs, who’s covering the rehab? I will say that I think most people overvalue the capital, especially newer investors, they overvalue the capital, meaning that just because someone’s bringing the capital doesn’t mean that they deserve 80% of the deal or maybe even 50% depending on what that deal looks like.
So I think ultimately, Jesse, you and your partner have to sit down and think about what is the structure that you guys are most happy with? But what I can say is that if your partner is just bringing the capital, if all they’re doing is bringing the capital and you are doing literally everything else. You’re sourcing the deal, you’re managing the rehab, or doing the work yourself, managing the tenants long term, finding those tenants, maybe you deserve more than 50%. But it’s all going to depend on how much work is going into that deal.

Ashley:
And I think an important part too is if this is your first deal partnering together, make sure that you are not in a situation where it’s going to be every deal going forward. So date this person, first try out this deal, try out this deal structure. Just because you set in stone this one deal structure for this one property doesn’t mean going forward for the rest of your guys’s life, every deal you do together needs to be that same structure. So think about that too. I love putting a cost or a dollar amount per the activities or the job responsibilities that you’re doing for the business too.
So making out a list. You said one of them is going to be doing the bookwork. Okay, put a dollar amount to that and maybe they get paid $100 per month or $25 per month, whatever that is to do the bookwork so that when you do eventually decide, you know what, I don’t want to do the bookwork anymore, I want to outsource this. Well, that’s not fair because we’re both 50/50 owners and I’m still doing all the maintenance, but now you’re not doing the bookwork or the leasing and you’re still getting half the cash flow. So putting that dollar amount to the jobs and responsibilities and getting paid for those. So taking in owner’s off for those things that you’re doing, then splinting the cash flow after that.
So in your question, do you both put 50% of the money in for the down payment? That also will depend on how you are purchasing the deal. If you are doing it in your personal names or one personal name, or if you’re doing it with an LLC because if you’re putting it into your personal name, the bank is going to require you to show that you have brought all the funds yourself or they were gifted from a family member. So think about that too, is how were you actually purchasing the property too. And then if you’re doing it into an LLC, it’s a lot easier to gather money from wherever to put it into the actual property into the deal.

Tony:
And just the last thing I’ll say on that point too is even if one person brings all the capital, there are different ways to repay that person as well. You could set it up so that person maybe gets a certain percentage of the cash flow every month before you guys split it. Somebody’s like, “Hey, the first 10% of all the cash flow goes to partner A for bringing all the capital, then the remaining 90% we split down the middle.” Or it could be a fixed dollar amount every month to say, “Hey, partner A gets back $100 per month every single month until they’re repaid what they brought to the table, regardless of how much profit is generated.” Or maybe there’s no profit that gets paid out and it’s just when you guys sell the property. So that’s called a capital recapture.
So you say, “Hey, when you guys go to sell the property, you guys agree to split everything 50/50, but partner A gets paid back first.” So say you go to sell the house and there’s $100 in equity, but partner A put up $25,000 to purchase that property, that means partner A gets their 25K back first and then the remaining $75,000 could split 50/50 between the two of you guys. So there are different ways to even structure paying that capital partner back outside of just like, “Hey, you get all of the equity in this property.”

Ashley:
Okay. So our last question today is from Derek Moore. And remember you guys, if you want to ask question, you can leave a question in the Real Estate Rookie Facebook group and we may pull it to be played onto the show where we answer it for you. So make sure you are a member of the Real Estate Rookie Facebook group.
Okay. So Derek’s question is how do you all screen a CPA and determine whether or not they’re familiar with real estate investment taxes? Every CPA I’ve spoken with says, “Yes, I know tax strategies for real estate.” Any good screening questions, you all can recommend anything? I should be on the lookout as a red flag. Lastly, anyone in the Tampa, Florida area know of a good CPA? So love for you guys to, if you’re watching this on YouTube, to comment into the YouTube video in the comments below and let us know if you have a good recommendation of a CPA in Tampa. But I think what the cool thing is that it’s very easy to find a great CPA that can be virtual. They don’t have to be in your location. There’s really no need to have a CPA that is located in your market or near you. You just have to make sure they have that knowledge of your state tax prep. So that’s the only thing.
As far as screening a CPA, and actually I was on the Real Estate Ricky Bootcamp call last night and we were talking about this too with Tyler Madame. And our recommendation that we gave when you’re trying to find a good CPA is reading the two textbooks that BiggerPockets has by Amanda Han. So it’s Tax Strategies for the Savvy Real Estate Investor is one, and then the other one is more advanced strategies. Reading those books and taking some notes of those tax strategies. And then using your knowledge, your basic knowledge, no reason to go in depth to ask your CPA about those tax strategies.
So I think a very common one is obtaining real estate professional status, even if that’s something you don’t need or you don’t even want, asking if your CPA knows what that is. And you can even put in a question about it, given my situation, what would I have to do to be a real estate tax professional? Wait, is that right? Tax professional? Did I say it right?

Tony:
I think it’s just-

Ashley:
Yeah. It’s just professional as I said that, yeah. So a real estate to qualify as a real estate professional. And then there’s other things in there can ask them a question about 1031 exchange, things like that. So I think giving yourself basic knowledge by reading one of those books can give you enough to build a questionnaire and make sure the question is tailored. So it’s not a yes or no question. So here’s an example, and this is actually a question I feel like Tony and I have gotten a couple times recently is I own a property with another investor and we want to do a 1031 exchange. Can we keep the property in, or can I just buy the new property and my partner just cash out and not have to be a part of the 1031 exchange? So asking different questions like that and seeing how knowledgeable they actually are.

Tony:
Those are great qu questions to ask Ashley. I think the only other thing I would ask too is don’t just ask them like, “Hey, are you familiar with real estate investments, the tax strategy?? Say, “How many real estate investments do you own?” And if they’ve only got one or two, maybe not the best person, or maybe ask them how many of your current X number of clients, what percentage are full-time real estate investors? And if it’s a really low percentage, if maybe like 1%, the other 90% are doctors and lawyers and cops or whatever it is, then maybe that’s not the right person for you.
But I want to see from my tax strategists, from CPA as someone who has a heavy concentration in real estate investments. Either because they own a lot themselves or because the majority of their clients are real estate investors also. So I really do think that spending time and places like the BiggerPockets forums or the Real Estate Rookie Facebook group and asking for recommendations from other investors is probably, Derek your best bet of finding a good solid CPA that understands real estate investing and its tax implications.

Ashley:
Well you guys, thank you so much for joining us for this week’s Rookie Reply. Keep the awesome questions coming. You can leave your questions on the Real Estate Rookie YouTube channel. You can also leave them in the Real Estate Rookie Facebook group or send a DM to Tony or I, and we may choose them to be played onto the show. You can also always leave us a voicemail at 18885 Rookie. Thank you guys so much for joining us and we’ll be back on Wednesday with a guest.