January 2023

Nine Mistakes New Entrepreneurs Often Make With Marketing

One of the first steps entrepreneurs should take after starting their business is getting word out to the public and attracting potential customers via marketing. A customer can’t find and make a purchase from a business unless they first hear about it, and this means marketing should be top of mind for any entrepreneur looking to grow their business.

But when you’re new to entrepreneurship, you may not know the most effective ways to market to your audience, which could cause you to make a mistake that might unintentionally damage your efforts. Here, nine members of Young Entrepreneur Council share some of the mistakes new entrepreneurs might commonly make when it comes to marketing their business, why they fall into these traps and what they should do instead.

1. Providing Education Without Entertainment

Many entrepreneurs make the mistake of marketing their brand with purely educational content, without adding any entertainment value. Brands should instead focus on content that provides a healthy mix of both—call it “edutainment.” If you want customers to buy into your brand, you have to first grab their attention and delight them. Then you can educate them on what makes your product great. – Rob Hoffman, Contact Studios

2. Lacking Understanding About Their Target Audience

One mistake new entrepreneurs might commonly make when it comes to marketing their business is lacking understanding about their target audience. They may be targeting the wrong audience or have a poor understanding of what that target audience wants. This can lead to financial issues. Instead, they should take the time to research their audience to ensure that a market exists. – Kristin Kimberly Marquet, Marquet Media, LLC

3. Marketing Too Broadly

A big mistake many new entrepreneurs make is marketing to a very broad segment. You can’t be everything to everybody. It will be a hundred times more effective if you niche down to a super specific market and solve one very acute and very particular problem. It’s like setting a doctor’s appointment—You can see a generalist pretty much every day, but it may take months before you see a specialist. – Solomon Thimothy, OneIMS

4. Running Paid Ad Campaigns

One mistake that new entrepreneurs commonly make is running paid advertising campaigns. They fall into this trap because paid ads bring quick results. However, they forget that the moment they pull the plug on the ads, the results they see will be gone. Therefore, it’s best to focus on gaining traction organically by creating relevant content. It’s cost-effective and ensures long-term results. – Stephanie Wells, Formidable Forms

5. Using The Wrong Platforms

New marketers often make the mistake of trying to reach customers on all social media platforms instead of the ones where their customers spend their time. For instance, if your primary audience is people in their late 50s, you probably wouldn’t want to market your product on TikTok. Similarly, you wouldn’t pay a premium for LinkedIn ads if your product is designed for teenagers. – John Turner, SeedProd LLC

6. Focusing Too Much On Their Products

One common mistake new entrepreneurs make when marketing their business is focusing too much on their products and not enough on the needs and interests of their target audience, as the entrepreneurs are closer to their products. This can lead to self-centered marketing messages or ones not particularly relevant to the audience, making it difficult to engage and convert potential customers. – Kelly Richardson, Infobrandz

7. Assuming The Audience Knows More Than They Do

New entrepreneurs assume their customers know as much as they do about their product or service. We fall into this trap because we’re so close to the product and overestimate how easy it is to understand. As a marketer, an entrepreneur must make their marketing and brand message easy to understand by the lowest common denominator. Don’t assume people will just “get it.” – Andy Karuza, NachoNacho

8. Ignoring Content Marketing

Many entrepreneurs make the mistake of ignoring content marketing. They often don’t know the value of creating content like blog posts, articles and other material that don’t drive immediate results. They rely on ads instead and forget the importance of storytelling and building relationships with their customers. What they should do instead is invest in content creation too. – Syed Balkhi, WPBeginner

9. Relying On Traditional Marketing Methods

Many new entrepreneurs rely a lot on traditional marketing methods, such as print or radio advertising. This can be expensive and inefficient. Instead of those methods, they should focus on leveraging online marketing strategies such as social media, email marketing, SEO and blogging. These strategies are cost-efficient, can reach a larger audience and their performances can be tracked and tweaked. – Thomas Griffin, OptinMonster

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Commercial Real Estate Could Crash

A commercial real estate crash is looking more and more likely in 2023. Rising interest rates, compressed cap rates, and new inventory about to hit the market is making commercial real estate, and multifamily more specifically, look as unattractive as ever to a real estate investor. But with so much money still thrown at multifamily investments, are everyday investors going to get caught up in all the hysteria? Or is this merely an overhyped crash that won’t come to fruition for years to come?

Scott Trench, CEO of BiggerPockets and host of the BiggerPockets Money Podcast, has had suspicions about the multifamily space since mortgage rates began to spike. Now, he’s on the show to explain why a crash could happen, who it will affect, and what investors can do to prepare themselves. This is NOT a time to take on the high-stakes deals that were so prominent in 2020 and 2021. Scott gives his recommendations on what both passive and active investors can do to keep their wealth if and when a crash finally hits.

But that’s not all! We wouldn’t be talking about multifamily without Andrew Cushman and Matt Faircloth, two large multifamily investors who have decades of experience in the space. Andrew and Matt take questions from two BiggerPockets mentees, Philip and Danny, a couple of California-based investors trying to scale their multifamily portfolios. If you want to get into multifamily the right way or dodge a lousy deal, stick around!

This is the BiggerPockets Podcast, show number 721.

Keep in mind, bigger is mentally more daunting, but bigger is easier. It’s the same amount of work to take down a 10-unit as it is to take down a 100-unit. So my philosophy is go as big as you comfortably can. When I mean comfortable is without putting you or your investors at financial risk, but just don’t be scared by the fact that, “Well, it’s a 100 units. I’ve never done that yet.” If you’ve taken down a 10, you’ve taken down a 100. It’s just the amount of the finances, and it actually gets easier the bigger you go.

What’s going on everybody? This is Scott Trench, temporary guest on the BiggerPockets Podcast here with the host, Dave Meyer. Sorry, I stole that from you, Dave.

Oh, no. I don’t know if I’m the host or the guest. Whatever it is, we’re here together, and we’re taking over the show today.

Well, thank you for having me on today, Dave. I appreciate it.

Yeah, of course. You’re very smooth at that intro. You’re an old hand at this. We wanted to have you on because we’ve had a couple of questions. You and I have actually had a lot of great conversations offline about this. You have some really interesting thoughts and, frankly, some concerns about the multifamily commercial space that we’re going to talk about here for the first 20 minutes of the show.

Yeah, I do. I think that the commercial multifamily has enjoyed a really phenomenal run in creating a tremendous amount of wealth over the past 10, 12 years as rents have really grown almost in accelerating fashion for the last decade as interest rates have come ticking down over that time and as cap rates have come down. That’s created an incredible environment for wealth creation that I worry has run its course and is set to give a lot of that back in the next 12 to 18 months. I want to voice those concerns really and ring the alarm bell here so that investors are very, very wary of this asset class heading into 2023 in particular.

All right, great. Well, this will be a great conversation. I’m looking forward to it. I have a lot of questions for you. Just for everyone listening, we’re going to talk to Scott for about 20 minutes. Then we’re going to turn it over to Matt Faircloth and Andrew Cushman who are going to be answering some mentee and listener questions about the multifamily space. So we have a great show for you today. We’re going to cover a lot about commercial and multifamily, so you’ll definitely want to stick around for this. You have some thoughts about what’s going on in the multifamily and commercial space, and we’d love to hear what you’re thinking.

I think the first thing that’s concerning me in the multifamily or commercial multifamily and commercial real estate space is that cap rates are lower than interest rates right now in a lot of this space. What that means is when I’m buying a piece of commercial real estate, I’m buying an income stream. If that’s at a 5% cap rate, I might spend $10 million to buy a property that generates $500,000 a year in net operating income. Well, if my interest rate is 5.5% or 6.5%, like Freddie Mac 30-year fixed rate mortgages are averaging 6.42% as at the end of the year, that means that my debt is dilutive. I’m actually going to get a better return by buying all cash or being on the lending side instead of the equity side unless I’m really bullish on appreciation. In the case of commercial real estate, that means I’m really bullish on rent growth or I, for some reason, believe I can reduce operating expenses. So this is a huge problem. This is not sustainable in my opinion. When the average of the market sees cap rates lower than interest rates, that means that the market is going all in on these assumptions for growth. And I don’t understand that. I think it’s a really risky and scary position.
So let’s go through what has to be true for this to work out for investors in the commercial space. One is rent growth has to go up. One way that could happen is supply and demand dynamics. On the supply side, we’re going to have the most inventory coming online since the 1970s. Ivy Zelman estimates that there are going to be 1.6 million units coming online in the next 12 to 18 months in the backlog here. Builders will complete that inventory, and they will monetize it. It’s possible that if things get really bad, they can stop construction, but then that just proves the point that there’s a big risk in this space.
Then the other side of this… So I think that’s a headwind to that rent growth assumption that the market’s going all in on, lots of supply coming online, lots of construction. All you got to do is peek out the window here in Denver and you see the cranes more prolific than they ever have been. That’s saying something because the city’s been booming for a long time. Now, this will all be regional. Some cities will not see the supply coming online. Some cities will see tons of supply coming online and still have no trouble with absorption of those units.

Well, just to reiterate, to emphasize that point, Scott, we are already seeing that rents, specifically in multifamily, are flattening and starting to decline in some areas. That’s even before, what you’re saying, this increase in supply comes online because I think that’s sort of towards the middle of 2023 when that’s intended to happen. So we’re already seeing this before the supply glut even starts to impact that dynamic.

Yeah, absolutely. I think a better bet is that rents stay flat or maybe even decline over the next 12 months in the multifamily space versus the implicit assumption when cap rates are lower than interest rates that they’re going to explode.
On the demand side, I think we have a wild card here, and I don’t really have any forecasts that I feel really confident in on demand. One of the big arguments for demand is that there are more people, household formation is accelerating. There’s long-term trends supporting that. That’s true, but there’s a whole bunch of volatility from the whole COVID situation: lots of people moving out, getting divorced, breaking up. That creates household formation, in my opinion, artificially. It’s a metric that can move and confuse economists. So I don’t know how to predict household formation in 2023 one way or the other. I think the safest bet is to assume very little household formation. If there’s a mild recession or interest rates keep rising, that’s going to put pressure in the economy. It’s going to result in less wage growth, and we might give back some of those rent increases. I think, if anything, there’s reason to believe that rents, again, stay flat or decline year over year. Again, that’s problematic.
So I worry that in 2023 we could see cap rates increase, which means multifamily asset valuations decline. So that same property that’s generating $500,000 in net operating income goes from being worth $10 million at a 5.0% cap to 7.7% at a 6.5% cap. That’s a 23% crash in the asset value of that property. If you’re levered 70/30, you used 70% debt, 30% equity, that’s going to wipe out the vast majority of your equity. This is the problem that I see brewing in this space or that I worry could be brewing in the 2023 space.

Do you see this across all multifamily assets? Are bigger syndications or smaller multi-families disproportionately going to be impacted by this?

I think that this is a threat to commercial real estate assets across the board, which would include office space, retail, multifamily and other assets. I think that you’re going to see more pressure on larger assets. You’re going to see pressure on assets that are not financed with Freddie Mac loans at 30-year fixed rates. I think that folks will be disproportionately impacted. I also think you’re going to see folks simply not selling in this period. If you’re invested in a syndication, your syndicator’s probably just not going to sell for the next year or two and hope that prices recover. My worry though is that if interest rates stay high, and they can even come down a little bit, I know you’re thinking that mortgage rates are probable to come down next year, but as long as they just stay much higher than they were for the last couple of years, I think you’re going to see cap rates reset at a higher level, maybe 6.5%, 7% on a nationwide basis, again, varying by region.

Well, also ideally, most syndicators and operators will probably hold on. But given the nature of commercial lending, most of them don’t have long-term fixed debt. Some of them might have balloon payments coming due or an adjustable rate mortgage that’s adjusting in the next couple of years, and that could potentially force a sale or further negatively impact the cash flow of the properties.

I think that’s true, and I think that’s a really big unknown in the space. I don’t know anyone who has great data on averages in commercial multifamily real estate debt terms. What is the average weighted life of these debts? Is it five years? Is it 10 years? Is it 30 years? Is everyone getting fixed rate Freddie Mac loans on this and we’re all set? My guess is there’s a big spread in these areas and that different folks are going to get impacted very differently. My best guess is that there’s going to be a process rather than an event for this cap rate reset. There’s just going to be continual grinding pressure on operators of these assets over 12 to 18 months, but there could always be some sort of event issue where things come to a head at once.
By the way, this is not news. Asset values in the space have come down 20% to 30% in many markets already. For some of those markets, it was like a light switch and some of it was over time. Brian Burke, I think, has some really good detail on this on a previous BP podcast. Then I also want to call out, you had Ben Miller on the On the Market Podcast, the CEO of Fundrise. He really has a good handle, I think, on the timing and credit issues that are coming up in the space, and how folks are leveraged and why lender A borrowed from lender B to finance property C, and everybody needs liquidity at once, that could create problems. I think that’s really hard to predict. I think, again, that’s a space where nobody has great data, and there’s a big unknown here.

It is really hard to find that information. If you want to check out that podcast Scott was talking about, it came out around Christmas on the On the Market feed. You can check that out. It’s called the Great Deleveraging with Ben Miller. Scott, I think this is fascinating and appreciate your take. I’m curious what you would recommend investors do. I guess there’s two sides of that. As a operator, multifamily syndicator, what would you recommend they do? Then as people like me who invest passively in syndications of multifamily deals, what would your advice be?

Well, I think if you’re in a current syndication, you got to just kind of pray and hold. There’s not really another option. You’re a limited partner, and there’s nothing to do. So it all comes down to what you can do going forward. I think that if you’re considering investing in a syndication, make sure that it’s a huge winner even in a no-rent growth environment. Throw out the syndicator’s projections on market rent growth and say, if there’s no rent growth, does this thing still make sense over the next couple of years for me? And does it make sense where, even if I have to sell the property with 150 basis point increase in cap rates in that market…? That’s a general rule of thumb. Each region will vary. You definitely can modify those assumptions by your region if you have one of those markets that has a lot of net migration with very little new construction.
Another one is, instead of getting on the equity side in a syndication, consider being on the debt side. There’s preferred equity, which is really consistent with debt in terms of its return profile, although it’s junior to the more senior debt at the top of the stack. Or you can just get into a debt fund. If the cap rate is 5% and the interest rates are 6.5%, why not just earn 6.5% interest rates or even higher with other debt funds? That’s a lower-risk way to earn better cash flow for a period of time. When things change or if they change, you can always go back to being on the equity side or when you have confidence in rent growth. If you’re going to go in on an equity deal, maybe consider finding somebody that is going to syndicate with no leverage at all. Again, if the property’s going to produce a yield at a 5% cap rate, consider using no debt at all. That’s actually going to increase your returns in a no or low-rent growth environment while being lower risk. So that’s really attractive.
These are super bold opinions that I’m trying to bring in here, but I really want to voice this concern because I feel like folks don’t understand this and I feel like they’re getting information… If you’re getting all of your information from people who syndicate real estate deals, recognize that these syndicators, they’re great people, they do a great job in a lot of cases, but this is their livelihood. It’s hard to see perhaps some of the risks in this space if your livelihood depends on raising large amounts of capital, buying deals, and earning money through acquisition fees, management fees, and then having a spin at a carried interest on the [inaudible 00:13:51].

That’s great advice, Scott. Thank you. Do you see this potential downturn in commercial real estate? From what you’re saying, it sounds like. I personally believe we’ll see a modest downturn in residential real estate, but this commercial one has more downside according to your analysis. Do you see it spilling over into residential or any other parts of the real estate industry?

This is not good news for real estate in a general sense. Look, I think that you have a really good handle on the residential market in particular. You have a good handle on all the markets. I don’t think you spend quite as much time in the commercial space. I would say, by the way, you should take some of my opinions here with a grain of salt because I’m an amateur aspiring journeyman in understanding the commercial real estate markets here. But in the residential space, I think we’ve got a reasonable handle on that. There’s a whole variety of outcomes. But, no, commercial real estate asset values declining will likely be hand in hand with residential real estate asset values declining. We already predict that. I think 3% to 10% declines are the ballpark that you’ve been discussing for residential depending on where interest rates end up at the end of the year next year.

Well, that’s super helpful.

By the way, if you’re considering investing in residential real estate, put it on the BiggerPockets calculator and look at the property with a 30-year mortgage and reasonable appreciation and rent growth assumptions and put it on there without a mortgage and see what the returns look like. In a lot of cases, the returns are going to be better without a mortgage on the property, which, again, is something that is really interesting and something that should get the wheels turning. You need to really find some good deals right now in order for this to work, and you might want to consider being on the debt side.

Awesome. Well, Scott, we really appreciate this very sober and thoughtful analysis. It’s clearly something our audience and anyone considering investing in real estate should be thinking about and learning more about.

Well, Dave, one question I have for you is, what do you think? I’m coming in hot with a little bit of doom and gloom here worrying that there’s a really big risk factor brewing in the commercial real estate space. Do you think I’m reasonable with that, or do you think I’m way off?

No, I do. I think that it’s a serious concern. I really have a hard time envisioning cap rates staying where they are. I can’t imagine a world where they don’t expand. As you illustrated really well, just modest increases in cap rates have really significant detrimental impacts on asset values. We’re just seeing conditions reverse in a way that cap rates have been extremely low for a very long time, and economic conditions, I don’t think, really support that anymore.
I think what you said about rent growth is accurate. The party that we’ve all seen over the last couple of years where rank growth has been exploding, the economic conditions don’t really support it anymore. I think it’s time to be very cautious and conservative. I don’t see any downside in being really conservative. If you’re wrong and if I’m wrong, then it’s just a bonus for you. If you invest really conservatively and rent growth does increase and cap rates stay low, good for you. But as you said, I think that the most sober and appropriate advice, both in commercial and residential right now, is assume very modest rent growth, if any at all, assume very little appreciation, and if deals still work, then that makes sense. But I don’t think hoping for improving conditions is a wise course of action, at least for the next year and maybe two years.

Well, great. Again, I feel a little nervous voicing this concern. I’m essentially coming on the show and saying, “I’m predicting a pretty…” I’m not predicting. I’m worried about an up to 30% decline in asset values in commercial multifamily. That’s one area where I really enjoyed Ben Miller’s podcast where he talked about the credit risks in here, but I really think multifamily is not insulated from this. His risk was for the commercial, like a retail office, those other asset classes. I think multifamily is very exposed right now, and I worry that some of these things have not been priced in appropriately in the market.
Again, it just comes back down to the simple fact of we’re trying to make money as investors. How can you make money if rents aren’t going to grow and your debt is more expensive than the cash flow that you’re buying? That has to change. I think that a reasonable spread between cap rates and interest rates on a national average is about 150 basis points. That amounts to a very large increase that’s going from about 5% on a national average right now to 6.5% cap rates. Again, that destroys a lot of value. So hopefully this is helpful.

The only alternative there is that interest rates go down, like you’re saying, you need this spread. But personally I think mortgage rates might go down by the end of 2023, but not a lot, I don’t think by 100 basis points from where they are right now. That is my thought, but I don’t believe that very strongly. I think there’s a lot of different ways that this could go. So I think that the more probable outcome, as you’ve said, is that cap rates go up to get to that historic healthy spread rather than interest rates coming down.

There may be a combination. That could be a mitigating factor. They could come down some and cap rates could still go up a portion of this, but I’m very fearful of this space over the next year.

All right, Scott. Well, we really appreciate this honest assessment and you sharing your feelings with us. It’s super helpful for everyone listening to this and given me a lot to think about. Before we let you get out of here, what is your quick tip for today?

My quick tip is if you’re analyzing commercial real estate or any other real estate, in today’s environment try analyzing it with and without debt first. Then second, if you’re looking at syndicated opportunities, if you’re still interested in syndicated opportunities, make sure that the sponsor is buying deep, buying at a steep discount to market value, that there’s significant opportunities for rent increases just to bring current rents to market, and that the property can still generate an acceptable profit when the syndicator needs to sell it three to five years later, even if that is at a cap rate that is 1.5% higher, 150 basis points higher than what it was purchased at today.

Well, thank you Scott Trench, the CEO of BiggerPockets. We appreciate you being on here. With that, we are going to turn it over to Matt Faircloth and Andrew Cushman who are going to be answering some mentee questions about getting into multifamily investing.

Philip Hernandez, welcome to the BiggerPockets Podcast. How you doing, sir?

I’m doing well. I am super stoked to be here. Thank you so much, Andrew.

You are part of the inaugural group of the BiggerPockets’s mentee program. You’re here with a few questions that hopefully we can help out with today. Is that correct?

Yeah, yeah, that’s right. I’m super stoked and thank you guys so much for your time. My question, in the multifamily world, but also just in the real estate world in general, a lot of times when we’re starting out, the advice is given to partner with somebody that has more experience than you by providing them with some value, either finding the deal or managing the deal or somehow making it easier for the person that has more experience than you. What if the thing that you’re able to do to add value is raise capital? I’m starting to find some… My network is starting to be interested in investing with me more. What if I don’t have the deal? What if somebody else has a deal, but I’m just starting to get to know them, how would you vet the person that you’re thinking of bringing your friends and family’s money into a deal for? What would your checklist look like so you do that in a good way?

Important topic. Just to make sure we’ve got that right, your question is basically, if I’m kind of starting out as a capital raiser, what’s the checklist look like to pick the right partner or co-sponsor to invest that money with?

Yeah, exactly. Because vetting a deal as far as doing my own due diligence, I feel reasonably competent at that, but that’s if I’m in control of everything. So what if I’m not in control of everything?

You’re right on. Matt’s probably has a lot to say on this, so I’m going to just roll off a few things, and then I’ll let him take over. Number one is I would say go read Brian Burke’s book, The Hands-Off Investor, because it is written towards LP passive investors. It is the most detailed, in-depth manual for how to vet an operator that I’ve ever seen in my life. So if you are looking at raising money and putting that money with somebody else, you need to be an expert in that book. That’s the first thing that I would do. Even as someone who’s been doing this for a decade and a half, I read every page of his book. There’s a lot to learn in there. So do that.
Second of all is if you’re going to raise other people’s money and then put it in someone else’s deal, do not be just in a limited partner. Make sure that you are either part of the general partnership or at bare minimum have some level of input or control in the deal. Unfortunately, just last week, a friend of mine raised money, put it with another sponsor in a deal in Texas. They had a fire. The deal is going bad. 100% of the equity is going to be lost. One of the biggest frustrations with the friend of mine who raised the money is he has no control. He can’t even get all of the information into what’s going on. So make sure that you have some level of input, some level of control.
I would also recommend when you’re looking at a specific deal, underwrite the deal and do due diligence on the deal as if it was your own deal and you found it. You’re basically duplicating the underwriting and the research that the sponsor’s supposed to be doing. Hopefully everything lines up and you’re like, “Wow, this guy’s great.” But if not, you’re going to find that, and you’re going to save yourself a lot of… You save your investors risk and save your own reputation. Then also realize you are really betting more on that operator than you are on any specific deal, especially as the market is now shifting. Asset management and good operations is where the money is truly made. We’ve all been riding a huge wave for the last 10 years, that has crested, and the good operators are going to be the differentiating factor going forward.
Then also really from your perspective, Philip, just understand that no matter what, you to some degree are placing your reputation in somebody else’s hands. Go through that vetting process, do it slow. If you do it right, it can be a wonderful thing for growing and scaling and focusing on what you’re good at. But just keep that in mind. Matt, I’ll toss it over you to see what you have to add?

Well, I could just say, “Hey, I agree with Andrew,” which I do most of the time. Everything Andrew said is 100% correct. Yes, vet them as if you were investing your own capital, and that’s how you should look at it. Above everything else, Philip, is look at this as if this were your money going into this other operator’s deal. Do what you would do if you were writing this check. Because in essence, the person investing is not investing in that deal. They’re investing in you. They’re coming to you to help them find a place to park their capital. They’re not so much like… They could just go to that operator direct. Why would they need to go through you? The reason why they have to go through you is because they trust you. They’re investing with Philip Hernandez in his network and his underwriting prowess and his market knowledge.
So do that. Go through and vet the market, find out why the market’s amazing. Don’t just listen to the syndicate or the operator or the organizer. Come up with your own homework as to why. Don’t just rely on the syndicator’s PDF documents that show financials. Get their real numbers in Excel. Underwrite the deal yourself. Get the rent roll and profit and loss statements from the current owner that they’re buying the property from and do your own analysis of the property. Maybe come up with your own vetting, your own underwriting, and stress test the deal, too. All these things are done by good LP investors that want to invest in a deal, and you need to act as if it’s your powder going into this deal, not your investors. That’s number one.
I could also offer you some thoughts, if you’re looking for it, on how you can protect yourself in raising money for someone else. Because my guess is you’re a great guy, I happen to know that, but you’re not doing this for a hobby. You’re doing this because you would like to get some sort of compensation in exchange for placing one of your investors in the deal, correct?

Yeah, definitely.

The problem is, and unless I’m wrong, you don’t hold a Series 7 license. You’re not a licensed securities equities broker, are you?


So that operator can’t compensate you for raising capital because what you’re doing is you’re selling a security for them. I can’t cut you a check in dollars and equity that you raise in exchange for raising capital because that would be compensating you as an equity broker for selling a security, and you need a license to do that, which you don’t have. But rest assured, I got you covered.
The way that you do that is you become a member of the GP, the general partnership, as Andrew had said. Now, there’s a carve out there. You can’t just become a GP as a capital raiser. You need to have an active role in the company. A capital raiser’s job pretty much is over after the company gets formed. You know what I’m saying? It’s not like you need more capital forever. You raised the capital and the deal closes, and then you’re done. So what the SEC will want to see, if there’s ever scrutiny on the deal, and to be straight, not what your investor’s going to want to see, do you remain an active partner in the deal? So Phillip’s job does not end once the capital is raised because that gets you an active role in the company as an owner. If you’re an owner of a company, any size owner, you’re allowed to sell equity. You don’t need a securities license if you own a portion of the company. You follow me?


Now, you own a portion of the company, but you also need to do something more than just raising capital. So you could sit on the asset management team. You could, as we do at DeRosa for my company, what we do is we form a board of directors, and that board of directors has a voice. They have say. We do regular board of directors meetings. We keep minutes. We even are total dorks and do the Robert’s Rules of Order where there’s motions and seconds and ayes and that whole thing. So you can do all that as a board of directors with the capitol raisers having a regular voice on the company. If the operator’s willing to play ball with you and set things up that way, then that’s a great way for you to become a member of the GP, for you to have a say and have control, and also for you to become a member of the GP so that the main organizer can legally compensate you in whatever form or fashion you negotiate for yourself.

So if it’s a smaller deal and if there’s three people on the deal, four people on the deal, Andrew, you said make sure that you have a certain level of control. What does that actually look like? Control as far as in the dispo or control…? What would I say, “Oh, this is how I want that to look?” as far as control?

Control in as much as possible. So you get to vote on, like you said, disposition, when/how, approval of price. You get to approve, does it get refinanced? Are you going to fire the property manager and hire a new one? You should have some input into that. You get input on whether or not to make large capital expenditures. Should they be held back, or should you go forward with them? You get to have input on, should distributions be made, or should they be held back to preserve the financial position of the property to get through potential rough times? So the more input you have, the better that is for your investors. Then also you’re going to learn more, too. Especially if you’re on the capital raising side, you’re not going to be spending as much time in operations. You’re going to learn more by doing that as well.

What’s interesting Philip, is that you had talked about, this is only a small deal. There’s only three to four of you involved in this project, correct? I didn’t want to scare you or anybody else thinking about, “Oh, board of directors. Well, geez, Microsoft has a board of directors, but this is a little however many size deal. It doesn’t need a board of directors.” Well, yes and no. You don’t have to let terms like that scare you or anyone else. There’s just ways to operate real estate that involves a couple of partners. It involves private capital coming into the deal. Every partner having a say, as Andrew said, in the project is imperative. Every partner having a vote.
By the way, it doesn’t have to be what Phillip says goes. It just has to be Phillip has a vote, Philip has a voice. In all of these things, it’s typically a consensus or even a “Aye say aye, nay say nay” kind of thing to determine whether or not you take the offer, whether or not you decide to replace the roof. This is how semi-complex real estate happens. This could be a four-unit property or a 10-unit property, whatever it is. I don’t want people to view this as any more complex than it needs to be. This could be a very up and down, quick Zoom call that you just make record that the Zoom call happened. Maybe here and again, put yourself on an airplane, Philip, and go out and look at the property.
The last thing I’ll leave you with, and everybody else too, too many folks do real estate investing like this as a dabble. If you’re raising private capital for an operator, you should not raise capital for that operator unless you’re planning on doing it 10 times for their next 10 deals or maybe growing into your own thing eventually. But you shouldn’t dabble in raising capital for an operator. You should do it over and over and over again so that your brand gets attached to them so that people view you as a capital source for them, and it’s something you can do over and over and over again. It’s not something you can try on one time because a typical real estate project could last five years, and if the economy changes a bit, it could be a good bit longer than five years in these projects to take. So you got to make sure that you like working with these folks, and you want to do a lot more work with them.

That’s great advice. Thank you guys so much. I really appreciate it.

Philip, before you split man, I want to let you know, you were an awesome, awesome, awesome juggernaut in the Multifamily Bootcamp that we had in the one that we kicked off a few months ago, and I want to thank you for bringing the sauce you brought to that. It sounds like you’re doing just the same for the mentee program. I am really grateful to see you here. Saw you at BP Con. I love your vibe, love your energy even though you’re bundled up there in Los Angeles.

Thank you. Appreciate it. Appreciate you guys.

All right, take care, Phil.

Andrew, we got another question lined up here. I want to bring in… I got Danny, Danny Zapata. Danny, welcome to the BiggerPockets Podcast, man. How are you today?

I’m doing excellent. Thank you for having me on.

You are quite welcome. What is on your mind? How can Andrew and I brighten your day a bit? What is your real estate question you want to bring for Andrew and I to answer and for the masses to hear our thoughts on?

Let me give you a little context. I’m a small multifamily investor currently, I have some properties in Sacramento, and I’m looking to take that next big step to scale. So it’s a really great opportunity to pick both of your brains here right now. The question I have is, besides differences in lending between small and larger multifamilies, what are some of the other things you looked out for when you’re scaling from less than five units to 10 to 20-unit properties?

Well, I know, Andrew, you and I have friendly debates on which is better. Andrew got pretty much right into big multifamily real estate because he’s a superhero and he’s able to do that. Most commoners like myself have to climb their way up from five to 10-unit to 30 to 40 and scale up in that. Andrew, I know you have thoughts on this as well. But I’ll give you my thoughts briefly, Danny, in that the profit and loss statement’s still the same. There is still profit, and there’s still losses in that. There’s still income and expenses. So you’re still going to have an income stream.
But as you get into bigger and bigger deals, it perhaps becomes a few more income streams. Perhaps it’s not just rental income. Perhaps your P&L is going to show laundry fees and all kinds of other fun things like trash valet or charging the tenants for cable or other things that come in. So it gets more complex in the revenue side. Additionally, things like late fees and that. I got scrutinized for showing late fee as income on a four-unit property because you’re showing that as revenue. You’re kind of trying to stretch it. But guess what? On bigger multifamily, it becomes more common, and it becomes expected for that to be part of revenue.
Additionally, on the expense side, that can get very big on the expenses on multifamily, not big in the dollars but big in number of line items you may have. On a five-unit, what do you got? Real estate taxes, insurance, maintenance, maybe four or five other line items. For a larger multifamily property, you could have 30 or 40 line items on an expense sheet. You’ve got a big one that a lot of people on small multifamily don’t think about, and that is payroll. Here’s what that means. For a four-unit property that you own, give me a real-life example, Danny, of a small multi that you own right now.

I have a fourplex in West Sacramento, a mix of two bedrooms and one studio.

Who’s managing it?

We have a property manager for that.

You don’t write a W2 check to that property manager’s salary that collects your rent and runs that property for you, do you?


For larger multifamily, you’ll see a property management fee, but you’re also going to see staffing charges. It’s a good and a bad thing because that means that you’ve got full-time personnel. The rule of thumb is somewhere over around 80 units a property can afford full-time personnel, and that’s awesome because that means that person’s career, their job is based on making your multifamily property meet its goals, correct? That could be a leasing agent, that could be a maintenance tech, those kinds of things. But you do not have those line items in your four-unit or in your 10-unit or in your 30-unit. It doesn’t have those things.
So you need to budget for full-time staff whose job it is to make that multifamily sing the song you want it to, leasing agents, perhaps larger properties may have a site manager. Larger properties may have multiple maintenance technicians whose job is to repair things that come up on the property big and small. That is far and away the line item that a lot of smaller investors, as I did, get surprised and say, “Oh, wow. I have to budget for that,” but also exciting. I now can give these people job descriptions and give them task lists and use software or whatever to help them fully optimize their positions in what they do and help that bring along my property. So it’s a good thing but you have to get a budget for it. Andrew, I know that you’ve thought of this, too. What other things do you see in the buckets on bigger multifamily that are maybe not in the buckets on small multifamily income expense-wise?

In your comments, so I jumped straight to 92 units because of one of the things you said is that the bigger properties will be able to support their own full-time staff because I was like, man, I don’t want to manage a 30-unit from out of state. That’s really difficult. You really mentioned quite a few of them and a lot of the really important ones.
Some of the other ones that are actually not necessarily line items on the P&L, but some of the other differences, Danny, one, keep in mind, bigger is mentally more daunting, but bigger is easier. It’s the same amount of work to take down a 10-unit as it is to take down a 100-unit. So my philosophy is go as big as you comfortably can. When I mean comfortable is without putting you or your investors at financial risk, but just don’t be scared by the fact that, “Well, it’s a 100 units. I’ve never done that yet.” If you’ve taken down a 10, you’ve taken down a 100. It’s just the amount of the finances, and it actually gets easier the bigger you go.
The other difference when you’re starting to scale from fourplexes to 10 units and 20 units is demographics become that much more important. If you have a fourplex and it’s in a market that’s flat or maybe even declining a little bit, it’s not that hard to fill a vacancy or two because you don’t need that many people to stay full. But if you’ve got a 20-unit and people are moving out of the area and you start getting two, three, four vacancies, it’s going to get harder and harder to keep that property full, and it’s less and less likely for rents to go up. So as you scale up, demographics becomes more and more important because you’re becoming a bigger fish in the pond. When you’re a fourplex in an MSA with a million people, you can kind of swim in your own direction and get away with it. As you collect 10 and 20, 30-unit properties, you’re a little bit more subject to the currents that are flowing around you.
Then also another thing to keep in mind when you get to 10 and 20 units is, if you buy a fourplex, let’s say you house hack it, you get an FHA loan, you move in, you get a vacancy, you probably have the reserve to cover that vacancy for a month or two or three. When you start going to 10 and 20 units, it’s a mental shift of, “No, I am not personally going to be able to cover all of these properties as I add them to my portfolio.” Because if you buy five 20 units, now you’re talking about 100 units. So you have to shift the mentality to really running them each as a business, and that means capitalizing it well upfront. Yeah, you’re not going to be able to float that $30,000 a month mortgage, but that’s okay because you brought an extra $250,000 to the table when you bought it and you set that as a reserve account. So those are also some of the differences that I would keep in mind as you shift from smaller fourplexes to 10, 20, and then on up from there.

That’s a great perspective because I’ve always kind of looked at the larger scale in terms of if you have 20 plus units, one vacancy doesn’t hurt you nearly as much as a small multifamily, but at the same time you got to consider all those other things and declining areas and demographics that can affect you and make it super hard to fill and keep it that way.

It’s a double-edged sword, Danny. Meaning, it can be very difficult to take a larger property and bring… I’ve brought a 200-unit from 30% occupancy up to 95% occupancy, and I can tell you that was a grind. That’s where I got most of my gray hair. It was tough. Because each time you lease one unit, well, great, that’s a half a percent occupancy. You just move the needle. Whereas you lease an apartment on a four-unit, that’s 25% occupancy, and you just moved the needle. Leasing one apartment could take you from from being in the red into the black. You might have to lease 30, 40, 50-units in a larger multifamily to really make significant cash flow differences.
The good side is that properties like that can take a bit of a hit from the market with regards to occupancy, maybe 5%, whatever. It’s not going to put you underwater. So you lose a couple of apartments, it’s not the end of the world. Your budget is going to have vacancy baked into it. Whereas for a four-unit, you’re either vacant or you’re not. You’re either 75% occupied or you’re 100% occupied. Whereas for a 100-unit apartment building, you could be 85% occupied and be doing okay. Other questions, other thoughts, Danny? What other light can we shine for you here?

That’s great. Thank you. As I mentioned, I have a few small multi-families that they do okay cash flow-wise, and I’ve actually budgeted some of that stuff that you’ve talked about in terms of the larger units and keeping accounts for vacancy and different line items there. But what I understand, I’ve gotten some good advice or some interesting advice recently around balancing cash-flowing versus appreciating properties. So I’d like to get your advice on, how do you balance those? Because you know have cash-flow properties that kind of pay the bills. Then you may invest in appreciating properties where you see a lot of potential, but they may not necessarily pay the bills or barely break even. Is there kind of a calculus that you do in terms of how much of each you have in your portfolio?

Danny, I can jump in. I’ve got a few thoughts on that. I know David talks a lot about this kind of thing on the podcast as well. It changes when you move from the smaller stuff into the bigger stuff. Number one, it also changes with the market. David’s talked about a lot of times he would buy stuff the last few years with almost sometimes negative cash flow because he knows in three or four years it’s going to be worth a lot more. That was a great multifamily strategy for the last seven years as well. You could buy a value add that had negative cash flow, get it fixed up nice. Like Matt was saying, he took something from 30% to 95% occupied. Well, it was negative cash flow at 30%, but it probably was cash-flowing pretty well and worth a lot more at 95%.
We’re in a different part of the market. If you’re looking at, again, a 10-unit, 20-unit, I would stick with something that at least cash-flows so that, in a worst case scenario, if the market shifts against you or the rent doesn’t grow or you can’t exit or you can’t execute your value add yet or whatever your business plan is, your worst-case scenario is you hold it and you wait. We are at a point now where the greater focus is hedging against downside risk. Then once that’s hedged, now you focus on, what can I do for upside?
The other beautiful thing about multifamily compared to single family is with single family you really are at the whim of the market. It’s the sales comps. With multifamily, if you are a good operator, you can execute a plan that increases net operating income, and you can force value increase of that property by increasing the net operating income. For me, if I’m looking at a 10-unit property, the current cash flow is important in terms of hedging downside risk and then future cash flow by executing a business plan and buying in the right markets. That is important in terms of creating equity. So with multifamily, you really can have the best of both worlds. You don’t have to say, “Well, I’m going to get no cash flow just so I can get appreciation.” The multifamily, to me, is one of the best investments out there because you can do both.
Also take a global view. Can you carry it personally or within your business? We talked a minute ago about, if I’ve got a 20-unit and I got one vacancy, that’s probably not going to affect me. That’s correct, and, again, that’s one of the advantages. If you’re going to buy a 20-unit that’s almost completely vacant, how are you going to cover that until it is not vacant? Can do it personally? Are you going to raise a big interest reserve upfront before you buy it? There are ways to mitigate that, but just make sure that you have it covered. In today’s market environment, factor that in much more than we have the last five to seven years.
Just as a quick recap, my approach is to try to get both, cash flow and then be able to force appreciation. If you forego the cash flow, to try to get even more appreciation. Make sure you bring lots of reserves to the table, whether it’s yours, whether it’s investors, whether it’s partners, to carry you through that period and get you out to the other side. Matt, you got anything else you want to add?

Yeah, man. I’ll throw just… Andrew, you and I are both old enough to be able to say we both invested in 2007/2008 when the bottom fell out. I do not believe that’s what’s going to happen again to the market, but I do certainly believe the market’s going to change. It’s going to go somewhere in 2023, and I would not be banking on appreciation. Appreciation has made a lot of people look like geniuses over the last 10 years, but really what they did was they picked the right markets and they made a lot of money on appreciation that they had no control over. Meaning, just cap rates went down, property values went up, certain markets blew up off the charts. A lot of people have made a lot of money on activities that they had no real control over, but they’re able to tout that they did. So I think you’re going to see a shift.
Personally today, just given what I learned in 2007/2008, cash flow is king, and I think it’ll become more king over the next couple of years. The properties that I owned in 2007/2008 did just fine during that recession if they were cash-flowing. The properties that were cash-flowing, they might not have been worth what I paid for a year or two ago. But if they were cash-flowing, you can weather the storm. You’re not just having to throw money at them to keep them going. Personally, my investment strategy would be invest in nothing that doesn’t cash-flow the very first day that I own it. I’m not doing negative appreciation stuff. I don’t judge anybody that does. That’s just not our strategy. I would be investing in cash flow because cash flow gives you time. Cash flow will give you time to hold it for a while, and cash flow with fixed interest rate debt will give you time to hold it. If things get funky in the market for a little bit, just keep cash-flowing it until you can sell at some point in the near future.
At this point, buying a property with a goal of appreciation to meet your long-term investment goals for yourself or for your investors is really investing in something you can’t control. Yeah, you can push a forced appreciation by increasing rents, by increasing NOI on the property. But the other factor in forced appreciation is cap rate, and cap rate is how a property gets valued. NOI divided by that cap rate is the value at the time. So if cap rates expand a bit, if interest rates stay high for a while, cap rates may start going up. The multifamily that was worth X today could be worth X minus 10% a year or two from now if cap rates continue to stay… if cap rates come up and investors aren’t able to pay for properties what they’re able to pay today. I can’t control what cap rates do. I can’t control NOI. I can control the way I operate my property in that. So I’m investing 100% in the things I can control over the next couple of years. I’ve got no faith in the market taking me to the promised land anymore.

I concur with Matt. Personally, I don’t buy negative cash flow anymore. We did that in the beginning. I don’t do it anymore. I think 2023, a lot of the, let’s say, motivated sellers are going to be people who bought in the last year or two and don’t have the cash flow they need to hold onto the property unfortunately.

I 100% concur. Again, I don’t think a bubble’s going to burst, the bottom’s going to drop out. But I do think you’re going to see properties on the market for people that, as Andrew said, they just need to get out just to stop the bleeding or whatever it may be.

Quick follow up here. It’s really interesting you mentioned how the market’s changing and you have all these folks who have properties which don’t cash-flow, which may present an opportunity for investors who want to get more in the market. Then you both mentioned, “We don’t want to invest in things or don’t want to invest in things where it doesn’t cash-flow on day one.”
I also live in California, which has some really interesting tenant laws, pretty restrictive. So I look at some of these properties, and from my experience from the smaller ones, the tenants that you acquire the property with aren’t always the ones that you want to keep long term when you reposition. So from that perspective, I’ve been thinking lower occupancy is actually better because it helps you accelerate the repositioning. But if I’m listening to you folks correctly, it’s not an ideal for this kind of market situation. So maybe get a couple thoughts on that.

I’ll throw quick thoughts on that one, Andrew. Remember, Danny, when I talk about negative cash flow properties or properties aren’t performing, occupancy, you can solve. Again, we’ve got into a property that was performing economically at 30%. I probably would do that deal again today, I would, because if a deal gets brought to market, and whatever market rate occupancy is, 90, 95%, and it’s still lean on cash flow, that’s not a good deal. But if I can do what I can control, I can lease up, I can run leasing specials, I can put in beautiful kitchens and beautiful bathrooms and those kinds of things, and I can do what I can control to get a property to cash flow, I’m all in. If you’re talking about a property that’s maybe 70% occupied in a market where there’s a lot of rent control and those kinds of things, that’s perhaps an opportunity where the other 20% of units you can put back on the market, you can put back on at market, I like that. Andrew, what do you think, 60%, 75% occupied property in today’s market?

Again, just make sure you can cover it and make sure you can cover it for longer than you would’ve planned last year or the year before. There is opportunity there. There’s just greater risk. Risk, there’s ways to mitigate it, and if you’re going to take on that risk, just make sure you’re doing that.

Danny, this has been an awesome conversation and hopefully relatable to everyone here. I appreciate you, man. Thanks for coming on the show today.

Good talking with you, Danny.

All right, thank you very much.


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

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Federal Reserve likely to hike interest rates again. How to prepare

Here's what the Fed's interest rate hike means for you

The Federal Reserve is widely expected to announce its eighth consecutive rate hike at this week’s policy meeting

This time, Fed officials likely will approve a 0.25 percentage point increase as inflation starts to ease, a more modest pace compared with earlier super-size moves in 2022.

Still, any boost in the benchmark rate means borrowers will pay even more interest on credit cards, student loans and other types of debt. On the flip side, savers could benefit from higher yields.

More from Personal Finance:
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“The good news is that the worst is over,” said Yiming Ma, an assistant finance professor at Columbia University Business School.

The U.S. central bank is now knee-deep in a rate hike cycle that has raised its benchmark rate by 4.25 percentage points in less than a year.

Although inflation is still above the Fed’s 2% long-term target, pricing pressures have “come down substantially and the pace of rate hikes is going to slow,” Ma said.

The good news is that the worst is over.

Yiming Ma

assistant finance professor at Columbia University Business School

The goal remains to tame runaway inflation by increasing the cost of borrowing and effectively pump the brakes on the economy.

What the Fed’s rate hike means for you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Whether directly or indirectly, higher Fed rates influence borrowing costs for consumers and, to a lesser extent, the rates they earn on savings accounts.

Here’s a breakdown of how it works:

Credit cards

Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, too, and credit card rates follow suit. Cardholders usually see the impact within a billing cycle or two.

After rising at the steepest annual pace ever, the average credit card rate is now 19.9%, on average — an all-time high. Along with the Fed’s commitment to keep raising its benchmark to combat inflation, credit card annual percentage rates will keep climbing, as well. 

Households are also increasingly leaning on credit to afford basic necessities, since incomes have not kept pace with inflation. This makes it even harder for the growing number of borrowers who carry a balance from month to month.

Here's how to get ahead of a rise in interest rates

“Credit card balances are rising at the same time credit card rates are at record highs; that’s a bad combination,” said Greg McBride, chief financial analyst at Bankrate.com.

If you currently have credit card debt, tap a lower-interest personal loan or 0% balance transfer card and refrain from putting additional purchases on credit unless you can pay the balance in full at the end of the month and even set some money aside, McBride advised.


Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.

“Despite what will likely be another rate hike from the Fed, mortgage rates could actually remain near where they are over the coming weeks, or even continue to trend down slightly,” said Jacob Channel, senior economist for LendingTree.

The average rate for a 30-year, fixed-rate mortgage currently sits at 6.4%, down from mid-November, when it peaked at 7.08%.

Still, “these relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” Channel added.

Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rises, the prime rate does, as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.65% from 4.11% a year ago.

Auto loans

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans. So if you are planning to buy a car, you’ll shell out more in the months ahead.

The average interest rate on a five-year new car loan is currently 6.18%, up from 3.96% at the beginning of 2022.

Boonchai Wedmakawand | Moment | Getty Images

“Elevated pricing coupled with repeated interest rate increases continue to inflate monthly loan payments,” Thomas King, president of the data and analytics division at J.D. Power, said in a statement.

Car shoppers with higher credit scores may be able to secure better loan terms or look to some used car models for better pricing.

Student loans

Federal student loan rates are also fixed, so most borrowers won’t be affected immediately by a rate hike. The interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and 2.75% in 2020-21. Any loans disbursed after July 1 will likely be even higher.

Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers will also pay more in interest. How much more, however, will vary with the benchmark.

For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the Education Department expects to happen sometime this year.

Savings accounts

On the upside, the interest rates on some savings accounts are higher after a run of rate hikes.

While the Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.33%, on average.

Guido Mieth | DigitalVision | Getty Images

Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4.35%, much higher than the average rate from a traditional, brick-and-mortar bank, according to Bankrate.

“If you are shopping around, you are finding the best returns since the great financial crisis. If you are not shopping around, you are still earning next to nothing,” McBride said.

Still, any money earning less than the rate of inflation loses purchasing power over time, and more households have less set aside, in general.

“The best advice is pick up a side hustle to bring in some additional income, even if it’s just temporary, and pay yourself first with a direct deposit into your savings account,” McBride advised. “That’s how you are going to create the pathway to be able to save.” 

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Federal Reserve likely to hike interest rates again. How to prepare Read More »

How To Get Comfortable Taking Risks (According To These Eight Entrepreneurs)

Different people have different comfort levels with risk-taking. Some are willing to jump out of an airplane just for the thrill of the adventure, while others may push themselves by reaching out to make a new friend. When it comes to entrepreneurship, your comfort level with risk may not necessarily prevent you from aspiring to be a business owner, but it can affect your success once you become one.

Business owners take risks every day, so those who may be more risk averse by nature may struggle to grow if they aren’t willing to take a chance every once in a while. Here, eight members of Young Entrepreneur Council offer their guidance on how risk-averse entrepreneurs can get more comfortable taking risks and why doing so is important to their long-term success.

1. Assess Risk From Both Emotional And Data-Based Perspectives

Nothing is black and white once it’s measured. Risk can be assessed from two primary perspectives: emotional or data-based. Emotional risk assessment involves considering subjective feelings or perceptions of risk and quantifying them to your best ability. Data-based risk assessment, on the other hand, involves using data and statistical analysis to quantitatively evaluate the likelihood and potential impact of an action or inaction. While the latter is more objective, having both measured in a spreadsheet in front of you will make it easier for your brain to differentiate the two, make better decisions and overcome any internal resistance. As a leader, you following this method will also help others overcome their fears without discounting the real human elements of decision-making. – Benji Rabhan, Aboutly

2. Leverage ‘Fear Testing’ And ‘Dream Testing’

Being a risk-averse entrepreneur is challenging. Being an entrepreneur in and of itself is a risk. I like the method of “fear testing” and “dream testing.” Fear testing is when you write down in the most vivid way you can the worst-case scenario and your battle plan for it. Dream testing is when you write about the best-possible-case scenario if you take your risk. Most entrepreneurs have enough optimism to realize that the promise of the dream is more powerful than the risk of the fear. You are smart enough to right the ship if it capsizes. You are capable enough to handle a worst-case scenario. Bet on yourself and take the leap. – Tyler Bray, TK Trailer Parts

3. Start By Taking Baby Steps

As an entrepreneur, you have to be open to taking calculated risks. If you are not willing to take calculated risks, then you will never reach your full potential or reach your business goals. So, one way to get more comfortable with risk overall is by taking baby steps. It’s best to start with small risks and work your way up from there. – Kristin Kimberly Marquet, Marquet Media, LLC

4. Push Yourself Personally Before Professionally

Learn to take risks personally first, then professionally. The more comfortable you become doing things outside the norm of your life comfort zone, the more you’ll learn to test the boundaries of your work comfort zone. Book a one-way ticket somewhere with no itinerary and figure it out. Go skydiving or climb a big mountain. Even just go to a movie alone. Push yourself personally to do what you would normally be afraid to do. When those uncomfortable things become your new normal, that will trickle into how you think about and operate in business. – Jonathan Ronzio, Trainual

5. Set Up A System Of Rewards And Consequences

I would suggest risk-averse entrepreneurs set up a system of rewards and consequences. This means setting measurable goals that, if achieved, will be rewarded, and if not, will incur some consequence. This system allows entrepreneurs to have a more precise measure of risk, as rewards and consequences provide tangible outcomes to observe the results of any decisions made. Entrepreneurs can use this system to learn from their mistakes and make better decisions in the future. Taking risks involves trying new methods, exploring new markets and pushing boundaries to drive innovation. Identifying and acting on opportunities is necessary if a business is to succeed in today’s competitive business environment. Taking risks is also a way to stay ahead of competitors and remain flexible and adaptive. – Jay Dahal, Machnet

6. Seek Out Networks Of Support

Seek out mentors and networks of other successful business owners who can provide support, guidance and advice. This is especially important for women in business and owners from under-resourced and LGBTQIA+ communities who may face additional challenges, such as discrimination and lack of access to capital, that can make it difficult for them to take risks. By building a supportive network of mentors and peers, business owners can become more confident, gain access to valuable resources and funding and obtain crucial advice and support that can help them navigate these challenges and flourish outside their comfort zone. Risk paralysis prevents us from attaining our highest levels of success, and with the right people around you, you can become comfortable with being uncomfortable. – Lauren Marsicano, Marsicano + Leyva PLLC

7. Shift Your Mindset Around Failure

Don’t take anything too personally. The biggest psychological turnoff for a would-be entrepreneur who’s risk averse is the fear of failure. However, if you shift your mindset to focus on failure being a learning opportunity rather than a personal setback, you won’t fear it as much. Because of that, you won’t fear risk so much. With great risk comes great reward after all, so get used to it. – Andy Karuza, NachoNacho

8. Understand How Risk Taking Differs From Making Bad Choices

Taking risks and making bad choices are not synonymous. If you’re risk-averse, the good news is that you can take calculated risks without feeling haphazard or close to failure. To become more comfortable taking risks, weighing out all possible situations and the pros and cons of the risk is crucial. By doing so, you can assess whether taking a chance is worth it. Ultimately, being a business leader is about taking risks, as there is no guaranteed success when leading a business. However, by approaching risk-taking in a controlled, calculated manner, you can mitigate the downside of taking risks and become more comfortable. – Jared Weitz, United Capital Source Inc.

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How to Time Travel Back to 3% Rates on Your Next Buy

With assumable mortgages, you can snag a three percent interest rate even in 2023’s high-interest environment. These loans exist everywhere around you—you could be sitting on an assumable loan without even knowing it! So, if there’s a way to pick up properties at all-time low-interest rates, why isn’t everyone taking advantage of assumable mortgages? We brought Craig O’Boyle from Assumption Solutions on to the show to explain.

Assumable mortgages aren’t new, but most real estate agents, loan brokers, and homebuyers have no idea what they are. In practice, an assumable mortgage allows a homebuyer to “assume” a seller’s loan with the same interest rate, contingencies, and principal paydown as the seller. This means you can walk into a home with significant equity, a low-interest rate, and the same fix-rated loan you’d be picking up from a bank. But, if you want an assumable mortgage, you’ll need to know where to find one.

Craig walks us through the ins and outs of assumable mortgages, where investors can find one, why most mortgage lenders and brokers don’t know about them, and one BIG caveat you’ll need to hear before you chase down this better financing. Want a lower rate and monthly payment with higher cash flow? Stick around; we’ll give you everything you need to know to find a low-interest assumable loan in your area!

Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined by Jamil Damji, who looks like he’s in a very dark and very… I don’t even know where… Where are you?

I’m in a penthouse in The Mirage in Las Vegas. For any of you that right now are shaking your head, or feeling like that’s very boujee, it is, but let me-

It is.

Let me very quickly qualify the boujeeness of it. Pace was also in the penthouse in the Mirage. We’re both speaking here at a summit. However, his costs $1,000 a night, and mine was $200 a night, because I slipped the front desk girl a $50 bill, and asked her if there was any upgrades.

That’s all it took?

That was it.

Wow. Good tip from Jamil. That’s awesome. Well, nothing beats… It’s so dark where you are. Nothing beats the blackout shades available in Las Vegas. They know that you need to be able to sleep at any time of day, and it looks very comfy for you.

The blackout shades are a double-edged sword, because they are also called podcast killers.

Did you have a rough night last night?

Not a rough night, just… It’s Vegas, man, all the things.

It’s so much fun. All right, well, we’ve got a fun thing as well to talk about today. We have Craig O’Boyle, who’s joining us to talk about assumable mortgages, which I honestly… I sometimes just group a lot of creative finance together in my head, and it’s so helpful to really understand the differences and nuances between different types of creative financing. Honestly, I didn’t really know that there was a big difference between generalized assumable mortgages and sub two, which I know your buddy Pace is a big proponent of, but I learned a lot. Did you?

Man, the entire time, I’m sitting here thinking, “I don’t think Craig understands just how…” or he does, but he… I mean, I want to help Craig. I want to help Craig so much just shout about this from the rooftops, because this is one of those moments where I say, “O’Boyle, O’Boyle, O’Boyle.”

You just can’t wait to blow this thing up.

I think that there’s a massive opportunity here, and I think that if marketed correctly, and if you educate agents in the right way, we could start creating more activity in the real estate market and so many homes that are sitting on the market stale with trade.

Totally. That makes a lot of sense. Well, let’s just get into it then. We’re going to welcome on Craig O’Boyle, who’s visiting us and joining from Assumption Solutions. But first, we’re going to take a quick break.
Craig O’Boyle, welcome to On the Market. Thanks so much for being here.

Thanks for having me.

Can you tell our audience a little bit about yourself? Who are you, and what is your expertise related to real estate investing?

Well, I got licensed in the real estate business as a real estate broker in October of 1995. I was 19 years old, so I’ve been in a little over 27 years. I guess the reason you have me here today though is during that time, I’ve sat at many closing table with buyers, and the topic of the assumability of certain mortgages would come up. It hadn’t made sense for a very long time, because rates have been dropping. About early to mid 2022, we went through a pretty big shift in the rate climate, and I started Assumption Solutions with a partner to help people understand and complete mortgage assumptions.

All right. Well, very timely of you. Let’s just start at the top. What is an assumable mortgage?

An assumable mortgage is the… Well, the only assumable mortgages that exist are government-backed mortgages. FHA, VA, and USDA mortgages can be assumed. What that means is when you purchase a property, instead of getting a new mortgage, you take over the existing mortgage at the existing rate and term that are in place. That was something that hasn’t really existed in the marketplace since the late ’80s, early 1990s. That’s because rates have effectively been dropping during that entire time. We’re now in a climate where rates have effectively doubled in just a few short months, and it makes sense.
The ones that used to be around used to have what they called non-qualifying assumables, which a non-qualifying assumable is just like what it sounds like. Anybody basically could say, “I want to take that over, jump in, and become responsible for it.” Those are all gone. Now, the only assumable mortgages are qualifying assumables, meaning you have to meet the criteria of the mortgage when it was taken out and put in place. We’re here to help people process those in transactions.

Essentially, what we’re talking about is a creative solution to purchasing a property, but by doing it by the book. We’re actually going to notify the bank. We’re going to let the bank… We’re going to say, “Hey, guys, I’m taking over this property. I’m not doing it subject to… I’m actually going to take over this property. I’m going to qualify for the mortgage so that this due on sale gorilla that for me is the biggest problem in subject two is appeased and fed.” Is that essentially, Craig, the way that the audience should interpret this concept of assumable mortgage?

Technically, this is… Unless it’s some private financing or something, this is really the only legal option out there for taking over mortgage. When you take it over, it completely releases the seller and original note holder from liability and responsibility, and transfers it to the new buyer.

How likely is the bank to say yes?

Well, so in our processing of this right now, the biggest challenge that we face is the servicers really don’t even understand it themselves. They haven’t been doing these. They don’t have departments for these, so we find that we are actually doing quite a bit of education on their side. We see them putting out information that is patently false and incorrect often to both the owner of the curb property, and the potential buyer of the property. So, in processing these, we’re trying to educate them because we actually see a lot of potential liability to servicers for putting out wrong information to people.
Because if you basically tell a guy who’s got a deal, “Oh, this can’t be done,” even though it’s part of the program that was put in place by VA, FHA, USDA as a benefit to those buyers, you tell them it can’t be done, and then they can’t sell their property, or they lose money. Well, I could see an attorney coming along at some point, and filing some lawsuit against them. We’re trying to straighten that out. We’re using a lot of resources that these government organizations actually have out there about how it should work, but it’s a challenge. There’s a lot of craziness out in this right now because it’s new.

Craig, just so I fully understand this, assuming a mortgage is basically when the buyer takes over the existing mortgage of the seller. There’s two ways to do that. One is subject two, but the problem, as Jamil pointed out, with subject two is that it’s not necessarily with the bank’s blessing. There’s this clause in most mortgages called the due on sale clause, where basically if the bank catches wind of what’s happened, and for whatever reason decide they want to say, “You owe me all the loan balance,” they can do that. That is within their rights.
Then what you’re doing with these qualifying assumable mortgages is all above board, and so it’s just… It’s like subject two, but it’s a little bit less risky. Is that the appeal above subject two?

Well, if you’re the seller of the property, it’s the best thing you can do if you do it. Now, the challenge is if you’ve got a conventional loan, you don’t have the option. If you don’t want to get rid of that existing note on a conventional scenario, then I guess your only option is subject two. But if you’re the seller of the property, and you can sell it, and you can no longer be on that note, it’s a huge benefit. Because if you’re going on in the future to buy something, it’s not going to show up on your credit, on your DTI, or any of those issues, because you have been released.
Not to mention the issue with if the guy that you let take it over has a shady nature, or doesn’t come through on making those payments, and it goes to foreclosure, well, that loss is coming on you, because you’re still on the hook On that note as far as the lender’s concerned,

Craig, that’s a great point. As an investor, you often think of the implications as the buyer. But as a seller too, it obviously makes more sense.

What’s interesting is in Canada, which is where I began my journey in real estate investing, they have actually outlawed assumable mortgages. The reason for it is because the banks and the government in Canada have a very, very close relationship. So, it’s safe to say that in the long-term scheme of the bank’s interest, this doesn’t meet the top of the pile. Given that, who are the advocates, or who are the processors for the assumable mortgage? Because I could guarantee that the bank is not going to put out a person, and they’re not going to lend you a loan originator to help with this process, especially if we’re talking about assuming a mortgage that’s 3.5%, where right now, they’re making money hand over fist at six or seven.
What does that process look like, and what army of people do you need to bring to the closing table in order to process and actually create this situation from start to finish?

Sure. You’re right, there’s low motivation on the servicer side. The people that approve these existing mortgage servicer is the one who ultimately has to qualify, receive the packet, and process this. Their motivation is not high. A lot of people that we work with and train are real estate agents, because they are on the front lines with clients who have these marketable assets that they’re trying to sell. So, we educate them about the process, and then when they have a deal, where the buyer and the seller’s going to do it, we onboard it, and we process it. We deal directly with the servicer.
A lot of the agents are out there going to mortgage brokers to try and get information. Mortgage brokers, mortgage bankers, loan originators, they have zero interest in being involved in these, because they don’t make any money. It’s for sale by owners with real estate agents. You’re generally not part of the equation.

Who’s going to get greased to make this happen? Essentially, what I’m trying to understand is do I got to pay the loan originator? Do I got to… Do I need to make sure that the real estate agent makes their commission?

Well, you do pay us as at Assumption Solutions. We charge a fee to both the buyer and seller to get a completed assumption. The servicers do have the right to collect a fee for processing these. We’re finding that truthfully, on average, they’re somewhere between $1,000 and $2,000. That’s a lot less than a loan originator would collect at a new origination, so it’s lower. It’s not as much motivation, but our company is born out of something my partner did in the last downturn, where he created a company that effectively processed short sales on behalf of a buyer and seller to make a real estate agent’s life easier to get more deals done, and dealt with the servicers to get short sales done.
Now, this is a lot less of a pain point than that. They were getting those done, but I mean, the servicers in those cases, it was like, “How do we limit our loss?” At least in this scenario, it’s like, “We can make a little money. We keep a loan that’s on the books going forward,” but they’re not originating a new loan at double the interest rate, so not a ton of motivation. I think that’s a little bit behind the fact that they don’t have the process in place and the staff in place, and even the knowledge base that is in place to do these right yet.
We are trying to shorten that curve, and make it simpler, but it’s a process that takes, once you start it, anywhere from 60 to 90 days. Now, the short sale process when it was in the heyday, I mean, it could take six to 12 months. We think it’s still better than that timeframe.

Because it takes 60 to 90 days, is the type of seller and therefore the type of property that you see go through these transactions, are there unique characteristics about it? Are these distressed properties, or is there something unique about them?

You’re actually not going to be able to complete one on a distressed property.

Oh, because it doesn’t qualify?

If the loan is not current, it’s very unlikely that the servicer will allow it to be assumed. There’s important things that your listeners should know, especially since you guys are all about the investment side of the world. The only people who can qualify to assume these mortgages are owner occupants. So if you’re coming at this from an investment standpoint, you probably need to be looking at, “I’m going to be an investor who occupies and then turns around and goes to an investment down the road after a significant period of time so that that loan is taken over by you as an owner occupant.”

I think the main concept here is that the banks are wanting to make sure that there’s not a straw buyer situation, or you’re not the straw buyer, and saying, “I’m going to live in this.” Then seven months or 10 months or a year down the road, you say, “I changed my mind.”

Well, with regards to a lot of those loans, number one, it’s about intent. It’s hard to put a timeframe on intent, but if you are in there for 30 days, and then it’s a rental, I think you could be in some trouble, but a year. I mean, just talking about VA loans benefit to a veteran. Veterans transfer all the time around the country with their orders, so it’s very common to see a guy get a house, VA loan, and then the army sends him somewhere 6, 9, 12, 18 months later, and it turns into a rental. Matter of fact, in my career, I’ve helped several people.
Gosh, I remember dealing with a gal who she was retiring. She was stationed in the Pentagon, and she was liquidating 10 or 12 homes around the country that she had bought everywhere she went, and was netting out a couple million dollars. This was back in probably the early 2000s. The key with regards to assuming is intent, and if your intent is not to occupy that property when you take it over, then you’re in trouble with loan fraud.

Well, would this work with any residential mortgage? Could you do this with a duplex or a quadplex, for example, live in one unit, and live in the others?

Let’s take FHA, specifically. FHA, you can do multi-family properties up to one to four units, where you live in one, and rent the others out. I actually connected with a gentleman in the Bigger podcast’s… Is it chat area or something in there who had some questions, because he had a property in Miami that he bought it, lived in. It was a fourplex, lived in it and was looking to sell it, and was getting a lot of people interest when they put it on the market, and mentioned that it was assumable. The challenge is all the people that were coming at them, nobody wanted to live in one of the units.
I said, “I look at it this way. When you’re marketing something to sell, it’s one more asset to the property, because when I put a home for sale, I’m marketing all the assets about it.” I’m marketing if it’s got updates like a new kitchen, if it’s got a great lot, if it’s got a great view, and I’m marketing if it’s got an assumed mortgage. It doesn’t mean it’ll sell that way, but it’s one more asset to market when you’re selling something. If you’re buying something, and if you can go that route, why not jump on it and save?
I mean, if you look at rates, your average $400,000 mortgage… I think in November of 2021, the rates were about 3.1%. By November of 2022, they’re about seven-ish, right? The difference in payment is $953 a month.

Over the life of the mortgage, Craig, what I want to really understand and impart to the listeners right now is what is the value of the note, and can I create an opportunity for me as a homeowner? Because you’ve been using some very interesting language when you call the note the asset, because he’s talking about, “I’ve got a renovated kitchen. I’ve got a renovated bathroom.” These are all things that add or force appreciation to a deal. You’ve got 3.5% mortgage attached to your property. Right now, the market says seven. So over the life of this mortgage, there’s a possibility of that gap costing hundreds of thousands of dollars.
So, what is the value, and how much could a homeowner add to their situation by saying, “Look, I’ve got this beautiful asset that I’m going to allow you to take over or assume the language is beautiful. Assume in this sale, but I want this amount of money as a premium in order to allow you to do it.” What’s the value of this asset, Craig? I think that there’s a lot of people right now. The bells are ringing in their minds, because essentially, the retail real estate market is slowed substantially. If you’re a seller right now, and you’ve got an assumable mortgage, now, you’ve got this gorgeous, beautiful essential asset that you can sell to the world.
What is the value of this, and can you rightfully market it in your listing verbiage?

That’s a great question. I think the value of the asset increases the more people know about it, understand it. Right now, when I talk to people, my point is that if you’ve got two homes next to each other, and they’re all the same condition, they got the same lot. They got the same view. One’s got this conventional non-assumable loan on it. One’s got this VA or FHA assumable loan on it. Which one should sell for more? In theory, it should be the assumable, because like I said, at 400, you save $900 a month. Although I’m not sure it’s easy to quantify it just that you should list your home higher.
In the market that we’re in, I look at it as you might just be able to sell faster. That means if you can sell faster, technically, you probably sell for more. Because if your home has been on the market for 60, 90, 180 days, you’re likely chipping away at your list price over time. Now, the more this spreads, and the more people start hunting it, the more they sell faster, or you’re able to say, “Now, we can sell these for more, because they’re out there,” but there are a couple other things that make this process a little bit complicated that it is also a reason for me. It’s difficult to say that yes, it’s worth more.
Let’s talk about what we call the assumption gap. You have the purchase price at 500, and you have a mortgage that exists on the property of 450. We call the difference between those two your assumption gap, which is effectively what you look at as your down payment. The big question that I get from everybody is, “Can you finance that?” Well, there’s no guideline with the government organizations that you can’t get secondary financing, but what we have found is, number one, good luck finding a lender that’s looking to jump into a second mortgage position in the climate that we’re in.
Then number two, if you are able to find it, it’s up to the servicer who’s approving the assumption whether or not they’ll allow it. Everyone we’ve been involved with has been a cash down payment to cover the gap. Is there an opportunity there for a second, whether it’s an owner carry, whether it’s all these other things? Potentially, but we’re not out there telling people that that is an easy thing to accomplish, because we haven’t seen it done yet. So, when you have that gap, it does limit the pool a little bit, so you don’t have as many buyers.
Even though you have this asset to sell, you don’t have as many buyers, because if you think of a traditional VA, FHA loan, they’re designed to be low down payment entry points for buyers, for people that use them. Now, what I’m finding is a lot of the people that are going through these, they’re what I call the move-up person, right? They’re selling something. They’re coming out of something. They’re jumping into these products, because of the savings and because of the long-term makes sense. I mean, we’ve even seen…
The best one I’ve seen, the one that interests me the most that we’ve processed that I’m seeing is we have a loan that somebody’s taken over that’s 15 years old. That means it’s half paid down. It’s a low rate. It’s low below what you could get today, but I just love the fact, and the gap is half a million dollars, but I love the fact that a mortgage amortization, it’s so front loaded in interest. Guys jumping in at a low rate, where most of the interest on the loan has been paid. I love it

I mean, essentially, you’re at one of those very unicorn-type situations where you’re paying down primarily principle at this point. If you’re halfway through, and, like you said, the amortization schedule, if you look at any of that, and if you look at the way that those loans are front loaded, it’s sickening. You realize just how much money you’ve burnt.

Well, they know most people sell within five to 10 years.

I mean, you essentially are a renter for the first 10 years of a house on a purchase. This is just incredibly timely and what a wonderful way to provide a solution for people to, a, sell their property, and b, as buyers come in and get financing, that is just unavailable.

Craig, I’m curious. If you are a buyer who’s willing to meet these conditions, owner occupy… In the BiggerPockets world, we call an owner-occupied investment house hacking. So if you’re willing to do a house hack, how do you look for this? I get that you’re saying that it’s up to the buyer, excuse me, the seller and the seller’s agent to market it. But if I am bought in and want to find one of these, what’s the best way to do that?

Our efforts and training with real estate agents, number one, we’re training people how to expose this asset that they’re marketing. In Colorado, Colorado Springs specifically where I’m located, our MLS system has input fields for this, where you can input one that’s an assumable loan, and then details about the loan, the PITI payment, the loan balance, the type of loan, all that kind of stuff. Nobody has used those fields in our MLS forever, so they don’t even know that. A lot of the agents don’t even know… I mean, most of the agents in the country have been licensed less than 10 years, truthfully.
So, we’re teaching them how to put that in there, how to get it marketed. Unfortunately, a lot of the MLS systems don’t pump that section of data out to public fields. I can build a client a search when they’re looking for a property in our MLS system, and it emails them stuff that meets that criteria. So if you’re looking for X, I can send it to you, but then you’d probably have to talk to me to see it, because the visualization of that criteria is not on my client’s side, unfortunately. I’d love to see some changes in that. We’re working on a lot of areas of contact for getting that out there.
Let’s just talk about finding stuff that maybe isn’t on the market that has this potentially. Because we’re training agents to grow their business by finding those, there’s a lot of data harvesting mailing list things that you can scrub for when things sold, what type of loans they have on them. All that kind of thing is out there. But in our local market, because we’ve done so much training, we’re probably the most robust with this in the country. I keep a search open. I can see every day a couple more assumable loans on the market, because in Colorado Springs, we have a huge military presence with multiple military bases here.
Between March of 2020 and March of 2022, we had 14,000 VA loans alone in our county, either originated or refinanced, which means their rates are most likely below 3.5%, some as low as two and a quarter, and that’s one county. So, there’s a ton out there. These products make up approximately, depending on your location, between 20% and 30% of the marketplace. The more military related your community or your area is, obviously, the more you have because of VA there, but USDA, I think, is it’s more of a rural product, and it’s about 1% of the market.
Then FHA can be used by anybody out there. So finding them, you really need to hunt down somebody who has access to real estate listings, but also who knows this product. Like I said, we’re doing education on this all over the country with agents, because we can process these anywhere in the country.

That’s super helpful advice,

Very helpful. My mind is just full of so many opportunities that derive from, a, awareness of the availability of your note having this clause in it, and secondly, being able to execute on that. How does somebody in a reasonable way find out whether or not their mortgage is assumable?

Well, it’s very obvious if you’re a veteran, and you took out a VA loan, right? Veterans know their benefits. If you were a first time home buyer, and you did a low downpayment program such as 3.5%, you’re most likely FHA. Now, if you don’t remember what you have, usually, you can go to something like a title company, and run an ownership encumbrance report, which will show you the debts filed against your property. VA and FHA are pretty clear on their deed of trust that they’re VA and FHA all over them. USDA, I mean, same. USDA and FHA are almost identical, so same thing there.
If you used a conventional product, and your downpayment when you bought your home was over 3.5%, most likely, it’s not assumable. Now, I do want to jump in with one thing that is important to talk about with VA loans. VA is a veteran benefit. It’s only a loan product that is available to a veteran when they take it out new. However, VA can be assumed by a non-veteran, but there’s something that’s important to know with that. VA’s process for giving loans is determining the level of eligibility that a veteran has available to them.
So, it’s like… You could do it on VA’s website, but it’s complicated, so I can’t… It’s not a dollar amount. That’s not true. It’s hard to say. There is a cap, but your eligibility’s it’s regional based. It’s got a lot of factors to it. But if you let another veteran assume your VA loan, not only are you released from the liability in the assumption, but your eligibility is released as well. Meaning, you can take 100% of your eligibility to get another VA loan in the future. If you go veteran to non-veteran, the eligibility portion that you used in that loan is stuck to that loan until it’s gone.
We see scenarios where for some veterans, they won’t do anything except veteran to veteran assumptions. However, we see some scenarios where it makes sense. The veteran’s just like, “I don’t care.” The big one I talked about, where it’s 15-year old note, the person selling that home is rather up an age. They’re getting a lot of equity out of the house. They’re actually… I believe they’re downgrading in what they’re going into, so they didn’t need to use a VA loan again. We’ve seen scenarios where some veterans are like, “I just need out of the house. I just want it sold. Whatever sells it first, I don’t care. I’m still getting equity, so I’ll go get a conventional loan in the future.”
There is a caveat to that. With the FHA, USDA, there’s no eligibility issues there at all.

Awesome. That’s great. Well, Craig, this has been super helpful. I’m curious, do you have any other tips for our listeners just when it comes to assumable mortgage or just navigating the loan climate in 2023 before we get out of here?

I mean, the best tip I can have if you want to assume something is it’s really good to have your penny saved up, either you’re coming out of a property, and you’ve got cash to put down, or you’ve been banking some money away. If you’re looking to buy something, why not capitalize on that low rate? That’s probably never going to come back. I mean, unless the government is foolish enough to think that just printing money is a great thing, hopefully they’ve learned their lesson on that. I don’t know. We’ll see.
But if you’ve got some assets, or you’ve got some cash saved, and you’re looking to get into something as cheap as possible that down the road maybe it makes the sense to turn into a rental, well, it’ll cash flow a heck of a lot better with a two and a quarter rate than it will with a six and a quarter rate.

All right. Well, that’s great advice. Craig, thank you so much for joining us. For people who want to learn more about you or potentially work with you and your company, where should they contact you?

Our company is Assumption Solutions. Our website is assumptionsolutions.com. We have lots of training. We have lots of info. We have lots of stuff that’s good for whether or not you’re a home buyer or home seller or real estate agent.

All right, great. Well, thank you so much, Craig, for being here. We appreciate your time.

Thank you.

Take care.

Jamil, what’d you think? This seems right up your alley.

Oh my gosh, there’s so much right now that my mind is… I honestly feel like I need to call Craig, and I need to figure out how to bring this opportunity to America. Right now, we’re sitting on this massive opportunity, where people are really struggling with affordability. When you’ve got an assumable mortgage, and a reasonable seller, and an educated agent, and a buyer who obviously wants to rewind and go back in time, and get that opportunity-

Now, you could do it. You could go back in time.

Yes. The assumable mortgage is the DeLorean of lending products.

Yes, it is. Yeah, it’s amazing. It’s super cool.


I mean, I guess the only thing I was a little bummed about was to hear that it’s only for owner occupants.

That and then, secondly, just the qualification process and the unmotivated nature of the whole process, because here’s the thing. This is where I always find inefficiencies happen is when we don’t pay people, or people aren’t being monetized or being taken care of through the process.

This is not incentivized.

They’re not incentivized. So then if you ever work in a situation, or if you’ve ever tried to navigate a situation where people aren’t incentivized, I can help everybody right now understand what that feels like. Go to a government office, and try to do something.


You’ll see that lack of motivation from everybody working there, because there’s no incentivization. So, that piece, I feel like, is going to create so much clunkiness, or make this more difficult than we might think that it could be.

Than it has to be. This seems like it could be easier, and we would all wish that is what would just happen is the easiest thing. But to me, this just seems like tailor-made for people who want to make their first investment.


If you have saved up some money, and you’re sitting around thinking like, “How do I get in? It’s expensive.” It’s like, listen, this is for people who want to owner occupy. We all know house hacking is one of if not the best way for people to get started in the first place. You can house hack, plus get an interest rate from a year ago that is going to increase… They said for a $400,000 home, Craig just said that that’s going to increase your monthly cash flow by nearly $1,000. That’s probably more than most people pay in rent currently.

I know.

That would be a huge saving. So if you are new to real estate investing, I think that is huge. I think the other main lesson here is through the BiggerPockets conference and a few other things, I’ve learned that a lot of our audience here on On the Market is real estate agents. To me, this is just a goldmine for real estate agents.

Big time. Big time.

If you have a selling contract for a qualifying mortgage, this is worth. They just said it’s worth $12,000 a year. For an owner occupant, if this is a home buyer coming in to buy this, they stay on average seven years. Seven times 12, what’s that? $84,000, that’s $84,000 on average that it would be worth for $400,000 homes.

That’s the entire life of the mortgage?

No, that’s seven years. That’s the average amount of time people stay in a mortgage. But if they’re going to stay longer, it’s worth even more. It just seems like… Know what you got. If you’re an agent or a seller, if you have one of these qualified mortgage, that is extremely valuable.

I couldn’t agree with you more, Dave. I feel like this is the peacock feathers of a property right now. I think that there’s a massive opportunity, especially with real estate agents feeling the crunch right now. A lot of you might be listening to this, and sitting on a house right now where you haven’t had an easy time selling it. You’ve got a seller who has a terrible situation, and wants to sell or whatever’s going on, and there’s this gap in information and execution. Real estate agents that are listening to this, please do some homework. Get ahold of Craig, and see if there’s an opportunity there.

Absolutely. Great advice. Well, thanks a lot, man. We appreciate you being here. For anyone who wants to connect with you, where should they do that?

Well, I’m always findable on Instagram at J-D-A-M-J-I. That’s @jdamji. Also, I have a YouTube channel where I go live and help people underwrite and learn all about the real estate investing that I do, which is a niche called wholesale. You can find me at youtube.com/jamildamji.

Awesome. If you have any questions for me, or thoughts about this episode, please reach out to me on Instagram, where I am @thedatadeli. Thank you all 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 BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.


Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page!

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

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Beyoncé and a $100k-a-night suite at Atlantis The Royal

Beyoncé performs on stage headlining the Grand Reveal of Dubai’s newest luxury hotel, Atlantis The Royal on January 21, 2023 in Dubai, United Arab Emirates.

Mason Poole/parkwood Media | Getty Images Entertainment | Getty Images

DUBAI, United Arab Emirates — It was the talk of the town. Of the entire country, really — and then some.

Beyoncé was performing her first live concert in more than four years at a private event for the opening of Atlantis The Royal, a $1.4 billion luxury hotel and residential project eight years in the making, located on the outer ring of Dubai’s Palm Jumeirah, a man-made beach archipelago in the Arabian Sea. The megastar was paid a reported $24 million for the night.

The concert, which took place over the weekend, was the grand finale event of the hotel’s “grand reveal,” whose 1,500 guests included model Kendall Jenner, rapper Jay-Z and a host of other influencers, socialites and royals.

The event, footage of which poured onto social media, showed off some of the hotel’s larger-than-life features including a fire and water fountain that coordinated with a light and fireworks show for the Beyoncé performance, eight new celebrity chef restaurants, and a seemingly endless number of infinity pools.

The stats themselves are pretty jaw-dropping. The hotel, 43 storys of what look like gigantic layered Jenga blocks, is home to 795 rooms and suites, 17 restaurants and bars and a whopping 92 swimming pools. Rooms go for an average rate of $1,000 per night, and Atlantis The Royal’s top-end suite costs a casual $100,000 per night. That’s where Beyoncé reportedly stayed.

The 99-acre property built by luxury developed Kerzner International also hosts 231 ultra-luxury residences — all of which have already been sold.

Models pose during the Ivy Park show at Nobu by the Beach during the Grand Reveal Weekend for Atlantis The Royal, Dubai’s new ultra-luxury hotel on January 22, 2023 in Dubai, United Arab Emirates.

Kevin Mazur | Getty Images Entertainment | Getty Images

“Following the gig, more fireworks than I’d ever seen filled the sky with explosions,” City AM’s Steve Dinneen wrote of the event. “This joyous, unabashed display of wealth is incredibly on brand for a city that prides itself on going bigger and higher than anyone has gone before.”

Atlantis The Royal’s launch is itself somewhat symbolic of Dubai’s meteoric economic recovery since the coronavirus pandemic and the emirate’s drive to become one of the world’s top three destinations for tourism, luxury and business.

Already well-known for its often over-the-top opulence, glitzy skyscrapers and record-breaking creations —like the world’s tallest building, largest Ferris wheel and biggest mall — the city that ballooned from a small fishing town into a teeming metropolis in just the last few decades seems to be making a new statement.

“Igniting the next chapter of the Atlantis legacy,” Atlantis Dubai wrote in an official tweet along with a promotional video of the opening fireworks.

Unlike the grand opening of Dubai’s first Atlantis luxury hotel, Atlantis the Palm, in 2008 — which preceded the worst financial crash Dubai has seen to date — the UAE’s commercial and tourism capital seems to be confident that this time, economic growth is here to stay.

“We have ambitious growth targets for the sector over the next ten years,” Sheikh Mohammed bin Rashid, the ruler of Dubai, said in a statement after touring the property. “The UAE and Dubai seek to build on their deep partnerships with the private sector to strengthen the country’s status as the world’s most popular destination for international tourists.”

“Our steadfast commitment to building an exceptionally safe and stable environment and a world-class infrastructure over the last few decades has created the foundations for a remarkable future,” he added.

Beyoncé performs on stage headlining the Grand Reveal of Dubai’s newest luxury hotel, Atlantis The Royal on January 21, 2023 in Dubai, United Arab Emirates.

Kevin Mazur | Getty Images Entertainment | Getty Images

Indeed, economic analysts note a raft of new reforms and regulations made to reduce risk and enable more people to work and live in the majority-expat city, including a remote worker visa, a “golden visa” for high-net worth individuals, liberalizing social reforms and 100% business ownership for foreigners.

Karim Jetha, chief investment officer at Dubai-based asset management firm Longdean Capital, noted the parallels between the new Atlantis hotel’s launch and its sister hotel in 2008, whose opening preceded the economic crash.

“With an uncertain global economic outlook, possibility of recession and a buoyant property market, it’s natural to ask whether history is repeating itself with the opening of Atlantis The Royal,” he told CNBC.

But despite this, he said, “there are good reasons to believe the economy is in a much stronger position this time.” He noted the oil-rich Gulf region’s windfall of higher hydrocarbon prices, and Dubai’s growth as a financial center.

“Dubai has seen a continued influx of wealthy expatriates as well as digital nomads attracted by the quality of life and availability of visas,” Jetha said. “Dubai is also growing in prominence as a financial services hub as underscored by several hedge funds opening up offices there.”

The swimming pool of a luxury villa for sale on Dubai’s Palm Jumeirah, on May 19, 2021.

GIUSEPPE CACACE | AFP via Getty Images

Luxury properties have been selling like hotcakes, aided by the deluge of wealthy Russians and citizens of other ex-Soviet states moving to Dubai to evade the instability and Western sanctions brought on by Russia’s invasion of Ukraine.

The last year registered a record 219 sales in homes classified as “ultra-prime,” or selling for $10 million and higher, according to property firm Knight Frank. That’s more than the cumulative total recorded in the decade between 2010 and 2020.

“The performance at the top of the market clearly demonstrates the arrival of Dubai as a luxury hub to rival long established markets elsewhere, with no sign to suggest a slowdown in the seemingly relentless demand from global ultra-high-net-worth-individuals,” Faisal Durrani, the firm’s head of Middle East research, said in a Jan. 16 press release.

Among the Gulf region’s wealthy, he said, “the UAE remains the second most likely target for a home purchase this year, behind the UK.”

The risk remains that many people in Dubai who don’t fall into the category of very wealthy may be priced out of the market; people who form much of the emirate’s economy. Numerous expats are already being forced to downsize as landlords ask for rent increases upward of 50%.

As property and rental prices continue to climb, Dubai’s dramatic recovery and continuing ascent — most recently highlighted by the lavish opening of Atlantis The Royal — may yet leave some of its residents behind.

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Starting A DEI Consulting Firm For His Second Act

After Stan Kimer retired from IBM 10 years ago, with 31 years tenure at the company, he formed a diversity training and consulting firm. Called Total Engagement Consulting by Kimer, the Raleigh, NC, business hummed along nicely for a while, until Covid hit, and demand almost totally dried up. Then came the murder of George Floyd and the national racial reckoning that followed, and quite suddenly the phone started ringing off the hook—and continues to do so today. “I went from almost nothing to operating more than full-time,” he says.

Becoming an Entrepreneur

As part of his benefits package, Kimer had access to a year of career transition coaching that was available to retirees. He decided to make the most of the service and work with a coach on a plan he’d long pondered—becoming an entrepreneur. “Working at IBM, I was a little fish in a huge pond,” he says. “I viewed this opportunity as challenge to myself.”

During those three decades at IBM, Kimer had done a variety of jobs, from marketing brand manager to director of sales operations. But one of his gigs was a four-year stint as corporate diversity manager for gay, lesbian, bisexual and transgender diversity. He’d found it particularly rewarding. “It was the most fun I ever had in a job,” he says. That, he decided, would be the remit of his new company.

So he set out his shingle, planning to work part time. Little by little, Kimer added to his expertise, what he calls “my portfolio of diversity knowledge.” He helped one company with its first employee to go through a gender transition. He worked with another on diversity training. He developed workshops on unconscious bias.

Going Beyond Statements

The business grew steadily until March, 2020, when it fell off a proverbial cliff. Then came the killing of George Floyd. “All of a sudden there was immense interest from companies in DEI training and strategy,” he says. “I had clients who realized they couldn’t just issue a statement. They had to start changing their own internal practices.” That interest has only increased since then, with the 2021 murders in Atlanta of eight people, six of whom were women of Asian descent, and last May’s attack at a Buffalo, NY, grocery store in a mostly Black neighborhood, during which 10 people were killed and three wounded, among other tragedies.

He’s also added more services, like helping companies launch employee resource groups and diversity councils. The latter are groups of 15 or so employees who volunteer to help drive a company’s diversity strategy. And he’s working on setting up inclusive recruiting programs.

Other Projects

About ten years ago, on a trip to Kenya, Kimer learned about the struggles of the people of Mtito Andei, Kenya, and the Kamba tribe, who faced high rates of poverty and HIV infection. With that in mind, he donated seed money to build the Kimer Kamba Cultural Center, which provides vocational training, HIV prevention education and help with boosting economic growth through cultural tourism.

Then there’s the figure skating. About seven years ago, at age 59, Kimer took up the sport. He recently won a gold medal in the bronze level for skaters age 66 and older at the U.S. Adult National Championships. He says he’s amassed three clients through contacts he’s made at skating events.

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Why Interest Rates Don’t Matter As Much as You Think

How important are mortgage rates to real estate investing? Should I take out as much depreciation as possible to lower my taxes? And what should I do when my DTI (debt-to-income) ratio is too high? You’ve got the questions, and David Greene has the answers! On this episode of Seeing Greene, David goes high-level, getting into the topics like real estate tax benefits, return on equity (ROE), and why loans and leverage are riskier than most rookies think!

We’ve got questions from house hackers, BRRRRers, multifamily and commercial investors, and more on this week’s Seeing Greene. First, we hear from a college student trying to house hack in an expensive housing market. Then, a family who has outgrown their space and wants to use creative financing to buy their next primary residence. And finally, a mother concerned that real estate investing could affect her children’s stability. Don’t know what you’d do in these situations? Then, stick around! David’s got the answers!

Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!

This is the BiggerPockets Podcast show 720. Leverage is great. It’s not great for everybody. It’s meant for people that understand how to use it. There’s a lot of things in life that are like this. Okay. Cars are great, but we don’t let nine-year-olds drive them. We don’t even let 25-year-olds drive them if they haven’t passed a driver’s safety course and passed the test and understand the rules of the road. You got to earn the right to drive. You got to earn the right to play with fire, right. There’s people that use fire in their jobs. There’s welders. There’s different types of people that use heat to conduct certain things, but you don’t just give them the tool and let them go play with it right off the bat. You got to earn that right. Leverage is very similar.
What’s up, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Greene episode for your viewing and listening pleasure. If you’re listening [inaudible 00:00:50] on a podcast, that’s awesome. I appreciate that. But you can also check us out on YouTube, if you want to see what I look like. I’m often told that I am taller in real life than what people thought. I don’t know if that’s a compliment or if what they’re trying to say is I have a shrill tiny voice that makes me sound like I’m four foot two. Not sure which way to take it. So let me know, when you watch me on YouTube, do I look like what you pictured in your head? It’s always fun when you see what someone looks like, and it’s very, very different than what you were expecting, and you can never really look at them the same way again.
In today’s show, we’ve got some really cool stuff. We talk about how to continue house hacking even when your debt-to-income ratio can start to shrink from owning all the new real estate. We talk about if a property that is currently owned should be rented out or if they should stay in that property and not buy a new one. We get into if someone should save $300,000 in taxes or if they should avoid that and save that money in the future, all that and more in today’s Seeing Greene episode. Now, if you’ve never listened to one of these episodes, let me just break it down for you real quick. In these shows, we take questions from you, our listeners, we play them, and then I answer them for everybody to hear with the goal of helping increase your knowledge base and real estate so that you can be more successful on your own path to financial freedom through real estate.
Before we get into today’s show, one last order of business are Quick Tip, and that is 2023 is now here. 2024 is not going to be better than 2023 if you don’t make intentional changes to do so. And 2023 is not going to be any different than 2022 if you don’t make intentional changes to make it that way. So spend some time meditating on what you would like your life to look like. And more importantly, who you would have to be to make that happen. Sometimes we make the mistake of asking, “What do I have to do, or what do I need to accumulate to get what I want?” It’s much better to ask, “Who do I need to become?” Because when you become that person, those things will find you. All right, let’s get to our first question.

Hi, David. Excited to have you answer my question. My name is Shalom, and I’m an avid listener of BiggerPockets. My question is as follows. So currently, I’m a college student in New York City, and I will be graduating soon with an income of $85,000 a year. I’m wondering how I can start house hacking or how I can continue my real estate journey. So currently I have one parking space, which I do arbitrage on. I lease it out for 275, and then arbitrages sublease it to someone else for 335 a month.
Now I’m looking to expand, but I don’t know how to house hack or how I can grow without… because my market is so expensive. So in New York City or in Brooklyn or in the outskirts in New Jersey, duplexes go for a million and a half, two million plus. So how can I house hack or expand in this market with such limiting constraints with… of income and other kinds of things? Thanks.

All right, Shalom. Thank you very much for asking that question. I appreciate it. Let’s dive into this because there is an answer to what you’re asking. You’re talking about house hacking, which is probably my favorite topic in all of real estate to get into. There’s so many ways to do it. It’s such a superior investing strategy. It could be a… It’s flexible. It should be a part of everybody’s strategy, even if they buy properties using different means. House hacking is great.
What you’re talking about is a commonly encountered problem in high-priced areas, more expensive stuff. Like what you’re talking about, New Jersey, New York, you’ll frequently see this. The reason that duplexes sell for so much is someone will buy it, and I know that sounds silly, but think about it. If you’re normally going to be paying four grand a month for your mortgage, but you could buy a duplex and rent out one side for 2,500, it’s a huge win if you only have to pay 1,500.
So if you’re trying to get cash flow, it’s not going to work, but if you’re trying to save on your mortgage, it is going to work. So, unfortunately, all your competition is okay not getting cash flow, which creates more demand. The supply stays the same. Prices go up. That’s what you’re facing with. So if you want a house hack in an expensive market, which you should, there’s two things to think about. The first, well, are you currently paying rent right now?
If you factor in the rent that you’re paying and include that as income in the investment, you might find the numbers look a lot better than what you’re thinking of not doing that. The second thing is you probably aren’t going to be able to buy a duplex because the higher the unit count in the property, the more likely you’re going to make the numbers look better.
The other thing is that you could look into non-traditional house hacks. So we always describe the strategy of house hacking. Brandon Turner and I would do this all the time by talking about, “Buy a duplex, buy a triplex, live in one unit, run out the others,” because it’s very simple to understand the concept. But that doesn’t mean that the execution needs to actually be done like that. It’s kind of hard to make it work that way, to be frank.
It’s easier to go buy a five-bedroom house with three bathrooms, add another bedroom or two to it, so you have six or seven bedrooms, rent out those rooms and live in one of the rooms yourself. Now, this isn’t as comfortable, but that’s what you’re giving up. You’re giving up comfort in order to be able to make money. Now you’re a young guy. You’re making 85K a year, which is not bad at all.
You can take some risk by buying real estate. I think that’s a smart move. You should be investing your money but sacrifice your comfort. You don’t have to just buy a duplex and rent in one side of it. If you were going to do that, I’d buy a duplex that had two to three bedrooms on each side and rent those out individually. You’re always going to increase the revenue a property brings in by increasing the number of units that can be rented out.
This can be done by going from a duplex to a triplex or a triplex to a fourplex or a fourplex that has two bedrooms instead of one bedroom and renting the bedrooms out individually or converting a family room into a bedroom and renting that out. Now, this doesn’t work at scale. It is very difficult to build a large portfolio doing this because now you’re renting out 10 to 12 bedrooms on every single unit. It’s very hard to manage that.
But when you’re new, and you’re just trying to get traction, and you’re going to be building appreciation, buying an expensive market, this is probably the best way to do it. You’re also going to decrease your risk while learning a little bit of the fundamentals of investing in real estate. So that’s the advice that I’d have for you. Stop looking at duplexes.
You got to look at triplexes or fourplexes, and you got to look at single-family homes that have a lot of bedrooms and a lot of bathrooms with sufficient parking and neighbors that aren’t super close because you don’t want them complaining and putting your tenant’s parks in front of their house. So you’re going to have to be looking on the MLS and looking more frequently for the right deal, but be looking for a different kind of deal, and you’ll find that house hacking works a lot better.
All right. Our next question comes from Jesse Goldstein. “Hey, David. Thank you for creating what is clearly the best source of real estate content available. Your show is packed more full of real estate protein than my family after Thanksgiving dinner. My question is about how to apply creative financing strategies used for investment deals to the residential real estate space. As a background, my wife and I are expecting our fourth child and are quickly outgrowing our 2300-square-foot townhome.
Our plan is to rent it out if we can find a bigger place, but since we have not been able to find one price right in the few months since we have been looking, a colleague is relocating out of state in December, recently listed her beautiful home, but with today’s interest rates, it is significantly more than I feel comfortable spending. I was chatting with her a few weeks ago after I heard her saying they had no bites after two price reductions and were considering renting the property out.
It seems both of us have been hurt by higher interest rates. I think we may now be in a situation where they might entertain some creative financing ideas to potentially solve both of our problems. They are set on their 1.3 million market price but currently have a very low-interest rate in the twos and are now getting quite motivated rather than renting it out. We have spoken briefly about a subject to loan installment, land sale contract, lease option, or potentially holding a second mortgage, and we are both seeking advice from real estate attorneys.
What is your impression on employing these strategies in the residential space? None of the local Pennsylvania realtors have been speaking with have heard of this approach. If we proceed down these paths, how might both parties compensate our respective agents for their hard work over the last several months? Thank you.” Okay, let’s dive into this one, Jesse.
First off, when it comes to compensating the agents, that’s something that the seller is going to be responsible for. That needs to come from the seller side regardless of how the transaction is structured. Now, the title and escrow company can handle this for you. They’ll just take out the commissions that would’ve gone to the agents and pay them even if you’re not doing the transaction at what we call an arms lengths deal where you didn’t put on the MLS. They didn’t just find a buyer they don’t know. They’re selling it to you.
Your question comes down to structuring this creatively, and it sounds like what you’re thinking is you can get a better deal if you do that. Based on everything that I’ve seen here, the only part of the deal that sounds better is the interest rate you’ll be getting. You’ll get it in the twos and not in the sevens or the sixes or wherever they are.
You’re not actually getting a better price. They want that 1.3 million. One thing to be aware of is if you take this over and you’re not getting your own loan, there’s a little less due diligence that’s done. So you’re going to want to get an appraisal to make sure you’re not overpaying for that property unless you’re okay paying 1.3 and you don’t care what it appraises for. But odds are, if it’s not selling, they probably have it listed too high, and they’re considering selling to you because they want to get the same money.
Now they’re not actually losing anything here other than they’re keeping that debt on their own book so to speak. So they’re still going to be responsible for making the payment even though you’re the one making it for them, and if they try to buy their next house, they’re going to find that that’s difficult. So, sometimes because the sellers don’t understand the downsides of a subject to, you do all the work, you put it together, maybe you even close on the home, they go to buy their next one, and their lender says, “You can’t buy a house. You still have this mortgage on your name.”
And they say, “Well, no. So-and-so’s paying it.” Doesn’t matter. Still shows up as lean on the property under you. Subject to is not this like catch-all that fixes every single problem. It can work in a lot of cases, but in other cases, it doesn’t. I don’t know that this sounds like one where it says an immediate, “Oh, subject to will make the deal work.” You didn’t mention what the numbers are running it at an interest rate in the twos. Okay, people fall in love with the interest rate. It’s an ego thing. “My rate is high. My rate is low. I’m in the twos.” That doesn’t mean anything.
If the property loses money every month or you could have a cheaper payment if you bought somebody else’s house that you didn’t do subject to. It doesn’t matter what your rate is. It matters what the property’s actually producing. You could theoretically buy a house with a interest rate in the 40% if it cash flowed. If it brought in enough money, that’s what really matters. So you need to do a little bit of homework here, run some numbers and see, “If I buy this property with their mortgage, is it going to perform the way that I want it to perform?”
If it doesn’t just stop looking at it. The purchase price is going to be the problem here, not just the interest rate. If it does work, there’s your answer. Now all you have to do is figure out how to structure it if you’re going to buy it. Part of the problem is you’re going to have to come up with the difference between what they owe and what they’re asking for. So let’s say that there’s a mortgage on this thing for 700,000, and they want to sell it for 1.3.
Well, that $600,000 difference you would have to put as the down payment, or you’d have to pay as a note to them, or you’d have to get from another lender, and that lender’s not going to want to give you the loan because they’re going to be in second position behind the loan that’s already there. See, when we get a loan to purchase a property, we’re paying off the existing liens with the money from the new loan, which puts the new loan back in first position, which is where they’re always going to want to be. This is another complication that comes up with the subject to strategy.
So if they only owe 1.1 million, and they’re trying to sell it for 1.3 million, and you have the $200,000 that you were going to put as a down payment anyways, that could work. But everything’s got to line up for you perfectly if you’re going to make something like this work. My advice is to not look at creative financing as a way to make a bad deal seem like a good deal. It almost sounds like you’re trying to talk yourself into this deal because their rate is in the twos, or you’re like, “Hey, we know each other. Here’s my chance to use all the cool stuff I learned on BiggerPockets.”
I really like the excitement, but that’s not what creative financing is ideally designed to be. It’s more when someone’s in an incredibly distressed situation, and they are very motivated to sell, and they’re willing to do creative financing even though it’s usually not in their best interest. Now, if you’re looking to buy this house for yourself because you mentioned replacing your townhome, so maybe this is a primary residence, then your due diligence is even easier. Look at what your mortgage would be on this house, if you assume their mortgage.
Compare that to what your mortgage would be on a similar house that you might buy if you bought it with today’s interest rates and see which of those situations feels better to you. Do you like this one more at this price, or do you like that one more at that price? And if you like this house more, the only thing you got to work out is that situation with the seller where there may be the discrepancy between how much they owe in their old mortgage that you’re taking over and how much the purchase price is that you’re going to have to pay the difference. Good luck with that.

Hey David, thanks for taking the question. My name is Guy Baxter. I’m 26 from San Diego, California. I’ve been listening to the podcast for almost three years now and just this year bought my first property in San Diego. I bought it in May.
I’m coming up on the sixth-month mark and have a few questions about BRRRRing, just with the current market conditions. Since I purchased the property, interest rates have gone up quite a bit, and I’m just trying to decide if I should continue on the path of the BRRRR and kind of bite the bullet with the higher interest rates and pull all of my cash out so I can put it and deploy it somewhere else, or if I should maintain the lower monthly payment and just save up a little bit more for next year to house hack again.
Luckily, with the rising interest rates in San Diego, the prices haven’t quite dropped yet, so I should be able to get most, are all of my money back, maybe a little bit more, and yeah, hopefully, that makes sense. I can’t wait to hear the answer. Thanks.

Hey, thank you for that, Guy. All right. This is a commonly asked question, and I’m going to do my best job to break it down in a way that will help everyone. When trying to decide, “Should I refinance out of my low rate into a higher rate,” which is what you’d have to do to get your money out of the deal to buy the next deal. The wrong question to ask is, “Should I keep my low rate or get a higher rate?”
The right question to ask is, “How much money would I have to spend every month if I refinance to pull my money out more than what I’m spending now?” So let’s say that your debt is at three grand a month, and if you refinance, it’s going to go up to 3,500 at the higher rate with the higher loan balance because you’re pulling the money out. Okay. So now you have a $500 loss if you do this.
You want to compare that to how much money you can make if you reinvest the money that you pulled out. So if you’re pulling out $250,000, can you invest $250,000 in a way that will earn you more than the $500 that it costs you every month extra to take out the new loan? So now you’re comparing 500 extra to what I can get extra somewhere else. That’s the right way to look at this problem. Now, of course, this is only looking at cash flow, whereas real estate makes you money in a lot of different ways.
But if you can get the cash flow somewhat close, it’s a no-brainer to buy the new real estate because you’re going to eventually get appreciation. You’re going to get a loan pay down on a new property. You’re going to get rents that go up on the new property while your mortgage stays the same. So every year, it’s going to theoretically become more valuable to you, and over a 5, 10, 15, 20-year period, having two properties instead of one is almost always going to be a superior investing strategy. So most of the time, most of the time, pulling the money out to buy more real estate, in the long run, will be better, but it’s not always the case.
All right. If you’re cash flowing incredibly well on the San Diego property, maybe it’s a better quality-of-life move for you to just live off of that and not reinvest. If you’ve got a bunch of real estate and you don’t want to buy more, maybe it’s a better move to just stick with where you’re at. But what I want to get at is don’t ask the question of, “Should I get out of the 4% to get into a six and a half percent?” It just doesn’t matter. It matters what the cost of that capital is.
How much does it cost you to pull that money out, and how much can you make with the money if you go reinvest it, or are you going to lose money if you go reinvest it? What if there’s just no opportunities out there? That’s a realistic scenario for a lot of people. There’s nothing to buy that they like. In that case, it doesn’t do you good to do a cash-out refinance and have capital if you’re not going to go spend it on anything. Okay.
So ask yourself the right questions. Think through this. Maybe give us another video submission with some different investment opportunities that I could compare. And then, I can give you a better answer on if you should take the money out of the San Diego house and put it back into the market in a different property.
All right. Thank you, everybody, for submitting your questions. If you didn’t do that, we wouldn’t have a show, and I really appreciate the fact that we’re able to have one. And I want to ask, “Do you like the show?” At this segment of the show is where I read comments from YouTube videos on previous shows, so you get to hear what other people are saying. And here’s also where I would ask if you would please like and subscribe to this video and this channel and leave your comments on YouTube for us to read possibly on a future episode.
All right, this comes from episode 699, tip from a listener regarding an unsafe tenant from Ariel Eve. On question two, call Adult Protective Services to voice your concerns. They will conduct an investigation regarding her safety to live alone. Our next comment comes from Iceman Ant. Ariel’s comment there was from a person who had a tenant and they were concerned about their safety. They were afraid that the person might pass out or possibly even die in the unit that they had, and they wanted to know if they had any actual obligation to care for the person or any liability in that scenario.
Our next comment comes from Iceman Ant. “LOL. He said, programs. It’s cool, David. I also grew up in the VHS area.” All right, this is some criticism that I deserve. I made a comment when referring to old TV shows, and I called him programs because that’s what my grandma used to call them, and it was stuck in my head, and it came out when I was talking. And Iceman called me out on it. It used to be, “Are you watching your favorite program?” I know somebody out there remembers that people used to call TV shows, programs.
There’s certain things like that that we just still say. Like someone will say, “Are you filming?” And I’m like, well, we don’t really use film anymore. Nobody’s used film for a long time. Like now, we would probably say recording, but you’ll still hear people say filming. All right. Our next comment comes from Brie. “I’m concerned about the first viewer’s question as serial house hacking was also going to be my strategy getting started. However, if you cannot apply rental income from the property you’re currently occupying to debt’s income ratios, that presents a huge barrier to qualifying for that second house. This is my first time hearing of this. So the alternative is to move out by either renting or increasing W2 income to afford the two houses without counting the rental income. Any other tips?”
All right. Brie comment and question have to do with the fact that when you’re house hacking, you can’t take the income that you’re being paid and use that towards income for your next property. You’re not allowed to use income from a primary residence to qualify for more properties and your next property in most cases. Now, I believe if it has an ADU or sometimes if it’s a duplex or you’re living in one unit renting out the other, you might be able to. But many times, lenders say, “Nope, that’s your primary. You can’t count the income that’s coming in from it because we can’t verify it.”
This is also a problem when people don’t claim that income on their taxes. If you’re not claiming the income on your taxes, you’re definitely not going to be able to use it to qualify for the next house. And I’m frequently telling people to house hack every single year. The key is when you move out of the last house, it now no longer is a primary residence. It does not matter if your loan is a primary residence loan.
And by the way, if you are wondering, no. If you move out of a house, it’s your primary residence, it doesn’t just automatically adjust to a investment property loan with a higher rate. The bank doesn’t know, doesn’t care, doesn’t matter. You got that loan as a primary residence and those loan terms, if you got a fixed rate, will not change for the next period of time, usually 30 years that you have that loan.
So when you move out of it, you still get a loan that’s a primary residence loan, but now on your taxes, it is now claimed as an income property. You’re now claiming the income that it makes, and you can now use that income to buy additional properties. So sometimes you buy a house, you house hack it, you move out of it into something else, then you start claiming that income on your taxes as an investment property, which won’t hurt your DTI. Then you can buy your next house. You can repeat that process indefinitely. So it slows down how quickly you can acquire new house hacks.
But in a worst-case scenario, you can still do it every two years, right. And once you get to a certain point, you’re not going to need the extra income to qualify. Your debt-to-income ratio is going to be good from the rent that you have of all the previous houses that you bought being counted towards your income. So it can make it a little bit slower to get started, but long-term, it’s not going to hurt you all that much. Thank you for that, Brie.
Next comment comes from Austin. “I think there is something Eli, who asked the house hacking question, could do. You can buy a primary house once every year. So if he’s coming up on that year, let’s say his one year into his house is 12/11/22, he can get the roommates to sign a new lease that just isn’t a rent-by-the-room lease, but the entire house lease. Then get the roommates to sign it for, let’s say, January 1st, 2022. Even though it’s December now, they can agree to a new lease now. So he can be living in the house from 12/11 to 12/31, trying to find a new house.
He can go to his lender now and show his January 1st lease, and they will count 75 or 80% of the rent as income. Or if all his roommates want to move out December 31st, he could just rent, pre-lease the entire house to a family and get a signed lease. Take that signed lease to lender, and they will count 75 or 80% of the rent as income to help the DTI. The other thing Eli could do is to try to buy a duplex. Let’s say the duplex has side A rented at a thousand and side B is vacant. The lender would count 75 or 80% of the rental income from side A towards his DTI. Curious if anyone has other ideas. I am house hacking as well and looking to scale.”
All right. Well, thank you, Austin, for your contribution there. I would… It may be right, but we would need to verify this before we assume that any of the advice you’re getting would just work. So whenever I’m in a scenario like this, I just go to a loan officer, and I say, “Hey, how does this work?” Now, most of the time, the loan officers aren’t going to know either. This is just way too granular. So they’re going to go to the lender, and they’re going to say, “Hey, I need to talk to an account executive. What are your rules for underwriting when it comes to these scenarios?”
And they’re going to go talk to an underwriter. They’re going to wait to hear back. The underwriter’s going to look up the conditions that they have for all the different loan programs and let you know can it work, or can it not work, or what would work. And then we get back to you. This is why I have a loan company, the one brokerage, and this is why I go to them and say, “Hey, this is my problem. How can we fix it?” And I let the professionals work it out. It is tempting to try to figure all this out on a YouTube column, but it’s not wise. There’s no way that anybody here is going to be able to know, and these rules shift all the time.
So your best bet, if you have questions, is to actually contact a loan officer or a loan broker and ask them, “Hey, this is my problem. How can I fix it?” Let them come back to you with some answers. And our last comment comes from Kelly Olson. “David, you keep saying, accountability partner. Try saying accountabilabuddy. It rolls off the tongue and is fun to say.” Accountabilabuddy. Okay, that is easier to say, and it is also a little cheesier, and I don’t know how well green cheese is going to come across. So, for now, I am going to use the very square-ish accountability partner, but I will say, Kelly, accountabilabuddy is probably going to take off. It’s going to be very popular.
And if you guys prefer accountabilabuddy, please let us know in the comments by just writing in accountabilabuddy. All right. We love and we appreciate your engagement. Please continue to do so. Like, subscribe, and comment on this YouTube channel. And if you’re listening on a podcast app, take some time to give us a five-star review. We want to get better and to stay relevant, so please, drop us the line if you’re at Apple Podcast, if you’re on Spotify, Stitcher, whatever it is. We will not stay the top real estate-related podcast in the world if you guys don’t give us those reviews. So that’s why I’m asking for it. Thank you very much. All right. Let’s get back into the show. Our next video comes from JJ Williams in St. Louis, Missouri.

Hey David. I’m under contract with a seller finance property. It’s a historic home that we’re going to look into turning into… It’d be three units in the main house, and then there’s also a tiny home associated with it. It is zone multi-family and commercial. So we’re looking to do two Airbnbs on the lower level as well as the tiny home. And then we’re looking to do either an office space or long-term rental in the upper level.
The deal it’s 125 doing 10% down seller finance, and then it’s going to cost about between 70 and $80,000 to rehab everything. I’m just curious. I have stocks to pull all the money out of to do the rehab. Is it smarter to take out a loan against those stocks, or should I just pull them out, use the money, and then, that way, my cash flow’s a little bit better? Let me know what you think. Appreciate you.

Wow, JJ, this is a very interesting question. I don’t get these very often, which is funny because you started off your question giving me all the details of the deal itself, and then when you ask the real question at the end, I realize none of those details are actually relevant. But congratulations on the deal you’re putting together and for explaining how it’s going to work. That’s pretty cool.
All right. The real question here is, “I have stocks. Should I sell the stocks and use the money towards the down payment, or should I take a loan against the stocks to do this?” This is going to come down to how strong your financial position is. If your position is strong, it might be better to take the loan against the stocks. Now, of course, this is assuming the stocks hold their value or go up. If the stocks drop and you take a loan against them, you just went into double jeopardy there. You lost money on the stocks, and you’re losing money on the loan you’re having to pay, right.
And we don’t ever know exactly how it’s going to work out. So most financial gurus like myself are going to give you advice that’s conservative. Almost everyone’s going to say, “Don’t do it.” Okay. This is put on my little Dave Ramsey hat here. “Don’t ever leverage against stocks. In fact, you shouldn’t have leverage on anything. Sell it all and pay cash for the house, sell it all and pay cash for the house. Don’t be stupid.” Now, he might be right because I don’t know enough about your situation to be able to tell you. But I will say if you’re in a strong financial position and you believe in the stocks, it’s not a terrible idea, in my opinion, to take a loan against him to go buy the property.
It is a terrible idea if you can’t make both the house payment and the payment on the loan against your stocks, assuming everything goes wrong with this rental. All right. Now, this is advice I would give to everybody. Assume the worst-case advantage. You can’t rent the property out, nine months go by where it’s vacant. You have to make the loan payment to the person that sold you the property, and you got to make the loan payment against the stocks, and the rehab goes high. Can you still cover all of your debt obligations with the money you have saved up and the money you’re making at work?
If the answer is no, don’t borrow against the stocks. Don’t do anything extra risky if you don’t have that extra money. If the answer is, “Yes, David, I’ve been living beneath my beans for five years. I save a lot of money every month. I work really hard. I’m good with cash.” Well then, my friend have earned the right to use leverage, and that’s just the way that I look at it. Leverage is great. It’s not great for everybody. It’s meant for people that understand how to use it. There’s a lot of things in life that are like this.
Okay. Cars are great, but we don’t let nine-year-olds drive them. We don’t even let 25-year-olds drive them if they haven’t passed a driver’s safety course and pass the test and understand the rules of the road. You got to earn the right to drive. You got to earn the right to play with fire, right. There’s people that use fire in their jobs. There’s welders. There’s different types of people that use heat to conduct certain things. But you don’t just give them the tool and let them go play with it right off the bat. You got to earn that right. Leverage is very similar. Be wise about it. If you can handle it, use it. If you can’t, just wait and use it in the future.
Let me know in the comments what you guys think about my approach to using leverage. All right. Our next question is rad, and it comes from Claudia Dominguez in Coral Springs, Florida. “I purchased a property in late 2021 serving as my primary residence until I can rent it out later in 2022, one-year owner occupancy requirement per the association.” So it sounds like Claudia here bought a property in HOA. “Being that this will be my first rental property, I have several questions I would love help with.”
All right. It’s a three bed, two bathroom, 1800 square foot house. It is a corner unit, single-level townhome with a two-car garage purchased for 322 with 10% down on a 30-year mortgage. Claudia believes that it could rent for 2,500 to 2,800 per month. “Our monthly expenses, including association fees, are 2100.” So what we’re really looking at is 400 to $700 a month in cash flow before we look into maintenance and everything else. All right. Question. “How would I calculate my potential ROI on the property? Our down payment and closing costs came to 50,000. We spent another 5,000 on new floors after move-in before there was damage to laminate that was there before.”
All right, let’s start with that. You don’t calculate the ROI because you’ve been living in it for a year, and it doesn’t matter what you put down. It matters how much equity you have in the property right now. So subtract the realtor fees, the closing costs, any cost of sale from selling this home, and find out how much money you’d have left. All right. You’re then going to take the 400 a month that you’d get if it rented for 2,500. We’re going to go conservative. We’re going to multiply that times 12. Okay. 12 months times 400 a month is $4,800 in a year.
All right. You’re going to divide that by the amount of equity that you have in the house right now. So it’s purchased for 322 with 10% down. So you really don’t have hardly any equity at all, most likely. Okay. Because if you sold the house, your closing costs are probably going to be close to 6%. So that leaves you with only 4% equity in this property, which is probably 12 grand. So let’s say it’s gone up a little bit, and let’s say that you have say… Man, let’s be helpful to you here because Florida had a good year, and let’s say you’ve got $40,000 in equity in this property.
So if we divide the 4,800 by 40,000, that gives us a return on equity of 12%, which is pretty good in today’s market. Okay. But let’s say that you don’t even have 40,000 of equity. If we divide that 4,800 by… Let’s say your house hasn’t got up at all, and you only have about $12,000 in there. Well, now the return on your equity is going to be 40%. So the less equity you have in the deal, the higher the return on your equity is, which means the more sense it makes to rent it out rather than sell it and put the money somewhere else.
So, before I get deeper into your question, it’s already looking like moving out of this property and renting it out is going to be a no-brainer for you, but let’s keep going. “How can I confirm if it makes financial sense to update the bathrooms?” It probably won’t. Just the amount of money you’re going to have to spend update bathrooms isn’t going to increase your rent by as much as you’re thinking. But your question wasn’t, “Should I?” It was, “How could I know?” And so my answer to you is going to be if updating the bathrooms is going to increase the rent that you can bring in by a positive return on investment, it makes sense to do it.
So if you could bump up the rent from 2,400 to 2,800 just by updating the bathrooms, and it was only going to cost you, say, 15 grand to update the bathrooms, and you’re going to hold it as a rental for enough period of time to make back the 15 grand, that’s how you determine that question. “I’m struggling with my own bias that I would not rent a property outdated bathrooms. I’m considering a low-budget remodel because I can get more modern used vanities, and I found that tubs can be painted. I’m just not sure if I should keep spending money on this.”
Okay, first off, good job on you for recognizing your own bias. It probably isn’t as big a deal as you think. However, you’ve swayed me. If you’re looking at doing a low-budget remodel, some of it yourself, where you’re just getting new vanities and painting a tub, yes, that can actually make sense for you to do. I assume this was an entire bathroom remodel that we were talking about.
“If the market continues as it has been the last few quarters, it will mean spending considerably more on the next property I purchased with the intent to rent it out. What criteria should I take into consideration to assure I am purchasing a good investment at what feels like inflated prices? I believe I’ve heard that appreciation should not be an immediate, or do I rate factor for long-term holds? I’m not sure how to estimate the increase in rental rates that might otherwise support purchasing the next property in a tight market.”
Again, the interest rates don’t matter when you’re making this decision. I know that feels weird to hear, and the purchase prices don’t matter. What matters is it going to go up in value from when I paid for it and is it going to cash flow? Now, interest rates and purchase prices do affect cash flow, and they’re relevant for that purpose only. Meaning the higher the purchase price and the higher the rate, the harder it is to cash flow. But in and of themselves, they’re not important. So the criteria that I think you should take into consideration is it will be more of your time and more of your effort spent looking for another deal to replace the one you have.
And this is not uncommon in real estate. In fact, this is probably closer to a healthier market than what we’ve been seeing since the last crash. I know that sounds crazy, but we got spoiled. We got used to buying a property that appreciated every single year that needed very little work that wasn’t intended to cash flow in the first place. This was mostly residential real estate. We’ve all been buying. That cash flowed from day one, and not only cash flow, but cash flowed in double digits. That’s just us being spoiled. And now that we’re not spoiled anymore, we’re angry about it.
But traditionally, the way that real estate is structured, it’s meant to make you money over the long term, not over the short term. So it’s okay if it’s harder than what we thought to make it work. Real estate is still a good investing decision. Question two of three loan options. “What are the best loan options for purchasing a property? I have a W2 job that pays above average for my area. And I have good credit, but I only have enough for about a 10% down payment on the next property. Since I already own one property, I believe that will be forced a conventional loan requiring 10% down.”
All right. So the best loan option for you is to do the same thing on your next house as this first one that you did that we just talked about. You want to use a primary residence loan and put as little down as possible. You don’t have to put down 10%. You can actually put down 5% in a lot of instances or three and a half percent if you don’t already have an FHA loan. If you’re not buying it as a primary residence, meaning you’re moving out of the one you’re in and you’re not going to buy another house to live in, you’re going to go live somewhere else. You can put 10% down many times as a vacation home. Okay.
So these are like a house that you’re going to rent out some of the time. But you’re going to rent out to other people, or you’re not going to live there as your primary resident. So hit us up if you want us to look into finding a vacation home loan for you or go to somebody on BiggerPockets, use their tools there and find a person that’s a member that does mortgages and ask them, “Hey, what options do I have if I don’t want to burn my vacation home loan? I want to buy a primary residence.” But I don’t assume you got to put 10% down. You can very likely get into something for three and a half to 5% since you’re moving out of your current primary residence.
A lot of people think you can only have one primary residence loan at a time. That is not true. You can usually only have one FHA loan or one VA loan at a time. But you can have more than one primary residence loan at a time because not all primary residence loans are VAs and FHAs. You can get a conventional loan, often with 5% down on a primary residence. Question three of three. This is a family-related question.
“I’m house’s hacking to start. I live with my kids in the property that will be rented. We just moved from an apartment that we were only in for seven months after moving from the house we sold in 2021. My intent is to purchase another property and live in it for a bit before renting that one out and then ultimately purchasing my long-term home. I feel as if forcing my children to move every one to two years might negatively affect them, but I don’t want to use my kids an excuse for not carrying out my goals. How do you reconcile some of the demands of real estate investing, in my case, house hacking, where I move my kids around every year to a new place with what feels like shortcomings while raising family?”
Ooh, this is a good question here. And, of course, you’re asking a guy that doesn’t have a family and doesn’t have any kids, and yet I’m still going to sit here and do my best to mansplain away this difficult conversation. First off, I just want to say I understand actually, I can’t literally understand, but I empathize with what you’re going through, and I think you’re a good person for even asking this question. Because, on podcasts like this, we always talk about the financial components to real estate. It is why people are here to listen. However, we’d be foolish to not acknowledge that there’s an emotional component to real estate as well.
This is a part of the process, and if you want your subconscious to get behind what you’re doing and support you in it, you got to satisfy the emotional side of you. So I’m glad you’re asking this, and if other people have been wondering the same thing, don’t feel bad about it. This is totally normal and something that all of us have to work through as investors. In fact, one of the reasons I think I took longer in life to go start a family was because I knew how difficult my law enforcement career, my hundred-hour work weeks, my commitment to building businesses and making money through real estate would affect a family negatively. It is harder, and I think that was in the back of my head, and I just pushed off starting the family because I wanted to build success in this arena first.
It’s obviously a different position I’m in now. So now, if I wanted to start a family, I think I could without some of that guilt. But you’re right there, smack dab in the middle of some of this mom guilt. So let’s work our way through this one. Claudia, the first thing I think about is you want to have an honest conversation with your kids and share why the decision will be a benefit to the family in the future. It’s a teaching tool, right.
So maybe your kids aren’t old enough to understand math, but if they are, you could explain to them, “This is what our house payment is. Now, if we move into the second house, it’s only going to be this much. That means mommy doesn’t have to work as much at work, and I’m able to be home with you more if we move again.” I wouldn’t say, “This means mommy makes this much more money,” because if I was a kid, I heard that, I’d be like, “Oh, cool, so you can buy me more toys now,” which isn’t where you want the conversation to go. So make the correlation between the more money you save, the more that you could be with them.
The next thing that I would do is I would try to find a way to make it fun. Nobody likes moving. It’s a pain, right. So can you make it fun? Can there be some kind of reward that you could give these kids that doesn’t cost money, that will make this less of a… I don’t know if traumatic is the right word, but less of a negative experience. Can you guys all get together and have pizza or popcorn on the floor when moving, sit on bean bags, and share stories of your favorite part of the new house?
Can you take an adventure as a family and walk around the neighborhood and point out the houses that you like the most or see how far away the restaurants are, the ice cream shop, or the movie theater? Can you take them to the new movies and say, “Hey, kids, let’s compare this to the other movie theater and see what about this one might be better.” Right. Can you turn it into a game or a system or a pattern where, every time they move, they learn what it takes to move and so they get better at doing it? Now, I don’t know that if it’s a moving that’s super hard on kids as much as it is changing schools, that’s what I would think. It’s having to lose some of their friends.
So if you’re able to house hack in the same school district, that would definitely be better. If not, I would have a lot of conversations about what they’re going through at school. A lot of parents make the mistake of assuming that everything is good for their kids because their kids aren’t saying anything. But when I was a kid, I wasn’t going to go home and talk to my mom or my dad if I was getting bullied or if I had a issue going on. That didn’t happen very often, but I definitely wasn’t going to go talk about it. And the times I did try to talk about it with my parents, they sort of dismissed it because they had other stuff going on in their lives that they were more stressed about.
So I was like when we did move, it was a very, very, very hard move for me. I was going into seventh grade, so I went into junior high at a new school with a bunch of kids that had way more money than the kids at the last school. And I didn’t dress very good, and I was getting teased, and I had never been teased because I was very popular at my first school. I just didn’t know how do you handle this type of a situation. And there was no one to talk to.
So I would be open with them about are they extroverted? Do they make new friends? Are they introverted? Are they having a hard time making friends? And just give them some advice of what they can do to be more likable in general so that the transition isn’t as difficult for them. Of course, I want to recognize you’re making some sacrifices here. It’s going to be harder on them because you’re doing this. So kudos to you for putting your family first, even though it’s going to be difficult in the short term. All right, our next question comes from Jack Graham.

Hey, David. My name is Jack Graham, and I have a big question for you, which is, should I bonus cost segregate some of my properties, so I don’t have to pay income taxes on my regular income? And just for context, I have about five properties worth about 2.5 million in value total. About 40% of that is in equity, and I’m trying to get some of these properties, which two of them I purchased this year, and I looked into YouTube, some videos, everybody brings up a bonus cost segregation.
Being a full-time realtor and ultra investor, I do work more than 75 hours a month in real estate. So I could technically use that part of the tax code to offset my personal income. And this year, I’m supposed to pay about probably 300 to $350,000 in taxes, and I really don’t want to. So my question was for you, “Hey, should I do this? Should I use those two properties that I purchased this year to bonus cost segregate them so I can keep the money in my bank and hopefully purchase new properties in the future, and I could make better use of my money right now versus keeping it… giving it to the government?
And what are the consequences? Do I pay more taxes in the future? If that’s the case, is that something I should still do?” Let me know what your thoughts are. Big fan of BiggerPockets, big fan of you and what you guys do. So thank you so much for everything, and looking forward to your response.

All right, Jack, thank you very much for this. What a great question here. So I’ll give a gist of what you’re describing for anyone that’s unfamiliar with bonus depreciation, then I’ll do my best to answer your question. What Jack is talking about here is, normally, when you buy a property, let’s call it a residential property, the government lets you write off a portion of that property every 27 and a half years because it’s going to be falling apart. So they’re saying the useful life of this property is going to go over 27 and a half years. So you take the total price of the property, divide it by 27.5, and you get to write that off against the income that property generates. So if it makes 500 bucks a month, but the number that I just described is 400 bucks a month, you only pay taxes on $100 a month.
If you are a full-time real estate professional, they will let you take the losses. So sometimes what happens is you get to write off 700 a month, but it only makes 500 a month. So you have $200 a month that is extra that isn’t being covered. If you’re a full-time real estate professional, you can take that $200 and apply it against other ways that you made money through real estate, commissions, income-flipping houses, I believe. Pretty much all the ways that you make income, you can shelter against that 200%. Now, when you combine that allowance with bonus depreciation, you’re actually able to not wait 27 and a half years to take that money. You can do a study where they let you take it all in year one. It’s called a cost segregation study. It’s a little bit more complicated than I’m describing, but I’d be here all day trying to talk about it.
So without giving you the details, the overall strategy is that you look at a property. You determine, “Okay. Well, this much of it is going to wear out much quicker than 27 and a half years, so I’m going to take the loss from that all off the upfront in year one.” When you combine the strategy of taking all your losses into year one with the fact that you’re now able to shelter income from other things full-time real estate professionals can end up avoid paying income taxes. Now, this is how people like Robert Kiyosaki and Donald Trump and me when we say, “I don’t pay any income taxes. I don’t pay taxes at all. I’m not stupid.” This is really what they’re getting at. Okay. It’s not that they’re avoiding taxes like they’re breaking the law is that they’ve reinvested all of their money into new real estate, so they have all these new losses to take against the money that they’re making.
Now, it sounds great, and that’s why we do it because we don’t want to pay taxes. Jack here, you don’t want to pay taxes either, but there is a downside. There’s actually a couple of downsides that I’m going to describe before we know if this is the right move. First off, you can never stop buying real estate when you do this. I say it’s like taking the wolf by the years. As long as you’re buying new real estate… Like I got to buy real estate every single year to offset the money that I made, and sometimes I have to spend close to or sometimes more than 100% of the money that I earned has to go back into real estate to not pay taxes on it. Okay. So if your goal is to save up a big nest egg, this doesn’t always work. Sometimes if you just want cash in the bank, it’s better to pay the taxes.
Second off. It’s not free. Actually, when you take it all upfront, you lose the ability to take it over the next 27 and a half years because you took it all in year one, so that depreciation is gone. You don’t get to shelter any of that income after you’ve taken it right off the bat, which means you’re going to pay higher taxes on the future income that that property makes. Now, as long as you take that future income, included in all the money that you’re making as a real estate professional, and keep buying more real estate, you won’t pay taxes on it. But do you see what I’m talking about here? You’re getting sucked deeper and deeper into this world where you can never stop buying more real estate.
And when you do stop buying more real estate, you’re going to pay taxes on the money you make, and you’re going to make taxes on the income that those properties are making, and that income is not going to be sheltered by depreciation. The last downside that I can think of off the top of my head is the fact that this isn’t free. You actually have to pay for cost segregation studies, which can be anywhere between six and $10,000 a study in my experience. So not only are you not getting to take the depreciation forever, you’re only getting to take it right off the bat. You had to spend six to $10,000 for the luxury of doing that. So yes, you will save $350,000, but you will also take some losses in some of these other ways I describe.
That all being said, if we’re going into a market like right now where I’m expecting to see better opportunities than we’ve been able to see, that extra 300 to 350,000 that you would be spending in taxes is going to do you more good than it normally would. If we were going into a market where prices just kept going up, up, up, up, up. And it didn’t matter how much money you had. You just weren’t going to be able to buy anything, and if you did, you were going to lose money when you bought it, or it might be crashing. That’s a different story. But we’re in a situation now where you could take that 350,000 and wait out to see is it going to dip more. Is it going to, quote-unquote, crash? Having capital right now is more beneficial than having capital in other scenarios where real estate just keeps exploding because of all the money that the government is printing.
So I kind of do lean towards the fact that I think that you should do this, right. Another thing to think about is that if you’re investing for the future wisely and you are growing your equity, there’s ways to make money in real estate that are not taxable, that are not cash flow. So you have to report your cash flow as income because it is. This is why when people are like, “Cash flow, cash flow, cash flow,” and they just get the little dollar signs in their eyes like Scrooge McDuck, and they’re just obsessed with cash flow because it’s going to solve all their problems. It doesn’t. It doesn’t. Now, it’s great. I’m not saying avoid it, but I’m saying it’s not as good as we hype it up to be.
When you get equity, you can do cash-out refinances that are not taxed, not at all. And the cool thing about a cash-out refinance is usually it takes you a long time to build up equity. So usually, during the time you’ve been building that equity, the rents have been going up on the thing you bought. So by the time you do a cash-out refinance, the rents have increased enough to support the additional debt you’re taking out on the cash-out refinance. So you don’t actually take any danger. You don’t lose money when you do it. The property continues to pay for the loan that you took out. You get a cash-out refinance, which is not taxed. You can either live on that money, or you can reinvest that money into the future real estate that you have to keep buying if you’re going to use cost segregation studies and bonus depreciations.
The very last point that I just thought of that I’m going to throw as a little cherry on top for this for you, Mr. Jack Graham is that bonus depreciation will not be around forever. In fact, I believe in 2023, it is set to scale back to where you can only take 80% of the value and in 2024, only 60%, and so forth, until eventually, it’s at zero. So if you’re thinking about doing this, I would say you should do it now because every year, it’s going to get progressively less beneficial until it’s not there at all. Thank you very much for your question. Please let us know what you decide.
All right, and that was our show for today. But what you guys got a little bit of high-level stuff right there at the end with some fancy words like cost segregation, bonus depreciation, some cool stuff there, and then you also got some stuff from beginners like, “Hey, what loan can I use to buy my next house, and should I buy a house at all? How can I keep my debt to income high if I keep house hacking?” And that is what we’re here for. We want to give you as much value as we possibly can so you can find financial freedom through real estate just like many of us, including me, did. And we would love to sit here and root for you guys, guys to watch you on the way.
So thank you very much for following. If you want to know more about me particularly, you could follow me on social media @davidgreene24. Go follow me on Instagram right now. You could also find me on YouTube if you go to youtube.com/@, little @ sign, davidgreene24, and subscribe to my channel and check out the videos that I have there where I do a little bit more personal stuff. You can also follow us at BiggerPockets on YouTube as well. You can follow us on Instagram. You can follow us all over social media. So look us up there and follow as well.
Look, get rid of some of the crap in your life. Okay. Get rid of some of the stuff that isn’t helping you with anything. Just the mindless scrolling or the doom scrolling that you do, and start actually listening to stuff that’s going to give you a better future than what you have right now. Thank you very much for your time and attention. I love you guys. If you have some time, check out another video, and if not, I will see you next week.



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

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Metro areas where U.S. rent prices have dropped the most

Colorful cafe bars at the iconic Beale Street music and entertainment district of downtown Memphis, Tennessee.

benedek | iStock | Getty Images

Despite broad hikes in rental prices, competition is easing in some U.S. markets as inventory grows, according to a new report from national real estate brokerage HouseCanary.

At the end of 2022, the median U.S. rent was $2,305, which was nearly 5% higher than a year earlier. But when compared to the end of the first half of 2022, that median rent had declined almost 6%, the report shows.

Although rent prices have cooled in some markets, others have continued to grow, including metro areas along the East Coast and through the industrial Midwest, HouseCanary found.   

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5 markets with the largest annual rent increase

5 metro areas with the largest annual rent decrease

‘It’s a pretty dramatic shift’ housing experts says

As rent prices ease and mortgage rates rise, it’s become cheaper to rent than buy in many markets. 

Renting a three-bedroom home is more affordable than owning a comparable median-priced property in most of the country, according to a recent report from Attom, a real estate data analysis firm. 

Similarly, Realtor.com’s December rental report published Thursday found the U.S. median rental price, $1,712, was nearly $800 cheaper than the monthly cost for a starter home.   

Wells Fargo to significantly step back from housing market

“It’s a pretty dramatic shift,” said Rick Sharga, executive vice president of market intelligence at Attom, pointing to one year ago when it was cheaper to buy than rent in 60% of the markets Attom analyzed. “You simply can’t overstate the impact that higher financing costs have had on homeownership.” 

While mortgage interest rates have recently cooled, rates more than doubled in 2022, which has never happened in one year, according to Freddie Mac. In January 2022, the average 30-year fixed rate mortgage was around 3% before jumping to over 7% in October and November.

Sharga said therate increase made monthly mortgage payments 45% to 50% higher for a home purchase, even as home price appreciation slowed. “That probably is the single biggest factor in creating that shift,” he added.

The decision to rent or buy is ‘always a matter of timing’

While conditions for homebuyers may be somewhat more favorable in 2023, it’s difficult to predict whether the economy is heading for a recession, which may shift financial priorities, experts say.

“One thing to always keep in mind is that markets are constantly changing,” said Keith Gumbinger, vice president of mortgage website HSH. “If you don’t need to be in this marketplace right now, you’re probably better to hold off and watch conditions change.”

Of course, there’s more to homebuying decisions than home prices and mortgage interest rates. “The decision on whether to rent or buy is always a matter of timing,” he said. “And more importantly, it’s a matter of need.”

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Is A Recession A Good Time To Start A New Business?

With tech layoffs making the news, it’s fairly likely that 2023 wouldn’t be a year in which it is easy to find a comfy tech job. While this would undoubtedly be a time of hardship, it would also be a time of opportunity. Here are the major threats and opportunities for new startups during a market downturn:

1. Capital:

Availability of capital is usually a problem during market downturns. Most startup funds become more conservative and generally speaking invest less in new projects. Even worse for early-stage startups – the risk tolerance of investors might also fall, which means that the available capital for new projects will naturally concentrate on a few “safe” bets.

That said, during economic downturns the usual government policy is to increase spending in order to battle the recession. This means that business loans along with other forms of fiscal stimulus (subsidies, etc.) could become more easily accessible.

2. Costs:

While capital might be a bit more difficult to find, you might need less of it in order to survive. During a recession, the cost of hiring employees, renting office space, and other operational expenses may be lower due to increased availability and reduced demand. This can allow a startup to stretch its funding further and become profitable more quickly.

3. Talent:

By far the biggest reason why a recession is a good time to start a new project is that great tech talent becomes available.

In periods of economic boom, it’s very hard to compete with established tech giants for top talent because of the level of pay and other benefits established corporations can offer. However, due to the layoffs, attracting and keeping high-quality people suddenly becomes easier.

However, in a time of cost-cutting and layoffs in the giants, experienced people suddenly become available on the market. This doesn’t just mean you can find and hire people more easily – you can possibly find co-founders of a very high caliber.

It’s not unheard of in layoff periods for ex-colleagues to become partners and start their own projects related to the industry they were previously working in. A recession is a great period to apply the lessons you learned while working for your previous employer during the economic boom periods, in which big businesses tend to grow more inefficient.

This leads us to our last point:

4. Markets:

The favorable market conditions and availability of capital during periods of economic boom make inefficiency less fatal for large corporations. A recession, however, puts a quick end to this. Consumers become much more cost-conscious and quickly cut their spending for what they consider non-essential products and services. Combined with the fact that capital becomes harder to access, this quickly drives inefficient and rigid businesses into bankruptcy.

This is both a threat and an opportunity for young startups. The agility of such projects gives them the opportunity to adopt innovative practices and business models – in other words, to apply the lessons we mentioned. Moreover, the failure of old businesses opens up space in the market for new companies that are able to provide better products and services.

Nonetheless, the cost-consciousness and conservativeness of consumers make it harder for unestablished brands to attract new customers, which means that in order to be successful, being the new shiny thing isn’t enough. You need to provide something of real value that people are actively searching for.

In conclusion, there are pros and cons of starting businesses during an economic downturn. All things considered, however, the higher likelihood to attract high-quality tech talent to your project makes it a great idea to try something new.

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