January 2023

Howard Lutnick, CEO and chairman of Cantor Fitzgerald, joins ‘Closing Bell’ to discuss money moving towards commercial real estate, the projected path for rate hikes, and how to invest in public sector REITS.

By John Rampton, founder of Palo Alto, California-based Calendar, a company helping your calendar be much more productive.

The working world’s obsession with hustle culture may finally be ending. This shift in career aspirations means that there’s an opportunity—no, a necessity—to cultivate happy, healthy and thriving workplaces in 2023.

For business leaders, this perspective shift offers an opportunity to leverage best management practices alongside your company’s purpose. In the new year, consider these happiness-inducing leadership strategies to help change the way your organization feels about work.

1. Bring Your ‘Why’ To The Forefront

As a company, your “why” is at the very core of what you do. But even among the most committed professionals, the drumbeat of daily tasks can distract from your overall purpose. Combat the draining effect of day-to-day minutiae by integrating the why of what you do into every facet of your work.

Take a cue from tech firms like Amazon and place an empty chair in your meeting rooms to signify your customer or client. This silent reminder of who you’re doing what you do for can lead to more thoughtful conversations and decisions.

Use personas to think through your clients’ journeys, assigning real or stock imagery to depict them and their needs. This visual aid can help your employees better connect with their impact, even if they aren’t client-facing. When your employees better understand how their work makes a difference, they experience greater satisfaction and tend to be happier and more productive at work.

2. Invest In Your Employees’ Growth And Development—No Strings Attached

Traditionally, employers have provided a standard package of benefits to their employees. The usual health insurance and paid time off might be complemented by education reimbursements. Although free education is a generous offer, the strings attached could make this sweetheart deal turn sour.

To boost employee happiness, avoid presenting education benefits as a quid pro quo scenario. Instead of dictating plans of instruction, modify your education reimbursement program to provide a set annual amount for learning and development. Free up your employees’ options, allowing them to choose what to study versus requiring courses to be narrowly role-focused. Who knows? Enabling your marketing manager to take an art history class might prove even more valuable than an SEO certification course would have.

Collaborate with your management team to determine how your education benefits can boost employee engagement and retention. Review recent engagement surveys to identify concerns that your management team can strive to resolve. One such issue might be the time required outside of work to complete course requirements. If your workload demands can support it, update your policies to allow employees to learn during work hours. Providing support in both funding and time can improve course completion rates, boost employee satisfaction and enhance on-the-job results.

3. Develop Clear Career Trajectories And Organizational Goals

If there’s one happiness killer at work, it’s lack of clarity. When project plans, individual goals and decision-making criteria are unclear, it can put your employees on the fast lane to dissatisfaction. Be honest with yourself as you assess how your organization performs in these areas. If your assessment yields anything less than happiness-inducing transparency, a change may be in order.

First, review your employees’ career progression plans, and if you don’t have them, create a framework now. Each role on your org chart should have a growth plan that helps employees move forward. This can include skills mastery, goal achievement or next steps on the career ladder. Each employee should know what success looks like and how to earn a promotion, should they want to.

The same principle applies to setting goals, which can often vary across departments. Implement a S.M.A.R.T. goal system, in which goals are specific, measurable, attainable, relevant and timely. The combination of specificity, time-boundedness and measurability creates greater accountability for leaders and employees, establishing a playbook for success. Together, these improvements can boost employee happiness, especially regarding individual growth and team achievement.

Transparency And Collaboration

One trait of stale and out-of-touch leadership teams is a disconnect between seniority levels. Even if a CEO has risen through the ranks, it’s easy to forget the concerns of frontline workers. Counteract this possibility by building opportunities for feedback and collaboration between all levels of management.

Whether your chosen method is companywide surveys, manager-employee one-on-ones or some other tactic, establish channels for equitable input. By doing so, you’ll earn greater buy-in and build trust. Together, your organization can identify what success looks like, how to implement changes and how to create the happy, healthy workplace you’ve dreamed of.

David:
This is the BiggerPockets podcast show 718.

Dave:
If you’re in a market where wages are not going up, there is just a psychological limit to what people are going to pay for rent. It can only be X percentage. Usually, it’s 30% of their income can go for rent, and so I totally agree that in a hybrid or an appreciating city, rent growth will go up. I don’t know if that necessarily means they’ll ever reach the cash flow that these cash flowing cities tend to support, but personally, I think that that’s the better bet because you’re not betting on just cash flow or just appreciation or just rent growth.
You’re getting a little bit of everything. You don’t know which of the three might perform the best, but whatever happens, you benefit.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast here today with one of my favorite co-hosts, none other than Biggerpockets’ own VP of analytics, Dave Meyer with a fantastic show for you. First off, Dave, how are you today?

Dave:
I’m doing great. I had a real fun time recording this episode. I think people have a lot to look forward to.

David:
You are doing great, because if you guys listen all the way to the end of the show, you’re going to see exactly why this was a fantastic show about a very difficult topic that all of our competition is avoiding, because they don’t want to talk about what’s going to happen in 2023 other than screaming. The sky is falling, or pretend like nothing’s happening, and just give me your money so I can teach you how to invest in real estate. Here, we’re not about that life.

Dave:
Absolutely not, and maybe we should have talked about this at the show, but I think people are avoiding the concept of risk. They see there is risk in the market, and that’s true. I believe there is risk in the market, but risk is the counterbalance to reward. So, you have to understand risks so that you can reap the reward and opportunities that are out there. I think at the show, we really talked about that. We talked very specifically about what the risks are and some of the ways that you can mitigate risks and take advantage of opportunities that might present themselves over the coming year.

David:
That’s exactly right. So if you’ve been curious, if you’ve been frustrated, if you’ve been just wanting to understand what the heck is going on in the housing market right now, this is a show that will bring a ton of clarity to you. If you listen all the way to the end, we’re actually going to get into three strategies that we both believe will work regardless of what the market does in these uncertain times in 2023. Before we get into today’s show, I have a quick tip for you. Go to biggerpockets.com/report, and download the report Dave ROE.
A lot of the information from today’s show was coming out of that, and you can get it for free if you’re a BiggerPockets member. Dave, anything you want to say before we jump in?

Dave:
No, go check out the report. I spent a lot of time on it.

David:
Go support Dave, and leave us a comment in the YouTube video telling us what you thought of this report. Show him some love. If you like this show, please leave us a five-star review wherever you’re listening to podcasts. Guys, honestly, this is very, very important. We are currently the top real estate show in the entire world. We want to stay that way, but we cannot do it without your help. So whether it’s Apple Podcast, Spotify, Stitcher, wherever you listen to podcast, please take a quick second, and let the world know how much you like this podcast so we can stay number one. All right, let’s get into the interview.
Dave, you wrote a report about the real estate market. Tell us a little bit about that.

Dave:
I did. It’s a full comprehensive state of real estate investing for 2023. I wrote it because there’s just so much going on right now. We’re not and haven’t been in a normal housing market for the last several years. I start the report by going through all the different factors and variables that are going to impact the housing market right now, and then talk about some of the best strategies that you can use in 2023 to take advantage of what I personally think are going to be opportunities in the coming year, and just pose some questions about the 2023 market because we all obviously like to make forecasts, and guess what’s going to happen, but there are some just unanswered questions that I think are going to be the X factor for the 2023 housing market that we just don’t really know how it’s going to play out just yet.

David:
I’d say in my short career investing in real estate… Well, I say short. Compared to some people, it’s long, but I’m not an old man yet. This is the most complicated market I would say that I’ve ever seen. It’s got a lot more competing factors that influence what we’re seeing. Is that similar to what you’ve noticed, and is some of that covered in the report?

Dave:
Absolutely. When you look at the housing market back in time for the last 80 years or wherever we have pretty good reliable data for, the housing market is usually fairly predictable. It moves in cycles, but for, let’s say, seven or eight out of every 10 years, it goes up 2% to 4%, somewhat just above the pace of inflation. It’s pretty steady state and not that exciting. For the last 15 years or so, things have gotten a little more interesting, and it’s been a little bit more boomer bust over the last couple of years.
For the last three years in particular, as everyone listening to this probably knows, it’s become insane. It doesn’t mean that people are necessarily acting irrationally, or that we’re totally unhinged from fundamentals. In my mind, what’s happened over the last couple years is the variables and the factors that always impact the housing market have all aligned in this perfect storm to push housing prices up. Now, we’re sort of starting to see that unwind and go back to a more balanced and honestly more normal housing market.

David:
That seems crazy. It seems really negative. We’re having this overcorrection, but I think when you consider the insanity we had over the last eight years in how hot the market was, and you put it within context of that, I don’t think this is as big of an overcorrection as people are saying, but it certainly feels like it when you compare it to 20% increases in price being the norm in certain cities. Now, you mentioned that there are some levers of the housing market that affect the way that it performs. Can you tell me what you mean by that?

Dave:
Sure. I think generally, there are different variables, and these are mostly macroeconomic indicators that impact housing prices more than others. There’s thousands of things, and every individual housing market does perform differently. But when you talk about the national level housing market, it really all comes down to a few things. People often want to honestly even oversimplify it, and say, “Mortgage rates are going up, so prices go down.” Fortunately, it’s not that simple. There are more indicators. There are more things that really matter, and it shouldn’t be surprising.
These levers are things like supply and demand. Obviously, pricing always in an economic sense come down to supply and demand, but if you extrapolate that out a little bit more, we need to really look at things like affordability, inventory, the housing shortage in the United States, inflation of course, and things like mortgage rates. Those to me were the major things that were impacting the market in ’22, and will continue to impact in ’23, but just in a slightly different way because the way these variables are interacting with each other has changed.

David:
Now, we came out of one of the biggest recessions in our country’s history right before we had this explosion. So from your take, what impact did that great recession play in the home builder space over the last 10 years?

Dave:
I mean, from pretty much everyone’s estimation, the U.S. has a huge shortage in housing units. The predictions vary significantly somewhere between three and a half and seven million housing units. When you talk about economics, this just means a shortage of supply, right? There isn’t enough housing units in the United States for people, and this is largely attributed to what happened during and in the aftermath of the great financial recession. Basically, tons of builders just went out of business in 2008. It was rough out there, and people were looking for jobs. Businesses closed.
People who worked in construction wound up going into other industries, and so we see, if you look at the graph, and I put this in the report, it’s pretty startling the graph. You could just see that construction just fell off a cliff from 2008 to 2010. We’ve slowly been building our way back up, and it’s now at a pretty good level. But that eight years, or, like you said, from 2010 to 2018, we were well below the building rates that we should be at. So, that created these conditions where there weren’t enough homes.
That coincided with the time starting around 2020 when millennials, which are now the biggest demographic group in the entire United States, hit their peak home-buying age. We have these confluence of factors where there’s a ton of people who want homes, and millennials who are starting families, starting to have kids, and not enough homes. That is a perfect scenario for prices to go up. That’s just an example of how these different macroeconomic forces work together or did through the pandemic work together to push prices up.

David:
Now, if you want to hear more about the stuff Dave’s talking about, and the nitty gritty details that make this so exciting, you can download the report for free at biggerpockets.com/report, and see this data for yourself. Now, we’re going to continue talking about what’s in the report, but if you actually want to stop the podcast, and check this out or get it after the podcast is over, please head over to biggerpockets.com/report. Now, I think what you’re mentioning about supply and the issues in supply plays, in my opinion, maybe it’s the biggest lever in this whole drama of real estate prices and trying to understand them.
I was just talking about this yesterday when someone said like, “Well, David, if rates keep going up, do you see prices plummeting?” I said, “I don’t see them plummeting, because they’re such a constricted supply.” If you’re a homeowner and you’ve got a 3% interest rate, and you could sell your house and get a 7% interest rate, unless you have to move, you’re probably not going to do it, especially with your house being worth less now than what it was before. You’re going to wait. So because we’re not seeing a bunch of supply flood the market, we’re not seeing this crash in prices, and that’s what we saw during the last time we had a crash.
There was so much supply. There was way more properties than people could afford to buy or even wanted to buy, which is what led to the big decrease in prices. That’s, I think, what’s confusing to people that are like, “What? We’re going in a recession. Shouldn’t prices be dropping like they did last time?” What’s your take on comparing the environment we’re in now to the last time we saw real estate crashed?

Dave:
That’s a great point, and there’s a lot to that. I’ll just say about supply first that there are two good indicators of supply. One is this long-term indicator, and it’s what I mentioned before, that there just aren’t enough housing units in the U.S. To me, I am biased, because I’m a real estate investor. That’s the thing that points to long-term appreciation for real estate. Regardless of what happens in 2023 or 2024, because we don’t know what’s going to happen, to me, the fact that there are a lot of people who want houses, and there aren’t a lot of houses, that bodes well for real estate pricing over the next five to 10 years.
When you’re talking about what’s happening in the short term, I like to look at a metric called inventory, which is basically how many homes are on the market right now. To your point, it’s not exploding. It’s definitely up from where we were in 2020 and 2021, but not in the way where it’s signaling a crash. Just to explain this to everyone listening, inventory, I think, is one of if not the best indicator of the short-term performance of the housing market, because it measures supply and demand. It’s not just how many houses are put up for sale. That’s something known as new listings.
Inventory is a measure of how many homes are put up for sale, and how quickly they’re coming off the market. So when you see inventories start to spike, that signals a significant shift towards a buyer’s market, where prices are probably going to go down. We have seen that in the last six months that inventory is going up. But actually, David, I was just looking this week. I don’t know if you know this guy, Mike Simonson. He’s from Altos Research. He’s a big real estate guy. Inventory fell last week. It’s going down now, so it’s not like inventory is skyrocketing, and all of a sudden, we’re seeing things stay on market way longer than they were pre-pandemic.
They’re just going back to pre-pandemic levels. As of right now, things could change over the next six months. But as of right now, we’re recording this in January of 2023. Things are pretty stable in terms of inventory, and that is a big difference from what happened in 2008. I’ll also mention that the main biggest difference between now and 2008 is credit standards. This is not my area of expertise, but I read a lot about this. Basically, banks are not allowed to give out the crazy risky loans that they did back in 2008.
People are not defaulting right now. People are paying their mortgages on time, and that really puts a backstop in prices, because what really causes a market to just bottom out like crazy is forced selling. When people are forced to sell, because they cannot make their payments, that’s what sends the market into a tailspin. Right now, there is no sign that that is happening.

David:
That’s important to note. I was using the analogy yesterday when I was talking to my sales leaders that were asking the same questions. My take on it is we’re a semi-truck coming down a hill. Now, everyone knows you’re not supposed to just use your brakes when you’re driving down a hill, because your brake pads get worn out. You’re supposed to shift to a lower gear. But if this was a real recession, we wouldn’t be going downhill. We would be going flat. If the economy was struggling, people could not buy houses. They could not make their payments. They were suffering. With the job market, you’d see for selling.
We’re in a market where we are artificially slowing things down by raising rates. It’s like using your brakes when you’re going down this hill. If we take our foot off of that brake, you’d see home prices go up. You’d see transactions happening in greater numbers. You’d see days on market start to go back down. It is important to note this is not a recession based on fundamental problems in our economy right now, at least. Who knows if ChatGPT changes all that. We all lose our jobs, but I’ve said something crazy. This is absolutely something that the government has chosen to do for the sake of trying to slow down the inflation and rising home prices.
Now, that is something that real estate investors need to be aware of, the decision the Fed makes, the decision the government makes. These macroeconomic factors play a huge role in what your investment is worth or what the cash flow numbers are going to look like when you buy it. Tell me a little bit about what types of markets are created as a result of the swings of low or high inventory that you mentioned.

Dave:
Basically, inventory, I think, is really good to look at in your local market, because it’s behaving really different in different markets. Often and in the report, I use different examples, but I think generally speaking, places in the Midwest and in the Northeast are doing relatively “well.” Everyone has a definition of well. Some people want to see the housing market crash. I’ll just say that prices are stable in the Chicago, Philadelphia, Boston, Indianapolis. If you look at them, and you want to understand what’s happening in your market, if inventory is staying flat and is still below pre-pandemic levels, you could probably expect that the housing market in that area is going to either be relatively flat or maybe modestly even grow over the next year.
When you start to see inventory levels spike above pre-pandemic levels, that, to me, is a signal that prices are probably going to go down in that market. You see this frankly in a lot of the boom towns from the pandemic like Boise, Reno, Austin, Denver, where I invest. These markets are seeing more of a correction, because they just went up too high. They’ve just reached a level, and this is another important indicator of affordability that is just not sustainable, people who their salaries, their wages cannot sustain the prices that we’ve seen in some of these boom towns.
I really recommend if people want to look at their individual markets, and figure out what’s happening, looking at inventory and days on market are two really easy ways that you can start to understand like, “Are you in a seller’s market? Are you in a buyer’s market?” Just for clarity, because I think people actually confuse this a lot, buyer’s market means often that it’s a good time to buy. I know that’s confusing because people see prices going down, but that means you have more leverage traditionally. Buyers’ market means buyers have the power. Seller’s market means sellers have the power.
So, we are leaving a time on a national scale where sellers had all the power, right?we sell this every… I mean, you’d probably deal with this every day, David. Sellers could basically be like, “I want everything, no concessions, your firstborn child. Give me your car and your wedding ring,” and people were doing it. Now, it’s a different scenario where buyers can be a little bit more selective and negotiate. Again, days on market inventory, good ways to tell where if your market’s in a balanced market, a seller’s market or a buyer’s market.

David:
That is a great point. I think something that sets our podcasts apart from other ones is we don’t just rely on the fear factor to get clicks. Now, it’s easy to tell people, “During a seller’s market, you shouldn’t buy because the seller has all the power. Just don’t buy.” But the reason it’s a seller’s market is usually because prices are increasing so fast, or rents are increasing so fast, or your alternative options to real estate are so bleak that this is clearly the best option. So, more of your competition floods there. That creates the seller’s market.
Then conversely, it’s easy to jump in and say, “Well, it’s a buyer’s market, or sorry, prices are dropping, so you shouldn’t be buying. You should wait for the bottom, even though it’s a buyer’s market. This could be a better time to buy, and so you have to be aware of both markets. There’s a strategy that works in either one, and there’s pros and cons. Buying in a seller’s market is very difficult. You’re going to give up a lot of things that you nor… Sometimes an inspection you have to give up. However, you’re getting the upside of the asset exploding in price.
In a buyer’s market, you may be buying into a time where prices could go lower. Theoretically, we never know where the bottom is, but you’re gaining due diligence periods, sellers paying a lot of closing costs, getting cream of the crop inventory that you couldn’t even get your hands on before unless you had 1.2 million in cash to go compete. There are pluses and minuses to both, and we really are trying to bring the full picture here rather than just making some title that says, “Buy now or wait. The crash of the century is coming.” Then we’ve seen that stuff for eight years. It never came.

Dave:
They’ll be right one day if they keep saying it. They’ll be right one day.

David:
That’s a good point. A broken clock is right twice a day. Isn’t that how it goes?

Dave:
Exactly.

David:
Your take on this is what I think people should be looking at as opposed to just, “Tell me what to do. Is this buy, or is this sell?” It’s understand the factors that are influencing price, and then the right decision will usually make itself known. We’ve covered the supply side talking about inventory, monitoring inventory, understanding this is why prices aren’t plummeting right now is there isn’t a lot of supply, but the demand side’s important too. Real estate is interesting, because the demand is a little more complicated than it would be in something else like maybe Pokemon cards.
Can you tell me a little bit about demand and how that works within real estate specifically?

Dave:
Demand in real estate is composed of two things. I think people often think demand is just how many people want to buy a home. It’s not. It’s how many people want to buy a home, and how many people can afford to buy a home. Those are two… They both influence demand, but they behave in different ways. I think the biggest example, David, we are both millennials. I think for years, you see these pundits on TV being like, “Millennials don’t want to buy homes. They’re not buying homes.” It’s like their data doesn’t show that. It shows that they couldn’t afford to buy homes, and then the second they could afford to buy homes brought on by low interest rates in the pandemic, they jumped into the housing market like crazy.
So, demand is not as simple as people don’t want to buy homes. I think that the major things that are driving demand and will, I said it already, is that millennials are reaching peak family formation years. This is a strong thing. People really underestimate, I think, the impact of demographics, but it’s super, super important. We’re seeing the largest generation in the country enter their peak home-buying age, so that is going to increase demand. Like I just said, with low interest rates from 2020 to mid 2022, people are going crazy into this market.
Now, that demographic demand will probably last another three to five years if you just look at the demographics of the U.S., but what has changed and the biggest factor that has changed from mid 2022 until now is that affordability factor. The second half of demand is how many people can afford to buy a home. With mortgage rates going up as quickly as they have, that is just completely eroded affordability. We have seen basically the housing market react to this single factor more than anything else, because if people can’t afford to buy a home, that pulls all the demand out of the market, and that really tempers prices, or can even send prices going down backwards.
That’s really what’s happened with demand. Frankly, maybe I’m getting ahead here, my opinion about what’s going to happen in the housing market over the next year, two years, three years, is all about affordability and if it recovers. It really comes down to, in my opinion, will affordability improve? That’s when the housing market will bottom and start to grow again.

David:
This is such a powerful nuance point that you’re making. Demand has two heads when it comes to real estate. You got to be willing, and you have to be able. Conventionally, able has been the problem. Even if you wanted to buy a house, you just couldn’t because the prices were going up faster than you could keep up, or you didn’t want to be competing with 11 other offers, or waving your contingencies, so you just said, “Hey, I’m out. I’m not going to do this.” When you’re in a really, really bad market is when the willing side is gone.
People don’t want to buy a house. That was what we saw in 2010. A lot of people were unable to buy a house, but many of them could. They just didn’t want to. I remember in 2010, no one actually looked at real estate like buying an asset. This is hard if someone wasn’t around back then. They looked at it like tying themselves to a 30-year anchor called a mortgage. If you said, “I bought a house,” I’d be like, “Oh my God, you have to make that payment for the next 30 years. Why would you do that?” This is funny, Dave, because my first house, my mortgage was $900. That was still considered a death sentence. Why would you ever want to just tie yourself to $900?
Nobody was willing to buy homes, and there was so much supply that caused that plummet in prices. This is what we’re monitoring when we’re looking at what’s the market doing is how much supply is out there, which we’ve covered, and then how much demand is out there. There’s two components to it. It’s you got to be willing to buy a house, and you got to be able to buy a house as opposed to many other things that don’t involve financing, like the Pokemon card example I gave. It’s just, “Are you willing to buy it, right?” Most people can afford to pay $30.
I don’t really know much about Pokémon cards. Then I bought my nephew some for Christmas, and he was super excited about it. It’s not a thing where you have to be able to buy them with real estate.

Dave:
So much of being able to buy real estate is out of our control, because most people use leverage, use debt to finance real estate. So, the rate on a mortgage really impacts what you can afford, and that was positively impacting people during the pandemic, because people could all of a sudden afford way more. Now that we’re back to… Actually, it’s high compared to where we were, but we’re right about the historical average of mortgage rates. Now that we’re back to a more normal mortgage rate in historical terms, that’s negatively impacted affordability.
When you talk about buying a Pokémon card or fine wine or whatever else, you’re just using equity. You’re not usually leveraging those purchases, so it’s really up to you like, “Do you have that money in your bank account? Then you can go buy it.” There are other examples of leveraged assets, but real estate is probably the biggest example of a leveraged asset, and it really is. That’s why real estate is really sensitive to interest rates is because it really, really impacts how able you are to buy investment properties or primary residents.

David:
Now, when it comes to rates and the Fed, can you tell us a little bit about how these decisions are made, and then how that ultimately ends up affecting affordability?

Dave:
Oh boy, my favorite topic. Basically, as we all know, inflation is really high. That is a huge problem for the economy. It erodes our spending power. Everyone hates it. Real estate investors hate it a little bit less, because real estate is a fantastic hedge against inflation, but it still sucks for everyone. The Fed is basically making decisions to try and combat inflation. They do that by increasing the federal funds rate. That’s the only thing that they can control. It’s wonky, but it’s basically the rate at which banks lend to each other.
The idea behind raising the federal funds rate is that if it becomes more expensive to borrow money, less people do it. When there’s less people borrowing money, less money is circulating around the economy. That’s also known as the monetary supply, and so they’re trying to reduce the monetary supply because we’ve seen it go crazy. Over the last couple years, there’s a measure of monetary supply called the M2. Basically, we’ve seen that explode, and that happened for a few reasons. One was because of low interest rates, but the other was because of money printing. We have introduced a lot of new money into the system, and so they’re not able to pull that money out of the system.
What they can do is raise interest rates, and try and get it from circulating around the economy less. If less people are borrowing money, the money stays in the bank, or it stays in your savings account, or you do less with it. That helps cool down inflation at least in traditional terms. That’s what the Fed is trying to do. Obviously, as of early January 2023, inflation is still super high, but the trend looks like it’s starting to come down. Now, the federal funds rate does not directly control mortgage rates, but it does influence mortgage rates. So, we’ve seen mortgage rates go from…
The beginning of 2022, they’re, I think, below or right around 3%. Now as of this recording, they’re at about 6.2%, so they’ve more than doubled. That significantly increases the amount of… That significantly decreases affordability, I should say. We’ve seen a time when at the beginning of the pandemic, affordability was at almost record highs. People could afford anything to a point where now, affordability is at a 40-year low. This is the least affordable real estate has been since the 1980s, and the implications of that are obvious. If you can’t afford it, you’re not going to buy it, so there’s less demand in the market.

David:
That is really, really good. Now, to recap here, so far, we have covered the housing market levers, what makes prices go up or down, supply and inventory and how you can be tracking those, demand and ability, the nuance of what affects demand as well as mortgage rates and inflation, which are all ingredients in the cake of the real estate market, I should say, that you monitor. You add more flour. You add more eggs. You add more sugar. You’re going to get a different tasting cake. This is what we’re all trying to understand when we’re trying to predict how things are going.
Now, before we move on to what works in an uncertain market like this one, my last question for you is that what needs to happen for affordability to become rebalanced again to where investing in real estate is something that people can be excited about and actually possible?

Dave:
First of all, I still think real estate investing is possible and excited. You have to be a little creative, which we’ll talk about in just a second. I think what’s happened is basically for two years, every single variable, all the levers that we’ve talked about were just pointing in one direction for prices, and that was up. Now, we’re at a point where we’ve need to rebalance, and things have changed. Affordability has declined to the point where prices are likely, in my opinion, going to go down a little bit in 2023. What needs to change for affordability is one of three things.
Affordability is a factor of three different things. One is housing prices of course, and so if prices go down, that improves affordability. The second thing is wage growth. If people make more money, things start to become more affordable. We’re already seeing wage growth start to decline, and I don’t think that’s going to be a major factor in the housing market. The third is mortgage rates, rights? If mortgage rates go down, affordability will go back up. Those are the major factors at least I’m going to be looking at for the next couple of months.
Mortgage rates already come down off their peak. They could go back up again, but back in October, November, they’re in the low sevens. Now they’re in the low sixes. Affordability is already starting to improve a little bit. That’s probably the thing. If you’re going to look at one thing to understand the housing market in 2023, affordability is the thing I would recommend.

David:
affordability is, as you mentioned, a combination of the price versus the mortgage payment. It’s not as simple as just one or the other.

Dave:
Exactly.

David:
Just funny because when rates were going down, everyone was complaining about how homes were unaffordable, because people could afford to pay more for them, so prices kept going. Then when prices finally came down, people complained that interest rates are too high, but they’re both two sides of the same coin. You can’t usually have one without the other, just like supply and demand. All right, let’s move on to three things that work in an uncertain market like this one. What’s your first piece of advice for strategies that people can take advantage, or where they can make money even when we’re not sure what’s going to happen with the market?

Dave:
Well, one of the things I’m most excited about, and I’m actually looking to make an investment in the next couple weeks here on, is private lending. When you’re in a high-interest rate environment, that’s the bank who is charging those high interest rates. So, if you can become the bank, that is a pretty exciting proposition. There are probably a lot of flippers out there who want money. There’s probably syndicators who need bridge loans. There’s people who need mortgages, and so there are opportunities to be a private lender. I am not an expert in this. David, I don’t know if Dave Van Horn, the third Dave. Maybe we should have him on one time.

David:
Three D.

Dave:
He’s a real expert in this. I forget what his book’s called, Note Investing. BiggerPockets has a book. Check that out. I think private lending is a really interesting option right now, because if debt is expensive, that’s bad for the borrower, but it’s sometimes good for the lender. That’s something I’m at least looking into at 2023. Have you ever done private lending?

David:
I have a couple notes through Dave’s company actually, the PPR Note Company I believe it’s called. It’s a similar concept like what you’re saying. That principle applies for private lending, but it also goes into just saving. You got punished for saving the last eight years or so. Inflation was way higher than what you could get on your money in the bank. That helps fuel the rise in asset prices because you’re like, “Well, I got $100,000 sitting in the bank, earning me half a percent while inflation’s at God knows what it is, probably realistically 20% to 30% if you look at food prices and gas and real estate and stuff like that.”
I got to put it somewhere. Where am I going to put it? Well, I’m probably going to put it into real estate, because that’s what’s going up the most, right? But when we see rates go higher, even though it does slow down, the asset prices going up. Man, there was a time, I remember, when I was working in restaurants where I was making 6.5% of my money that I would put in the bank, and that wasn’t even in a CD. So, strategies like private lending, just saving your money at a certain point become possible when we finally get rates up to healthier levels.

Dave:
I actually just wrote a blog about this in BiggerPockets that I think we’re reaching a point where savings rates are attractive again. In my high-yield savings account, I can get almost 4% right now. I know inflation, it comes out tomorrow, but as of last month, I think it was at 7.1%, right? People are like, “The 7.1% is higher than 4%.” Yes, that’s true, but 7.1% is backward looking. That’s what happened last year. If you look at the monthly rate, it’s averaging about 0.2% over the last five months. So, if you extrapolate that out, and no one knows what’s going to happen, but if you just extrapolate that out, you can imagine inflation a year from now might be somewhere between 2% and 3%.
So if you’re earning 4% on your money for the first time in years, your savings rate can actually earn you not a great return, but at least more money than inflation is eating away. Personally, at least I’m putting the money… I’m looking for opportunities in real estate, but I’m taking the money I have, putting them in either a money market or a high-yield savings account, because at least you can earn 1% to 2% real returns on your money as opposed to the last few years where if you put your money in a savings account, you were losing 6% or 7% at the minimum.

David:
You didn’t even have this as an option when rates were super low, and it was fueling this big run that we had. Now, with no investing specifically, you do make a profit on the interest that comes in from the note, but it’s negligible compared to how much money you make when the note pays off early. Typically, what you’re doing is you’re buying a discounted note in these cases. I bought a note. Let’s say maybe I paid $50,000, and the note balance was $75,000 or $80,000, and I get my $300, $400 a month coming in from that note, so there’s a return on the money that I paid.
It’s amortized, so you’re going to get more than what you put out, but you really win when that person sells or refinances their property, and you get paid back the $80,000 when you only had spent a smaller percentage for the note. The hard part is unlike real estate, you don’t have control. It’s not like an asset. I can go in there, and I can buy, and I can fix it up to make it worth more. I choose at what point in the market I’m going to sell it. You’re at the mercy of the other person, so the strategy is just to have all of these little notes that are out there. Unlike a jack in the box, you don’t know when it’s going to pop, but at a certain point, it’s going to.
Then boom, you have a note pop off. You make a profit. You either go buy a bigger note that gets more cash flow, or you go invest into something different, which is something that I had planned on doing a lot more of when I bought it. Then we saw what happened with the housing market. It was like, “Oh no, all steam ahead, get me irons in the fire as I can as this market is increasing.” I think that’s great advice, different strategies surrounding real estate, but not necessarily just owning it. The second thing I see that you mentioned are hybrid cities. Let’s start with what do you mean by hybrid?

Dave:
If you look back historically, different housing markets perform really differently. Traditionally, pre-pandemic, what you saw is that certain markets were great for cash flow, but they didn’t really appreciate much. Other markets were great for appreciation, but they didn’t cash flow that much. Those are the two ends of the spectrum, but there are some that get modest appreciation and modest cash flow, which personally I am really just interested. I think that’s the best conser… It’s conservative in a way that you have good cash flow, solid cash flow, not amazing cash flow, but solid cash flow so that you can always pay your mortgage.
There’s no risk of default. You can hold on. There’s nothing. No risk there. But at the same time, it’s appreciation, so you still get some of the upside opportunity that you get in markets like California or Seattle. It’s not quite that much, but you get a little bit of each. I think those markets are going to do particularly well, because a lot of these hybrid markets tend to be more affordable cities. My theme in a lot of what I’m talking about today is affordability is dominating the housing market. I think, markets that are more affordable are going to perform well relative to other markets over the next couple of years.
I think some of these hybrid cities are really interesting. I just want to caution people who have gotten into real estate in the last few years that what we’ve seen over the last few years is so atypical in so many ways, but what I’m talking about right now is appreciation. We’ve seen every market appreciation, big markets, small markets, rural markets, urban markets, suburban markets, everything. Why not? That is not normal. Normally, some markets go up. Other markets stay flat. Some markets go down.
I personally believe we’re going to return to that dynamic over the long run. I don’t know if it’s going to be this month or next year, but I think that is normal for the housing market. I think we’re going to get back to that. So, I would look at markets that we’re seeing some cash show and some appreciation pre pandemic. These are tertiary cities like Birmingham, Alabama or Madison, Wisconsin or places like this that have strong demand population growth, but still offer cash flow. I think they’re going to outperform other markets for the next couple years. That’s just my opinion, but that’s what I’m looking at.

David:
If somebody wants to identify cities like this, what data should they be looking for?

Dave:
I think the number one thing is if you want to look at cash flow, you can look at a metric called the rent to price ratio. You just divide monthly rent by the purchase price. If it’s anywhere near 1%, you’re doing really well. You’ve probably heard of the 1% rule. I think it’s a little outdated personally, and that expecting a deal that meets the 1% rule is probably going to cause you more harm than good, because you’re going to wait around forever looking for a mythical unicorn. Not that it can’t exist, but like I was just talking about, those 1% deals often occur in markets that don’t appreciate. I think to me, that’s not worth it.
I would rather see something that’s a rent to price ratio of 0.7 or 0.8, but is an appreciating market. That’s what I mean by a hybrid city. Rent to price ratio is good. Then for appreciation, it’s difficult to predict, but the most important things are very simple, population growth. Is there going to be demand, or more people moving there than leaving? Two, economic growth, you can look at this in terms of wage growth or job growth, but if people are moving there, and they’re getting paid more and more, asset prices are going to go up.

David:
We often talk about appreciation and cash flow as if they’re opposing forces like Yin and Yang. Are you a appreciation investor, or are you a cash flow investor? But in practical terms, for those of us that own real estate, we realize that they’re not actually mutually exclusive, that many times, you see cash flow appreciates as rents go up. What are your thoughts on the idea that certain markets will have rent increases, just like the value of the asset will increase?

Dave:
I personally… I agree. There are great markets that have 1% cash flow. I wouldn’t invest in them, because personally, I work full-time. I’m not reliant on my cash flow for my lifestyle entirely. But also, it’s just too risky to me, because those markets tend to have declining populations or not great economic growth. That’s, to me, risky. I know people say cash flow is a good hedge against risk, but I think some… But if your vast value is going down, then I don’t think cash flow is going to make up for that. I think that’s super important.
I personally would caution people against assuming rents are going to go up at least this year or the next year. I just think that we had what they call in finance or economics a bit of a pull forward, where it’s like rent prices usually go up a couple percentage points a year. They went crazy the last few years, and that might have just taken all the rent growth for the next two or three years, and just pulled it forward into 2021 or 2022, for example.

David:
Very possible.

Dave:
My recommendation is to underwrite a deal assuming that cash flow is not going to go up for the next year or two. If it happens, which it might, that’s just gravy on top, but I think the conservative thing to do is to presume that cash flow is probably going to be pretty mellow… I mean, rent growth, excuse me, is probably going to be pretty mellow for the next couple of years. But if you’re holding onto it for five years, seven years, then I would probably forecast some rent growth for sure.

David:
Well, when you’re making a decision on where to buy, do you think it’s reasonable to expect a hybrid city’s rents to increase more than a cash flow market, Midwest non-appreciating market?

Dave:
Oh yeah, 100%. I mean, if you’re seeing a city that has economic growth, I mean just look at wage growth. If wages are going up, if good jobs are coming to that city, those are some of the best indicators.

David:
People are able to pay more because there’s demand within the rental market, just like there is within the home ownership market. Same idea.

Dave:
Exactly. If you’re in a market where wages are not going up, there’s no legal limit, but there is just a psychological limit to what people are going to pay for rent. It can only be X percentage. Usually, it’s 30% of their income can go for rent. If you’re way above that, and if wages aren’t growing, then it doesn’t support rent growth. So, I totally agree that in a hybrid or an appreciating city, rent growth will go up. I don’t know if that necessarily means you’ll ever reach the cash flow that these cash flowing cities tend to support.
But personally, I think that that’s the better bet because you’re not betting on just cash flow or just appreciation or just rent growth. You’re getting a little bit of everything, and you don’t know which of the three might perform the best. But whatever happens, you benefit from it.

David:
Well, that’s what I wanted to highlight for the people who are maybe newer investors, that are inexperienced in some of these cash flow markets where turnkey companies tend to operate, and the gurus that are selling you a course, they’re usually, “Cash flow, quit your job. Get a girlfriend. Don’t be a loser. You need cash flow, and they’ll fix all your problems.” Then they push you into some of those markets that rents hardly ever go up. For the last 10 years, they’ve been the same. Versus if you had invested in maybe Denver 10 years ago, it might have been modest cash flow when you bought it, but 10 years of rent growth, and it’s doing really, really well.
We don’t want to say assume it’s going to go up, but you can absolutely put yourself in a position where it is more likely to go up by going into one of these markets that is having wage growth, companies moving in, population growth without completely betting the whole farm on investing in some wild appreciating market that you’re bleeding money. There is a responsible way to do it. I think that’s a really good sound advice that you’re giving here.

Dave:
I mean, this is probably a whole other show, but God, man, you know how many rentals it takes to become financially free? I know a lot of real estate investors are like, “Oh yeah, just quit your job. Buy three rentals, and be financially free.” It’s just absolute nonsense. The way to think about it is the way you earn money and cash flow in investing is you need X dollars invested at Y rate of return to equal Z cash flow.

David:
Just like we look at every other financial investment vehicle when we’re like, “How much do you need in your 401k at what return to retire?”

Dave:
Exactly, and so you can choose to be a cash flow investor and say, “I’m going to have $100,000 invested at 11% cash on cash return.” Great, that’s making you $11,000 a year. I can’t live on that. If you want to build for the long term, and you say, “I’m going to make a 6% cash on cash return, but through appreciation and working at a good job, I’m going to have $2 million invested at a 6% cash on cash return,” then you’re making $120,000 a year. I think people just get obsessed with this cash on cash return idea without thinking about the amount of principal you put into your investments is equally if not more important than the cash on cash return. That’s just my rant.

David:
We won’t go too far down that road, but I will tease people, which is this little idea. This is one of the reasons that I encourage people into things like the BRRRR method or buying and appreciating markets, because your property can create capital for you much like you earned at your job that you were working. You can have two sources of capital being created. We just call it equity when it’s within a property. We call it capital when it’s in our bank account, but it’s the same energy. You start your career off using methods like that, and then later in your career, you transition into higher cash flowing markets that are a little bit more stable, and then you do exactly what you just described.
This is some pretty deep cool stuff that we’re getting into when we just plan on talking about the market.

Dave:
I like this conversation. This is fun.

David:
All right, last topic I want to ask you about is buying deep. What do you mean by buying deep?

Dave:
I mean, buying deep just means buying below market value. I don’t know about you, David, but for the first eight years of my real estate investing career, I never even offered at the asking price. I would always offer less than the asking price. Only in recent years did it become normal for you to offer above asking price, and still pray.

David:
So true. You hear agents say things like they paid full ask, and I laugh like, “That’s a deal out here.” Full ask doesn’t mean anything, but they’re operating from the old paradigm where nobody pay the asking price.

Dave:
Totally. In the beginning, you would always try and nickel and dime the seller a little bit, see whatever you can get. I think we’re back to an environment where that’s possible. Not in every market, not every asset class, but we are in a market where you can buy below asking. I think it’s just a good way to hedge. If you think your market might go down 5%, try and find a property that’s 5% below. I invest in Denver, and it’s already gone down almost 10% in Denver. It’s one of those leaders of the market in terms of price declines.
I think it might go down another 5%. So when I make an offer right now, I’m going to offer 5% below asking. That way if it goes down, I’m okay. It gives me a little bit of cushion. That’s what I mean by buying deep. It’s just going below asking price to give yourself a little bit of cushion. I’ll also say I really think timing the market is hard, and if it’s between 1% and 2%, don’t worry about it too much. I bought my first property in 2010. The housing market bottomed in 2011, 18 months after I bought or something like that.
Do you think I’ve ever once thought about that, that my property went down 1% before it started to come back up? Not once. People tell me how jealous they are that I bought in 2010. What they don’t see is that my property value actually went down 1% or 2% before it started growing like it did over the last couple months. I think buying deep is really important, but I wouldn’t obsess about trying to get it exactly to the bottom of the market. It’s literally impossible to do. But if you think the market’s going to go down 5% or 10%, try and get some concessions out of the seller to make yourself more comfortable.

David:
That is incredibly sound advice. When I bought my first property, it was the end of 2009, so I wasn’t even at 2010. Then it went down more. I was like, “I’m so dumb. I should have waited.” Everyone was like, “Why’d you buy real estate?” In my head, I pictured it going all the way down to zero. Then a year later, it started going up, and then it exploded. It’s funny. I paid 195 for that house that probably dropped to 185, and I was kicking myself. Now, it’s worth 525 or so. It just doesn’t matter.

Dave:
Exactly.

David:
This doesn’t matter, right? It’s your ego trying to be smarter than you are, and you’re making it. That was a property that I was under contract at 215, and I went in there to get some seller concessions, and got it at 195. That is exactly what people should be doing in this buyer’s market. If the house has been on the market three days, it’s getting tons of interest. Maybe you don’t get to use the strategy, but I look for houses with high days on market, poor listing photos. I literally teach people how to target stuff in the MLS that’s been passed up by other people, write very aggressive offers, and then gauge based on the counter offer how serious that seller is and how we can put a deal together.
In the 1031 exchange that I wrapped up a couple months ago, I think I bought 17 or 18 properties, but only 12 or 13 of them were through the exchange. From those 12 or 13, I made over a million dollars in equity based on the appraise price versus what I paid. It was just this strategy of, “I’m on the MLS. I’m not doing anything crazy,” but I’m not going after the house with the beautiful listing photos professionally taken by a really good realtor. I’m looking for the people that paid a 1% commission to their realtor. They took some pictures with their iPhone seven.
It looks terrible. It’s been sitting there for a long time. I mean, literally, Dave, some of them had upside down uploads. The bathroom pictures were uploaded upside down that you can tell Zillow’s, “Four people have looked at this, and no one has saved it.”

Dave:
Those are the ones you want.

David:
That’s exactly right. So buying deep, I refer to as buying equity. Same idea. Don’t just think you have to pay asking price like you used to. Explore. Write a really low offer, and wait and see. I tell people, “An offer should be like a jab. If they accept your first offer in this market, you probably wrote too high.” You shouldn’t be knocking people out with an offer. It’s a jab, and you wait and see how did you defend? Are you weak? I won’t go too deep into it, but one of the deals in particular was listed for 1.6 million, had dropped its price all the way down to 1.2 million.
I went in and wrote an offer at $1 million 50 with about $50,000 in closing costs. It was about 1 million even. He countered me accepting my deal, but just he didn’t agree to the $50,000 closing cost difference. I knew if he countered me that hard, he wants to sell this house. I’ve got all the leverage here. I’m going to get this deal. I ended up holding out, and he still came back and said, “Fine, I’ll give you the closing cost too.” Now, if he had countered me at maybe $10,000 off of his 1.2, I would just let it go. That’s not a motivated buyer.
You could never use strategies like this the last eight years. They just did not exist. That’s a great point. If you’re worried the market’s going to keep dropping, just go in there and write a more aggressive offer than you normally would have, and cover yourself that way.

Dave:
You got nothing to lose. I think people are like, “Oh my God, they’re going to reject it.” It’s like, “So what?” Obviously, you don’t want to just be doing stuff that makes no sense, but if you think your offer is fair and reasonable, might as well try. See if they agree.

David:
Then the other thing, the piece of advice I’ll give people is don’t assume that one punch is going to knock someone out. Many of these properties we’re talking about, I wrote an offer. They said no. I had my realtor go back a week or two later, and it was maybe. A week or two later after that, it was like, “Let’s play ball.” Then that started the actual negotiation. Sellers are freaking out just like buyers are freaking out. Everybody’s freaking out in this market, and you just want to find the right kind of freak to match up with your interests.
Dave, I’m going to lead us to wrapping this thing up by asking you for the one thing that we’re always hesitant to do, but everybody wants to know, what are your predictions for 2023?

Dave:
It’s really hard, but the thing I feel confident about is that we’re probably going to see a continuation of the current market conditions through at least the first half of 2023. I just think right now, there’s just still so much uncertainty. Are we going to see a recession? How bad is it going to get? Is unemployment going to go up? What’s the Fed going to do? There’s just too many questions right now, and until there’s some confidence about those big economic questions, I think we’re going to see, like you said, people freaking out a little bit and not really having stability enough for the market to find its footing.
The second half of the year, I think, is really the X factor. I think there are different scenarios that can play out. I’ll give you three different scenarios. The first is if there’s a global recession, which most economists believe there will be people… I won’t get into the details of this, but if there’s a global recession that tends to put downward pressure on mortgage rates, people flock to U.S. government bonds that pushes down yields, mortgage rates track yields, and so you see a scenario where mortgage rates could go down more than they are now. If mortgage rates go down even more than they are now, I personally believe the housing market is probably going to bottom a year from now, the end of 2023, beginning of 2024, and start to grow again.
The other scenario is the Fed miraculously achieves a soft landing, and mortgage rates could go down. That’s another scenario where I see the market bottoming towards the end of 2023, early ’24, or inflation keeps going up, unemployment goes crazy, but the mortgage rates for some reason don’t go down. Then in that scenario, if mortgage rates stay above 6.5%, above 7% for a long time, I think we’re probably in for a two-year correction. All of ’23 and ’24 will be like this. In that case, we might see double digit declines in the national housing market, but it’s still hard to say.
I think, two of the three scenarios in my mind point to a one-year correction where we’re going to see single digit price declines. I’ve said I think it’s going to be somewhere between 3% and 8% negative on a national level if mortgage rates stay high. I’ve said this. It’s all about affordability. So if affordability doesn’t improve, the mortgage rates stay high. Through the second half of this year, that’s when I think we’ll see 10%, 15% national declines, and not bottoming to the end of ’24, maybe even early ’25.

David:
That is a remarkably well thought-out and articulated answer for someone who did not want to give a prediction, so thank you. Thank you for that. I like how you’re providing the information you’re basing it off of rather than just throwing something out there. Because as the information changes, so will the prediction. Something people have to remember, these things are not set in stone.

Dave:
Totally. People are like, “You said this, and you didn’t factor in this.” It’s like, “I’m not a fortune teller.” I’m just like, “I’m looking at this information. Here’s how I’m interpreting it.” I don’t know what’s going to happen, but I think those three scenarios, I don’t know the probability of each of them, but I think that it really will come down to mortgage rates and affordability, and when we see it bottom. I will just say… Can I just say one more thing about it is that traditionally in recessions, they say that housing is the first in and the first out, where because mortgage rates go up, and real estate is a leveraged asset, prices tend to decline first. That’s what creates the recession.
We’re seeing that right now, right? Rates went up. Housing is in a recession, and so we’re starting to see that start to ripple throughout the rest of the economy. But like I said, when mortgage… When we enter official recession or whatever, mortgage rates tend to come down. That gets people to jump back into the housing market. That creates a huge amount of economic activity, and it pulls us out of a recession. It’s just interesting to see that recession’s not good for anyone. I’m not rooting for that, but if you see it, it often is the first step, and the housing markets start to recover. So, it’s another thing to just look that.

David:
It’s why you can’t time the bottom, because you don’t know when that’s going to happen. By the time you see that show up in the data, it’s already started, and the bottom’s already on the way up.

Dave:
It’s already happened.

David:
Great point. All right, so we’ve got a pretty good market prediction for 2023. We have a very solid understanding of the things that affect real estate prices. That would be the levers that people pull on to make prices go up and down, supply, and you can measure that by inventory, and then demand, which is a double-headed monster of both being willing to buy a property and able to buy a property. We’ve talked about mortgage rates and inflation and all of the complexity that that’s created in this insane but beautiful market that we like to invest in. We’ve also talked about ways that you can make money in 2023 regardless of what the market does.
Private lending and buying notes is one way that people can expect to make money in real estate. Looking for these hybrid cities where you’re not… You don’t have asymmetric risk in either direction of a cash flowing property that never increases in rent or in value, as well as a speculative market that you’re just hoping goes up and lose control over, and buying deep, understanding that this is a buyer’s market, and that means you have the control. So, you’re a fool if you don’t use it. Use the control to try to go out there, and get the very best deal that you can rather than just worrying about things you cannot control like when the market is going to bottom out.
Dave, thank you very much for joining me. I love it when you come for these things, and we can help make some sense out of the emotional insanity that we typically feel when people don’t know what to expect. Is there any last words you’d like to leave our listeners with before I let you get out of here?

Dave:
No, this has been a lot of fun. But if you want other recommendations about how to make money in 2023, or to understand this in full detail, I encourage everyone to download the report I wrote. It’s free. You could just do that at biggerpockets.com/report.

David:
All right, biggerpockets.com/report. Check it out. If you thought Dave sounded smart, wait till you read them. He looks even smarter when you’re reading there. Then you wrote a book with J Scott on a similar topic to this. Can you plug that real quick before we go?

Dave:
Sure. J and I, if you don’t know, J is a prolific excellent investor. He and I wrote a book called Real Estate by the Numbers. It is all about the math and numbers and formulas that you need to become an excellent real estate investor. I know if people think that sounds intimidating, it’s not. The math behind real estate investing is not super hard. You just need to understand some simple frameworks, and that’s what we outlined it. The whole point of it is to help you analyze deals like an expert. So, if you want to be able to analyze deals conservatively, especially in 2023, and understand what assumptions to make, that stuff, you should check it out.

David:
Yes, go check that out as well. If you’re a nerd, or you want to be as smart as a nerd without being a nerd, this is the book for you. All right, Dave, thank you very much for joining me today. I’m going to let you get out of here, and get about doing some more research to help the BiggerPockets community understanding what’s going on in the market. This is David Greene for Dave, the gentleman’s renegade, Meyer signing off.
I’m a professional. Just watch. Watch how good I am at saying things.

Dave:
He’s Ron Burgundy. He’ll read anything you put on the teleprompter.

Learning some basic accounting principles will not only help startup founders to manage their projects effectively but also make informed decisions that will benefit the company’s growth and success in the long run.

While finance and accounting can seem daunting for those without a financial background, you don’t need to dive too deep into finance as an early-stage startup founder. Initially, your project would be relatively simple, which means you’ll be able to make informed financial decisions and communicate effectively just by knowing certain fundamental accounting concepts and by consulting experts on the topics you need help with.

Later on, as your company grows and the level of financial complexity grows with it, you should be able to hire a specialist (a CFO) to take care of that part of your business.

Until you reach this stage, here are three crucial accounting concepts to make you more confident when you spend time in front of the spreadsheet in which you organize the finances of your project.

1. Accrual Accounting

Accrual accounting is the method of recognizing revenue and expenses when they are earned or incurred, rather than when cash is received or paid.

For example, if you deliver a service to a customer in January but you get paid two months later in March and you need to cover the expenses related to the service in April, under the accrual accounting method you’d put down all the revenues and expenses in January when the actual value was generated.

This is important because the payment date can distort the picture you see of your company’s financial health and performance. Continuing with the example from above, if you account for all transactions in the months they happened then it would seem as if in March you generated a higher revenue, while in April – higher costs. When your business has multiple projects, this could add up to a lot of confusion and the finances of your business could seem more volatile than they are in reality.

Accrual accounting helps you distinguish when and with what activities you were able to generate the most value for your company without letting payment dates distort your understanding of the financial health of your business.

2. Cash Flow

Cash flow is simply said the opposite concept. It is the movement of cash in and out of the company, and it can be positive or negative. Consequently, it cares about transaction dates, rather than the period when a service was provided.

Positive cash flow means that the company has more cash coming in than going out, while negative cash flow means the opposite. Knowing the cash flow status of the company is crucial because it determines the company’s ability to meet its financial obligations.

In other words, while accruals accounting makes sure you understand if your company is profitable and how it generates value, cash flow accounting helps you plan successfully to have enough cash to cover your expenses. It lets you see in advance if you would need financing (from banks or investors) in order to cover periods of negative cash flow and let your business run without hiccups or strained relationships with partners and suppliers.

3. Financial Statements

The three commonly used financial statements include the balance sheet, income statement, and cash flow statement, and provide a snapshot of the company’s financial health at a specific point in time. Depending on where your business is registered, your company would be required by law to produce these statements. Generally speaking, this would be done by professional tax accountants.

It’s important to keep in mind that the main concern of your tax accountants would be to make your business compliant with tax laws and regulations and to minimize the company’s tax liability – in other words to optimize things so that you owe as little taxes as possible.

Because of this, it is fairly likely that the professionally created financial statements would look a bit differently than the documents you use to manage the finances of your business – this shouldn’t worry you, as the two types of documents serve two different purposes.

Dave:
What’s up everyone? This is Dave Meyer, your host for On the Market and today we have a super cool show for you. We are bringing on three different super experienced lenders to help us all understand the state of the borrowing and lending market for 2023. As we all know, we’ve talked about ad nauseam for the last year or whatever, interest rates have been going up and that has really shifted the types of loans that are available, the way that mortgage companies are working. And as an investor, it’s really helpful to understand the intricacies of the mortgage industry because it helps you get better loans and just become a better borrower, find better products that are more aligned with your real estate investing strategy. So it’s a super cool episode. We have a great lineup of people who are on. And just as a recommendation, if you are looking for a lender or want to understand more, check out biggerpockets.com/loans.
It’s completely free. There’s great places where you can connect with lenders who are specifically working and geared towards investors. So it’s not just conventional loans where you can find things like a debt service coverage ratio loan or different bridge financing options. So definitely check that out because you’re going to hear about some of these different loan products that are available for investors that aren’t really meant for conventional home buyers. And if you hear something on this episode that you’re really interested in and want to learn more about, biggerpockets.com/loans is a great way to do that. So with that, I’m going to take a quick break and then we’ll be back with our lender panel.
Let’s all welcome in our lending panel today, I’d love you all to just go and explain a little bit about your specialty and who you are and Christian Bachelder, could you please, let’s start with you.

Christian:
Yeah, absolutely. First foremost, appreciate you inviting me here, and happy to take part in it. I’m Christian, I am David Green’s business partner, co-owner and founder and managing broker of The One Brokerage, which it’s been mentioned a number of times, but I think I’m the only broker here, so kind of cool we’re getting a kind of varying stance on the market, so excited to take part in it.

Dave:
Awesome, great. And in that role, do you mostly focus on residential real estate or lending, or do you have any particular niche?

Christian:
Yeah, we’re definitely a little bit of… We got a lot of tree branches kind of branching off from the main one. If I had to say what our trunk was, so to speak though, absolutely one-to-four residential is the majority of our business. While we do have commercial programs and kind of a wide variety of kind of niches that we can branch off into, one-to-four, anywhere from conventional through DSCR and kind of more creative loan products when someone doesn’t qualify conventionally, is definitely your brand and butter.

Dave:
All right, awesome. Matt Neisser, how about you?

Matt:
Yeah, thanks for having us. Appreciate it Dave. Thank you. Matt Neisser, I’m CEO and co-founder of Lending One. We’re a national lender for investors around the country, so 40 some states. We specialize both in it’s all one-to-four family, largely a little bit of multi-family, but let’s assume all one-to-four and a lot of long-term rentals. So we specialize in lending to landlords and also a little bit of fix and flip and short-term type lending programs. I think where we probably excel is the long-term lending 30-year fixed rate loans, comparable to a little bit different than a conventional lender, a little bit easier to get qualified. And then we have a larger program for large investors, non-recourse, large portfolios of properties up to say $50 million.

Dave:
Awesome. Great. And then for our final guest today we have Bill Tessar.

Bill:
Thank you, Dave. Bill Tessar, President and CEO of Civic Financial. Similar to Matt’s company, we’re a national lender, specialized really in a handful of products, your DSCR products, which is really 5, 7 and 10/1 I/Os, your bridge and fix and flip and multifamily as well. Balance is probably 45% bridge, 45% rental and about 10% multifamily. And I think it’s just under 40 states.

Dave:
Wow, that’s awesome. Well, it sounds like we have a great wealth of experience here for lending and this is something we’ve really wanted to dive into on the show. As investors, we deal with lenders and work with lenders all the time, but hearing from you, we’d love to know your insights into the industry and sort of what we can expect over the coming year or so. So Bill, let’s start with you. How would you say the rising interest rate environment over the last nine months has impacted your business?

Bill:
I think the first thing I’d say is it had a huge impact on our industry. So not just, when I say industry, I mean the whole lending industry. So if you think about it, from a conventional side, and I spent the first 30 years of my career on the conventional side and developed a lot of long-term relationships there, and it literally gutted that industry, probably second only to the financial crisis. And in many of these instances they had volume levels down 80 to 90 percent. They couldn’t cut their way out of those problems. I think that continues. As it relates to our space, I think Matt would agree that a lot of the smaller folks, medium-sized folks, really took it on the chin. They had a whole bunch of loans sitting on their warehouse lines that got re-traded by their capital partners and so they go into those trades above par and they come out significantly under.
So some of those trades are still taking place right now as Wall Street picks through those portfolios. So I think it really screwed up the capital markets on the BPL side and forced the companies that are still around really to reset and find a pricing level that could at least be at par. So they were originating for origination fees and junk fees and I think the level is there now. I think you’re starting to see, it’s the beginning of the year, more of those Wall Street guys coming back into the market and I think it’s actually pretty darn good for some of the folks that are still around. But yeah, I mean, big shake up, Dave. And probably still a little more to come on some of those peripheral lenders that hanging on by a thread.

Dave:
Matt, are you seeing something similar?

Matt:
Yeah, I mean, I largely agree with Bill. I think the fortunate part for probably both of us is there’s been a sort of demise line of large lenders and smaller lenders and the in between, probably… If you were small or large, you’re probably okay. If you were in between, those are probably much more challenging for those folks. But as it relates to borrowers, I think it’s a big reset on the way that you look to underwrite a deal. And probably for the audience here, if I rewind 12 months ago, maybe started in January of last year, and we had rates in the fours basically, 30-year fixed, which I guess when I started the business I thought would’ve been crazy. And then that ended up happening, and people were excited and people were buying stuff and could afford to probably pay the premiums that were out there to buy properties.
And I think the big shift that’s happened is now that rates not just ours, it’s really across the whole mortgage industry as we… A conventional rate tipping to 7% last year is a huge shakeup both for us as lenders and investors as a whole as to, how do we navigate? And I think that’s really what a lot of investors were struggling with of what do I do with my strategy? Does it have to shift? How do I navigate rates going from four and a half to seven? And that happening very quickly. I think probably the quickest that’s ever happened in history. So that’s what I think really this uncertainty is what created so much uncertainty for borrowers and investors understanding what am I going to do into 2022. We do feel like most people have now sort of come to the realization this is a new normal at this point and are adjusting their strategy. And we’ve started seeing that last quarter, I think Q2, Q3 people were just confused and didn’t know what to do really, frankly. So that’s what we’re seeing.

Bill:
You think about what Matt says, so I think the stats are… A typical investor going into the rate increase was making about 67,000 a transaction, in-and-out all-in return on their investments. So if you think about rates going up, let’s just say 200 basis points, and in some cases more, but at 200 basis points on a half a million bucks, it’s $10,000 of carry for the year. And so now they’re making 57,000 and at least what our experience has been is that the investors are still in there, they got people on their payrolls, the bigger firm, the bigger groups, and so they’re still going in and making trades. They’re negotiating better deals on the buy side. Yeah, their cost of capital’s cheaper, but now contractors are coming back into the space and supply chains are a little bit better. So they pick up on some areas, lose on cost of capital, and 57 isn’t a bad number if that’s the average return on your investment or transaction.
And so we haven’t really seen a lot of our investors, Matt, I don’t know about you or Christian, if you guys have seen a lot of your investors completely get out. I think they’ve just reset expectations, as you mentioned earlier. And from a volume perspective now you have these new rate levels. We really haven’t seen a dip off, which is, that’s probably the biggest surprise for me. At least mentally, I was rethinking the way 23 would look like from a volume perspective, but I actually think it’s still going to be good. And I think just everyone’s reset expectations and living with the new norm.

Christian:
Yeah, I was thinking as you were talking, and I think there’s a added layer to it, too, that especially us three, I know we’re all very investor focused. With BiggerPockets, we’re like trying to be in this realm and I think that there’s been a concentration of buyers into the people who are knowledgeable and not everybody’s able to just, oh, I have $10,000 increased carrying cost. Not everybody’s capable of adjusting their plans to accomplish still success in that realm. And that’s why I think when we’re talking about the large and the small lenders, typically, it’s all the people who just did the in between loans as well, not just the volume wise, but it’s the in between loans of maybe the intermediate experience, maybe the non-experience, but really fine-tuning systems like you said, they may be making extra premium on, maybe they’re saving on contractors, maybe they’re saving on the supply chain’s cheaper, the cost of wood is cheap or whatever it is.
And experienced investors and people who have been through the trials and tribulations of what… I know you guys do a lot of fixing and flips. With me, it’s running accurate numbers on rentals, running accurate numbers on maybe short-term rentals, being able to educate yourself on, man, is this market compacted or is there something unique that can be taken advantage of here with the right staging? I think I haven’t seen a pullback, but I’ve definitely seen a concentration into a fewer number of hands, which I think is a really interesting market trend.

Dave:
So Christian, you’re saying that total volume is remaining at a pretty steady state, but it’s just fewer people taking on higher volume per person, per investor?

Christian:
I don’t want to misconvey. Volume just on a grand total is down, but volume per investor if that’s a metric that I could use, is definitely-

Dave:
It is now.

Christian:
Yeah, so I just think there’s a larger amount happening per person that we work with, which is kind of interesting when you think of total volume being down, but volume per person… I can’t think of a whole lot of people that we’re doing our very first loan for. So many of our clients are repeat, so many of our clients are experienced, they know what they’re doing, they’ve run their numbers and just like Bill shared, that extra $10,000 holding cost if they’re making 57 versus 67, a lot of investors still take that, right? And they just pivot their numbers a little bit and they find a way to make it work. So that’s an interesting trend that I’ve seen kind of take place and our firm kind of encapsulated there.

Dave:
One thing I’m curious about, given what you’re saying about investor activity, all three of you, is are the types of loans and loan products that investors are interested in changing at all? Matt, let’s start with you.

Matt:
Yeah, I think a little bit is the answer. And it depends… Again, depending on their strategy coming into the year last year and what… If they were building a rental portfolio and relying on what a lot of clients and I see on BiggerPockets quite a bit is sort of like the BRRRR strategy coming in, buying, renovating, hopefully refinancing and then pulling equity out. I think the biggest shift I’ve seen is the challenge of them actually getting equity out, at this point, to keep that velocity going that they had before or got a little bit accustomed to. Whereas I think three or four years ago, I don’t think the perception was that every deal I did I’d pull out all my equity. I think it was every deal at least I kept some equity in the deal. And I think that mentality changed a little bit, particularly with COVID, when prices were appreciating so rapidly that people got accustomed, for 2022, it’s basically I got to pull out equity on every single deal and just keep on going.
Now that isn’t a true, true product shift, but I’ve seen that shift of on the backend, refinance then trying to evaluate, okay, can I keep this same deal level up on the buy side that I kept up a year or two years ago effectively? So that’s the one thing I am noticing a little bit. And honestly, values are down in some markets five or ten percent already. I don’t think it’s on all markets, clearly, but you’re seeing both values in a little bit or at least more conservative values from appraisers. And then you have this LTVs and they’re… They might have to bring a little bit of money to close and that’s a strange concept for a lot of people that have been doing transactions the last few years. Although-

Dave:
Imagine that.

Matt:
You go back five years ago that was like, you expected it.

Christian:
Yeah, I can piggyback on that for sure. I can’t tell you how many times we’ve had the conversation of is a BRRRR a fail if I don’t a hundred percent cash out the funds I invested. It’s like, no man, you’re getting 60% of it back, make that keep rolling. It doesn’t make the strategy completely null and void. It’s just, it’s a pivot, right?

Bill:
Yeah, I think, Dave, what we’ve seen is if I do a 24-month look back, we were heavy bridge and fix and flip and then really became super heavy on the rental. I think part of the success, and Matt you probably saw this too, but we inherited a bunch of loans and customers where lenders just couldn’t deliver at the closing table. And so, was that really organic growth or did we have staying power right place, right time, probably the latter, right? And so we saw a big swing in the rental units, not volume, units through 2022, almost to like 65%. So I think we closed just about three billion last year and 65% of that was rental. The last quarter, and going into this quarter, looking at the pipeline, what we’re seeing our investors do right now is they’re just paying the higher WAC on the bridge because they don’t want to get locked into a prepay in these high coupon rental loans, believing that rates are going to come down in the very near future.
And whether that’s true or not, I mean I do get it. Matt, I don’t know if you or Christian heard the last conference. I was at the IMN conference, and they were talking about new products. And one of the products that’s been floated around there is kind of a hybrid between the rental with the prepay and the bridge. So a little bit lower WAC than bridge, a little higher than rental, no prepaid component. So people could kind of go into nomad land for a little bit and decide whether rates are going up or down. Probably going down long-term, but this quarter, little rocky. But yeah, so right now we’re 50/50 on bridge to rental. We’ve seen a big swing recently.

Dave:
And WAC just for listeners is weighted average cost of capital, right?

Bill:
Yeah, weighted average coupon. Sorry. Yeah.

Dave:
Oh, coupon. Yeah. Okay.

Bill:
My wife always, as I’m talking to my boys that are in this… We’re talking at the table and she goes, “You guys sound like you’re foreigners.”

Dave:
No, I just want to make sure I’m tracking. And then with… Christian, I’m especially curious in the residential space, I hear a lot about sellers buying down rates for people. Are you seeing that pretty frequently?

Christian:
Oh yeah. I think, last month, we did a little internal audit. I think we got… On our purchases, I think we got seller credits on 90% of them.

Dave:
Oh wow.

Christian:
I mean it was that level where… And I mean granted that’s like the realtors that we work with, we help coach them too. Hey, we have a 2/1 buydown program, like go negotiate seller credit. The sellers, the house has been on the market for 90 days. It kind of becomes the obvious trend once a couple realtors pick up on it. But especially if… Our borrowers are also coached, so they’re advising the realtor, “Hey, I want to get the interest rate from eight months ago, 12 months ago,” whatever it is. And even though the 2/1 buydown program is a temporary buydown, right? So that’s a really big product right now in the conventional space, where the first year you’re 2% lower, the second year you’re 1% lower. And there’s even a 3/2/1 buydown that gets a little expensive at that point.
But they’re really cool products and we’re utilizing it a lot. And I know, I think even you guys, Bill, I don’t know if Civic’s got a buydown. So everybody understands, I’m a broker. I actually work with both Civic and Lending One, so we’re on their wholesale space, so I’m somewhat familiar with their products, but I don’t know if you guys are seeing more of those. I don’t know if you guys are implementing buydown programs, but that’s my experience.

Bill:
The loans are expensive on the BPL side anyways. On the conventional side, if you start with a little bit of rebate, then you get the par, then you buy into through points. It’s a little different than maybe what Matt or I get to see, because people are paying quite a bit of points if they’re going to buy that rate down. Loan still has to have value somewhere. So yeah, I don’t see a lot of it. I do believe that on your side, Christian, just having links to some of the biggest firms in the nation, they have to come out with new products and they have to come out with new products like right now, or you’ll see big companies, publicly traded companies fall.

Christian:
A hundred percent.

Bill:
They have to come… The 3/2/1 buydown graduated payment mortgages, qualifying at the start rate I/Os. If real estate values weren’t so uncertain right now, in some areas you’d see NegAm loans work their way back in for the market, like back in the ’06, ’08 time. So I think they have… The only thing conventional space can do to save the majority of the conventional spaces is come out with products that are exciting for the marketplace to get back in there and buy. And you’re doing it right now, Christian, with what you mentioned. More is coming, and way to lead the group, but more’s coming,

Christian:
I want to make sure I point that out for any borrowers. That’s probably the best said that I’ve heard it is that these programs aren’t… A lot of people have told us the programs are to save the housing market, have these temporary rate buydowns so people can still pay exorbitant prices. That’s not the goal. It’s exactly what Bill said. This is what has to happen. There has to be a loan-

Dave:
To save the lenders. That’s what you’re saying. Not to save… Yeah.

Christian:
In some capacity. Yeah. And granted, I mean, these guys are in different spaces and then in non-QM and bridge and fix and flip. But the big… I mean, I don’t know if you guys heard LoanDepot Wholesale went under, right? I mean, they don’t work with brokers anymore. I mean, there’s these very, very large lenders, we were talking about large and small kind of state. There are some big lenders they got out of the space too, the AmeriSaves and LoanDepot Wholesales. So there’s a little bit to that, Dave. They got to come up with these programs to save face at some point when they go in the right direction.

Dave:
So it sounds like, just to make sure everyone’s tracking this, there are programs right now, like a 2/1, where basically you can buy down your interest rate. Christian gave an example where you can buy down your rate by 2% for a year and then 1%. And the trend that, as a listener or as a borrower you can consider, is that costs money. You have to buy points to get those reduced interest rates. But the trend is that you have this seller who’s usually a motivated seller in this type of market, buy down those points for you, so you’re able to get your purchase and get a lower interest rate on the seller’s dime. But it sounds like what Bill and Christian are saying is that this is just the beginning, potentially, and there might be other borrower attractive loan products that come out for borrowers in the next couple of months. So I’m curious if any of you have recommendations for where listeners can stay on top of this information. What type of incentives and what type of new products are coming out that might be useful to investors?

Bill:
I think Christian’s doing a pretty good job with his company, but the fact is you won’t have to look very far. They’ll find you.

Christian:
That’s exactly what I was going to say. I mean, all of us are on BiggerPockets. If you’re just in a network or an environment, I mean, the information’s going to find you if you’re even relatively searching for it. So get with a broker, get with a loan officer for one of these guys from one with my company. It’s really something where if you want to stay on… I mean, Dave and I had an episode on our series that we were doing where a new program came out when he was in escrow. That was for the deal.
Dave, I don’t know, I think you were in the background that episode after I think they brought you in. But literally as he was in escrow, a program came out and I was like, this is a perfect match for you. And we pivoted, we completely canceled the loan, opened up a new one on an entirely separate product, and we only knew that because he was so fine-tuned into what I had to offer and obviously we’re business partners, but I knew what he was looking for. So communication is key with your loan officers

Bill:
And I don’t actually think it’s just lenders trying to solve this. This is being solved at Wall Street. You got a lot of bond traders that don’t know what the hell to do with their time. Just think about the green backwards. Matt and I were talking about golf earlier, but think about the green backwards. This stuff is being solved in Wall Street right now because there’s just no trades on the conventional side. There’s no trades. It is tumbleweeds, the way you would think about an old Western.
And so yeah, I do think they will come out with products. I’m actually quite blown away that the fourth quarter didn’t show that, but I think there was so much trauma and some of that trauma’s leaked… It kind of leaked into the first quarter that if I’m a gambling man, I would say you’re going to see stuff this quarter that is going to be good for the market. And Dave, when I think about 3/2/1 buydowns or 2/1 buydowns, I’m thinking about that as a product. Then you could employ Christian’s strategy and you could buy that start rate down, but the product is a 3/2/1 then Am for the rest of the 27 years. But you could buy that loan down and now you’re talking about a rate that people can get their arms around and live with, right?

Dave:
Yeah, absolutely. Two things about that. First, I think this conversation just underscores the idea that you shouldn’t assume, just because you’ve seen a headline, what interest rates are right now that that’s what you would be paying, and you should actually go out and talk to a broker and see what you can actually get and learn about some of these new products. Let me ask you this, Matt, and I guess all of you, is there an interest rate that you’re seeing through some of these new products where people are comfortable? Because it seems like just looking at the market, once it hits 7%, things were going crazy. I mean, things really just halted. Is there… Do you have a sense of what the sweet spot is where buyers and borrowers are feeling like that’s a tolerable rate?

Matt:
I think it also, like I was indicating before, is that if you pencil your deal to start… If I’m underwriting a deal, and I’m talking on an investor side, then we’ll talk about conventional sort of like I’m a home purchaser looking for my house. If I’m an investor and I underwrite from day one and say the rate’s going to be 7% and I’m able to get 10% off on that deal now that I was overpaying by 5% nine months ago or six months ago, it’s tolerable, it’s just more of a mental thing of getting comfortable actually doing that. Now three or four months ago, I would say that if the rate was in the sixes when it got into sevens, people started to get jumpy because they were used to paying four and five. And then it jumped to seven or eight, and then when that came back underneath seven, that was a mental trigger, as you’re talking about to say, okay, I’m interested again.
But practically, my personal view is if someone’s underwriting day one, they can get comfortable with any rate, as long as it values that they can apply the deal right. And that was the sellers hadn’t adjusted yet. I think you’re starting to see sellers adjust now. And then on the conventional side, I mean you’re starting to see it. It’s like there’s not much inventory at all, but you’re seeing all the things that were… You are, at least in my markets that I follow, seeing price reductions on the listing side. I don’t think there’s any screaming deals yet, but at least you’re directionally going the right way.
So I think some of it is just a mental breaking point with people and saying, okay, I get it now. I know rates aren’t going to all of a sudden going to be 5% again. It was six months ago, I really… Half of our borrowers believed, as Bill was sort of indicating, when things were in sevens or greater, they were still in their minds thinking things would be high fives again somehow in three months, until the Fed sort of laid out what’s happening. And then I think people started, okay, this is not going to randomly go back down 200 basis points in three months. So that’s what I’m seeing.

Bill:
I think, Matt, I think that’s a bullseye. Think about stock market, think about interest rates, think about real estate values. When things are moving around a lot, I always think the smart money just takes a step back and tries to figure out is this going to continue rattling back and forth or one way or the other, or has it just settled down and they have a new norm? And I think that’s right, Matt. Interest rate wise, it’s perspective. If you look the last 12 months, interest rates suck. If you look at the last five years, interest rates are good. If you look at the last 25 years, interest rates could arguably be great. But we lived for three years in the most incredible low interest rate market where all of us got to get fat and happy about the originations. And on the conventional side, they were rewriting customers five to seven times over 36 months.
Like, hey Bill, it’s Matt, just want to let you know I’m going to drop you from three and a quarter, 2.75, no point no fee, sending the documents, sign them. And you get a half a point rate reduction. And they would literally stairstep those borrowers down. Those borrowers, for the most part, most of them are never touching those loans unless there’s a death, a divorce or some move up or move down. I actually think you’ll see seconds kind of expanding, because no one wants to touch the two or the threes. So there’ll both be… There’s seven or eight percent on a second, and then five years from now they’ll do the cash-out refi at the four and a half. So I think you’re spot on, Matt. We’re seeing… The Fed’s probably close to being done. This next time, whatever they’re going to do quarter and a half, it’s probably, probably it.
They just need to say that. Once they say it, then I think you’ll see some smart money come back. I mean, the 10-year is better right now, just thinking about it from perspective of overnight lending rate. We’re owned by a publicly traded bank. They’re overnight cost of funds have gone up significantly, but the 10-year, because I’m a mortgage guy, but it’s so much lower than it was three rate hikes ago. So it’s interesting that way, but I think it tells me that rates are going to come down. If you had a magic wand telling you, end of the year, you’re going to see lower rates than we have today, both BPL and the conventional space.

Dave:
That’s a good segue. And just to sort of clarify what Bill’s saying here too is that we’ve discussed this on the show many times, but what the Federal Reserve controls is the federal funds rate that is not controlled mortgage rates, and the much more highly correlated indicator for mortgage rates is the yield on the 10-year treasury. And as Bill was just saying, despite the Fed raising the federal funds rate, the 10-year is back below 4%. I don’t know where it’s today. I think it was at 3.7 yesterday or something like that. And so there are indications that loan rates are at least slowing down and could start coming down towards the end of 2023. That’s just sort of my take. And Bill, you just gave yours. Christian, where do you see rates heading over the course of 2023?

Christian:
Yeah, I’m in agreement with everybody. I think they’re a lot more on the capital market side, so I know you guys have a very intricate understanding, right? Me on the broker side, I’m much more client-facing. I obviously keep up with what’s going on. What I would say is I think… I want to draw it especially to demand and what’s really driving clients. I don’t think it’s an interest rate that everybody’s looking for. I think it’s just some amount of stability. We’ve been through this 12-month period where it’s like I get pre-approved and you guys know how long it takes to buy a house. A few days to get pre-approved, your credit’s only good for 60 days, you got to go find a realtor, you got to go tour 10 houses, you got to find one you like, you make an offer, right? There’s a process to it. And a lot of times it’s 60, 90, 120 days before you have a house.
Well, when rates are changing by a point and a half in that time period over a 12-month period, it’s like nobody wants to buy because they’re like, I go get in love with getting a loan, and by the time I actually get one, we’re talking about a one and a half, two percent difference in my rate. So I don’t think it’s a rate everybody’s looking for specifically. I don’t think it’s just a magic… If rates are back in the fives, we’re ready to go. I think it’s just like can I just have some confidence in what my rate will be at this point? I don’t want it changing this drastic amount in the time it goes and takes me to find a house.
And I do kind of double down on what everybody’s saying. I think obviously the Fed can’t do it forever. I do think they’re trying to build in wiggle room because I mean we got down to 0%, right, during COVID. I mean, historically, they’ve been able to use dropping interest rates to stimulate the economy and you can’t drop them unless there’s some margin to drop them by it, right? That’s where I’m thinking is that they’re building it up to a point where they have enough leverage maybe in the future to potentially stimulate again and we play this rollercoaster on and on and on, right?

Dave:
Absolutely. Yeah. So Matt, one of the other things about rates I’m curious if you have any insight on, is despite the Fed raising rates, they’re doing their thing, the spread between the federal funds rate and at least conventional mortgages, I’m less familiar with the commercial side, is abnormally high right now? Typically, it’s like 170, 190 basis points. I think it’s well above 200 still. Can you tell me, with you and Bill, your knowledge of the capital markets, can you tell me why it’s so much higher and if you think it’s going to change in the coming year?

Matt:
Yeah, there’s a number of things going on. As Bill indicated, generally bond investors and broadly Wall Street right now in the last Q3, Q4, if it’s a mortgage, there’s a little bit of uncertainty and that means buyer liquidity has drained out. Two, you have a historically large and probably unprecedented balance sheet of mortgages held by the government, which never has happened before in terms of the size and scale. So they own, I forget if it’s two or three trillion, whatever it is, Bill, maybe somewhere in that handle, I think, of mortgages. And of which at some point they’re going to need to sell down or let it wind off. People are unsure what that’s going to be. So you have this huge net seller of unprecedented size that has never existed before, sitting on this inventory that maybe they could sell at some point. That creates a lot of uncertainty. And then three, you have really high rates, which means that when rates are very high, people need to assume that that loan will prepay at some point and that creates this inverse.

Dave:
Wow.

Christian:
That’s the tricky part. Yes.

Bill:
That’s the bullseye right there.

Christian:
Yep. Couldn’t agree more.

Bill:
He’s right. That’s it. Matt, that’s bullseye. There’s just… Think about it, rates at 7%. Who believes that’s going to be on the books for 30 years? Who believes that’s going to be booked… I think you have to have a loan on the books for somewhere between 36 and 40 months to break even if you’re a purchaser of conventional loans. I think that’s the number-ish. Think about that. Who believes a 30-year six and three quarters or seven is going to be on the books? Those suckers are going to get a call from Christian the second rate’s got-

Christian:
The three and a half all got eaten up when rates went to 2.99. I couldn’t agree with that more.

Bill:
That’s right, though, Matt. It’s, man, it’s those… And here’s kind of the scary thing that Matt mentioned earlier. You think about the government, if they didn’t have that many loans at that low of interest rates, it goes back to what we were commenting on earlier, death, divorce, some life-changing event before those people are going to get out of those mortgages. They can’t afford a home equal to that. Most people can’t, when you go up to today’s interest rates. And so they just sit, which puts some pressure on real estate inventory and probably helps us with valuations with all the other crap going on it. It’s an interesting study, but I think the government’s going to have to take it on the chin if they try to start offing some of those mortgages.

Dave:
That’s fascinating what you said, 36 to 40 months to break even on a loan. And with almost everyone predicting that rates will go down, maybe not in ’23, but probably in ’24 at least, or even ’25. That’s why the lenders are baking in this extra spread to, I guess, accelerate that break-even point.

Matt:
And to clarify, just so you know, and everyone understands. The lenders themselves, this is not more profitable for them. Put us aside for a second, our little… We’re a sliver of the mortgage market. We all pump our chest and think we’re big, but we’re like a gnat on this whole mortgage market. So if you met the whole mortgage market, those folks are not more profitable right now, even with those spreads the way they are, they are the least profitable they’ve been in a long time, because they’re not the ones taking that margin, just a risk premium built into the market. And they’re selling their loans immediately and their margins are the worst they’ve ever been. So it’s a weird dynamic right now.

Bill:
It went from being the greatest business to be in if you were the LoanDepot Wholesale or the FOA biggies that were printing profits quarterly, printing hundreds of millions of dollars, they couldn’t cut quick enough. Yeah, the bigger ones are really suffering.

Christian:
Yeah. I mean, I can’t think of… There’s like three lenders that we partner with where we have the same account executive as 12 months ago. There’s not very many. Account executives are, I mean, we have over 150 lender partnerships.

Dave:
Wow.

Christian:
So I mean, it’s like account executives have gotten axed across the board. And it’s funny, both of these guys actually have the same person. But it’s just wild to me that, I mean, exactly like Bill said, there is just that… They cut, they just cut, cut, cut, the moment it turned. That’s definitely felt.

Bill:
Well, Matt’s right, if you take the biggest three lenders in our space, those lenders do as much in a year as some of these guys were doing in a week to two weeks. It’s just not apples and turnips.

Dave:
Yeah. Well, this has been fascinating and I’ve learned quite a lot, but unfortunately we do have to get out of here. But would love to hear just from each of you, advice you have for borrowers and investors heading into this year and how to navigate the rapidly changing debt markets here. So Christian, let’s start with you. Do you have any words of wisdom?

Christian:
Yeah, I think pretty much every time I’ve been asked, I’ve always answered the same way. While you hear less people are maybe successful in real estate, less people, crypto, stock market, whatever it is, if you are surrounding yourself with knowledge and people who are well-versed in the space, you’re going to have the right guidance to be in that top 10, 20% of producers. And those are the people who make money in the hard times. I mean, there’s still people having success on the stock market right now. It’s probably the better people, the people who are more knowledgeable, the people who are more informed, the people who have more access.
Whereas, I mean, there’s people still succeeding in short-term rentals, even though a lot of markets are impacted and a lot of markets are shutting them down. The people who are well-educated and well-versed on how to run them successfully thrive throughout those times. So surround yourself with it. Listen to stuff like this, get with me, get with Bill, get with Matt. I mean, get with people who are industry professionals in the space and they know what they’re doing and that’s all you can really do is put yourself in the best position to win. And if you win, then it’s not a surprise, right?

Dave:
Awesome. Great. What about you, bill?

Bill:
Yeah, so look, I’ve sat on so many of these panels throughout the year and at the last six months, I kind of felt like I was an individual on an island by myself. I’ve heard all the doom and gloom, heard the inflation, heard the recession, heard real estate values pulled back. I’ve heard all of that stuff. But we’re close to six million homes underwater in terms of supply and demand. And if you believe any of this stuff I said earlier about low interest rates and those people not refinancing or selling out of those transactions, I think it’ll exasperate the problem.
So I am really bullish on real estate, short and long-term. I think you can get a better deal today than you could six months. You can negotiate a little bit, you could demand a little bit more. You’re not paying over list price, you’re getting contingencies on your deals, you’re getting seller concessions on points, you’re getting all that stuff. That’s great. So I’m bullish on real estate, and if I was to give a recommendation, I think you got to get your partnerships in line. So you hook up with a company like Matt’s or ours on the BPL side, you hook up with a company like Christians on the conventional. You get a kick ass realtor, you get some kick contractors, you get some good vendor relationships. And I think partnerships today will make a big difference as we go through ’23 and ’24 in terms of what investors believe is successful or not.

Dave:
Awesome. Great. Well, Matt, take us out. What’s your advice for any borrowers this coming year?

Matt:
The one thing I’d say to borrowers I say to myself is I try not to bet on interest rates. Okay. Because it’s one of the craziest things in the world of to bet on. So it’s not an all or nothing decision you’re making. If you’re out there buying 10 properties over the next two years, or multiply that by however big you are, you can spread that decision over 10 or 20 decisions over the next two years. So you don’t have to… You’re not making one big bet. Okay. This month, I don’t know, maybe my rate’s a little bit higher than it should have been, but maybe next month or three months from now, it’s a little bit lower than it was. And you’re really just like, if you’ve heard the concept of dollar cost averaging in stock market, I don’t look at it that dissimilarly to borrowing is that you just need to look at it over a couple year period and say, all right, I won some, I lost some. What’s my average over that timeframe, am I comfortable in the deals, still pencil. That’s the way I look at it.

Dave:
That’s great advice. I like that a lot. All right. Well, thank you all. Matt, where can people connect with you if they want to learn more?

Matt:
Sure, lendingone.com. We’ll take care of you. Just call in. You can call in. You’ll get someone live. We’re staffed all the time, so it’s probably the easiest.

Dave:
All right, great. What about you, Bill?

Bill:
civicfs.com.

Dave:
All right. And Christian?

Christian:
Same thing, the1brokerage.com. All of us are just company name.com. Yeah, all of us are pretty easy find. We’re all on BiggerPockets too.

Dave:
Making it easy.

Christian:
Yeah, we’re all on BiggerPockets. If you go to the find-a-lender tool as well on BiggerPockets, an awesome resource to get to find someone.

Dave:
All right, thank you. Well, appreciate you all being here and sharing your insight and experience, and hopefully we’ll have you on again sometime soon.

Bill:
Good stuff, guys. Thank you.

Matt:
Awesome. Thanks guys. Appreciate it.

Christian:
Appreciate you guys.

Dave:
All right, thanks to Christian, Bill and Matt for sharing their insight and knowledge with us. That was super interesting. I learned a lot. And I think the main thing I want to reiterate, and this is something people ask me all the time, they’re like, what interest rates should I be looking for, or I don’t think I qualify for this kind of loan or this kind of loan? And they ask me and I have no idea. So I really think that, in this type of environment, it’s super important to just connect with a lender. Even if you don’t do a deal, just go call two or three of them. As we just learned on this show, people are getting interest rates in the 5% using seller buydowns and buying points. And there’s all these different products that lenders are coming up with to incentivize people to buy right now and to borrow right now.
And so don’t just assume because you see some headline either in the media or in the newspaper or whatever that says that interest rates are at 7%. There are different products available, especially for investors, than just those top-line things. So that was my number one takeaway from this, is just talk to someone and see if your assumptions are right or learn more about some creative ways to potentially borrow on any of the deals that you’re looking to do over the coming year. So that’s it for us today. I hope you found this episode helpful. If you did, we really appreciate a five-star review on either Apple or Spotify. If you have any questions about this episode, you can find me on either BiggerPockets or on Instagram where I’m @thedatadeli. Thank you all so much for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Every business is built on its human resources. Those humans have experienced unprecedented change since 2020 and, with them, the companies they work for.

Many employers are paying more, increasing benefits and adding flexibility to once-rigid scheduling to attract and retain the best talent. Meanwhile, economic uncertainties are causing other companies to rein in costs until they can ride it out. In this tug-of-war, it’s tough to anticipate which approaches can help a business move ahead of its competitors.

It’s not sound strategy to achieve growth by grinding employees down to a nub. Instead, companies should focus on building their employees themselves so they, in turn, can grow the business. Adult learning may be the perfect way to achieve this.

The shift toward helping employees bloom where they are planted is once again changing business as usual. And companies that make that shift accordingly will benefit. Here are a few reasons why you don’t want to miss out.

Adult Learning Lifts Everyone

You have probably heard the Doctor Seuss passage: “The more you read, the more things you shall know. The more that you learn, the more places you shall go.” The value of lifelong learning is virtually indisputable. But it’s no longer just about learning more on the job or reading or traveling more. It’s about adult education.

The “adult” adjective is significant here, and not just because those learning are over the age of majority. It’s used because working adults face a lot more barriers during the learning process. There is the transition back to education, the cost of it, the time needed to devote to it, and all the normal distractions of full-time jobs, kids and—maybe—a social life.

Employers have the perfect opportunity to remove some of those barriers for employees who want to further their education. If employers take advantage of it, they can grow their own talent to right-fit changing needs within their companies.

The vast majority of employees agree that access to professional development opportunities is vital. If granted access, they’re also more likely to continue working for the employer that invested in them.

Retention, engagement, job satisfaction and productivity all rise when employers actively encourage adult education. In that scenario, everyone gets to go places.

Adult Learning Is a Piece of the HR Strategy Puzzle

Automation spurred by the development of artificial intelligence and machine learning is also changing the face of business. Long-term HR strategies must consider the impact it will have on a company’s workforce. The pegs and the holes are morphing simultaneously.

It’s an almost overwhelming proposition for HR managers. They’re looking at the employee roster and seeing how many people may be made redundant by technology. At the same time, they’re looking at novel positions being created by that technology and wondering where they’ll find the talent to fill them. Adult education should be a piece of this puzzle.

Automation potential in emerging technology will change everything from sales and marketing to customer service and fulfillment. In fact, it’s already altering roles and accelerating the changes daily. Company leadership needs to peer down the road and plan accordingly.

Consider those employees whose roles will be replaced by automation. Provide the educational opportunities they need to move into newly created roles or to handle future roles the latest technological advances will demand. A savvy reskilling strategy is a great way to retain a company’s best and brightest.

Taking the long view will also transform other HR functions, such as creating job postings, recruiting, hiring and onboarding. Of course, technology has challenged the status quo since the invention of the wheel. Adult education will help companies meet the challenges today’s tech developments pose.

Adult Learning Promotes Diversity

The pandemic, social unrest and sharp political divides have prompted companies to confront their diversity demons. Diversity, equity and inclusion have reshaped everything from board and C-suite agendas to the exit interview. No one said altering hundreds of years of collective corporate histories would be easy.

Most companies continue to struggle with reaching the DE&I goals they have set. In fact, many have made little headway at all. And if they manage to get diversity right, they can’t seem to follow through with the equity and inclusion bits.

Creating a diverse workforce requires a sea change in multiple business practices, from the writing of job descriptions to eliminating recruiter bias. Adult learning shouldn’t be overlooked as a potential path to achieving even the most ambitious diversity goals. And it can do so on two key fronts.

First, adult education on diversity issues for leadership and HR can alter entrenched perspectives from the top down. Second, companies can offer educational opportunities to current team members. Employees of certain races, social backgrounds, genders and sexual orientations may have lacked some of the educational opportunities of their white, male, cisgendered colleagues. Adult learning can narrow that gap. And once these diverse employees are on the job, continuing education can keep more of them advancing within the company.

Using adult education as a tool for creating a truly diverse, equitable and inclusive workforce is shrewd. It makes companies less reliant on market forces and more self-reliant. They’re creating their own success from within, rather than paying lip service to DE&I goals.

Making the Shift

Education can be the key to success in business. Employees know that, and they’re often enthusiastic about furthering theirs to advance their careers. Companies need to embrace and support those employees.

So many forces are changing how business is done these days. Adult learning is an easy and profitable one that will take employees and employers to the head of the class.

David:
This is the BiggerPockets Podcast Show 717: Quit to Become a Real Estate Professional, and in the professional status that will help your investing, but you’ll also be able to make money through all the different ways that real estate investors need services. You can become the CPA, you become a bookkeeper, become a property manager, become a contractor, work in construction, become a consultant, become a real estate agent, become a loan officer, become a processor, become a manager in one of those companies. There’s so many things that you can do. Before people just jump from one to the other and go to an extreme, I recommend them looking at the huge space in the middle of that spectrum.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with a Seeing Green episode for you, green light flashing behind my head.
All right everyone, we got a really good show. In today’s show, if you haven’t seen one before, I take questions from you, the audience, and I answer them for everybody to hear. Today, we get into some really good stuff, including how you should solve problems with contractors that stop replying to you or aren’t doing the job that they said they would do, when you should buy a home with sentimental value over financial value, when you should flip versus BRRRR, how to know if you should hold the property or if you should flip it for a profit, and what to do if you’re playing catch-up because you got started investing later in life. All that and more on today’s show.
Before we get to our first question, today’s quick tip is remember that when you’re investing in real estate, you’re not always trying to make money. In fact, most of you are here because you’re trying to get out of trading your time for money. You’re trying to get a life of financial freedom, which is what we’re all about here at BiggerPockets. What you’re really looking for is time. Investing in real estate can get you time back, time that you don’t have to spend working. Now of course, we often look at time through the value of money. The more money I have, the more I can spend my time on what I want. But when a deal goes better than you were hoping that it would, you got more time or you started earlier in the timeline than you were expecting. And when a deal goes bad, you just lost yourself some time, you’re going to have to wait longer before the deal performs the way that you would expect it.
But real estate will always go up because inflation always goes up. We’ll have of course momentary times where it goes down like right now, but those moments never last and it gets turned around, so buying real estate is a very smart financial move. Remember, you’re not trying to earn money, you’re trying to buy time.
All right, let’s get to our first question of the day.

Corey:
Hey David, thanks for taking my question. Mine is deal specific. I’m currently under contract on a house. All in, I’m going to pay $270,000 for, it needs 60,000 in renovations, and the ARV is going to be $420,000. I have a $75,000 personal loan that needs to be paid back. It was used for my real estate business. It needs to be paid back at the beginning of 2023. So I wanted to do the BRRRR method, pay back my investors and hold onto the house. However, when I did the math, my monthly payment is going to be around $200 more than what I think I could reasonably rent the property for.
So alternatively, I could just flip the property, pay back my investors, have a little bit left over for the next deal, and then employ a buy and hold strategy moving forward. There has been a lot of talk on the podcast about holding onto properties because of the rate of appreciation we’re experiencing right now, even if it’s slightly cash flow negative, so I just wanted to hear what you would do in this situation if you would employ the BRRRR strategy or do a fix and flip. Thanks David.

David:
Hey Corey, this is a great question, a great question and I’m glad that you asked it because we all get to learn from a minute. So it is true. I have said in the past that sometimes it makes sense to hold a property that doesn’t cash flow or even loses a little bit of money for the long-term benefit to take a short-term loss, but your question is about your specific situation. When does it make sense to hold a property? For you, it probably doesn’t, and here’s what we’re getting at.
You’re already in some debt. You said you owe $75,000 to other people. If you’re in a position where you’re going to hold a property that doesn’t cash flow, I only recommend that when you’ve got either so much money coming in from other sources or so much money coming in from cash flow of properties you already bought that it covers your loss. That’s not the case for you. You’re not making money from other deals and it doesn’t sound like you’re making a ton of money at your job where this would make sense.
The other thing that you brought up, which was a really good point, is that you do this because of the long-term appreciation. But we’re not in a market right now where we can reasonably expect short-term appreciation. It may go down, it may stay the same, it’s probably not likely to go up in the next year or so. Eventually though, real estate always goes up. You just don’t need to hold this specific property hoping it goes up. You want to hold real estate as a whole in general for a long period of time.
Now, the reason that when you ran your numbers, you’re seeing that it isn’t going to cash flow is probably because you’re not buying a cash flowing property. In other words, you said it’s going to be worth 430 I believe. If you had just went to go buy this property right now for $430,000, it wouldn’t cash flow. So you wouldn’t buy it, right? You wouldn’t want to own this asset as a long-term buy and hold in the way that it’s designed to be operated. You’d pass on it.
So if it’s a situation where you would pass on the deal after the BRRRR is done, you probably don’t want to keep that as a BRRRR. That makes more sense to flip. Now, if this was a situation where you said, “Man, this is a triplex, it’s going to have three units, it’s going to cash flow really strong,” those are the properties that I would say you want to hold at the end of the BRRRR.
So I hope that makes sense. I think for you, it makes more sense to flip this property, make your money, pay off your investors, get yourself out of debt, have a nice chunk of change to go get the next property, and it’s okay if you keep flipping them until you find the property that works as a BRRRR, just like it’s okay if you keep using BRRRRs until you find a property that doesn’t work as a long-term buy and hold and then you flip. Much like in poker, you got to play the cards that you’re given. You can’t play a hand different than the one you’re holding right now. The important thing is you’re doing the right thing, you’re taking action, you’re making money, and you’re just deciding how you’re going to hold the property based on the nature of the property itself and not based on the situation you’re in or, “I want to be a buy and hold investor.” Eventually that is going to be where you make your wealth, but it’s okay if you flip some properties in the process to get there. Thanks for the question and good luck on your deal.
All right, our next question comes from Dean [inaudible 00:06:11] out of Sarasota, Florida. Dean says that I have $200,000 in cash sitting in my savings, and I just moved to a brand new market for myself, Sarasota, Florida. I would like to start my real estate journey in buying rentals to retire early. What is the best way to do that in brand new market with $200,000 cash? Is it buying single family homes or going big on a 10 unit plus rental? Thank you.
All right Dean, great question here. First thing, this shouldn’t come as a shock. If you listen to Seeing Green or you listen to me in any context, I’m always going to say, especially as a brand new investor, your initial goal should be to house hack. You’re in a brand new market. Put as little of that $200,000 as you have to down and buy yourself a property that you can rent out to other people and learn the fundamentals of landlording, of real estate operating, and real estate investing in general with low stakes as a house hacker, eliminate your own housing expense. That’s a big one.
The next thing I’m going to say is after you got that down, it’s not bad to go for a 10 unit plus rental if you’re going to get a good cash on cash return, and I do like doing that in an area like Sarasota because population is expected to continue moving in that direction. That’s a really strong market, so I do like it. The benefit of buying single family homes is that they’re more flexible. They’re easier to buy and to sell. You can refinance them. When you buy a 10 unit apartment, you got to sell the whole thing or refinance the whole thing. When you have several single family homes, you can sell one, you can sell two, you can refinance a couple, you can refinance one. There’s some flexibility with how you operate the portfolio itself.
But at this stage in your journey, it’s not super important for you to have flexibility. You don’t really have any real estate yet. So just house hack once, house hack twice, house hack thrice. Continue to house hack every single year, and don’t rush into buying the apartment complex anytime soon. There’s a very good chance that the market’s going to continue to soften, so you’re in a position where waiting is to your advantage. Just don’t wait on a great deal if it crosses your path.

JD:
Hi David. My next question is on contractors. The rehab that I’m working on is a duplex that I’m trying to add rooms in order to increase value. First contractor I had to get rid of because he did not pull permits and charged me for things that he did not actually complete. I brought in a second contractor and things were going well until he disappeared on me and stopped replying to my texts and phone calls. Every now and then I would get a reply, but it never amounted to him actually doing what he said he was going to do. And then he said that he had a family member that was sick in the hospital, and it was a month I had to threaten him in order to get him to start responding.
So what I learned from the first contractor is I put into this subsequent contract my ability to charge for delays and for problems. I’m trying to figure out what’s fair, how do I deal with this situation, because he truly could have had something happen but the way that he handled it was not cool. He disappeared and he basically caused a month of delay and he didn’t have a backup plan. And I don’t want to be a jerk, I want to be fair, so how do you deal with situations like this when people do things, they don’t perform, they say they have problems, but they don’t really give you much to work on or work with, and I could use some help. Thank you.

David:
All right JD, and fortunately this is one of the more common questions that I get in my life is people reaching out to me saying a contractor in some way, shape, or form is not doing the job and I can’t make them, what do I do? Now the answer most people give is the contract has to be airtight. The tighter the contract is, the better you are. Here’s the problem with that. The contract itself is only applicable when you’re in a court of law. When you’ve already decided to try to sue the person and the judge has to figure out who’s in the right and who’s in the wrong, what they say is, “Well, what does the contract say?” Just like with real estate sales, just like with everything else, the contract is all that matters.
If you’re in that position, you’ve already lost a ton of money. Our goal is to prevent ourselves from ever being in a situation where you got to sue a contractor. So here’s the advice that I give, and this is what I’ve learned over years of doing rehab projects with contractors. The first is that accept that they are good at swinging hammers and sawing wood, they’re not great with other elements of business. You will receive so much relief when you lower your expectation. In general, this is not every contractor of course, every once in a while you get a brilliant business person, the problem is when you get one of those, they don’t stay doing these small single family projects like we’re used to. They move on to bigger stuff and you never work with them.
So the people that work with us as investors are typically the ones that are not super business savvy. They don’t manage cash flow very well. They have to pay their guys, they have to buy materials, they have to buy tools, and they don’t know what money’s coming in and what money’s going out. So they will frequently try to get you to pay for everything upfront. They usually don’t have a strong operation, kind of a system going on. They don’t have the same employees that show up every day to work. They’re constantly cycling through people to do the work, and they don’t know if they’re going to get good labor or bad labor, and they don’t want to tell you that.
So here’s what I do. When I draw up the contract, I have a full scope of work that they give me prices for, but I treat it as if I’m hiring three or four separate contractors to do that scope of work. I will have my contractor say, “I’m going to do this part first, demolition and rough in for these things. Then I’m going to come in and I’m going to put in the sheet rock and the drywall. We’re going to tape and texture. We’re going to put in the plumbing. We’re going to run this electrical. After that, we’re going to do this section, and in the last segment we’re going to add the finishings and we’re going to put the finishing touch on the property.” So I’ve got four separate jobs now.
What I do is I pay them to do each segment, so maybe they get one quarter of the total scope of work to do the first part. When they’re done with that, they send me pictures and videos and I have someone who’s boots on the floor go to the property and actually check to see the work was done. This could be a property manager, this could be an agent. This could be a BiggerPockets member that lives in the area. This could be someone you pay on Task Rabbit, because I have seen times where a contractor sent a picture of a wall that was painted, but the rest of the house was not painted. It’s possible if you’re not careful for them to take advantage of you.
Once the work has been done to my satisfaction, I send them the second draw and they do the second part of the work. Now, the benefit of this is I can only be ripped off by 25% of my deal. And if they stop replying to me, they stop talking to me, I don’t know if work is going on, I can find another contractor and say, “Here’s the scope of work. Here is what I will pay you to do it. Do you want to take the job?” And then they can jump in and pick up where the first contractor stopped replying. “Hey, I understand someone’s sick in the hospital. There’s nothing you can do. I’m going to move on and get the second part done with someone else. If your family member is recovered and you can work, we can jump back in and have you do the third, but if not, I’m going to get somebody else.” Doing it this way gives you some flexibility and freedom.
Now, here’s where I’m going to put on my little angry teacher hat and you’re going to get a red mark on your paper. If you’ve read my book Long Distance Real Estate Investing, I detail this pretty clearly there. I make sure that I cover all of you guys that are listening to this and all you BiggerPockets fans from losing money because contractors are one of the two ways that I see people lose money in real estate. One of them is contractors. The other is low appraisals, particularly with the BRRRR method, those are the two ways that you can get yourself in trouble.
You’ve got to manage your contractor’s payments. Every scenario that I’ve seen in my whole career where someone came to me and said, “The contractor stopped replying,” every one of them, they paid the contractor too much money up front, sometimes the whole job. Once they get their cash from you, there’s no incentive for them to finish the job. They’re going to finish it whenever they want. And if you’re thinking, “Well, I’m going to leave them a bad review on Yelp. I’m going to go to the Better Business Bureau and I’m going to report them,” most people hiring contractors will never look at that. They’re going to get a recommendation from someone else. They’re going to get a bid that’s really positive, really low, and they’re going to pick them. So it doesn’t hurt them as much as you would think to be able to do that.
So for everyone out there listening, every contractor’s kryptonite is not getting paid. They’re not good at managing money. If you set it up so they get paid after the work is completed, they will be very motivated to get that work completed because their guys are saying, “I need to get paid. I need a forward on the next thing I’m going to get paid on. I can’t find the tools. You need to buy more. I ran your truck into a wall. We need a new truck.” They’re constantly having people come to them and saying, “We need money. We need money. We need money.” They then turn to the customer and say, “I need money. I need money.” If you’re the person that gives them all the money, you solve their problem, now they’re not incentivized to solve your problem. If you make it so they only get their problem solved when they solve your problem, human nature will be working for you, not against you, and you’ll have a much better result with your contractors. It’s not in just having an airtight contract. It’s in the incentive structure that you set up when you’re working with them.
Hope that works out for you JD, sorry that that’s happening. I see you’re in the Sacramento region. Make sure you come to one of the meetups that I hold. We do them out there pretty often.
All right, at this segment of the show, I like to get into the comments that you all have left on YouTube. I’ve seen other podcasters doing this and I love it. They read the comments from their shows so everybody gets to hear it. Sometimes people say something funny or cool or profound or meaningful and everybody gets to hear. So if you’re listening to this, do me a favor and leave a comment on this show. Tell me what you thought, what you want to see more of, what you liked, what you didn’t like, and maybe I’ll read one of your comments on a future show.
Our first comment comes from Mark Ruth. “I’m finally under contract on number three. Most of what I learned from YouTube about real estate investing is not to put the properties in your own name and use a LLC. However, my lender says the fixed rate loans that you get from the secondary market requires the property to be in your personal name. How would I reconcile that?”
Okay, so there are many people that say don’t put the property in your own name, instead use an LLC, and the reason is for lawsuits. First off, if you don’t have a high net worth or you don’t have a lot of equity in the property right off the bat, that’s not really something you have to worry about. But let’s say that you do. It is very true that it is harder to get good loans in an LLC, and this is the trade-off everyone has, and real estate investors hate trade-offs. We want really low interest rates, but we don’t like to pay points for the closing costs. We want to buy in a market that’s appreciating and going up, but we don’t like the competition with everyone else doing the same. When the market’s bad and we can actually get really good deals, well nobody else is buying and prices aren’t going up, so we don’t like that either. Real estate investors hate trade-offs, but they’re a part of life and you have to accept them.
Your problem here is that if you choose to put properties in LLC, you sometimes cannot get conventional financing. And if you can, it’s usually going to be a rate that’s worse as if you put it in your personal name. Some way around that is that people go put it in their own name and then they later move the title into the LLC. There’s a trade-off for that. The lender could call the note due because technically you sold it to another entity even though you own that entity without telling them. Now, in my experience, that doesn’t happen very often, but it could happen.
So the way you reconcile this is you ask yourself what is more valuable to you? Is saving the money by putting it in your own name more valuable to you, or is reducing the risk by having it in an LLC more valuable to you? You just objectively turn it into a number. You have to quantify the risk of keeping the property in your own name. Now, I started off this reply by saying in most cases if you don’t have a high net worth or there’s not a ton of equity in the property, it’s not that much risk. It’s not like tenants are running around suing landlords every single chance they get over anything. And in the rare cases that you do get sued, your homeowner’s insurance will often cover you for most of what the lawsuit would be or all of it. So it’s not as big of a risk as people think.
In general, the people who need to worry about putting their properties in an LLC are people who own a lot of real estate or have a high net worth. So as a general rule, if you don’t have a high net worth, you don’t own a ton of real estate, you don’t have a ton of equity, your own name is fine. Just maybe buff up your insurance coverage in case you get sued. And if you do have a high net worth, it’s usually worth it to not get the better rate, but to get the protection of the LLC. Hope that helps, thank you for the question there Mark.
Giovanni Alvarez says, “I love the end of this episode,” which was episode 699, “Referring to are my standard set too high, I think it’d be awesome if you and Rob can go further into the mindset, psychology, personal development, and emotional intelligence needed to become a good investor. We need more of this for the upcoming year. Thank you for everything you do.”
Well, thank you for that too Giovanni. I personally love to get into mindset stuff. A lot of our listener base hears that and goes, “No, just give me the practical stuff. I just want to know what paper to sign and what metric to use,” but there is a lot to be said for the mindset, psychology, personal development, the intangibles that go into making someone a really good investor. So I’d recommend you check out my YouTube channel on Friday nights, it’s youtube.com/@DavidGreene24, where we talk a lot about this kind of stuff. Every once in a while here at BiggerPockets, we do a mindset episode for you.
But what you could do is you could come on and you could submit a question yourself at BiggerPockets.com/David and ask more about the mindset, the way that Rob and I or Brandon or other investors look at life and look at money and look investing. I personally believe that’s even more impactful than just telling you the 1% rule or the 80% rule or another way of explaining the BRRRR acronym for the 700th time. I think the mindset stuff will actually help people more, but that isn’t what people always want to hear. So come in, ask your question, and I’d love to get to know you better. Thanks Giovanni.
Adrian A says, “No. David said, ‘Irregardless,’ I’m done with the show. JK, I love the show and all the good info you guys provide us. You’re the man David, keep it up.” This is a problem in my life. I’ve receiving therapy, I’m going to counseling, trying to get this fixed. Sometimes I say regardless, sometimes I say irregardless, I don’t know why. They mean the same thing. I’m pretty sure the correct English is regardless. Sometimes irregardless slips out. It’s got something to do with my brain thinks that irregardless makes more sense, like without regard, but regardless also means without regard, right? So I don’t know why I do that. I know the English majors out there definitely catch it and put a comment in there. Thank you Adrian for your patience with my stupidity and my less than black belt mastery of the English language. I am working on that, especially because I am a professional podcaster now.
The question is when should someone use irregardless? Is there ever a time where irregardless makes sense? My producer here says the point of the irregardless is to shut down conversation. So irregardless is a word, it has a specific use in particular dialects. That said, it’s not part of the standard English, and so especially if you’re writing or if you’re using it in formal places, you should use regardless instead. Oh, so irregardless is a way of saying like, “I am done speaking to you. You are beneath me. Move on peasant. I’ve got more urgent matters to attend to,” which might be why I offend people when I say it instead of regardless. Guys, I’m not on an ivory tower of real estate over here. I will do my best to stop saying irregardless. My intention is not to shut down conversation, I actually want to encourage it. And what better way to encourage it than to say, go on YouTube and leave a comment. Tell me what you think about what I just said.
Our last comment comes from Gregory. Gregory, “Ha-ha, the Golden Girls, Matlock, and Murder She Wrote references, awesome, I love it.” I’m glad somebody caught those Gregory, because you’re probably in the 2% of our audience that knows what I mean. If you know what we mean by Golden Girls, Matlock, or Murder She Wrote, please leave a comment on YouTube and let us know which of those three shows was your favorite and why. What memories do you have of these shows when you would watch them? And what context can you provide for everyone else for why they should go look them up?
All right, we love it and we so appreciate this engagement. Please continue to engage. Also, just do me a quick favor, like and comment and subscribe to the YouTube channel here so you get notified whenever we have a new Seeing Green or BiggerPockets episode air. You don’t want to miss this good stuff, and YouTube will help what’s coming if you subscribe to our channel.
All right, let’s get to our next video question that comes from Julie in Reno, Nevada.

Julie:
Hey David. My name is Julie. My partner and I are looking to purchase a home from a family member in rural northern Nevada. This family member is an elderly hoarder and this family homestead has been in the family for over 100 years. Because of the hoarding, the home is in poor condition and probably would not qualify for a traditional mortgage. There is a current mortgage on the property for about $200,000 that is likely 70 to 80% of the current home value. The lot on which this homestead resides is quite large and likely could be subdivided. My partner and I don’t have cash to purchase the home outright. This family member has been unpredictable in the past, so we’re looking for a legal arrangement that would not allow the family member room to litigate or reverse a signed and completed deal. Can you talk about various strategies we could use to acquire and improve the home, including a subject to deal subdividing the lot to fund repairs or use of a DSCR loan? Thanks so much.

Corey:
Okay Julie, I understand the challenges you’re facing here and I’m glad you reached out for help. I’m going to do my best to give you several options that you can move forward. But before I do, I just have to make a disclaimer before we get into it. Objectively speaking from what you’re telling me, it doesn’t sound like this is a great deal. You mentioned that it’s got a $200,000 note that’s probably worth 70 to 80% of what the property’s value would be, so you don’t have a ton of meat on the bone. If this was a deal you were looking at that was not in your family, you would probably just pass on it right away. If the house is worth $240,000 and there’s a note for $200,000, that’s not a deal that people would be jumping at to go buy, especially when it’s in poor condition. Like you said, it’s in such poor condition then it might not even qualify for conventional financing.
So the only reason that I think you would want to buy the house is the emotional value that it has, but it’s coming with a lot of complications. You’re going to have to go rehab it and you don’t have money. You’re not getting it at a great deal. Your family member themselves is going to pose a problem as the seller could likely come back to you and try to take the property back from you once you buy it. The thing screams not a good real estate deal. Now, I just have to say that before I give you any advice because from a financial perspective, it probably doesn’t make sense to pursue this. However, if you want it for emotional reasons, I will still give you the advice that I would for what you can do to try to put in contract. I would strongly encourage you and your partner to sit down and ask yourself if this is the right financial move to make for you for real estate because this podcast is here for buying real estate for financial purposes, all right?
As you were discussing, the number one thing that jumped out at me would be a subject to deal. It wouldn’t make sense to try to go get a loan to buy the property from the current owner because it won’t qualify for financing and it’s not a great deal. The products you can use that you can buy a property that is not a great deal or isn’t going to qualify for financing would be bridge loans, hard money loans, personal loans. They’re going to have higher rates than standard financing. And because rates have gone up, my guess is the rate on the loan that they currently have is going to be significantly better than anything you could get now. So objectively speaking, it would make more sense to take over the note that’s already in place.
Another benefit of doing that is it’s probably an older note, which means in your amortization schedule you’re further along, so a higher percentage of your payment is going towards principle than towards interest. So even though it may not cash flow super strong, if let’s say the payment’s $1,000, when you first take that loan on maybe only $100 out of that $1,000 is going to pay off the principle. But you might be in a position where $500, $600, or $700 is going to pay off the principle. So even though your cash flow is going to be the same, you’re actually building anywhere between $500 to $700 a month of additional equity because a bigger chunk of the payment is going towards the principle. That’s another benefit of buying a property subject to where you’re taking over the existing mortgage.
That’s the route I would take in this scenario. I would say okay, I’m going to take over your mortgage. How much money do you need to get out of this property and move you into whatever home they’re going to move into it? I’m assuming it’s an assisted living facility or they’re going to live with another family member. You want to figure out how much money they need to move on to the next phase of their life and maybe come up with that part out of pocket.
If you can buy the property, you’re subject to financing, now you got to think about what am I going to do to rehab it? And again, you need some cash here to make this deal work. If you don’t have a lot of cash saved up, it’s not a good move. You can figure out subdividing the lots before you actually buy the deal, that’s going to be calls to the city and to tell them what your plans are and to see if that would be approved. They won’t approve it, that’s a quick answer. If they will, you want to make sure you ask them how much is it going to cost to do that and then figure out once you’ve subdivided the lots, who are you going to sell it to and how much are they going to pay because they’re going to have to then go develop it.
This is the best road of action I see for you, but again, the deal doesn’t look great. I think you’d pass on this deal if it wasn’t a family member and if the home hadn’t been in your family for 100 years. It might make more sense for them to sell you the home, let you take it over subject to, and maybe give you some money to take it over so that you can fix it. I don’t know what advice to give you as far as the family member coming back and saying, “I wish that I wouldn’t have done that.” That’s legal advice you’d have to get from a lawyer, it just sounds ugly. It doesn’t sound like there’s any good way to do this or there’s a very good chance that other family members will be upset if they think that you’re ripped off grandma and they wish that they could’ve got a piece of that. It smells rotten from a lot of different angles, so I would be highly cautious pursuing it, but if you’re going to, I think subject to is definitely going to be your best bet. Thank you for your question Julie.
All right, our next question comes from Andrew Carter out of Spain, [inaudible 00:28:20]. “Hey David. First off, I just wanted to thank you and the whole BiggerPockets team for what you guys do on a daily basis helping people around the world. That said, when you and Rob are chatting with this tax guy Matt, you brought up that real estate investing is a grab the wolf by the ears kind of situation. My question is what’s your exit strategy when or if ever you’d like to stop working 60-hour weeks and buying 15 short-term rentals per year? Is there a way to exit and semi-retired to live off your earnings without having a crushing tax bill due? Thank you again and can’t wait to hear your thoughts on it.”
[Inaudible 00:28:58] Andrew Carter. I will do my best to try to answer it. All right. First off, I’m not currently working 60 hours a week. I work when I want to now. Now, does that mean things don’t get done as fast? Yes. Does that mean I don’t make as money as I could? Yes. I’m not saying that everything is just perfect clockwork and I never work anymore. It’s more like if I want things to be better, if I want to make more money, if I want to do something different, I need to jump in and work, but I’m definitely not putting in hours like what I used to.
I also don’t buy 15 short-term rentals every year. I bought 15 at one time because I was forced into a 1031 that I didn’t really want to do, but I had to do because people were stealing the title to my properties. And once I started analyzing deals, I realized short-term rentals are the only thing that’s cash flowing, so I have to do it.
Now that being said, real estate is the best thing ever. Real estate investing is not a grab the wolf by the ears scenario. Using bonus depreciation to shelter your income is a grab the wolf by the ears scenario. And what I mean by that, when you grab a wolf by the ears, you’re safe because the wolf can’t bite you, but you lose your freedom because you can’t let go. So you’re in a stalemate, so to speak, if this is a chess reference here. Real estate itself is not a grab the wolf by the ears. It’s the opposite. You’ve got a bazillion exit strategies. It’s something that I love. So here’s a couple that you can keep in mind.
Always buy properties focused on building equity more than just cash flow. When you focus on building equity, you have more exit strategies to get out from the property. That could be selling it, that could be refinancing it, that could be selling it as well as other properties together in a 1031, that could be selling one individual property as a 1031 or not. But you have a ton of flexibility, and flexibility equals options, and options equal wealth.
Something else you could do is you could buy some short-term rentals, get them cash flowing really good, wait for the market to be in your favor when everybody wants short-term rentals, sell them to the next investor that wants to come in and find financial freedom and quit their job and instead they want to make money through managing short-term rentals, and then you take that money and you go dump it into an apartment complex via a 1031. Now you’re getting cash flow and you have enough money to hire people to manage it for you. You don’t have to work all the time. Maybe you don’t make quite as much as you did when you were doing short-term rentals, but you get all your time back. This is a very easy way to get in, build some wealth, and then basically step out and have mainly passive income getting into multi-family real estate.
You could also sell the short-term rentals and do different management structures. So I bought a whole bunch of short-term rentals and I believe 10 or 11 of them I set up with a property management company, and they do everything. Those are passive income to me as long as they’re cash flowing and I don’t have to think about it. Now, I do little things to make them cash flow more. I might spend time looking at where I’m going to add bunk beds, add games, get better pictures taken, add things to the property to make people choose it more often, but I’m not managing that property. So by getting something that cash flows at a high degree, you can now afford property management and you don’t have to work forever.
You can also do the same thing in-house. You get enough short term rentals, like 15, you can hire a person to be a full-time property manager that just manages your portfolio and now you’re not working at all. There are literally so many exit opportunities through real estate. It is the most flexible way that I know of building wealth, much more flexible than building a business or a big business or a small business or working at W-2. Even saving money for retirement, real estate is better than all of it, so I don’t want to get you confused by that reference of grab wealth by the ears. It does not apply to real estate investing. It applies to bonus depreciation, sheltering of income that you make from active income making, like the stuff I do with the businesses that I run. Thank you very much for your question, Andrew, and I hope things are going well out there in Spain.
Our next question comes from Mike Higgins in Atlanta. “Real estate tax benefit question, I need guidance. It seems my wife and I are in a real estate tax situation where we cannot take advantage of any potential tax benefits from our properties. Here’s why. We have a combined W-2 income of over $150,000. And number two, neither of us are real estate professionals. Two of the properties are self-managed and the third is under a property management company. All properties are under a Georgia LLC owned by me and my wife. I’ve spoken to two CPAs, both are painting a clear picture where we cannot pass through any expenses or write off any deductions due to the above reasons. What are your thoughts on how to get tax advantage from owning real estate investments?”
Okay Mike, I like what you’re saying here, but I want to clarify something. You are receiving tax benefits from owning that real estate. It’s not sheltering your W-2 income. It’s not sheltering all of your taxable income. It is doing a great job of sheltering the income that the real estate itself puts off. So those three properties, you’re still able to use the depreciation from them to shelter the income that they put off. So if you’re making $50,000 a year in profit from those three properties, probably only paying taxes from zero to $20,000 out of that 50, because the depreciation of the buildings is sheltering the rest.
So when you make money from real estate, or I should say when you make cash flow from real estate, it’s tax-sheltered. The depreciation covers how that income’s coming in. Also, when you do a cash-out refinance on that property, you pay no taxes on any of that. So the equity that you build through real estate is tax free unless you sell. Now, if you sell to get that equity, you can do a 1031 and you can delay the taxes that you’d have to pay on the capital gain. So as you see, the real estate itself is very tax efficient. It’s doing a great job of protecting the money that it makes from taxes. Your problem is your W-2, and what you’re finding out is that your real estate stuff cannot help your W-2 problem.
You’ve only got one option when it comes to that. Well, I guess you’ve got two. You’ve got the short-term rental loophole that they call it, where if you manage the properties yourself, you could become a full-time real estate investor. In the episode we do with Matt Bontrager, we cover that, so that might be something to take some time, look it up. But if you’re not going to do that or if it doesn’t work for you, you’ve got to leave the W-2 world and become some form of a real estate professional, which is what I did. I quit being a cop and instead I became a real estate agent and then I built that into being a real estate team. I’m now the CEO of a real estate company. I started the one brokerage. I’m now the CEO of a loan company. We’re going to be starting an insurance company, and this will be the first time I mention it, but it’s going to be called Full Guard Insurance, and that’s the same thing. These are all situations that make me a real estate professional.
I do podcasting. I write books, I teach courses, I speak to people, I do coaching, consulting. You see what I’m saying? I make my income in the space of real estate. I didn’t try to shelter my police income through real estate. I moved out of the police world and got into real estate so that I could shelter my income.
Now, there’s another uncomfortable truth here. We probably won’t be able to do this forever. I believe in 2023, you can only use 80% of the bonus depreciation to shelter your income, and then it’s going to be 60% and then 40 and eventually it’s going to be zero, and real estate professionals will be right back in the same boat as other people when it comes to bonus depreciation, taking all of the depreciation from your real estate in year one. However, we may have politicians that come back in and reinstate that role. You never know how things are going to turn out.
But what we do know is it you can’t force the round hole into the square peg, or the square peg into the round hole, I probably should say it like that. You can’t keep your W-2 and try to use real estate to shelter that income. Your CPAs are correct. You got to make money as a real estate professional, which is one of the reasons that me here at BiggerPockets and in every endeavor that I have, I’m constantly telling people, “If you hate your job, don’t quit to become a real estate investor full-time. Quit to become a real estate professional, and in the professional status that will help your investing, but you’ll also be able to make money through all the different ways that real estate investors need services. You can become the CPA, you become a bookkeeper, become a property manager, become a contractor, work in construction, become a consultant, become a real estate agent, become a loan officer, become a processor, become a manager in one of those companies. There’s so many things that you can do.” Before people just jump from one to the other and go to an extreme, I recommend them looking at the huge space in the middle of that spectrum. Thank you for your question.
Our next question comes from Laura [inaudible 00:37:03] in Wisconsin. “I don’t have a specific question. Just what advice do you have for those of us investors who got a late start? There haven’t been a lot of podcasts elated to this topic. Cash flow’s important at this age, but appreciation is nice too. We aren’t comfortable investing in markets that provide the most cash flow. Ease of management is important to us. We love a good property that can take advantage of Jeff’s strengths and add value too. We don’t want a huge portfolio, but are hoping to have enough properties to make a difference in our ability to retire comfortably. I realize this is quite a broad question, but maybe it’s a topic you can tackle in the near future. Thanks for all you do for the real estate investing community.”
All right, now for some context about Laura’s question here, she’s 57, her husband is 58. They got their first property in 2018, and they’ve done a BRRRR and they’ve 1031 into a couple small multi-families and they’re currently doing a live and flip. And her husband Jeff I presume is a contractor, so he understands construction. This is going to be the key here.
Okay, so Laura, if your husband is in construction, you have a benefit that other people don’t have. First off, you’re doing a live and flip. That’s great. I’m sure in retirement you’d like to set your roots down and you don’t want to have to have a house that’s always under construction, but you might have to deal with that for a couple years because you can earn some really good money if you buy a house, fix it up as a live and flip, and then sell it in two years and avoid capital gains on the first $500,000 probably if you’re married I believe.
Another thing you guys can do is to continue having Jeff work part-time. So he’s a contractor, but that doesn’t mean that he has to do all of the work. You guys could find these fixer upper properties and buy them and slowly fix them up over time. So what if you bought a 10 or a 15 unit apartment complex and all of the units needed rehabbing and you just waited for tenants to move out, and then Jeff and his team went in there and rehabbed it, increased the rents, rented it out for more to somebody else, and then waited for the next tenant to move out. That’s one way to do things slowly where it doesn’t feel like a full-time job and you can still enjoy some retirement.
If your goal is to build up more income for retirement, as in like cash flow, the small multi-family or medium multi-family space is going to be your best bet. You’re going to want to look for apartments that other people are tired of managing, buy it from them, and try to only buy stuff that has a value add opportunity. Now, if your husband is able and capable of working, he can do the work, but if he’s not, he should still have contacts within the space that he can hire out to do some of this work for you.
If you’re trying to build equity, that is going to take longer, meaning you don’t want to invest in South Florida or Texas or some of these states that we think are going to receive long-term appreciation and bank on that happening. You’re going to want to do what I call buying equity. This is one of the 10 ways that I make money in real estate is I go in and I buy something beneath market value. Then you’re going to want to add equity or create equity, which is going to be through a rehab. If you can find a way to do both in the same property, you’re good. So you want to go in there and find something that needs a value add component, meaning it needs to be upgraded cosmetically or you can add square footage to it, then buy it beneath market value and you don’t have to worry about time not being on your side.
In fact, here is a cool way of looking at real estate for those that may not be at the end of their career, they may be at the beginning, the middle, or the end. When you make money in real estate, you’re not really making money. You’re just buying time. When a deal goes poorly and you don’t hit the ARV you thought, you didn’t really lose money, you lost time. You have to wait longer before that deal is worth what you thought it would be worth. Now when a deal goes better than you thought, the ARV’s higher than you anticipated or the rehab comes in lower than you expected, you didn’t make money, you bought yourself some time. The deal performed well earlier on the timeline than what you thought.
If you can stop looking at real estate as far as money is concerned and you can start looking at it as far as time is concerned, it takes a lot of the pressure off and the negative emotions associated with the deal gone wrong or a deal that came in better than was expected. You just bought yourself some time. And you can find ways to force yourself to get time by buying properties beneath market value and by using the benefits of your husband’s construction background to add value to those properties after you bought them.
And that was our show for today, hope you guys enjoyed another Seeing Green episode. We got in some really good stuff and I was able to share what I hope was some pretty sound wisdom for you all. If you liked it, please leave us a comment on YouTube. And if you loved it, please consider giving us a five-star review wherever you listen to podcasts at Apple Podcast, Spotify, Stitcher, whatever it is that’s your pleasure. Please go there and leave us a review, we want to stay the top podcast on the airways for real estate and we need your help to do it.
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All right, that wraps up our show for today. Thanks everybody. I will see you on the next one. If you’ve got a minute, watch another BiggerPockets video. And if you don’t, I’ll see you next week.