January 2023

Ashley:
This is Real Estate Rookie episode 253. If you haven’t started yet, make sure you have solid personal finance foundations. This might sound a little harsh, but if you can’t quite manage your own money yet, it’s a big leap and jump to think that somehow you’re going to start managing this business or maybe even someone else’s money, whatever it may be. So track your spending, figure out some goals, reverse engineer them personally if you haven’t already done that yet. My name is Ashley Care and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we give you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I want to start today’s episode by shouting out someone by the username of NickHalden5621. Nick left a five star review on Apple podcast. And Nick said, I recently started listening to podcasts and I really like the way you both conduct the show. The way you ask the questions, the way you share your experiences. It really gives a lot of insight and knowledge to someone like me who is planning to buy his first investment property. Keep up the good work. Nick, we appreciate you. If you’re listening and haven’t yet left us an honest rating and review, please do. The reviews go such a long, long way of helping us reach more folks and our goal is to reach more people so we can help more people. Yeah, so Ashley Care what is up? I wish I had the book in my hand, but I got to looking last night.

Ashley:
I was just thinking that. I actually have it right there. So talk for a minute, keep everyone entertained. I’m going to go get it.

Tony:
All right. So I’m going to keep everyone entertained while Ashley runs away to go grab this. But Ashley has a super special announcement. Ashley has joined the ranks of the Bigger Pockets Elites because now she is officially a published author, the Real Estate Rookie 90 Days to Your First Investment by Ashley Care is printed in her hands and is here to be shared with the world. How you feeling, Ash?

Ashley:
Oh my God, it was so exciting. The book launched for pre-orders on Black Friday and the same day I got the sample copy. So it’s not even the edited version in here yet, but it was just marketing material and I have 13 of these to give out to people just to get a preview of it. But it was so fun. The boys and I, we did a video of us, the unboxing of it and stuff, and it was a lot of fun, but it still feels surreal. So anytime, of course, I have to always agitate, so anytime I go with Daryl or I go with the kids anywhere, it’s always like, ugh, you only want me to come because I’m a published author now. I think they’re getting really sick of it. But yeah.

Tony:
All the fame is going through your head now, huh?

Ashley:
It’s like whenever my kids want to watch YouTube, I’ll just go and put on the Real Estate Rookie Podcast. No, we don’t want to watch you.

Tony:
That is so funny. I don’t think I’ve ever done that to Sean Lowe’s YouTube also. But I should just make him subscribe to the Rookie Channel.

Ashley:
Yeah, yeah. Next time he has his friends over.

Tony:
Okay guys, I got the perfect thing for you.

Ashley:
Yeah, come on, let’s watch this YouTube video. You just have the podcast playing in the car when you pick him and his friends up somewhere.

Tony:
Well, congratulations. I’m super happy for you. I know that it was a long journey to get from nothing on the page to actual book in hand, so I’m super excited for it. I can’t wait to see how well this book does. So Ashley Care, the published author. I am humbled to be in your presence and thank you for having such a lowly person like me as your co-host now. because I’m not yet a published author.

Ashley:
And Tony, don’t feel offended that I didn’t send you one of these sample copies. My mom came over the other night and I was showing it to her and she tried to walk out of the house and I was like, no, this is for events that I’m going to. I have to give them out to Rookie Investors.

Tony:
No, actually I do have one. I have one. It’s downstairs.

Ashley:
Oh, you do? You got one?

Tony:
Yeah, I got one. It showed up yesterday. I forgot to bring it up to the office.

Ashley:
Yeah, you’ll have to thank Savannah then. She was the thoughtful one today.

Tony:
Well, we got a great episode in store for you guys today. We actually have someone by the name of Malia Gudenkauf. And that name might sound familiar because we interviewed Malia’s sister Grace back on episode 161. And they are business partners. And we got to hear Grace’s side of the story initially. Now we’re bringing Malia back to hear her side. But her approach is slightly different than Grace because Grace is really focused on scale and getting those units, whereas Malia is coming from more so of a personal finance background and real estate investing is just kind of one piece of her wealth building strategy. And she goes into what the rest of that kind of puzzle looks like and how real estate plays a role in that whole picture that she’s got.

Ashley:
I have to giggle when you said that. We’ve got this family, two sisters, we got her side of the story, so let’s bring on out. It’s like a Maury spiel.

Tony:
Yeah. And the lie detector test determined that was a lie.

Ashley:
So yeah, I love the personal finance piece that she brings to the table here and just talking about, and Tony and I harp on this, having that strong financial foundation for yourself, whether that’s before you start your real estate investing journey or building that as you are investing in real estate.

Tony:
Malia, welcome to the Real Estate Rookie podcast. We are super, super excited to have you. Before we started recording, we’re actually talking that you and your sister are the first siblings that we’ve had on separate episodes. So if you can, tell us who your sister is first and then give us a back story on who you are.

Malia:
Yes, for sure. So my sister is Grace Gudenkauf and she is the real estate mogul of our family. I am her older sister, Malia. We’ve got one other sister. So we’re one of three girls.

Tony:
That’s awesome. So give us a little bit of your backstory, Malia. What have you been up to and then what kind of brought you to the Rookie podcast today?

Malia:
Yeah, so I will say as myself as a real estate investor, I don’t know a ton about real estate, I feel, and I don’t care to know everything there is because I found the value in partnership with my sister, which we’ll talk about. And I’ve been able to pursue those opportunities because of really solid personal finance foundations. So that’s what I’ve really been up to over the past several years is building my financial education business, which is Little Miss Finance. Started as a coaching business, working one-on-one with individuals, and now I’m really working with businesses to help employees better understand their benefits at work. So I am a personal finance guru, now turned a little bit real estate guru, and I’m excited to chat more about all that.

Tony:
Yeah, I’m excited to dive into the personal finance side of things. And before we go too far down the rabbit hole of your story, I just want to ask one question. Because you’re both a real estate investor and you’re in the personal finance space, what are your thoughts on the Dave Ramsey notion of building wealth?

Malia:
I think Dave Ramsey has helped a lot of people, and I read his book and learned some from him as I started out, because when you’re starting out, it’s kind of like you feel like he’s the only person out there preaching personal finance until you find some of these other outlets. But I will say I have different mindsets and maybe some disagreements with methods that he teaches. So I think there’s some things of value to take away from him, but I have a little bit of a different perspective now that I’ve grown in that field.

Ashley:
And before we get any further, I just want to mention that we did have Grace on episode 161 if you guys want to go back and take a listen. And Grace also is a contributor of the Real Estate Rookie YouTube channel too. So make sure you check out the YouTube channel and some of her videos. So what would be the first thing you would say that kind of made you realize that you wanted to get into real estate investing? Was the personal finance piece kind of first and then it was like, okay, I want to get into real estate and pursue that?

Malia:
Yeah. The personal finance piece coming first for me was huge and it’s kind of what I preach on as well. And it’s really what helped Grace get started in her journey too. Having really solid personal finance foundations, knowing how to be in control of what’s going in and what’s going out of your income, having some savings, paying down debt. And then you get into this world of investing. And I’m very into using your retirement accounts, investing in stocks and bonds. But then as you grow, you realize there’s other paths to build wealth as well, which is real estate. And because I had those foundations and I had saved money and I had paid off debt, it allowed the opportunity to invest in real estate be more flawless.
It was easier to enter. And I felt like I took on a lot less risk because I had those solid foundations in personal finance. So I realize I’m investing in 401ks, IRAs, which traditionally you’re not able to access that money until a long ways down the line. So kind of sifting out what are these other paths that I could build this passive stream of income. And that’s where real estate really came to light.

Ashley:
And was Grace a huge part of this as to you were watching what she was doing or was it kind of the same time?

Malia:
Yeah, definitely.

Ashley:
For a rookie investor that maybe doesn’t have a sister that’s already investing, what would you say is one kind of piece of advice you can give them that maybe you learned on your own or figured out that they can take and maybe turn into an action item to get started?

Malia:
So I think, when I think about my journey as a real estate investor, and as I kind of mentioned, I’m not an investor that’s trying to scale to 30 doors in a year or quit my job to do real estate full time. I’ll probably never be that person. I’m using real estate as a way to grow a portfolio slowly over time as just another stream of income. So for someone who might resonate with that, definitely finding the educational tools. Obviously Bigger Pockets has a huge resource of those. And one Bigger Pockets book that I really love and author is Chad Carson, because I feel like he’s aligned a lot with the small but mighty, he calls it.
People that aren’t necessarily trying to get caught up maybe in scaling so quickly. So finding those resources. But I will say, regardless of Grace being my sister, she was a partner that I found emulated a lot of things that scared me about real estate and she picked up in those areas that I lacked. So I know for me, it’s a special case scenario since it was my sister, but finding someone else out there who’s investing, maybe creating a mentorship with them or coming to the table with money and partnering with them in a way. I feel like that gave me the big hump or the big jump into real estate that I wouldn’t have taken on my own.

Ashley:
I have to completely agree with you on the recommendation of Chad Carson and it was one of my favorite Bigger Pockets books. It’s called Retire Early with Real Estate, a phenomenal book about how he talked about going small but mighty. And I think it’s super interesting for anyone to read, no matter what your goals are. But let’s kind of go over that, your goal. So you identified that you have no desire to build a huge portfolio, that you know what you want and what you’re trying to achieve and you’re using real estate to build that. Can you talk about how important it is to know what you want and then to use real estate as a tool or leverage to get you to that kind of destination in your life?

Malia:
Oh yeah. Yeah. So many things running through my head right now. Personal finance goals in general are so crucial. Otherwise, I feel like you’re always going to be standing at the bottom of a mountain, looking at the top, seeing all these things that everyone else is doing and just have no idea how to get there. You’re going to be overwhelmed into doing nothing. So creating some goals, whether it’s saving, paying off debt or then into investing in real estate is crucial to take those goals. And I’m a big proponent of reverse engineering everything. So I was just listening to your guys’ episode with Jesse Dylan and I feel like I just wanted to say, preach, every two seconds. Everything in that episode I stan.
But for when it comes to any simple goals, reverse engineering things and taking things from, okay, I want to save 10,000 or I want to start investing in real estate. What do I need to do this month? What do I need to do this week? What do I need to do today? And it’s just so much more actionable and bite size to take a step forward as opposed to trying to get to the end goal and being so overwhelmed going nowhere. So the concept of reverse engineering is huge no matter what goal it might be.

Tony:
So I want to talk about the real world application of that reverse engineering. But before we do, can you just give the listeners, Malia, what does your portfolio look like today? How many units do you currently have?

Malia:
Yes. So I currently have four doors, which is compromised of two duplexes. Bought those in April of 2021.

Tony:
All four in April of 2021?

Malia:
All four, yeah. Both duplexes and I partnered with my sister on those.

Tony:
So, let’s talk about the reverse engineering aspect, because you have this unique approach that most of our guests probably don’t take. Most people that we bring onto the show, their goal is to go big, go fast and they want to scale, they want to do all these things. But you’re looking for a more balanced approach and obviously you have the benefit of having your sister in that partnership there. But when you say reverse engineer, what steps did you take when you made that decision to buy those four units? How did that play into that plan? What was the end goal you were looking for and how did those four duplexes fit into that plan?

Malia:
To break it down even more, to have the opportunity to get started and invest in those four duplexes, I was reverse engineering a goal of how much do I want to save in a high yield savings account that’s specified towards having real estate investing opportunities? So with my paycheck, I was investing, I was saving, I was doing all these things, but I didn’t know quite what I wanted do with real estate, but I wanted to have the opportunity to do something when it arose. So that became the exercise of saying, I’m going to save $500 a month maybe from my paycheck in a savings account that’s specific to real estate.
And that’s what really builds up. And when this partnership and this opportunity arose, again, I didn’t have to know everything. I had the opportunity with the partner who knew more and could help me along the way and help me figure it out. But I had the money to show up and say, yeah, I can be a part of this, I can bring the money to the table. So even zooming out a little bit more, that’s how I viewed my reverse engineering when it came to my first real estate goals.

Tony:
So it sounds like, Malia, before you even took the dive into real estate investing, you focused first on your own financial picture. So you talked about your savings goals. What were some of the other things that you felt you needed to get in order with your own personal finances before taking a leap into real estate?

Malia:
So hot take, and I know everyone has different opinions on the concept of being debt free before you begin investing. For me personally, it was important for me to come debt free as one of my first goals with my personal finances before even real estate. But as I think back and I see people who have invested and got out of debt, I still believe that I personally would want to get out of debt prior to investing. Because, I’ll give an example, when we bought these properties, we ended up, we didn’t take anything from it the next month, that cash flow is.
Everyone likes to talk about these big numbers of oh, here’s your cash flow, but it’s still a long term game. So we didn’t take any cash flow away because we were saving for our reserves, so on and so forth. Then we rehabbed something so we were saving back up again. So it was a while until we actually took anything away from the properties. If I had been investing in the name of, oh, I want to use this to get out of debt, I think it would’ve just placed a lot more stress on myself or I would’ve been taking the money right away and not doing justice for reserves for the property. So, one of the big things in my personal finances before investing in real estate was definitely paying off my personal debt.

Ashley:
That is definitely a huge accomplishment right there, and just how you talk about building that foundation. I kind of went through the same thing in paying off personal debt and just kind of refocused my life right there. And it does make it life changing. So besides sitting down and paying off debt, what are some other financial tips and tricks to help somebody kind of build that stable foundation?

Malia:
So, a couple things. One, if you haven’t already done this, and I know I mentioned Jesse Dylan’s episode, but you guys talked about this as well. The simple concept of tracking your spending to have complete awareness of the money coming in and where your money’s going helps you get your arms around your financial situation more than you ever might think. It’s a perfect starting place to just get that pure awareness. From there, you can move forward and look forward to decide what you want to accomplish. And, as a bigger scale, I was listening to a Bigger Pockets back when I first got into Bigger Pockets, maybe in 2020. It might have been David Green or someone in it, said something so simple, yet it was so mind-blowing to me about when you’re working on maybe saving more or cutting back, whatever it may be, focus on your big three expenses. Housing, food, and transportation.
And I think in the personal finance world, a lot of times you like to talk about, if you cancel your Netflix you’ll save $10 a month or these things. And going after those little things are important and they will add up, but also these big three is what I’ve attributed to a lot of my success and ability to save or invest a little bit, larger scale, or move the needle more than a different mindset might be. So focusing on those three things as well as in your personal finance situation will move that needle a bit more and a bit quicker.

Tony:
I just want to share my story, and I’ve shared this on the podcast before, but it was so effective for me when I did this. I asked about Dave Ramsey earlier on Malia and I feel the same as you, right? He’s got some stuff that I think are super sound. I completely disagree with his notion on debt, but his budgeting perspective I love. And when I was in my early 20s, I actually ordered, Dave Ramsey used to sell on his website an actual wallet that had a bunch of different slots to put all your cash in. And in 2009, you could probably get away with that, but in 2020, carrying cash is so inconvenient and I want to Apple Pay everything. So this is a couple years ago and I asked myself, how can I take the idea of the envelope system that Dave Ramsey promotes and digitize it?
And I said, well, what if I just opened a bunch of checking accounts? So when I was still working my W2 job, the way that I set up my direct deposit was that I had money set up through direct deposit to go into different checking accounts. So every month, it would be like X dollars went into the grocery account, X dollars went into the student loans account, X dollars went into my mortgage account, X dollars went into groceries and shopping and all these different buckets that you would typically have, but it happened on autopilot. And then I would carry one debit card, and when I wanted to spend for one of those categories, I would transfer out of groceries into the spending account, I would transfer out of the dining out into the spending account. So it was a way to systematize and really control my spending without having to carry around a bunch of cash and envelopes like Dave Ramsey would. So I just love sharing that because it was so impactful for me to really get my spending in control when I was looking to make that happen.

Malia:
I think something I take away from hearing your story, it’s just the intentionality behind it all. And a lot of people might hear and be like, that’s so much work. Well, would you rather do a little bit of extra work and have all these opportunities on the other end? Just the intentionality is everything.

Tony:
Cool. So Grace, let’s keep moving. So I love the idea of getting the personal finances in order first. I think that’s a great place to start. Let’s talk a little bit though about why you made the decision to partner as opposed to going after this yourself. And if you can maybe give some details of how you structure that partnership to make it mutually beneficial for both you and your partner.

Malia:
Yeah, so I will say, one, I feel like, and I still feel like especially when I’m in the Bigger Pockets world, I’m like, I don’t know everything there is to know about real estate, and I’m sure everyone would agree with that. So I feel like I didn’t quite have the full comprehension, which then translated into confidence to do it on my own, which was nice things to have in a partner. And two, I was able to bring money to the table for the partnership. So if someone’s looking for a partner, I would say, in my case, I was also like, I don’t want to manage tenants. It literally scares me. So if I bring money to the table and you bring management to the table or whatever it might be, that could be a good fit and a good partnership. At the time of our partnership, Grace was still pretty new in her real estate investing journey too.
So it was all equal. We all brought the same money and we all took away the same equity and ownership. As it’s evolved over the past year and a half and her business has grown, what we thought as roles we would all take on have shifted, and the roles I personally were going to take on have shifted to other resources under her business have been able to cover. So, our partnership has changed it a little bit in that aspect. But from the get-go, we did try to be really intentional about creating an operating agreement, which might sound really fancy, but we really, while everyone is in a good state of mind, trying to lay out how this is going to go, who’s going to own what, who’s going to do what.
It’s so much easier to try to discuss that and figure it out when everyone’s in a happy headspace, a good headspace, rather than on the other end of things. So really tried to do that first and foremost, which I think is important in a partnership to have that groundwork and that structure prior to getting into things and maybe things potentially going downhill.

Ashley:
Tony and I love talking about partnerships. That was what we did our presentation on at the Bigger Pockets conference. So along with having that great partnership with somebody, what are some of the things that you recommend maybe as you’re first starting out as a partner and then to do down the road? Okay, maybe every quarter, every year. And is everything written down or is some of it verbal? How are you kind of maintaining and keeping, I don’t know what the word is there, but liability from each other? Yeah, yeah.

Malia:
I will say some of this that I’m about to say is advice that I need to take and go do in our partnership. I think creating roles and responsibilities off the bat about who’s good at what, that’s exactly where we started. And it was written down and you can use an attorney to help check you. And I don’t know if notarized is the right word, but all of that sort of thing. Then I say down the line, open communication is everything, in real estate, in relationships, in all of life. So I think revisiting where everyone’s at, again, don’t wait until something goes wrong and everything starts going downhill to start airing maybe all of your thoughts or frustrations or whatever it be.
The upkeep that you can do checking in on where everyone’s standing, and that’s really where Grace and I got to, is everything’s been great, but I felt like, oh, things have changed. I’m not doing this, so how can we reorganize the partnership so it’s still fair for everyone? So I think that maybe quarterly, like you said, couple times a year, when you’re in a good headspace, it’s so much easier to discuss and revise as you may wish than on the backend when things are already tumbling downhill.

Tony:
Yeah, Malia, I love the idea of revisiting the structure because just like you said, when you enter into a partnership, especially a new partnership, there are a lot of assumptions that are made around who’s going to do what and how the workload may be balanced and who takes on what responsibilities. But once the rubber hits the road and you actually start doing the thing, the reality doesn’t always quite match up with your initial expectations. And if a business partnership goes unbalanced for too long, that is the recipe for disaster. So it is super important to make sure that both partners, A, have clarity at the beginning around what they feel that partnership should look like, but also have an understanding that maybe what we’re agreeing on today might not make sense six months from now or a year from now or two years from now.
And we both need to be willing to come back to the table and have a discussion around what’s fair and what isn’t. So one of the things that we started adding into our partnerships with other investors is an end term. So every new partnership that we enter into, under the joint venture agreement that we sign, it lasts for a predetermined period of time. And the only way that that partnership will continue to exist is if both partners agree to extend that partnership. So there’s a natural end date, just in case, for whatever reason, we can’t come to an agreement on what’s fair and reasonable for both parties.

Malia:
Yeah, that’s so good. I was just going to say the same thing. If you’re uncomfortable maybe with bringing up the conversation on your own down the line, add that as part of your agreement from the get-go. So that end date or even just we will check in every so often. Because in Grace and I’s situation, we were both kind of new to it. We were creating these roles and responsibilities, but at the end of the day we were still new to it, we didn’t really know what we were doing. So it’s important to create that structure and those expectations on the front end to just avoid any miscommunication or downfall.

Tony:
So Malia, at this point, would you say that you’re completely passive on those four units?

Malia:
Yes, so that’s exactly where I’ve transitioned to. The things that I thought I was going to be able to bring to the table, I haven’t so much. I have helped paint and do some rehab and stuff, but I’ve realized as a real estate investor and as a partner, I through and through want to be someone who can bring money to the table, partner up with someone who will manage, do all the other things, and be truly more of that passive real estate investor.

Ashley:
Do you plan on doing any more partnerships at all besides just with Grace building on and using that as a tool to build your small but mighty portfolio?

Malia:
I foresee myself, unless I was to purchase my own home and do a house hack or something like that, I believe that my journey in investing in real estate will continue to be partnerships that I will bring the money and be that passive person. Most likely with Grace just because it’s worked and we work well together, all of those things. But as income levels increase, savings levels increase, I’ve already had opportunities with family members who are looking almost to me maybe as a hard money lender or something like that. So I’ve seen the opportunities, perhaps they’ll be there down the line and I’m open to it if it feels right. But I’ll definitely continue to partner in several ways down the line.

Tony:
So, one follow-up question. It seems like you’re leaning towards partnering with folks that you already know. But let’s say that maybe you’re approached by someone that wasn’t already in your circle and they know that you like playing the role of passive investor, you have the funds or the balance sheet. What kind of things would you be looking for to say, okay, this is the kind of person I’d want to partner with?

Malia:
Oh, that’s a really good question that I haven’t thought too thoroughly about. But obviously someone who has a track record of being a good landlord or real estate investor on their own. The numbers are everything. But I think someone that, it’s hard because I have worked with people I know, so I know all the soft sides, the soft skills of everything that is going to work well. So I think I would want to see just a little bit of a track record that they’ve been able to successfully invest on their own before and they’re just looking for someone to put up some money for them to continue to do that.

Tony:
Yeah, I think it does definitely get tricky when you start working with the folks that you don’t have as much experience with. And again, that’s why we like the idea of having that timeline around, okay, here’s how long that partnership lasts for. Because sometimes you pick the wrong person. They might seem great up front, then you actually start working with them and you maybe see a different side. So it’s always good to have that out if you need it.

Malia:
For sure. Yeah.

Tony:
Malia, I want to transition just a little bit. So obviously you come from more of a personal finance background versus real estate. What are maybe some of the negatives of real estate investing that you’re not super fond of, that you kind of like the stocks and the other types of investing more than real estate?

Malia:
Everyone loves to say, in the shiny object syndrome of real estate is this passive income stream, right? And so we all think we’re going to start investing in real estate to have this monthly cash flow and you’re not doing anything, when we all do know deep down that is a little bit more than that. So that’s my biggest downfall and why I really love to pair investing in retirement accounts, investing in stocks and bonds with real estate, as it truly is passive. You are automating things you can put in the account every month and there’s really little to no maintenance. I’d probably spend an hour or less a year on my investment accounts. So that’s the major downfall that comes to my head right away is just, and like I said, I’m scared of tenants, I don’t want to do all that, which has led me to kind of that passive partner, is that just not so passive. But there’s several different upsides when you compare it to the stocks and bonds and retirement accounts that make them pair so well together as an investment strategy.

Ashley:
I think there’s probably a lot of real estate investors listening to this episode and agreeing with you on some of the nicer things of investing in stocks that things you don’t have to deal with. So I think everyone can relate a little bit to that. What about the people that say though that, well, real estate, you’re in more control. When you’re investing in the stock market, it’s a CEO, it’s a board of directors when you’re investing into their company really that have control of that asset. So what’s your opinion on that?

Malia:
So I do agree, when you’re investing in real estate, you’re in more control. You can scale quicker, you can really often access the funds quicker and it can often allow you to retire earlier than this traditional route of investing in a 401k that traditionally you’re not able to touch until 59 and a half. But to that, I just think having both of them together creates such diversity and a solid investment platform. So, it’s not something that I look into too much. I feel like there’s a track record also in the stock market of having success. So I don’t know. If someone said that to me, I probably wouldn’t really argue. I would just say, okay.

Tony:
Malia, are you an index fund? Isn’t that what you buy? You buy index funds?

Ashley:
Yeah, that’s really the only stocks that I invest in are index funds.

Malia:
Yeah, me too. Team index fund. And I think if someone’s listening and it’s like, oh, investing in stocks is so complicated. I’m a basic financial literacy gal, so I only invest in index funds and that’s often what I try to educate people on. It’s the perfect route to go.

Tony:
Can you just define index funds for folks that aren’t familiar with it?

Malia:
So an index fund, you could buy a single stock like Apple or you could buy basically a basket of stocks. So an index fund we talk about a lot is the S&P 500 index fund. That’s just the list of the 500 biggest companies all being in that basket that you can purchase.

Tony:
So instead of trying to pick the right stock and time the market and do all these other things, you’re just going to put a little bit in every single bucket and then you get the ups and downs balance out hopefully to still give you a net positive.

Malia:
Yeah, in my investment journey, I’m a long-term investor. I’m not a day trader or any sort of thing. I don’t invest in crypto. Long term buy and hold, just like probably my real estate journey. Buy and hold for the long term and keep that zoomed out perspective.

Tony:
Malia, I think it’s interesting because you said you started this journey a few years ago and that would put you in your earlier 20s. I feel like most people in their early to mid-20s aren’t quite thinking about index funds and building wealth long term. What do you feel sparked that in you and where do you see other people who are in that same demographic, those early to mid-20s, where do you see them making mistakes?

Malia:
So for me, the fire lit inside of me when I was a senior in college and I went to free online, or not free online, this was before COVID. In person, there was financial literacy classes on campus and I was just like, wow, that’s a part of life that’s going to be part of my life for forever, yet we’re not talking about it. I didn’t really grow up talking about it at home, I wasn’t talking about it with my friends, and I was just kind of mind blown. I was like, wow, this is really important. So that’s what just got me passionate about learning all of this stuff and it was prior to having a job and earning money. So I really took the education and then put it into practice and quickly realized by this solid foundation education, the decisions I was making were really adding up quick and propelling me forward a lot quicker than I would’ve expected.
So, that’s kind of where my journey started and why I got passionate about it, because it also provides so much opportunity. When you have a solid financial foundation, I was able to start investing in real estate. I eventually left my job to create a business out of it. It just provided opportunity and me to make a choice. And I feel like a lot of people when they’re younger, we just all fall into this YOLO state of mind. And since we’re not talking about it, we think that everyone just lives this way. Maybe with credit card debt, paying off their student loans through the next 20 years, whatever it is, because it’s not being talked about. So how are we supposed to know? That’s so valid.
But I think when I can get in front of young people especially and tell them, I’m so passionate about young people because you are shaping the trajectory of your financial life right now. And a couple years, a couple decisions can make that trajectory so much different. So, for young people, I would just encourage them to better understand what investing $100 a month, what that could truly be over the long term. And taking that bigger zoomed out perspective as opposed to just YOLO today or this year or whatever it may be.

Tony:
Malia, one follow-up question. So when you went to that financial literacy class as a senior in high school, what were some of the topics they were talking about? Was it just like, hey, here’s what the stock market is, or here’s what it means to have a 401. What did you hear that was like, oh man, everyone should be talking about this?

Malia:
I feel like so privileged in hindsight, and I was a senior in college, and the guy, he was just passionate about it as well. So he really had two classes, if you will. One was investing 101 and one was the world of money. So we were talking about buying a car, credit card debt, buying a home. Just all of these decisions and what they mean down the line. And then investing, he was really educating, here’s how you can use these retirement accounts, 401ks, IRAs, invest in index funds. Here’s how you can actually understand it on your own and do it on your own as opposed to maybe thinking you need a financial advisor, all this sort of thing. So he really covered it all. It was several weeks. Each class was like 10 weeks and it was probably 90 minutes a night. I always laugh looking back, because my friends, I was a senior in college. They were like, let’s go out, let’s go to social house.
And I’m like, sorry I can’t. They’re like, oh yeah, Malia has her money class. And they would make fun of me. I’m like, this is important to me, okay? Yeah.

Ashley:
And look at how it’s paid off, right?

Malia:
Yes, yes. I’m very thankful.

Ashley:
Okay, well, Malia, did you want to go through one of the numbers of one of your properties for us?

Malia:
So I can share high level the numbers of the two duplexes that we bought. So at the time we bought the four doors, two duplexes for 250K. I would say at that time they were probably valued at 300K, so we got to buy into a lot of equity. At that same time, Grace was working on our VP of our local bank to say, because of that, can you allow us to put 10% down instead of 20? So there was actually Grace, her partner and myself into the deal.
We each put about 9K at the closing table into the deal. And funny story, I always laugh looking back at this, because I was brand new. I don’t know what we were doing fully and all this stuff. I was at the closing table with my checkbook and they were basically like, okay, we’re good to go. And I was like, we were getting up to walk out, and I nudged Grace and I was like, “When do we pay? When do we write the check?”
We almost got up and left without putting the down payment down. We all started laughing, but I was so confused. I was like, at what point do we pay the money? So, we bought those for 250, four doors, we inherited all the tenants, and we turned one into a midterm rental, which basically doubled our rent. They were all renting for about 750. The midterm rental is now 1600. And I will be completely honest. Grayson, her CPA does all the numbers, so I’m not exactly sure what the cash flow is on all of them, but it was definitely, it was good. I want to say six or 700 bucks a month per unit.

Tony:
That’s awesome.

Ashley:
Yeah, that’s great.

Malia:
That’s probably the least thorough numbers has ever been shared on the Rookie podcast.

Ashley:
This was the first one you bought or the second one you bought, even though they were both at the same time?

Malia:
We bought them both at the exact same time. Yeah. Yeah.

Ashley:
Awesome. Well, congratulations on that.

Malia:
Thank you.

Ashley:
So what is one piece of advice that you could give to somebody that is starting out and they’re a rookie investor, maybe they have already started their personal finance journey. What’s something to maybe overcome analysis paralysis or to actually take that action, take that leap, take that step for someone who’s a similar path as you? Because you’ve been paying off debt, you’ve been saving money, and now to throw it into some investment that maybe you don’t know a lot about yet. How do you kind of overcome that?

Malia:
So, if someone that’s listening has resonated with some of the things I’ve said, I probably still would not be started investing in real estate if I was doing it on my own. So if you feel like you’re someone that’s in that analysis paralysis, you’ve got the good personal finance foundations, maybe you’ve got some money. You’ve got the knowledge, but you just haven’t done it yet. I obviously am a huge advocate for finding a partner and maybe someone who’s a couple steps ahead of you who’s maybe a little bit more ballsy and willing to do that and kind of take you along the way or take your money and allow you to be a little bit more of a passive person. So I am completely victim to analysis paralysis.
And like I said, probably still wouldn’t be starting. So for me, my biggest recommendation is, if you feel like that’s you, then start with a partnership deal. It can be pretty simple. It doesn’t have to be so complicated. It’s also kind of scary thinking about a partnership. But you share the risk, you have someone else share the knowledge, and then from there on, nothing’s permanent. The next deal you could do, maybe now you have that confidence to go do it on your own or whatever it may be. So I’d say consider a partnership if you’re ready, but you’re just still kind of scared. You don’t want to mess up, you don’t want to do the wrong thing, whatever that is.

Ashley:
I think that’s a great piece of advice right there.

Tony:
All right, so we’re moving to our rookie exam?

Ashley:
Yes, this will be way harder than the personal finance.

Malia:
Oh, I’m scared.

Tony:
All right, so these are the three questions we ask every single guest, and these are the most important questions you’ve ever been asked in your life, Malia. So question number one, maybe you touched on this already a little bit actually with what you just said, but I’ll ask it anyway. But what is one actionable thing Rookie should do after listening to your episode?

Malia:
If you haven’t started yet, make sure you have solid personal finance foundations. This might sound a little harsh, but if you can’t quite manage your own money yet, it’s a big leap and jump to think that somehow you’re going to start managing this business or maybe even someone else’s money, whatever it may be. So track your spending, figure out some goals, reverse engineer them personally if you haven’t already done that yet.

Ashley:
Love that. Okay, so the next one is, what is one tool, software, app, or system in your business that you use?

Malia:
I use, this may be very basic. I use this scheduling app, it’s called Acuity. In whatever business, if it’s personal finance, maybe real estate, maybe life. It’s so nice to have a calendar to send people to and say, hey, we want to connect, just go on here. Instead of wasting all this time saying, when are you free? Where are you free? Does this work for you? So my calendar scheduling app has been with me from the beginning and it’s the best $16 a month I spend.

Tony:
I love that. I have Calendly that does the same. And Calendly is cool because it actually has a Gmail integration. So if you have a 30 minute slot or a 45 minute slot or an hour slot, you can just click the button inside of your Gmail and it’ll automatically add the link for your Calendly there. So totally agree. I don’t know why it took so long for people to come up with that, the whole back and forth round. When are you? Anyway, yeah. All right. Last question on the rookie exam, Malia, where do you plan on being in five years?

Malia:
I will say this question always scares me a little bit because I’m scared of commitment and so I’m scared. It’s just hard for me to think. Grace and I, we will go on walks every day and we’ll have a different grand life plan every day. I kid you not. So for me to think five years in advance, I’m like, oh my God, I have no idea. But I would like to continue building my business, Little Miss Finance, and create a really sustainable business model that allows me to do it longer term. In real estate, I’ve bought that one property in 2021. I plan to continue buying real estate. Again, as I’ve made very clear, I’m not trying to scale quickly. So it’s really more of when an opportunity arises financially, I’ll make sure that that opportunity, I can pursue it. So purchasing perhaps another property, maybe two, and growing my financial education business to a really sustainable manner that can continue long term.

Ashley:
And help a lot of people build that strong foundation.

Malia:
Yes, absolutely.

Tony:
Yeah. And for those of you that are listening, if you’ve resonated with Malia’s story on the whole personal finance journey, obviously we have the Bigger Pockets Money podcast with Scott and Mindy as well as the YouTube channel. So be sure to check those guys out because all they do is talk about personal finance all day every day. And Ash and I have both been guests on that podcast, you guys can go back and listen to that and they’ve had a bunch of amazing guests come on that show as well. All right, well, Malia, I think you passed the exam with flying colors. We appreciate that. Before we get you out of here, we want to give a quick shout to this week’s Rookie Rockstar. And if you want to be highlighted as a Rookie Rockstar, get active in the Real Estate Rookie Facebook group or you can post your success in the Bigger Pockets forums.
But this week’s Rookie Rockstar is Rekia Waller Vasquez, and she says, my goal was to get into real estate this year. I refinanced my first house for $225,000. It rents for 1,800. Purchased home number two for 201,000 and it rents for 1,650. Then purchased home number three for 208,000 and it rents for 1,700. So she got in and really just kept moving. And she finished off by saying, I’m a single mom to three kids, ages four, three, and two. Anything is possible. I hope 2023 brings everyone success. Rekia, thanks so much for sharing your story and congratulations to you. That is absolutely amazing. We’re happy to see your success as well.

Ashley:
Yeah, super cool. And thank you so much for sharing. If you guys have a win, we would love to hear it. If you guys could leave it in the Real Estate Rookie Facebook group or send a DM to Tony or I. If you guys have a question, you can always call us at 1-888-5Rookie, and leave us a voicemail. We may play it on the show for a guest to hear. So Malia, thank you so much for joining us today. Can you let everyone know where they can reach out to you and find out some more information about you?

Malia:
Yeah, so I’m most active on Instagram and TikTok at Little Miss Finance. You can find me there. And I appreciate you guys having me on. It’s been a lot of fun.

Ashley:
Yes, thank you so much for joining us and taking the time to share your journey with everyone. And I love that we had the personal finance piece. Actually, before you go, I’d love to pick your brain on what are some good book recommendations? I love reading personal finance books even more than real estate books sometimes.

Malia:
I love books and I’m team books over sometimes YouTube or podcasts when it comes to personal finance too. So I feel like a pivotal book in my life was Your Money Or Your Life by Vicki Robinson and Joe Dominguez. That’s a huge one. I will also say, if you want to get more into investing, one of my favorite ones is A Little Book of Common Sense Investing by John Bogle. So those are two at the very top of my list.

Ashley:
I’ve read that second one, the Little Common Sense Book of Investing. That one is a really great one. The one that I also add that I’m sure you’ve probably read too is The Simple Path to Wealth. I feel like that’s the pretty common one. But yeah, I really enjoy that one.

Malia:
Yeah, that’s a great one.

Ashley:
Okay, well thank you so much for joining us. I’m Ashley @Wealthfromrentals and he’s Tony @Tonyjrobinson. Actually, Tony just got his account suspended for 90 days.

Tony:
I’m back from Instagram purgatory.

Ashley:
He may or may not be on there if you search him, but that’s Tony @Tonyjrobinson. If other ones come up, there’s like 20 other people trying to copy Tony because he’s too cool. So make sure that it’s actually @Tonyjrobinson and spelled just like that. Thank you guys so much for joining us and we will be back on Saturday with a Rookie reply.

Most startups are built through trial and error. Founders build, test, then pivot. This process is essential to build breakthrough products. But it’s not the best way to approach legally. When it comes to legal matters, trial and error can get extremely expensive.

Below are the top five most common legal mistakes for startups and some tips on how to avoid them.

Splitting the Equity Up Front

A lot of founding teams avoid the hard conversation about individual contributions and commitments by splitting the equity evenly up front without a vesting schedule. This can lead to a number of problems and is how you get “Zombie Founders”—holders of significant equity in your startup that don’t contribute anything of value.

To avoid this, have that hard conversation with your co-founders up front and make sure everyone is on the same page. Work out the levels of contribution and commitment each founder can provide, and make absolutely sure that all founders’ shares are vesting with at least a 12-month cliff. This means if one of your co-founders can’t deliver value, can’t give up prior commitments or just loses interest before the year is out, you can let them go without having to buy out their equity, diluting the equity by issuing a ton of new shares or starting a new company.

Not Assigning Intellectual Property

Founders are often too preoccupied with developing their product to keep track of who wrote what code, or who came up with an idea or strategy. This can leave your startup vulnerable to serious legal issues.

By default, the creator of any intellectual property (IP) owns it. The creator must assign that IP to the company for it to become company property. If your startup fails to secure assignments of IPs from everyone involved, an early contributor could come back years later and take a large portion of your business.

To protect against this, you should use a tech assignment agreement, also known as a Confidential Information and Inventions Assignment or Proprietary Information and Invention Agreement. This document should be signed by everyone in your company—founders, employees, contractors, everyone. It states that all intellectual property contributions and inventions of those working on the project belong to the company.

When your startup grows to the size of an enterprise, an early-stage contributor could cause serious damage by claiming ownership of a key part of your product or operational model, costing the company millions. A tech assignment agreement will prevent this risk.

Mishandling Employee Equity

Attracting a strong team with the limited resources of an early-stage startup is incredibly hard. Since you’re likely unable to pay market rates for top talent, you’ll need to compensate them with equity.

Some founders don’t plan for this and split up all of the equity among themselves. Without setting aside an equity pool for employees, they are forced to rely on junior professionals or contractors, slowing down the company’s development.

Establish an employee equity pool immediately after incorporation. High-potential startups can easily collapse when early-stage employees believe they have a piece of the company, only to find out there is no equity for them. They become disappointed and leave. To attract passionate and talented people who want to build something great, they need to have an ownership stake in the company.

Another issue founders may encounter with employee equity is not clarifying the details of the grant. Equity should be vesting, but there are other important details as well. There are two kinds of equity you can give your employees: stock grants and stock options. Grants hand over a piece of the company to the employee, while options allow them to buy that piece at a deeply discounted price.

To avoid nasty surprises or hurt feelings, make the decision early about who gets stock grants and who receives options. Be very clear with your employees about the specific type of equity they are earning. This can also have significant tax implications for the employee, so you want to avoid an unexpected tax bill.

Spamming Everyone with a Non-Disclosure Agreement

Many first-time founders inundate everyone they talk to with non-disclosure agreements (NDA). They think they have a truly unique idea, and they try to protect it fiercely. In reality, this is rarely the case. Execution, not the idea, is the most important factor of startup success.

This often doesn’t provide them the protection they need, and can even turn off potential partners and investors. Refusing to meet with venture capitalists because they won’t sign an NDA marks you as a rookie and can kill a deal before it begins.

Instead of hiding behind an NDA, figure out how to explain your product or service without getting too technical. Don’t reveal the details of your algorithm or proprietary technology, for example, but do explain, in general, how your product works, how you deliver value, how you’re different from your competitors and what you think will be your impact on the market.

Stacking SAFEs

Most startups raise their first capital using the Simple Agreement for Future Equity (SAFE). This instrument is quick and simple, so many founders stack SAFEs without understanding the implications.

Imagine getting to your Series A funding and finding out that all those SAFEs have converted, leaving you with only a small sliver of your company. This could severely limit your ability to raise enough money in the future. Even if you succeed, your personal financial upside is negligible.

To avoid this, always keep a current pro-forma cap table that takes into account the dilution impact of every dollar raised. If you don’t know where to start, Foresight can help any founder learn and improve their financial modeling skills.

Conclusion

You’re investing a lot of time, your own capital and maybe the most productive years of your life into building your company. Inattention to your cap table can rob you of the rewards of your hard work.

Check out this video to learn more. For a deeper dive, read this guide.

Search “how to make passive income” online, and there’s a good chance you’ll see “real estate investing” on every list. Why? Real estate investing is one of the most time-tested, stable, and repeatable ways for the everyday American to get rich, build wealth, and start collecting passive income every month. But you’ll never get going if you don’t know where to start. So to make your 2023 as successful as ever, David Greene, investor, agent, and host of the BiggerPockets Real Estate Podcast, sat down to walk through the eleven steps it takes to go from onlooker to real estate investor.

Real estate is NOT a “get rich quick” type of investment, but it can help you build wealth in a surprisingly short amount of time. Just ask David, who spent years working overtime as a cop, slowly building up a real estate portfolio that eventually led him to hit financial freedom before most people buy their first house! In this episode, David will walk step-by-step through everything a new investor must do to get their first rental property, how to analyze real estate deals once you find them, and how to repeat the system, so your passive income stack grows bigger every year!

Want to become a real estate investing expert in 2023? Sign up for BiggerPockets Pro, where you’ll get access to real estate tools and calculators, bootcamps for any investor, lease agreement packages for all fifty states, unlimited webinar replays, and exclusive videos.

Start the new year off right by upgrading to BiggerPockets Pro, and use code “NEWYEAR” at checkout for a special discount! 

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Watch the Episode Here

https://www.youtube.com/watch?v=F0x0HgMFWb8123????????????????????

Help Us Out!

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

In This Episode We Cover:

• How to make 2023 your best real estate investing year EVER 
• David’s slow start and going from almost giving up to financial freedom in only a few years
• How to analyze a real estate deal from start to finish (with a LIVE example)
• The 11 KEYS to success when starting in rental property investing
• How to find real estate deals in ANY market using the LAPS funnel
• Setting goals and why so many people fall short of their new year’s resolutions
• Using BiggerPockets Pro to get your first (or next) real estate deal even faster! 
• And So Much More!

Links from the Show

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

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

Ken Zener, KeyBanc analyst, joins ‘The Exchange’ to discuss the homebuilder outlook for 2023, expectations for KB Home’s Q4 earnings and the influence of Fed policy on housing markets.

Just over a decade ago, TV property expert George Clarke presented The Great British Property Scandal, a series highlighting the scourge of hundreds of thousands of long-term, empty, crumbling and decrepit houses across the U.K.’s towns and cities.

Government data shows the UK currently has 238,306 homes in England classed as ‘long-term empty,’ meaning they have been uninhabited for more than six months. An estimated 600,000 homes are now vacant, compounding Britain’s ongoing housing crisis.

The TV program shocked viewers but piqued the interest of property entrepreneurs Nick Kalms and Ben Radstone. Genuinely concerned at the absence of a national strategy for dealing with the problem, they set out to do something different. After career stints in the property development and finance sectors, they spotted an opportunity to switch careers and launch YouSpotProperty, the consumer-facing division of their company Hyjan.

Kalms had started his career working in a couple of property agencies before calling on his vast network of industry connections to go it alone. In 2008 he started his own property business Hyjan, which developed individual houses on a small scale. His initial team included Radstone, and in 2010 the pair became business partners.

In 2013 they came up with an innovative way of identifying, acquiring and returning to use empty, derelict and forgotten homes across the U.K. They launched YouSpotProperty, which rewards members of the public for tip-offs of eligible houses falling into this state. Much like a hole in the road, a derelict building can also be a pain for those living nearby, so the model also benefits local communities by cleaning up neighborhoods blighted by these properties.

A business dealing with empty homes is inevitably fraught with stories of family dramas, death, probate and mental health, which Kalms and Radstone soon realized was often why they fell into this state. This forced them to upskill as property entrepreneurs.

“The reason homes become derelict or stand empty is complex,” says Kalms. “It can be the result of delayed probate, which can go on for years, but in most instances, it has to do with the poor mental health of the owners. We’ve had to acquire genealogy skills to track down hard-to-find family members, the sensitivity and care of social workers in navigating the psychology of the owners, and the know-how of quantitative surveyors in identifying if a property can survive a renovation.”

Their initial database of empty and derelict properties was compiled from addresses they recorded when driving past the properties while they were out and about. Although their database was growing, it was at nowhere near the rate they needed.

“We needed a way of being notified about properties that hadn’t seen ourselves,” says Radstone. “We were aware of a website called ‘FixMyStreet’ where a private company relied on the public to report issues on the streets where they lived that were sent to the council to be repaired. It gave us the idea of encouraging the public to report derelict buildings on the street to us.”

To date, the company has given away 6,857 £20 vouchers to people who have reported a property, while 128 individuals have earned the ‘1% of the purchase price’ reward for a successful property purchase.

Since launching YouSpotProperty, the company has had more than 60,000 properties reported directly to them, with their purchasing rate increasing yearly. The model is being rolled out to numerous towns and cities across the U.K., with the potential for replication in cities worldwide facing a housing shortage crisis. This year Hyjan and YouSpotProperty anticipate a combined turnover of £21 million.

The entrepreneurs are stepping in where local councils have failed to deal with houses that should be homes once again. Traditional agents generally steer clear of marketing such dwellings because of the challenges of tracking down owners, identifying why the properties are in such a neglected state and the fact that members of the public struggle to gain mortgages for properties requiring extensive renovation.

With the U.K. continuing to miss its housing delivery target of 300,000 new homes per year, Kalms and Radstone have instead focused on the estimated 600,000 long-term empty and derelict properties.

Kalms adds: “We have had interest from overseas for our model, particularly from the U.S. Every major city has its own unique set of housing challenges and nuanced ways of dealing with their empty properties, but the fact remains they need a discerning eye to help solve the issues of why they fall into this state. We have the track record and expertise to make a difference.”

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

James:
No, just hanging out in the sunshine and I got to fly to Seattle after this, so I want to stay where I am, but that’s not in the cards today.

Dave:
What are you heading up there to do?

James:
We got to walk some properties. We’re doing our market update. We have a investor class and then we have our Heaton/Dainard holiday party, which is always a fun time. We like to wild out on the holidays.

Dave:
Well, for anyone listening to this, we are recording this a couple weeks in advance given the holidays, so you know that we are recording this in late December, but what’s your holiday party plan?

James:
Well, typically, and COVID kind of has messes up, we used to throw big house parties at one of our flips or our new builds.

Dave:
That’s awesome.

James:
They’re pretty wild and we have a good time. But this year we rented out … It’s cool. It’s like a bunch of games, so they have bowling, Topgolf, all the different things. We’re doing a little bit more formal. Next year I will be going back to a house party, DJs and all sorts of things.

Dave:
Man, I’m missing you by three days. I’m going to be in Seattle on Friday.

James:
Oh dude. Yeah, because I leave Wednesday night.

Dave:
That sucks. All right. Well, that’s too bad. But today we do have an awesome show for you. I don’t know, I think Henry hosted the first time that we had Taylor Marr on, but we have Taylor Marr who’s the Deputy Chief Economist for Redfin and probably one of the people who’s research I follow most closely. He is an expert on the housing market, everything. But today we really go into a lot of migration conversation and about what happened during the pandemic and if those trends are continuing now or what new trends are emerging that investors and aspiring investors should be paying attention to. James, was there anything in particular you really enjoyed and think listeners should keep an ear out for?

James:
Well, I think it’s just really tracking these trends that aren’t … Like I think a lot of us as investors, we look at our local markets and the housing, what’s going on right now and what we’re doing. The most important thing for investors is to switch and pivot your plan up. And I know I learned that in 2008 is like to look at all these outside things. Migration is, that was something I never really looked at before besides my local market. But as an investor I want to keep investing and you can track these trends in really place … It’s not always about the hottest trending areas. It’s like where are the people moving? The migration is a huge factor in that and I think it’s just important that people open their eyes and look at the big picture and then it tells you how to invest in the next two to four years because you want to invest where the people are going.

Dave:
Yeah, absolutely. That’s great advice and I think you all can learn a lot, not only about how what’s happening over the last couple years, but just the general mindset and some new information that you should be considering as you think about your own personalized investing strategy. All right, so we’re going to take a quick break and then we will bring Taylor on after that. Taylor Marr, who is the Deputy Chief Economist at Redfin, welcome back to On the Market.

Taylor:
Thanks for having me. So great to be here.

Dave:
Well, I think we said this when we were talking before the show, but your first episode was one of our most popular ever. We’re very grateful to have you back on the show. We had you first on back and I think it was like May or June and the housing market was looking very different than it does now. Can you just give us your take on what’s happened over the second half of 2022?

Taylor:
Yeah. So I mean, the first half was very interesting because already by that time interest rates rose substantially and we were seeing a lot of leading indicators take a dive south, the market was reacting, that was sort of act one with mortgage rates adjusting to some of the actions of The Fed. Now we’re in stage two, which is really that inflation was more worrisome in the second half of the year. That caused a bit more aggression on the part of The Fed to raise rates. They were hiking faster than anticipated. As a result, interest rates rose much faster even since the summer and really they just were more volatile. They shot up during the months of, I believe it was August and July and down at the same time about a percentage point swing. They’ve done that now twice. Mortgage rate volatility hit a 35 year high and that aspect in particular really explains what’s happened in the market the last six months because as interest rates have fluctuated dramatically even after they rose and were cooling the market, we’ve also watched other indicators play catch up.
Home values, for example, have been falling at one of their fastest paces since 2009 according to the Case-Shiller Index. That’s in reaction to these rising interest rates. But also we see more of the short term leading indicators of demand really bounce back and forth alongside this rise and fall of interest rates. A couple of examples, sellers have increasingly had to drop their price as they don’t get an offer that they want and rates are higher. They drop their price to meet buyers where they’re at and what they can afford. But then when interest rates fall, they’re not having to do as many price drops. And that ping ponging has happened for sellers. A lot of them have been de-listing their homes or jumping back into the market and re-listing their homes when interest rates fall. Then the same as true of buyers, they’ll rush in start touring homes, maybe even shift when they’re making offers after rates are falling and they get a little bit more of a tailwind from the lower rates. Really it’s been just one of volatility. If I were to pick one word to sum up the last six months.

Dave:
And Taylor, some of your work that I enjoy the most is all about the different regional variations in the housing market, but the assessment you just gave us, is that true across the board or are you seeing this more? Are you seeing more volatility in certain markets compared to others?

Taylor:
We definitely are seeing more volatility. At a large scale, if you think about the last 10 years, you also see large volatility in places where it’s easy to build housing. Places like Phoenix, Texas, Nashville, these places are more volatile because it’s easier to increase supply, it’s easier for investors to swoop in and also make the market a little bit more volatile. But that’s even been true just on a more narrow time scale of the last six months to a year that it’s these pandemic boom towns, particularly in the mountain region like Boise, Salt Lake City, Phoenix, all of those places, Vegas as well have boomed, but they’ve also cooled down sharply. As interest rates have bounced back and forth, they haven’t actually seen as much of a bounce back in demand, meaning that they have continued to cool sharply in reaction to still the yet higher rates.
I think part of that is because investors have been pulling back and sellers have been pulled back and a little bit of change in interest rates in the near term I think has already scared off a lot of the big players where they sense there’s just a lot of risk out there for now. Those markets have seen a bigger back off, but other markets out on the northeast and the Midwest, those have seen more resilience when interest rates fall a little bit from their highs and that’s marking in some of that national volatility we’re seeing

James:
Taylor, I operate out of the Seattle market, so it’s tech. We saw a lot of appreciation the last 24 months, or not so much last six, but I guess the last 28 to 30 months. And we’ve definitely seen a pretty drastic pullback from the peak pricing. A lot of the pricing’s down 25, 30%, not from medium but from that peak spring pricing. Then what we’ve kind of seen recently is it’s kind of leveled off with a slow trickle going on through the market. And part of what we’re looking at as far as investors goes is we saw a big drop from the seller settlement because people got so impatient with the days on markets that they were cutting price after two, three weeks.
And now what we’ve seen is the pricing’s actually kind of leveled out a little bit and the days on market are being consistent around 30 to 45 days in our market and now things are selling very close to list or I would say within a 2-3% ratio at that point. We’ve seen hot markets like Phoenix, Boise, even San Diego, these hot bubbly markets and then we’ve seen the tech ones that bubbled up because of the job growth, do you think that those are going to start leveling out as well or do you predict that those could still decline even with those big drops that we’ve seen in the last six months?

Taylor:
That’s an excellent question. I know a lot of people in Seattle are wondering this. I talked to a lot of reporters there. I have a lot of friends in Seattle because I recently lived there and for the last 10 years been most of my home base. I’m pretty familiar with Seattle. And what I know about Seattle is it does have these floors when financial markets starts to recover. There’s a lot of tech wealth in the area and as stocks like Amazon and Microsoft and Facebook recover a little bit, that can really help support demand by quite a bit. It’s harder to see that in the data because there’s also this psychological component, just like when there’s a rise of layoffs, not everyone is laid off, the layoffs are really small, but there is a psychological ripple effect that a lot of people might have increased fear and anxiety about acting in the real estate market is the big decision.
With that said, markets like Seattle and San Francisco that are very expensive and that haven’t been characterized as much of a boom and bust like Boise or Phoenix, Boise and Phoenix are relatively small markets so it doesn’t take a lot of activity to make a big change. Whereas Seattle and San Francisco, it’s harder to get that magnitude of difference. Now Seattle, it’s fallen in home values from its May peak through September according to Case-Shiller by about 9% already. Based on more recent data I believe that’s continuing by at least a few percentage points. We have seen a big adjustment from the higher interest rates, but also it’s been really a trifecta in Seattle of three things. There’s been higher interest rates, it’s already an expensive market, so it’s more sensitive to that. Financial market conditions with a lot of, as I mentioned, tech stocks as the NASDAQ is down more than 30% from the start of the year, that weighs much more heavily in markets like Seattle or San Francisco where there’s a high presence concentration of tech workers.
The third thing is migration. In 2021, Seattle posted a net outflow of people leaving the area for the first time in more than a decade. There was really just an untethering from remote work that allowed a lot of people to leave. It continued to get an influx of people from the Bay Area because they were facing the same decision, but a lot of people went to Eastern Washington and even to a place like Phoenix. Now there is this element of higher interest rates are causing people to sort of freeze in place and not move as much, but as interest rates have fallen, we’ve definitely heard from agents on the ground as recently as last week that buyers are jumping back in. They’re eager to get out there and they might have pulled back extra quickly as things started to turn south, but they’re still there.
They’re sideline buyers, there’s a lot of income eligible, those with sufficient down payments where they could be buying a home if they just found a good deal. The problem is it’s taken a while for sellers to sort of meet buyers where they are. They’re usually slower to drop their price, slower to react to market conditions. And once they fully do, there’s enough buyers to really start to stabilize the market. I’m in the camp that things are reacting sharper in Seattle maybe than we even realize, but there is an element of stability that’s sort of on the plate right here. And one of the key things as well with this feature in Seattle is there have been some homes that have dropped even more than 20%. I looked at some homes that actually recently closed in April and May when prices peaked and looking at their Redfin estimate or their Zestimate, indeed some of them have lost more than 20% of their home value, which wipes away almost all of their equity.
That’s scary. Now, thankfully, most of those buyers probably won’t be moving for 10 years, so it’s not going to impact them too dramatically unless they lose their job or have some sort of other economic shock. I don’t think there’s a wave of supply to hit the market. Then there’s also this element that yeah, maybe sellers aren’t having to drop their price as much, but there is still a lot of bargaining power that buyers are building up and they’re able to ask for increasing seller concessions, which means that maybe they’re getting additional 3% back from the seller to do things like home repairs or buy down their mortgage rate. And this is sort of a missed feature in a lot of the data right now because no one is capturing, “Here’s what a list price was.”
Let’s say you listed your home for a million dollars in Seattle, maybe you had to drop your price down to 900,000, then maybe you sold it for under asking price at 850, but then maybe you had to give back another 50 in seller concessions. If we’re looking at any of the one metrics, we might not capture that full effect of how really the housing market has adjusted for this particular seller. Part of that missing feature is the seller concessions that are on the rise as well.

James:
Yeah. We sell a lot of different type of product in our market. And I think our market’s probably very similar to Austin and San Francisco. I think we’re seeing this. I’ve been tracking those to kind of see what the trends are in there. I’m like, okay, we’re all in the same boat at this point. I think that’s a great point is it you have to be careful about the data because I know that on every … We do sell a lot of new construction product town homes. Every deal we’re doing, the rates are getting bought down by the builders or the sellers where that’s what we’re really pushing on is to buy that rate down. And it’s costing, I mean, anywhere between 25 and $35,000 in credits, which if you think about that, it’s about anywhere between two and 5% of the actual sale price.
It’s kind of like when apartment sellers go to sell their apartment deals and they want to pack the performer and they give away all the concessions up front, but on paper it looks like it’s really good because they gave away a free month and I feel like it’s throwing the data off. When we’re looking at transactions, we’re going, “Okay, well how much closing costs are actually coming off there and is that the real value of the property?” Because these buy downs are expensive and it’s really something that it became normal, at least in the new construction, not as much in the fix and flip or the renovated product or the [inaudible 00:15:27] but in new construction it’s fairly common.

Dave:
Just for everyone listening, just to make sure everyone understands is basically what Taylor and James are saying is that even though in a market like Seattle where the data is reflecting price drops of, Taylor, I think you said about 9% according to Case-Shiller, and this is happening in a lot of markets across the country. But it sounds like what you’re saying Taylor and James, is that the real number might actually be more considerable because sellers are giving concessions that have a monetary value up to 20 or $30,000 like James just said, but that’s not reflected in the sale price. In terms of actual buyer leverage, it might even be more in a market like Seattle than 9%, it could be 11%, it could be 12% and in whatever market you’re operating it in, it might actually be two or three more points than what’s actually reflected in the data.

Taylor:
Absolutely. And going back to the mortgage rate buy down, so this has been something that has been increasingly common this year looking at data from Freddie Mac, they report on mortgage rates as well as what points are being paid on a loan in order to buy down the rate. And it did rise to nearly a 20 year high for different loans like a 15 year fixed, for a 30 year fixed also has risen to about a decade high. They stopped reporting on that. It’s hard to know what’s happening real time now, but this isn’t important because a lot of builders are also going through this tactic to try and make it where buyers aren’t scared off by a high monthly payment when they plug in today’s interest rates. By buying down the rate, they can make a monthly payment much more favorable. In fact, it is so favorable that buying down the points is even better for a buyer than just getting that cash down in the lower sale price.
It actually is pretty great to overall increase demand of buyers, the pool of buyers that could afford on a monthly payment that home. The problem though becomes buying pain points on a loan is effectively placing a bet that you’re going to lock into this rate and that rates won’t be falling. And what we’ve seen in, again, mortgage rate volatility, the fluctuation of mortgage rates from one month to the next is at a 35 year high. And this means that the chances that rates fall by a percentage point are higher now than they have been in a very long time. I don’t think it’s likely that rates ever go back to sub 3%, two and a half percent that happened during the pandemic. That was a unique circumstance with The Fed pumping billions of dollars into mortgage backed securities creating an abnormal market for mortgages.
But now going ahead rates could go higher and you would be really happy that you paid points on a loan and you don’t face higher borrowing costs. That would work out really well if rates never fall below where you are. But if rates do fall back to let’s say 5%, which is possible if we enter into a recession, rates normally do fall during a recession, then you effectively gave up tens of thousands of dollars to bet on that rate not falling effectively. You might not see it that way. There’s refinancing costs, there’s other things at play there as well. But this is sort of a hidden feature also that’s impacting the market that people might not always have full control or negotiation over.

Dave:
That’s such a good point and I haven’t heard it articulated that way before, but basically the reason you accept and want a seller concession of someone buying down your rate is because your monthly payment is too high and you’re saying, “Okay, you’re going to get my payment down to an acceptable level and in exchange I’m willing to pay the price that you’re asking for.” But if rates fall in the future, then you’re basically the benefit that you negotiated is moot and you’re still paying that higher price that the seller wanted and the benefit they gave you is sort of negated.

Taylor:
At least in part. And in the flip side of that is really adjust rate mortgages, which we’ve also seen rise in tandem with paying points on a loan. There’s effectively a rise of on both sides of the equation of people placed a bet effectively that either rates will stay high and not fall in the future or that they’ll go low and not rise too much in the future. The adjust rate mortgage camp, which makes up about one in 10 buyers as of lately, they’ve been opting for adjust rate mortgages according to Mortgage Banks Association. And that rise of the use of ARMs is basically again, placing a bet that rates won’t shoot up much higher or significantly higher than you have now, making that your borrowing costs in let’s say five years after the fixed exchange period expires that you’ll be able to afford that payment. If rates do fall or even stay steady and adjust rate mortgages is sort of the other set of that equation that would be beneficial for someone.

James:
Taylor, I guess we’re talking about kind of markets and things move around, you pointed out something very interesting in Seattle or I know a lot of these tech areas or San Francisco, the population went down as well, that people were moving out over 2023 and a lot of that was the migration and the work from home where people could be flexible. If you have the opportunity to leave Seattle and work in a sunny place, a lot of people like to take that, they will take that opportunity. Do you see with the migration, we’ve seen this rapid, like in Phoenix, Florida, Texas, a lot of people have moved into these states and we’ve seen a lot of inflation rise in those areas, pricing rise in those areas. Do you predict as we’re going into, as the rates increase and we’re looking like we could go into a recession, do you see that the migration could A, start falling dramatically?
Because as people get concerned about their welfare and their jobs, they stop moving around, they want to spend less money and they want to be more stable. But also do you see maybe a reverse migration coming back with a lot of these companies, I know in Washington or even in New York I’ve read a few times that these companies want people back in the office and they want bodies back in the chairs. Do you see that some of these markets, Austin, San Francisco, Seattle, New York, do you see that migration reversing over the next 12 to 24 even though it’s really expensive to live there? Or do you see the migration pattern still going consistent where people are chasing affordability and more being comfortable in the condition that they want to live in?

Taylor:
You’re right to call out this dichotomy of, on the one hand you have people that are chasing affordability and that really is what dominated the pandemic during 2020-2021. People were untethered from their workplace and able to relocate move remotely. That also was coupled with a unique circumstance where rates fell and made an affordability opportunity even better where you can move and lock in this lower rate. This flood of people leaving California, which I think the state lost population during the pandemic for the first time in, I believe it’s a century if I have that right from the census. And a lot of these people went into adjacent states, Nevada and Arizona and Oregon even. And that created a home buying frenzy in these areas. That was really a chase for affordability. Most of the people surveying said that they were moving for housing related reasons.
Typically people primarily move for job related reasons, to get a better paying job or job opportunities. But the pandemic, we saw that take over from housing related reasons and it was really one of affordability. People wanted bigger space, to work from home, larger yard, suburban house, things like that. And that move for affordability impacted all of these markets, pushing up prices. Now the flip side of that is that prices grew so much in places like Austin that they really make it less attractive today than it was two years ago for someone looking for affordability. In effect, some of the people that have already taken advantage of that affordability opportunity have sort of mitigated the current affordability opportunity. Especially as you mentioned, inflation costs have been more than double in Phoenix than they have in LA and as well as Atlanta or Tampa than they have in New York.
And part of this is due to the migration trends that have taken place during the pandemic. But as these places get more expensive with not just housing but other costs of living at restaurants, to pay for the workers, the increased demand, that also has weighed in making these places as attractive as they used to be. At the same time, I don’t think we’re going to see a big return to these cities that lost people. We don’t see too much of a slowing down. Instead what we do see is we see the places like Salt Lake City that had a boom, they’re past their boom period and that has been slowing down to basically not quite lose people, but essentially not gain as many people as they did a year ago. The same story is true in places like Austin. A lot of these pandemic boom towns, Boise as well, migration has slowed into them.
But it’s not that people are flocking back to places like Seattle and San Francisco, they’re just losing slightly fewer people. Going back 60 years or so in the migration data, what we know is that during recessions and periods of higher interest rates, people are … They have economic anxiety and they just freeze in place. They don’t make these big moves as often during the immediate years of an economic slowdown or crisis. As such, our prediction for next year is that this is also going to be the case we’re entering into a tough economy with The Fed having interest rates higher and holding them above 5% most likely. And as that happens, it’ll keep mortgage rates elevated and soften the labor market. All of those things create conditions where it’s less favorable to move and relocate on net than it was right now or maybe over the past year.
We do anticipate a slight slowdown to migration, but to remain elevated above pre pandemic norms because of this untethering remote work. And still people do want to move for some affordability still, especially if you have that flexibility. But then there’s this other component. It doesn’t mean all bad news for the San Francisco, New York, Chicagos of the world. If you look at Gen Z and some surveys, the number one cities that they want to go to are still the same cities of San Francisco, New York and coming out of the Great Financial Crisis, now there was a big hit to those cities in the immediate years, but the second recovery started, they led the recovery. They led in job growth. A lot of people relocated to San Francisco. I mean, we know it now as having lost 180,000 people during the pandemic. But during 2014 it was booming.
There was a lot of job growth. It was early in the recovery and a lot of young millennials were launching their careers moving to cities like San Francisco or New York or Seattle. It’s just that they got so expensive by not building housing that now they’re losing people. I do think coming out of this economic slowdown, when things start to pick up again, we might see some Gen Z younger people still move for their careers. They’re less concerned about housing costs than maybe the older millennials are who are starting families and left these cities. But it doesn’t mean that that will completely offset the loss that’s taken place during the pandemic.

Dave:
Taylor, so glad you brought that up. I’ve seen some of, I’m guessing similar surveys about Gen Z and how they’re moving to relatively high price cities, which to me makes a lot of sense. If you’re young, these are attractive cities, there’s a lot to do, they’re high paying jobs. That makes a lot of sense. But for the people who were migrating during the pandemic, you mentioned millennials, is that the demographic that was moving most like people who were just starting their families or was it ubiquitous like everyone was moving?

Taylor:
Yeah, the census recently released back in September I believe, or October, some data on the demographics of everyone at the county level down to the age, race and other aspects about them. I spent some time digging into that data to see how did different counties changed during the pandemic and the counties, the 20 most populous metro areas, those urban counties are really what drove the exodus of migration. New York County, San Francisco County, King County, Washington, these are the urban counties in these large cities that saw all of these people leave. Who left? Well, we know a few things about them. We know that the demographic of millennials, so those basically in their 25 to 44 range, that age group is what drove the exodus out of these large urban counties and in particular non-Hispanic white households that are starting families. Those are the ones that either suburbanized to become a homeowner, to look for more space or to move somewhere more affordable. Places like Tampa or Atlanta where a lot of inbound migration took place as well.
That’s primarily what we know about who moved. There’s also an element that was a little bit more unique now during the pandemic, which is politics. It was a big political response during the pandemic about how do we handle things around shutting down businesses, enforcing mask wearing, all types of different regulations at the state level that took place. And if we look at who left California, it was disproportionately Republicans that left California, registered Republicans that left California into nearby states or that left places like Seattle and Western Washington into Idaho. There was also this political sorting that really was amplified.
That’s been taking place since about the ’80s, which is increasingly why the place we live describes our politics now more than ever, but especially during the pandemic, you increasingly were impacted by your local politics or the state level politics. And that played a role as well in migration with who might have moved. Now going ahead, I don’t think that’s going to play as large of a role. There’s less of this impact even in spite of things like Roe v. Wade or other political aspects at the state level. It still is that taxes dominate and affordability dominates with a high preference for what states people move to.

James:
I always think about this migration because I’ve been talking to a lot of people from Washington. I do know a lot of people that moved out of that state. I actually split my time now between Washington and a sunny place. It had nothing to do with politics, had all to do with sun. But I wonder if, and this is going to be a hard data, this isn’t something you can put data behind, but I guess you could, but the relocation remorse is what I’m calling it because I do know some people that have moved states kind of drastically. And they just kind of did it because they’re like, “I can do this because everyone’s doing it” and now they’re locked in because their homes have depreciated down and they kind of figured out that they picked the wrong city and they’re kind of stuck where they’re like, “Oh man.” It is not that they would’ve not relocated again or sold their home again, but they just did it on such a rush, and the market was also so hot in all these neighborhoods that they had to do …
A lot of home buyers unfortunately in the last 24 months didn’t get to think about their purchase and they had to just get into a house. And I wonder what that’s going to do as far as, because they went into either … I guess some of them can become rentals if it was a more affordable market. But I know a lot of people in Idaho specifically where they moved out there, they loved it for six months, 12 months, and then they go, “You know what? I want to be back towards the ocean.” But now they’re stuck because that market has deflated so quick. Do you guys see any of that? I was wondering if that’s going to actually because some sort of wave of foreclosures because people are just going to say, “No, I don’t want this anymore, I’m just leaving. I don’t care what it is. I have no equity, I don’t care what my payment is. I want to get back to the city.”

Taylor:
It’s a great question because you’re right. There’s not great hard data on this to know, okay, is this seller someone who recently relocated and that’s their motivation for selling? What we do know is we carry out a lot of surveys at Redfin and we ask our agents, our customers and the general public different questions. And during this migration surge of the pandemic, we did ask people, are you happier after you moved? And also how about affordability? And despite the run up of prices in 20-30% in places like Boise, most people actually saved money on their monthly payment and came out ahead in terms of their monthly mortgage relative to their income.
And in part that’s because, well it’s higher income people that are moving into places like Boise able to afford these. And we can look at data from HMDA, the Home Mortgage Disclosure Act, to see what about the income changes of people that moved? There was an affordability component that might be driving some of this happiness that people felt like they’re getting more disposable income now after their relocation. But by and large people have been satisfied with their moves. You’ll definitely hear regrets. In fact, early on in the pandemic, the New York Times ran the story of someone who left New York City and bought a farm and they discovered a bees nest and they didn’t know what to do so they just sold the home.
Anyway, you’ll hear stories like this, but they’re not the norm. And overall I think people have been more happy. In fact, people do desire to migrate more than they do currently. Mobility has declined for the last five decades, actually six decades now. And as a result people just aren’t moving as much. And that’s not great for the American economy. There’s a lot of reasons for that, such as the rise of occupational licensing makes it harder to move across state lines. But that said, what the pandemic did was it lowered the bar to move. You didn’t have to cut social ties because they were already cut by social distancing, not going to churches and schools and all types of other social institutions. You were already sheltered in place, you weren’t commuting to work. By and large the cost to moving in terms of the social costs were much lower.
That made it where people who really should be moving but are hesitant to because of, well they have their situation set up. The pandemic kind of severed those ties and allowed people to relocate in an easier way. And a lot of people came out ahead because of that. On net, I think it’s good news, there’s definitely regrets. I personally did relocate as well. I left Seattle during April of 2021, moved to Northern Virginia. I love the sun now. It’s wonderful. It’s a super sunny day today and it makes me happy waking up to the sun during the wintertime. But I can relate to those buyers who it was a hectic market, you kind of have to take some compromises.
We didn’t get our dream home, but we got a better home than we had in urban Seattle. But that said, it doesn’t mean I’m going to move next year or the next two years and could always convert to a rental if I want to relocate somewhere and rent even. There are opportunities that people have to mitigate some of those challenges. I don’t think people are as much handcuffed by the decision and renting is really a great option. I do think that’s why we’re seeing a little bit more of people leave the rental market and remain renters in home ownership. We’ll probably take a little bit of a hit in the gains over the next year because of that too.

Dave:
Awesome. Well, this has been fascinating Taylor, and it sounds like all these migration trends are super interesting and relevant to homeowners and real estate investors alike. It sounds like it’s calming down a little bit and we’re going to enter a new phase of migration in the US which we’ll have to see what comes as the economy slows down. But before we get out of here, I did want to shift gears because when we were chatting before the show, you teased some short-term rental information and data that you might have. And I know James and I are eager to hear what you have to say. Can you tell us what updates you have about that market?

Taylor:
Yeah, so during the pandemic we watched a boom of people buying up second homes. It more than doubled the activity overall, partly as a result of lower rates as well as untethering people being able to enjoy them more and move to places where they might have these short-term rentals. But then there were some regulations that were carried out by FHFA that made the cost on this higher. And immediately once those restrictions went in place, there were two separate times that this happened, we saw second home activity pull back sharply. Now second home buying has fallen even faster than the overall housing market has retreated. And investors also are retreating faster than the overall market too. And both of those together really are creating some lack of demand that really propped up a lot of these investor markets. The markets where a lot of second home buying and short term rentals have been purchased are cooling off as well.
And even we see this in Florida, if you split Florida up into the Gulf cities like Cape Coral and Tampa where there’s a lot of second home buying compared to places like Miami where it’s not as common, you see the markets are cooling down sharper in the places that had higher concentration of second home buying. This is posing a problem as now the market cools and you have a lot of people pulling back from selling their home. New listings hitting the real estate market for sale are down about 22% year over year. These are people who basically are opting to not sell. Now some of them are just home buyers, move up buyers who are just going to sit in place. That doesn’t matter too much. But there’s also these second homeowners that maybe would normally offload their properties. But as the market has cooled, they’ve seen home values retreat a little bit.
They’ve decided now’s not a favorable time to sell and maybe they’ll opt to move their home onto the short-term rental market or the long-term rental market. We’re seeing supply move from owner-occupied homes a little bit towards short-term rental listings and long-term rental listings as well. That increased supply is really starting to bring down the overall rents. But in the short-term rental market, what we see immediately happening is really a rise of vacancies and occupancy rates overall are declining. So far AirDNA has put out some great data showing that there’s more short-term rental listings hitting the market and these are people that maybe are having a hard time completely filling it and it’s going to be harder to cash flow some of these short-term rental properties. There’s a lot of concerns, a lot of risk about how these mortgage loans were maybe even structured during the pandemic that maybe there will be some distressed sales coming from these properties.
I do think some of the fears out there on Twitter and elsewhere might be a little overblown. When we look at overall how occupancy rates have changed and even projecting into next year, AirDNA put out an outlook, revenue will decrease because there’s going to be fewer nights booked and with more supply even lower daily rates slightly. But overall the revenue pullback isn’t dramatic. And if people were planning this for a long-term investment, say 10 years, I think they’ll be fine. Most of the people. There were a lot of people that bought during 2020-2021 when prices were high and they might have seen some of the equity go away and maybe they’re not cash flowing it as much as they want, but overall this is only impacting a handful of markets. Even if all of these listings were to list for sale, I don’t anticipate major spillovers into the for sale real estate market causing prices to [inaudible 00:40:27] like that. That’s kind of what I’m watching evolve right now.

Dave:
I’m so glad you brought this up, Taylor. I’ve been saying on this show, people who listen probably know that I think these high price vacation areas, ski areas, mountain towns, beach communities are probably at some of the greatest risk. Largely my opinion, is informed by some of your research, especially around second home demand and how you’ve shown that it went spiked something like 90% above pre pandemic levels, now it’s well below pre pandemic levels and then I saw the same AirDNA data that you’re referencing and agreed that it’s not like some crazy thing that’s going to happen. They’re forecasting 5% decline, something like 5% decline in revenue. But I think the lesson, or at least what the takeaway from me from this is about people who are trying to get into the short term rental industry right now, I think it could be really difficult.
We’re seeing this huge increase in supply and the number of listings in area and the people who have a lot of reviews and who have their operations set up and humming along are probably going to do just fine during this downturn. But if you’re a new listing in a time where I think revenue for the whole industry can come down as a whole as people pull back on spending a little bit, during a time where there’s more increase or more supply coming online, I just caution people about being too gung-ho and overly optimistic getting into the short-term rental market, particularly in these markets you’re talking about. I don’t know if in major metro it might be totally different dynamics, but in these vacation rental areas, second home areas, like you said Taylor, I think it is an area that is riskier than the overall housing market I should say.

James:
Yeah, we’ve seen a lot of inventory increase and it … I mean, when you mess with that mortgage calculator, it is expensive when you’re looking at these secondary home markets. And I think that’s where you’re seeing this influx of housing. And also I think people are moving around less, but I know Palm Springs, Lake Havasu, even in our Washington market, Suncadia, which is an awesome place, but I mean, the inventory has dramatically increased in these areas and the amount of transactions going on, I think they’re down substantially as well. It seems like those are always the first things to go. When you want to save money, you want to get rid of that extra expense, and I think that the short term rental market with it slowing down, people are just concerned, or a lot of people that bought short term rentals, they might not have rented the way they thought they were going to rent and they just want to get out from underneath them.
Do you know how much short-term rentals got bought with low down payments? Because I was wondering if that is going to be a concern because a lot of people were structuring their deals as they had not owned properties, they wanted to get a new investments and then they bought it with 3-5% down owner occupied. Do you know what the data is behind that? How many transactions got done with little bit of liquidity? Because I mean, those are going to be very underwater properties in the next 12 months.

Taylor:
I don’t know exactly the share. From what I understand, it should be relatively small. Now there are some increased use of different loans, I’m trying to remember what they were called. But basically a loan structured solely banking on sufficient revenue from average bookings per night and at the average rental rate. As both those equations are changing and are going to change then some of the assumptions that went into structure in these mortgages are definitely problematic and could cause people to not only become underwater on their loan if equity falls, but also not able to meet their monthly mortgage just based off of the revenue from the short-term rental market. Some of these people are opting to look for long-term rentals and some markets work favorably for that, like mid-sized cities for example. But the destination resorts, mountain ski towns, lakeside, those aren’t as favorable to finding long-term tenants either.
It is problematic in some of those areas certainly. But I’m not sure exactly the magnitude as to how popular that is. A lot of the buying normally happens with cash and during the pandemic we saw a bunch of people opt to jump on a mortgage because of the rates were so favorable until those restrictions went in place from Fae and Freddie about higher origination fees for example. It really was extremely favorable. You’re getting 3% on a second home loan as long as you had 20 or 25% down. There were certainly some people putting less down. But those I think are a little bit more … Well, a little less common, more unique overall for the short term rental market. But certainly we have seen that that’s taken place.

James:
And I noticed that though over the last 12 to 18 months, there was a lot of DSCR loans going on. It was like these business loans that were getting structured that way. I mean, they were putting a little bit more money down on those loans. I think they would go up to 80% loan to value, maybe 85%. But one thing that’s a little scary is these loans have pretty nasty prepays on them where they’re five year 54321s and so not only are they underwater with the equity, they’re going to have to come up with the difference for … I mean, let’s say you bought a million dollar house and you have a prepay at four or five points and then the market came down 20% off peak. I mean, that’s a very substantially underwater asset in addition to at determine that loan.
Depending if they got two, three or four year terms, in two years their income might be so low to where people have to come in with a lot of cash to buy that loan back down. And that’s where I’m a little concerned with that market in those loans that were structured that way. Because if the income, like you said is going down, the bank’s going to want more money and a lot of these people didn’t have the money. That’s why they went with the DSCR product, and that’s a little terrifying at that point.

Dave:
That is dicey, man. I mean, so much of what we talk about, at least personally, why I don’t think the wheels are going to come off in the housing market, I think we’ll see declines is that lending practices are so much better. But like a DSCR is not a residential mortgage. That’s a business loan like you said James. And what James is saying about prepayment, that means is even if people sell it underwater, there’s a penalty that the bank assesses for ending the loan early that people will have to come up with as well. That can put them further underwater. That’s pretty dicey. Well, Taylor, thank you so much. This has been a huge, huge help. Always enjoy having you on the show. If people want to read your research or connect with you, where should they do that?

Taylor:
Two places. First I’m on Twitter, @TaylorAMarr. And then also I write and contribute research to the Redfin blog. That’s redfin.com/news. And that’s where you can see most of our data, research, we put out a weekly report covering the market as well as a bunch of other research.

Dave:
Thank you so much to Taylor Marr, who’s the Deputy Chief Economist at Redfin. We really appreciate you coming back on the show.

Taylor:
Thank for having me.

Dave:
All right, James, so what’d you think?

James:
Oh man, Taylor’s great, man. I got to say he might impress me almost just a little bit more than you on the data drops.

Dave:
He definitely impresses. I mean, I look up to him, he knows everything. Most of the stuff I talk about, I’m just copping what Taylor’s talking about anyway.

James:
Yeah, he definitely knows the stuff. And it was really interesting on the migration patterns. Then one thing with the inflation too and the migration, that was something I was reading up yesterday. It blew my mind. I was like, “Oh wow. Yeah, the inflation is double or triple with the people moving there.”

Dave:
Totally. I think two things Taylor does better than anyone is talk about migration. He really has a grasp on where people are moving, why, obviously it impacts the housing market. But it’s just kind of interesting in general if you’re just curious about what motivates people to move and you should definitely check out his research, but I thought that was so true. We talk on the show about how there’s no “national” housing market and you need to look at your regional market to understand pricing. But like you just said the same is true with inflation, right? You look at Phoenix, the inflation rate is double that of LA. You have to factor that in when you consider what’s happening in the housing market there because not only did prices and houses go up in Phoenix faster than most places, but spending power is going down faster than most places in Phoenix. It’s getting a one-two hit in affordability there, that’s probably going to put a lot of downward pressure on prices.

James:
Yeah, it’s kind of smoke and mirrors. I was like, oh yeah, everyone wants to go here because it’s more affordable. But now you’re paying double for everything else. But I mean, at the end of the day too, it’s always short term pain. They did go to a different market. They got a great rate, a lower payment and inflation will give up at some point, especially if the housing market cools down. Because I did see a lot of that stat was … I mean, a lot of the housing market did cause the increase. But yeah, these migration patterns, I know I’ve always been a local investor in Washington, but as I’m watching these and learning more about these, it’s definitely opening my eyes to invest in some other markets.

Dave:
Okay, we’ll have to follow up on that and just see where you’re going. But yeah, I thought the encouraging thing, at least from an investor standpoint about Taylor’s research is that the migration patterns are calming down. It was so hard to predict what was going on the last couple of years. You see these reports, but most population data comes in once a year. You don’t really know even what’s going on. You just hear anecdotally that everyone’s moving to Austin or Phoenix or Boise and it’s hard to know, is it for real? Is it going to last? And to me at least, if you are investing in multiple markets or trying to pick a market to invest in, the best thing that could happen is that one, the work from home situation and two, the migration patterns just become more predictable.

James:
Yeah, I think you’re right. I have thought some of these cities were just surging. And part of it too is where you were living, right? When I was down in California, a lot of people from California were going to Idaho or so was Washington, but then a lot of other states, the Upper East Coast were going down to Florida. Kind of depended on what you were hearing. But yeah, those migration patterns, I knew it had an effect on the market, but I didn’t really realize it had that much pull on the inflation, just everything across the board.
And it did seem like people were moving out a lot more rapid. But at the end of the day, I guess it shows that they’re really not moving around. It was maybe more hype than anything else. But I don’t know, we’ll see what happens. I personally think that this is going to slow down quite a bit because once we go into a … I just remember in 2008 when we went into recession, everyone just kind of froze. Everything froze. And I think we’re going to see that slow down for the short term and then maybe in 12, 24 months people might figure out, it’s like the life after COVID. It’s like you go through this weird thing, then you get settled and then you really figure out what you want to do.

Dave:
Totally, yeah. One of the interesting things I read about migration too is that a lot of migration’s actually in state, it’s like the majority, I forget, I’m not going to say a number because I don’t remember what it is, but I think it’s more than 50% of migration is in state. Just using Seattle as another example, people who are moving Seattle, even out of Seattle, even though some of them went to Boise or Austin or whatever, most of them went to Bellevue or Tacoma or whatever and somewhere else. And based on what you were saying about people like being like, “Yeah, I don’t like this so much,” I wonder if some of that will actually start to reverse. Like you moved to rural Washington during the pandemic because you could and now you’re like, “Oh, maybe I’ll move back to the city where there’s better jobs” and at least for me, better restaurants. I don’t know. We’ll see if that starts to reverse.

James:
Yeah, that pricing on that rural property went through the roof and it was like the further it … Real estate’s always been, the closer you are to the metro, the more expensive it gets and it COVID broke all those rules. And I do feel like those rules are coming back into play right now. People wanted land and they wanted quietness from COVID. Now I think they’re bored and they’re like, “I got to get back into the hustle bustle of the city. I want good restaurants. I don’t want chain restaurants.” They want to live life the way that they’re used to living.

Dave:
Totally. Yeah. It’ll be interesting to see. Hopefully Taylor agrees to come back every couple of months because he’s the master of this and we can continue to pick his brain.

James:
I hope so. I hope you have me on with him.

Dave:
All right, well throw your name in the hat. You’ll be here.

James:
I’m going to bug Kailyn.

Dave:
All right, well, thanks a lot James. Appreciate you being here. And thank you all for listening. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

In today’s hypercompetitive business environment, building a strong brand is crucial for attracting and retaining customers. As the unique identity of your company or product, your brand consists of more than just a name, logo and color palette. It also encompasses your corporate values, your brand promise, your voice on social media and more.

It’s crucial to get these right, because with a strong brand, a business can remain competitive in their industry, increase customer retention, and command a higher price for its products or services. So how can you become a brand that customers love?

1. Identify—and Communicate—Your Brand’s Values and Mission

Having a clear sense of mission or purpose can help guide decision-making within your company and differentiate it from competitors. It can also help you attract like-minded customers and employees. I’ve noticed that the best brand advocates tend to have an alignment with the brand values. I remember speaking to the CMOs of one of the largest beverage companies in the world, and I learned that they weren’t having to pay for influencer marketing campaigns. This is due to the fact that influencers were actually volunteering to get behind the brand because of its values and mission.

Say your mission is to make financial services accessible to younger consumers and other investment newbies. To define your brand’s values and mission, consider your company’s unique strengths and what sets it apart from your rivals. You may have financial advisers who can explain complex concepts in easy-to-understand language and make recommendations that give fledging investors a sense of confidence. Your website may be chock full of informative content that makes the stock market a less scary place and empowers customers to invest for themselves.

Use your brand’s values and mission to inform the language and messaging that appears in your marketing materials. Stuffy Wall Street jargon won’t align with your mission and values. Speaking in terms your customers can understand and addressing them as a confident yet down-to-earth friend will.

It’s just as important to communicate your company’s mission and values internally as it is externally. Doing so will enable your employees to align their work with these principles. When employees embrace your company’s mission of bringing financial savvy to the masses, it will influence everything from the inclusive copy your marketers write to the welcoming tone of your customer service reps.

2. Prioritize Customer Satisfaction

Providing excellent support is crucial for building a positive brand reputation. It’s hardly rocket science: Satisfied customers are more likely to recommend a company to others, while dissatisfied ones will shred you on social media. With any company I’ve been involved in, I’ve always emphasized the importance of having a sense of pride in your service. I’ve witnessed a clear difference in employee loyalty to companies that prioritize customer service. Employees seem to want to naturally add value for people, because it can give them a sense of self-worth in their position.

Customer satisfaction begins, of course, with delivering the product or service you’ve promised at the agreed-upon price. If you can do this with notable speed or an uncommon degree of friendliness, so much the better. Yet ensuring customer satisfaction doesn’t end there, since mistakes will inevitably occur. Your employees are only human, and your business is just as subject to the whims of the global supply chain as any other.

When hiccups happen, it is essential to respond promptly to customer inquiries and complaints. Customers appreciate quick responses, which shows that you value their time. While chatbots are available 24/7 and can handle many minor customer issues, be sure to offer multiple channels for customers to get in touch with your company. Providing email, phone, web and social media options can make it more convenient for customers to reach out to you. This allows them to choose the method of communication that they feel most comfortable with.

Your goal in these interactions should be to find a resolution that satisfies the customer in a timely way. A brand that’s willing to go the extra mile to address customers’ concerns and make them happy is one that will earn their trust and loyalty.

3. Foster Trust Through Transparency

People are more likely to do business with companies they trust, which is why trust is an essential component of any customer relationship. Building it requires transparency about your business practices. If you’re a manufacturer, for example, this means being open about how you source materials. You can back this up by obtaining your industry’s responsible sourcing certification—they exist for everything from agricultural products to concrete.

Customers also want you to be honest about your products or services, including any potential limitations or drawbacks. By all means, tell them if a killer feature is in development—just don’t claim to offer it now. You should also be clear about your privacy policies and how you use customer data. Customers are willing to provide personal data to obtain better service if they’re confident you’re using and storing it appropriately. When you are transparent, customers can trust that they are getting the full picture and can make informed decisions.

One of the biggest things to be transparent about is pricing. I have a rule with my sales teams that they must disclose the pricing over the phone or in person, then in writing, and also in the agreement. It’s a three tier approach to transparency in pricing. This includes disclosing any fees or additional charges that may be associated with your products or services. It also means being clear and concise with pricing information so it’s easy for customers to understand. Not only will transparent pricing build trust with your customers, it will help stave off misunderstandings or frustrations that can arise when pricing is unclear. When consumers get what they pay for, and they know how much that is, they’re far more likely to come back—and tell their friends.

A strong brand, built on a foundation of trust, transparency and excellent customer service, can lead to a loyal customer base and long-term success. But as with most things in business, brand building is not a one-and-done deal. Rather, it’s an ongoing process that requires regular adaptation to changing market conditions and customer needs. You’ll constantly need to solicit feedback on customers’ expectations of the company and how well their experience aligned with those expectations. By acting on their feedback, you can continue to improve and maintain a strong, recognizable brand that customers will return to again and again.

Ashley:
This is Real Estate Rookie, episode 252. Another thing you can do, too, as a landlord is look into different kinds of funding, state funding, county funding, for the tenants. There are a lot of resources, even small non-profit organizations, that will help people who need help to subsidize their rental income. Especially since COVID and during COVID, there was a lot of programs that were put out that helped people get caught up on rent that you could apply to as the tenant, and even the landlord could apply on the tenant’s behalf. My name is Ashley Care, and I am here with my co-host Tony Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey. Today I want to shout out someone by the user name of Agboola5252. I’m just going to call you Boola, all right? But Boola left a five-star review on Apple Podcast that says, “I’m a real estate agent in Minnesota looking to invest in real estate, and I think I found the perfect virtual mentor to help get me started. This is the best place to learn if you’re feeling overwhelmed.” Boola, we appreciate you. For all of our rookies that are listening to this podcast, if you have not yet taken the two minutes to write an honest review and help us reach more people, I’m asking you, I’m begging you to do that. The more reviews we get, the more folks we reach. The more folks we reach, the more folks we help. That’s what we’re here to do.

Ashley:
I have to say, some of these user names for your guys’ Apple reviews are quite entertaining. We had, what, Milkman, recently?

Tony:
We had Milkman earlier.

Ashley:
Honestly, I don’t even know what mine is, how to even set that into my [inaudible 00:01:45].

Tony:
I think mine is actually the name of my podcast that I started when I was 22, called Do Really Good. I think that’s still like my Apple podcast review name.

Ashley:
Yeah. I’ll have to look what mine is. But today we have a great show for you. We are live, in person. We love recording in person, and we hope you guys do, too. Please leave us a comment on the YouTube videos, or if you leave us a review on your favorite podcast platform, let us know what city you guys want us to come to next. We have Alex on the show today. She is a dentist and started investing in real estate to help pay down some of her student loan debt, and she does reveal, after continuously saying many times it’s a large amount of debt, she gives us what that amount is.

Tony:
It’s a mind-boggling number. But Alex has a really cool backstory too, right? Because she, like most people that become health professionals, her and her husband both are in the medical field, a lot of them never really even think about investing in real estate as a full-time thing. It’s just something they kind of do on the side. But she’s really taken a more active approach in building her real estate portfolio, and we kind of get to hear the why behind that.
We’ve got Alex coming up. Alex. You guys want to clap it up for Alex?

Ashley:
Woo, Alex.

Tony:
Alex actually hopped on a flight from Fort Lauderdale this morning, so she-

Alexandra:
4:30 a.m.

Tony:
4:30 a.m., and she’s still going. Clap it up one more time for Alex. That’s an early flight.

Ashley:
Alex, tell everyone a little bit about yourself and how you got started in real estate.

Alexandra:
My husband and I are healthcare professionals, and being in school our whole lives, we didn’t know a lot about finances, truthfully. We didn’t really work while we were in school. And so I’ve seen a lot of healthcare professionals who have a high income, but they’re still living paycheck to paycheck or they’re burnt out from work, and we just didn’t want to be like that. And so I researched a lot on how to not do that, and, obviously, real estate was one of the top ones.

Tony:
But outside of real estate, you looked at some other things beforehand.

Alexandra:
Yes.

Tony:
What were some of those other options, and maybe, why didn’t they work out for you?

Alexandra:
I did everything. I dove in, I took the Dave Ramsey Financial Peace University. I tried to study a little bit on stocks and day trading. Please don’t ask me anything about those things. I don’t know anything. It just didn’t interest me. Of course, real estate investing was one of the top things online, and so I just researched real estate investing for beginners. BiggerPockets came up, and I started listening to the OG podcast, and that’s how it started.

Tony:
If you can, tell us just what does your portfolio look like today? How many units? Where are those units located at?

Alexandra:
We have three in Kansas City, and we have one short-term rental here in Phoenix. We have a new build here in Surprise, Arizona, as well.

Ashley:
What was your big motivator for getting into real estate investing?

Alexandra:
Truthfully, I just did it. We see a lot of the people in our profession burnt out, and we just didn’t want to be like that. We do like what we do. We love what we do, and we want to have a choice of going to work and not have to go to work to pay off our student loans, and have to go to work to live up to this lifestyle or anything.

Ashley:
You already told us earlier, but I just want to see everyone’s jaw drop when you tell us what that student loan debt is.

Alexandra:
I don’t know the exact number, but my husband and I combined in student loan debt, just student loans is over $750,000.

Tony:
But-

Alexandra:
Man, I wish we had a camera on this side. Why has no one been recording?

Tony:
But can you tell them what you and your husband do for a living? They went to good use, I would say.

Alexandra:
My husband is an orthopedic surgeon, and I’m a general dentist. It sounds like, yes, high income and all that, but, again, $750,000. If I listened to a lot of the people in our lives who tell us, “You can’t invest, because look at your student loans. You have no money to do that. You need to pay the student loan off,” we would not be in the position we are, and we would not be able to do that.

Tony:
I know you’re taking real estate investing super seriously and there’s a big change coming next year. Can you share that with everyone and what the motivation was behind that?

Alexandra:
Our third deal was a seller-financed deal. For 2023, I’m going to take a year off of dentistry and try to see how many creative financing deals I can get in that year. I am not quitting dentistry, but I’m just going to take one year off.

Ashley:
I mean, you guys have to clap for that. I mean, that’s amazing, being able to have that option to do that. Tell us what your goal is for the next year.

Alexandra:
My goal is to try and get 12 creative financing deals. I mean, I don’t know if I’m shooting for the moon or not, but we’ll see. That’s a goal that I have.

Tony:
All right. Last thing before we get into the question here. What is some advice you can give to a new investor if they were looking to get started today? Based on your experiences, based on everything you’ve done.

Alexandra:
I would say invest in yourself and take action. Like I said, a lot of people in our lives, my close friends, my family, they literally told us, “You shouldn’t do this.” They kind of tried to steer us away from it. But if we didn’t take action, we wouldn’t be able to have had the five properties that we have now, and, hopefully, scale from here. I would just say try and network as much as you can. By the way, this is my first networking event ever.

Tony:
This is her first meet-up ever.

Alexandra:
Take action, because, again, if you listen to all the other people who say don’t, don’t listen to the people who aren’t doing it.

Ashley:
Okay. For our question, what is a healthy return for a buy and hold in Phoenix? What is attractive about the Phoenix market to you? You have your short-term rental here. I mean, technically, your short-term a buy and hold. You’re holding it. What made you want to come into the Phoenix market and why are you going to continue to invest here?

Alexandra:
I think it’s because I’m from Phoenix. My family still lives here. So I was familiar with the area, and because we are out of state, I was able to use that second home loan, the vacation. But I love the Phoenix area. Everyone still comes here to vacation. There’s a lot of snowbirds. There’s a lot of hospitals. There’s a lot of growth. Even though the market is what it is, there is so much growth in Arizona, and I’m sure everyone here knows that, with all the big companies coming here. You still have to look at the numbers, though. Don’t do something that’s going to make your wallet cringe. You need to make a return, still. With a short-term rental, it’s a little higher than a long-term rental. Ours right now, it’s a little lower than I thought. It’s about 23%, I would say. But it just started, so I’m-

Tony:
23% is still pretty good.

Alexandra:
Yeah. I still think the Phoenix market is a great area to invest in. So look for growth and make sure you do your homework with the numbers. Make sure the numbers work. And network. I would say network. Our places in Kansas City, I’ve never been to them. I managed two rehabs at the same time while being a full-time dentist. Even though I didn’t network in person, all the groups online, BiggerPockets, the forums, were so helpful. That’s how I met so many people, and I trust them. Obviously, that’s how we were able to finish those projects and scale, I guess.

Ashley:
Okay. We’re going to start with our first rookie reply question, and this question comes from Tim Reese. If you own multiple properties, what’s your backup plan if your tenants stop paying rent all at once and can’t be evicted? I think a lot of investors saw this during COVID, whereas there was the moratorium where you could not evict tenants, and there was tenants who really could not afford to make payments at that time. And then there was some, and I’m not going to name names of my tenant that took advantage and didn’t pay the whole time. I think this is definitely a risk as a landlord and something that new investors are very scared of. Alex, what would be your advice to get over that fear of that happening or something they could implement in put in place to mitigate that risk?

Alexandra:
That’s a challenging one. He means if all of them stopped paying?

Ashley:
Yes.

Alexandra:
That is a challenging one. I would first talk to the tenants. I mean, they’re human, you’re human. I would try, maybe, if they really can’t pay, try to come up with a payment plan or something. Like, “Hey, I know you can’t pay the full amount, but can you give me 50% of this month, and then try to ease your way back into it somehow?” That’s tough. I haven’t had that situation, thank God, so far.

Ashley:
Well, I think that part of that reason it’s so tough is because I think the chance of that happening is rare. Unless maybe you have two or three units, then the less units you have, the more probable that’s going to happen. But as you grow and scale your portfolio, there’s kind of that less chance of every single unit being non-paying at the same exact time. But this is where your cash reserves come in, is having those three to six months cash reserves for each unit set in place, so you can at least cover those expenses and get a game plan in place for those three to six months. Especially if you have a smaller portfolio, highly recommend starting out with six months. That covers your mortgage, your property taxes and your insurance for those upcoming months.

Tony:
That’s a great answer. The only thing I would add to him is, like Ashley said, is that I do think that unless there’s a global pandemic that happens again, probably super rare that you’re going to see a point where all of your tenants aren’t paying. If there isn’t a major health scare or something that’s preventing people from paying, and your tenants just decide not to pay, then you might need to do a slightly better job of screening your tenants. That would probably be my advice back to you. If you’re nervous about that, spend a little bit more time up front on the screening process to make sure you get the highest quality tenant.

Ashley:
Another thing you can do, too, as a landlord is look into different kinds of funding, state funding, county funding, for the tenants. There are a lot of resources, even small, nonprofit organizations that will help people who need help to subsidize their rental income. This is completely different than Section 8, because Section 8, you can be on a waiting list for three years to get assistance. But there are smaller organizations, and especially since COVID and during COVID, there was a lot of programs that were put out that helped people get caught up on rent that you could apply to as a tenant, and even the landlord could apply on the tenant’s behalf. That would be something to give your tenant, some of these programs that they may not even know about where they can get that assistance, and that’s going to your local housing authority and organization website.
For example, in Buffalo there’s HOME NY is one of them, and then there’s also Belmont Housing. That would be the best resource to find out about these kind of programs that can help your tenant get caught up on rent.
Another favorite is doing cash for keys. If your tenant is paying, instead of waiting the three months until you can do an eviction or whatever that waiting time period is, maybe just offer them, say, ‘You know what? I’ll give you $500, I’ll give you $1,000 if you move out by next week. I’ll come here, all your stuff is gone, you hand me the keys, and I will hand you a $1,000 check or $1,000 cash, and we’ll part ways.” That may be enough for them to go and get another unit and start over.

Tony:
You took the words out of my mouth. That was the next piece I was going to land on, as well.

Ashley:
I read your mind, and I was like, “You know what? That’s a great idea. I’m going to say it before he does.”

Tony:
That telekinesis.

Ashley:
Okay, let’s check out our next question. This one is from Brian Cavalier. Is it a bad idea to lower the rent if no one is applying for a unit? Plenty of showings and interest, but no one is following through. Alex, what would you think about that?

Alexandra:
This actually happened to us. The first unit we turned into long-term rental, and it actually rented out for $200 more than our goal was. And then that tenant, when they moved out, they moved out in the middle of winter. It’s snowing. No one really moves at that time. We knew that we wouldn’t get a renter for that amount that we were going to get in the summertime. We actually did have to lower it a little bit, but we were still cash flowing a little bit. As long as you’re not negative, I think, cover what you need to cover and still have a little bit of reserves, I think you’re okay. Ashley, what you always harp on, always make sure you have reserves, just in case. But we had to do that, and we’re still okay. I mean, we still have those tenants there. They signed an 18-month lease, so it’s a little lower than the first one, but, hey, we got someone in there for 18 months.

Ashley:
Sometimes that’s better is not having that turnover, is taking a little bit off the monthly rent to have somebody there longer, because turnovers can be expensive.

Tony:
I briefly worked for this massive property management company when I graduated from college.

Ashley:
I feel like today I’m learning all of these new things about you.

Tony:
I was there for six weeks, and I’m actually non-rehireable there, because I didn’t give them a full two-week notice when I left. But, anyway, I learned a few things while I was there for that month and a half.
One of the things they did was they adjusted the pricing based on the term of the lease. Say that someone was signing a lease in June, and they know that December is a difficult time to relist a property. They would give you the option of having a six-month lease, but it would be significantly more expensive than a 12-month lease that would expire in June, and they did that for all of their properties. These are massive apartment complexes, a hundred units, but that’s how they tried to decrease the number of move-outs during the slow season when they would have to charge less and increase the number of move-outs during the peak season when they could charge more.

Alexandra:
We negotiated with them to do the 18-month lease instead of a 12-month, because if we did 12, we would have another turnover, potentially, in the wintertime. We added a couple more months to the lease, so if they did turnover, then it would be in the spring/summer where it’s more demand.

Tony:
Have you ever done that for your listings? For your listings. Sorry, short-term mental brain talking. For your long-term rentals?

Ashley:
Actually, no, I haven’t. And you would think in Buffalo nobody wants to move in the snow, which is completely true. I think that’s a great idea.

Tony:
All right, this next question comes from Shauna Garnett, and Shauna’s question is, what’s everyone’s thoughts on doing a six-month lease and then moving to month-to-month? I hate the idea of being stuck with a bad tenant for a full year. I feel like we just kind of touched on this a little bit, but I mean, I don’t know, what are your thoughts, Alex, on a shorter lease to get around the potential of having a bad tenant?

Alexandra:
They just nervous, then, for the tenant?

Tony:
That’s what it sounds like, right?

Alexandra:
I mean, I would say vet your tenant as best as you can. There’s certain criterias that you can find out from BiggerPockets, forums, and things like that, from property managers. Screen them really heavily, so you can at least trust them. You might get a bad tenant even if you have a six-month lease. They might stop paying after a month, but you really have to just vet them really well. I don’t think I really answered it, sorry.

Tony:
No, that’s a great answer.

Ashley:
I do think that is a fear. Especially if you are in a state where it is more tenant-friendly, where it is harder to evict a tenant, especially if they’re locked into a lease. I’ve actually been more favorable to being month-to-month, because instead of doing an eviction for non-payment, you can do an eviction for non-renewal. When they’re month-to-month, you have to give certain notice. If they’ve lived there less than a year, it’s 30-days notice. If they’ve lived there, I think it’s up to two years, then it’s 60 days. And then over two years, it’s 90-days notice. You give them notice stating that you’re not going to renew their lease, and then you have those three months, and then that’s when you can either increase the rent or offer that non-renewal. It’s an easier way to evict in New York State right now doing the non-renewal process than the actual non-payment process. That would be one benefit, I guess, if you are in a state where it’s more tenant-friendly, the laws, than it is landlord-friendly.

Tony:
Yeah, Shauna, I think, like we said, sometimes turnover is more expensive, so if you have all these month-to-month leases and you’re allowing people to swap out every six to seven months, it could end up costing you more money in the long run. To your point, Alex, I think spending time vetting upfront could be better.

Ashley:
Too, how easy is it for a tenant to actually get out of a lease? Because, in New York State, it is very easy for a tenant to kind of get out of their lease. They can maybe lose their security deposit, but still move out. It’s very hard to, if you do put the stipulation in their lease that, okay, if they move out, they lose their security deposit and they pay rent until a new tenant is put into the property. But you have to actively search for a new property. So they have a very good case, “Oh, well, you didn’t find a tenant for two months. It was your fault. It was too slow.” Things like that. So it’s very hard to actually get that money out of the tenant and to get them to continue to pay for that vacancy until it is filled.

Tony:
I don’t know how you-

Ashley:
Or, even if it is filled right away, you still had that turnover cost that you’re not recouping.

Tony:
Just one other piece on that. The way that that same property management company I was talking about that I worked for, that’s how their lease was set up, that if you broke your lease, you were responsible for the rent until someone else moved in. And if you didn’t pay, they would send you to collections, and they would let collections kind of chase after you. I don’t know if you want to do all that, Shauna, but we’re just talking [inaudible 00:20:36].

Ashley:
Okay. Our last question is from Matt Pauls. How do you determine rental rates in an area? Thanks in advance.

Alexandra:
There’s a lot of websites, platforms that you can use. You can even search Zillow, honestly, and just look at the neighborhood that you’re in or that the property is in, and look at what the comps are in the area and what they’re going for, for rent. But Rentometer is a great website, as well.

Tony:
The BP rent estimator is actually pretty spot-on. I bought my first rental property before the rent estimator rolled out, so just out of pure curiosity, I went back and plugged that address into the rent estimator, and it was spot-on to what I was charging my tenant. Or, I think it was off $25 bucks, something like that, but it was pretty close. So if you’re looking at markets trying to understand what that rent could be, I think the rent estimators a great tool.

Ashley:
The only trouble with some of those tools is that when you get into rural areas where I invest, there’s not enough data for them to actually pull information. That’s where going to Facebook Marketplace, even Craigslist, and seeing what properties are listed at, and then just checking every week. If there was a listing there last week, and it’s gone the next week, then most likely it was rented for what the asking rent was, and you can use that as a comparable. Then, also, calling property management companies in that area, and you can even just pretend you’re looking to rent an apartment, even if they don’t have anything vacant. Just asking, “What size are your one-bedroom apartments, and what do you currently rent them for? What’s included?” Things like that, too.

Tony:
Going back to that same company, that was actually part of my job as the leasing agent was to call other apartment complexes just to get rental estimates on comparable units so we would know how to price, so it is a common practice.

Ashley:
Okay, cool. Well those are our rookie reply questions for you guys today. Alex, thank you so much for joining us.

Alexandra:
Thank you so much for having me. It was so fun.

Ashley:
Can you let everyone know where they could reach out to you and find out some more information about you?

Alexandra:
Yeah, on Instagram, I’m AK_Burnham, and then on Facebook, Alexandra Burnham.

Ashley:
Okay, cool. Thank you so much. I’m Ashley @WealthFromRentals, and he’s Tony @TonyJRobinson on Instagram. Thank you guys so much for listening, and we will be back on Wednesday with a guest.

Speaker 4:
(singing).