January 2023

Ashley:
This is Real Estate Rookie, Episode 251.

Tony:
Every recession going back to the ’60s, most of them lasted, on average, just under 12 months. So it’s like, can you buy this property? Even if it maybe isn’t a home run over those first 12 months while there’s all this economic uncertainty, what happens in year two and in year five and in year 10 as you own the short-term rental? If you kind of check those boxes that we talked about where you’re hitting the location, you’re hitting the value, you’re hitting the amenities, more likely than not that listing is going to continue to do well. There will probably be some uncertainty in the short term, but I think as real estate investors, we have to roll with those punches and remember that we’re really investing for that long-term appreciation and cash flow as well.

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

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week we bring you the inspiration, motivation, and stories you need to hear to kick start your investing journey. I want to start today’s episode by shouting out someone by the username of Eshazamm. Shazamm [inaudible 00:01:05] to say five-star review on Apple Podcast. It says, “All these real life stories are so inspiring. I love knowing all these people jumped in without being experts, they are learning along the way, and they exemplify that there are many ways to approach real estate investing. The guests aren’t necessarily practiced interviewees. But Ashley and Tony, you do an amazing job keeping the podcast flowing and interesting. And you guys are just adorable personalities, too.” Shazamm, I appreciate that. I think that might be the first time as an adult I’ve been called adorable, but I am here for it. I’m all about it.

Ashley:
Tony, every time I meet somebody, that’s usually the number one thing they say about you.

Tony:
“Oh, he’s just so adorable.”

Ashley:
“What’s his skincare routine? He’s so adorable.”

Tony:
Skincare, I get all the time, but the adorable is a new one, but I’m okay with that. I’m okay.

Ashley:
Yeah, I’ll take that any day.

Tony:
I’ve been called worse.

Ashley:
Tony, I’m super excited because today we are starting a new series in the Real Estate Rookie Podcast episodes. We are doing a 90-day mentee group. We have three people we have chosen where we are going to stick with them for 90 days and help them in any way that we can to reach their real estate investing goals.

Tony:
It’s super exciting. We’ve got such an engaged and amazing rookie audience. Us, along with the production team, we thought, how can we provide more value to folks in our audience? We thought, man, what cooler way than bringing some folks who are rookies onto the podcast, following along with them for 90 days, Ash and I giving as much value to them as we can. Then the rest of our rookie audience getting to listen along and hopefully pick up some cool things along the way. So you guys are going to meet three amazing people on the podcast.
First up, you’re going to meet Brandon DiOrio. He is from Minnesota. Then we’re going to bring on Lawrence Briggs from Texas. We’re going to finish off with Melanie Wilmesher from Colorado. Each one of them is in a slightly different position, slightly different starting points, slightly different goals. Ash and I are going to do our best to break down what they’re working on and give them some insights and advice on how to keep moving towards those goals.

Ashley:
I already know that we’re going to learn a ton from them, too, which I’m super excited about. That’s one of the best things about being the host is we get to learn from everybody else firsthand, too. Today, we’re just going to talk about goal setting. We’re going to assign some homework and give everyone their MINS, the most important next step, and plan out what we’re going to be doing with them over the next 90 days. So today’s just the starting point, and then we’re going to be doing follow-up episodes to see what the journey is like and helping them get those deals.

Tony:
Really, what we want you guys to do as you’re listening is to challenge yourself to follow along. If your goals are similar to what Lawrence and Brandon and Melanie are all working towards, see if you can challenge yourselves to do the same things we’re talking about in these episodes. Then maybe by the 90 days or so, you have your own goal achieved just by listening to what we have here. So that’s our challenge to you guys, is to follow along and do it at home as well.
Brandon, welcome to the Real Estate Rookie Podcast. You’re the first mentee up. As a quick intro for our rookie audience, I just want to share a quick few things about you so folks can get to know you a little bit better. Number one is that you’re an HVAC contractor, looking to get that first deal done. Number two, your family’s in commercial real estate, but you are actually interested in residential. Number three, you enjoy paint-balling, man. Anything else outside of those three points you want to share with the rookie listeners?

Brandon:
No, that sums me up pretty good. Work quite a bit when it’s hot and cold now like it is. I’m actually in my truck in between calls. Pushed my lunch to 2:00 p.m.

Tony:
Dude, if that isn’t the sign of a rookie investor, I don’t know what is, man. You’re out there working on your lunch break, hopping on this podcast episode. Before we started recording, you told me how cold it was where you were. Just give us a sense of how frigid it is out there. You said it was in the single digits?

Brandon:
Yeah, single digits overnight. Right now the sun’s still pretty strong. It’s 22 degrees, so I don’t have my truck running. It’s not too bad. But overnights are pretty bad, walking my dog who woke me up at 3:00 last night to go out.

Ashley:
Brandon, I have to ask, what is your strategy for when you have to break that bad news to someone that they need that new HVAC system put in?

Brandon:
I don’t really have a strategy that much. Because with how expensive furnaces have gotten, it’s hard unless it’s truly unsafe. That’s about the only time I really try to emphasize getting a new one. But you get to 20-year-old furnaces that need $1,400, $1,500 worth of work, then you try to educate them that’s just not worth it, like an old car with bad tires, brakes, and a weird engine tick.

Ashley:
So you don’t get a lot of customers that would cry like me because they have to spend a lot of money and have to console them.

Brandon:
It’s never usually like the total amount, but it’s red tag when furnaces are just putting off too much carbon monoxide and you have to shut off their gas. That’s the one that gets to people.

Ashley:
We are super excited to have you on over the next 90 days with us. Can you maybe tell everyone a little bit about what you have going on in real estate investing now?

Brandon:
So nothing active right now. I’m trying to track down a few deals. Just actually missed out on one today because it was a pre-foreclosure. It was the last day of the rescission period, I believe it was. We just couldn’t come up with the money fast enough. It was only about a two-week heads up from walking through it to when that was running up. Just trying to identify a house for either long-term or a house hack for myself.

Ashley:
In what market are you currently looking in?

Brandon:
About 40 to 50 minutes west of Minneapolis where I’m currently living, so just wanting to stay somewhat close.

Ashley:
When did you start looking for deals? When you decided, “I’m taking action, I want to start putting offers in, I want to start looking, I want to do this,” how long have you been in this period of time?

Brandon:
About a year ago I spent two months pretty heavily trying to buy something but was never even close with how the market was. Basically foolhardily gave up offering and looking and stuff like that and just focused more on reading the books and learning what I could. Now that stuff’s finally slowed down, trying to finally make it happen.

Ashley:
Now that the market has changed, what do you think is your biggest obstacle, your biggest hurdle, the thing that you need help with right now?

Brandon:
I guess the biggest thing I need help with is just knowing that I’m looking at numbers right, just using the different programs for estimating rents, managing rehab costs, and stuff like that.

Tony:
When we think about your goals, I just want to recap for our listeners here. You’ve been thinking about doing this for about a year or so, maybe dabbling a little bit. But the goal for you, Brandon, is that over the next 90 days to get your first property under contract somewhere in and around that region that you’re at in Minnesota.

Brandon:
Yeah.

Tony:
Awesome. Now one quick thing, because I mentioned this when we first started, you said your family’s in commercial real estate, but you’re choosing to go the residential route. Give us some insight into why you’re leaning that way versus the commercial.

Brandon:
Right now, I’m leaning residential mostly just for the startup costs. Down payment money with commercial is just much, much more, a little bit harder to get into. My family, they did a lot of development, but they’ve kind of moved into residential now more that I’ve been talking about it and a few opportunities have come that they were able to tackle that I wasn’t able to. So they’re kind of split with a few properties in both now.

Tony:
When we think about this goal you have of getting that first residential property under contract in the next 90 days, what are some challenges that you’re anticipating, maybe with your market or any other things, rent control? I know every market’s a little bit different. What are some challenges you feel like you might be facing?

Brandon:
Challenges right now are just making the numbers work. Now with higher interest rates, just trying to find a property that cash flows a little bit just so I can be safe about it or just something that makes sense for moving into for myself and renting out the rooms.

Ashley:
Brendan, can we dive into your finances a little bit? As of right now, what is your plan to purchase a property? Have you been pre-approved for a loan? Do you have a down payment saved? Do you have a private money lender? What does your purchasing power look like right now so we can get an idea?

Brandon:
I actually did just get re-pre-approved because the other one was a year old today. I do have a down payment saved up, so I could put 20% down of upwards of 440 kind of. I think that math works out there. So I do have that set aside waiting to make something happen. Ideally, it would be two cheaper properties with the money I have set aside for a down payment.

Tony:
It seems like you’re in a pretty good spot, Brandon. You have some capital set aside. You have the ability to get approved for a loan. When you think about the challenges, you said it’s really just making the numbers work. I just want to ask you a question. In the last month, how many deals would you say you’ve analyzed?

Brandon:
Last month, last 30 days [inaudible 00:10:14], do you mean?

Tony:
Yeah, yeah.

Brandon:
I’d say only probably about five looked heavily into and kind of a hundred-foot view on closer to 20.

Ashley:
Brandon, do you have a buying criteria like a buy box as to when you’re looking at the property, it’s like, “Okay, checklist, it matches this, this, oh, not that. Okay, I’m moving on to the next one”? How are you doing that overview of the properties and then deciding which one you’re actually doing that deep analysis on?

Brandon:
That could be kind of where I hang myself off is I don’t have a 100% buy box or anything narrowed down. The biggest thing, surfer house hack, ideally, I would like something with a master bedroom, which, in the price point that I’m looking, there just hasn’t been too many because it’s older houses that just never had those. For more long-term stuff, I guess my buy box for interest has been, if it looks rough, that’s kind of sparked my interest. Scrolling through pictures, I like seeing older furnaces, older ACs, water heaters, stuff that I can very easily take care of and also use as a negotiation for saying that those have to get swapped out and then being able to do them both in a day. Other than that, I haven’t really narrowed down too much. More of it’s an area thing for me at this point.

Ashley:
Are you saying that when you see a property, it’s just in your head as you’re looking through it?

Brandon:
Yeah.

Ashley:
This makes it easy for us. This is your first homework assignment. What I want you to do is actually take the time to write down some of those things you listed off to me and then add more things on, like what is your budget for a property, all these different things that you want in a property, and just start making a list of that. Then as you’re going through and looking at these properties, maybe you’ll think of more things like, “Oh you know what? This property had this. I think that would be a huge value add. I’m going to add it onto my criteria, my buy box.” So every time that you’re looking at a property, you’re going through this same checklist. That will get rid of the fluff, and you won’t be wasting time analyzing deals that don’t meet what you actually want anyway. That way you’re getting it right off the bat as to looking for those things that are on your list so you don’t spend more time on it. Then Tony, what would be the second part to that, doing deal analysis, you think?

Tony:
Yeah. I think we got to ramp up the volume of deals that you’re analyzing. You said you did about five deals in the last month. I want to five, six X that. So if we can get you to a point, Brandon, where you’re analyzing at least one deal per day, you get off of work, you’re eating dinner, whatever it is, just spend like that 30, 45 minutes analyzing a new deal.
What’s going to happen is two things. First, the buy box piece that Ashley talked about, that buy box is going to become clearer for you. Because as you analyze more deals, you’re going to start recognizing trends in certain areas or bedroom sizes or square footages around, “Okay, these properties tend to do better than these properties, so I’m going to narrow my buy box down to now just these things.” So that’s the first thing is your buy box gets tighter just by analyzing more deals. Second, there’s a good chance that if you analyze 30 deals this month instead of five compared to last month, one of those 30 might be worth actually submitting an offer on. I think that’s the first hurdle that we have to get you towards is submitting those offers. Because once that starts to happen, now we’re getting closer to you actually closing on that first deal.

Ashley:
Brandon, as you’re doing… It’s so easy for us to say that, but you’re going to have to make the time and be intentional about doing that deal analysis and creating that buy box. So when we’re done on this call or sometime even tonight is time block, “Okay, this time period, every single day I’m going to be doing this.” Or you know what? Maybe you’re just going to batch do it. On Sunday evenings, you’re going to do seven different deal analysis. Even if there’s not seven deals that meet your buy box, just grab anything just to practice running the numbers on it, too. Just remember, too, that even though that’s what the asking price is, that doesn’t mean what you have to pay for a property, so just decrease the asking price, decrease your offer to make the deal work, and see what that number actually comes to.
I want you to do those things and work on it. If you need that accountability, feel free to post into our Slack channel that we have your deal analysis. So if you’re using the BiggerPockets’ deal analysis, post those reports. I might actually harp on you and nag on you if I don’t see any activity in there, just to help hold you accountable and just submit them in there. Then too, maybe we can provide more value to you as to look at this thing and maybe you could change that and just help you fine tune that deal analysis, too.

Tony:
Last question from you, Brandon, just so I better understand your situation. Are you currently working with a realtor? Are you sourcing these deals yourself? What’s your deal flow look like?

Brandon:
Currently, my dad’s the realtor that I’ve been working with. I have my license as well, but it’s frozen right now. I’ve been using his insights on a lot of stuff, which might have been what’s been slowing me down as well is I underwrite with an extra percent or two, and then he looks at it and adds the percent or two over what I have, so then stuff just has never worked out. So definitely need to kind of narrow it in there.

Tony:
I feel like we’ve got a decent game plan for you. Ashley mentioned the idea of time blocking. It is difficult to make the time to do these things when you have a full-time job, especially one that’s demanding from a time perspective, from a physicality perspective. So what I really want you to focus on, Brandon, is why you’re starting on this journey. So if you can, share with us why is it so important for you to reach this goal, and what does your life look like if you’re not able to make this happen in the next 90 days?

Brandon:
I guess the biggest thing is to have the flexibility if I want that as I grow up, start a family. I don’t want to get to the point of wanting a family and wishing I had more time for that. I love what I do, but physically I don’t want to be struggling to get up out of bed in 20 years because my knees are gone or something like that. I want to do what I am doing as long as I can because I do enjoy it, but I do want the freedom when I might need it if something unforeseen happens or wanting to focus on family stuff.

Ashley:
Brandon, that’s definitely a great why. We’re super excited and happy to help you. Just make sure you go through that homework until the next time we touch base. It’s so easy. Some people may be thinking, “Oh, that’s so obvious of a thing to do,” but how many people actually sit down and do it? That’s the hard part is sitting down and actually doing it. It’s so easy to tell somebody or to know that you have to do something, it’s taking the action and actually doing it. Brandon, if there’s maybe somebody who’s in the same situation as you and maybe wants to reach out to you and have some accountability, where would be some place that they could reach out to you or find out some more information about you?

Brandon:
Instagram would be best. It’s brandon.diorio, so my full name, so B-R-A-N-D-O-N dot D-I-O-R-I-O.

Ashley:
Well, Brandon, thank you so much for taking the time from your lunch break, and hopefully you’ll have a couple minutes to eat. Usually, Tony shoves his face before any recording, so feel free next time to bring your lunch [inaudible 00:17:59].

Tony:
You can eat while you’re doing it. It’s totally fine.

Ashley:
Okay, Brandon, we’ll see you next time. Thank you so much.

Brandon:
Thank you guys.

Ashley:
Next up we have Lawrence Briggs from Texas. I feel like Tony and I already known Lawrence just from Instagram. We see him all over the place. Lawrence has professional property management experience and has been investing in single families near large military bases. Lawrence currently owns two long-term rental properties, but he’s looking to take his business to the next level and secure creative financing. Lawrence, welcome so much to be our mentee for this Quarter 1.

Lawrence:
Thank you. Thank you all so much for having me. This is like an epic opportunity.

Ashley:
Well, we’re very excited to learn about where we can help you with. So why don’t you start off with maybe telling us a little bit about your current investments that you have.

Lawrence:
Of course. I have two long-term rentals. I actually purchased two rental properties within six months of each other this year in 2022. I did both of the properties off market, so I was able to source the deal, put the deal together, and now lease them and self-manage. Right now leading up into 2023, my Q1 goal can go either way. I’m very close to becoming 100% consumer debt free. However, if I can land another property by Q1 of 2023, I’d rather purchase another property and let the cash flow pay down that little bit of consumer debt that I have.
Right now, I’m a W2 employee like most people, so I have a extremely low DTI, but I’ve been looking at possible properties that are a little bit above what I would normally get approved for, especially if I want to get into maybe a duplex. So my goal is to be able to learn how to strategize and use creative financing to my advantage because I’m not afraid to go out there and find a deal and put it together. I just need to make sure I’m putting together the right deal that’s going to become beneficial for me and the seller, so possibly either a DSC loan type thing or a seller finance for the next deal.

Tony:
Lawrence, first, congratulations on knocking out those first two deals and doing them in such a short period of time. I think so many of our listeners are looking to be in that same situation, so you’ve already set a foundation there.

Lawrence:
Thank you.

Tony:
When you talk about your goals, it really is adding to that portfolio, but really focusing on, like you said, either some kind of DSCR-based loan, or maybe some subject 2 or seller finance type deal. What type of property are you looking for? Are you looking for a single family residence, large multi-family, small multifamily? What does that property type look like?

Lawrence:
Of course. My ultimate buy box are single family homes just because I am close to a military base, and so it’s very advantageous for single family homes to be available in this area. Then my secondary buy box would be either a duplex or a fourplex. Again, that would be contingent on if I can put together a stellar win-win seller finance deal or a DSCR-type deal.

Tony:
Lawrence, when you think about the steps you need to take to get from where you are today, to getting that first creatively finance deal in place, what does that roadmap look like to you?

Lawrence:
Definitely, I need to learn how to be able to analyze those properties to make them work for seller finance. So that’s kind of my biggest hurdle that I would definitely be very appreciative for you all to help me in that area to be able to look at deals and say, “Okay, would this work for DSCR and/or seller financing or possibly subject 2?” So that’s my ultimate goal of learning how to analyze those properties. Because we all know as of 2022 going into 2023, there are some road blocks when it comes to interest rates with traditional financing.

Ashley:
I think one way we’ll be able to help you, Lawrence, is to submit multiple offers. So looking at a deal and saying, what number or price point would this work at with seller financing? What would this look like with doing a bank loan? What would this look like if we can do subject 2 on it? Lawrence, do you want to just explain to everyone what subject 2 is? Because we don’t hear that a ton, but we did recently do an interview with Pace Morby as a Rookie Reply, so if you guys want to go back and listen to that more. Lawrence, do you want to just describe it real quick what it is?

Lawrence:
I’ve never did a subject 2 loan. Most people, what they’re going to do is they’re going to take over pretty much an existing loan. That can be advantageous in this area because it’s a military town. What happens is that we have our soldier members buy properties with VA loans, and then they’ll get to deploy or leave the area. So now they’re stuck with these properties, and they don’t have a background in real estate investing. So it can be very advantageous to be able to come in and do a possible subject 2 where you pretty much take over that loan.

Ashley:
That episode, too, with Pace Morby, for anyone that wants to learn more about subject 2, is Episode 236.

Tony:
Lawrence, you said one of your challenges was analyzing these deals using creative financing, but you analyzed those first two deals that you purchased on your own?

Lawrence:
Yes, yes. I’m a huge nerd when it comes to Excel, so I have my Excel sheet and I run the numbers of what I would ask for, what I would be approved for, and then I run about five different scenarios of different interest rates and down payments. If it gives me that sweet spot, then I will just go ahead on and do the deal.
I don’t like to à la carte deals. I like to holistically look at a deal. Some people are like, “Oh, I have to have a 15% cash-on-cash return. If not, I’m going to leave it.” I’m like, “No, I’m not going to à la carte a real estate deal. I’m going to look at it overall.” Because for me, I’m single with no kids, so I’m in the long haul. I’m investing for generational wealth to change the trajectory of my family. I may fall short of that cash-on-cash return, but guess what? I may be able to get that appreciation. My primary residence that I purchased four years ago pretty much doubled in value when people were saying not to buy in 2018. So I don’t like to just say it has to hit this particular item or I’m done with it.

Tony:
I want to dig into that idea of building generational wealth, something we talk about often, but it sounds like it’s a strong why for you. But before I do, I just want to point out something. You talked about how you analyzed those first year properties that you purchased. You talked about the different Excel models, analyzing them using different interest rates and down payments, that process can be applied to the creative financing route as well.
Just because the type of debt that you’re using is the seller instead of the bank, it doesn’t mean that your analysis of that deal changes. Because even when you go seller financed, there’s still going to be maybe some percent of money that you’re putting down. There’s still going to be an interest rate. There’s still going to be an amortization period. There’s still going to be a term for that debt. So even though those numbers may vary from seller finance to a bank loan, the analysis steps are still pretty much the same. Based on what you just described, it sounds like you’re pretty good at analyzing deals already. So I don’t know if the analysis piece is really as big of a challenge for you as you originally thought it would be.

Lawrence:
Yeah, it’s definitely… That’s why it’s good to have mentors because if you’re just talking to yourself, you don’t realize that you’re already doing something. I just want to make sure that it’s win-win. Whenever I did put together my previous deals, it was a win-win for me and the seller. But just kind of learning as though how would it work, because some deals, they may want a balloon payment, or how would it look if I would need to refinance it, being able to put that extra layer on what I’m already good at with analyzing.

Ashley:
Lawrence, the deals that you’re getting, that you’re analyzing, how are you sourcing them?

Lawrence:
Oh, network. I’m a huge networker. I carry around business cards. People recognize me from my bow tie around town. I just tell people, “Hey, I’m a real estate investor. I’m looking for properties. Reach out to me.” I’m active on social media, as you all are aware. The two ways that I found those properties, one was through doing food delivery. So I stopped and I thought the contractor was the owner, and I’m like, “Hey, is this your home?” He’s like, “No, but I’ll give you the owner’s contact information.” I’m like, “Oh, great.” And I purchased that property. Then the second property was through a Facebook group. A guy posted and was like, “Hey, I’m trying to sell a property.” I’m like, “Okay, let me run the numbers.” So I definitely feel as though, people like to say cliché, your network is your network, but that’s really true. It’s not what you know but who you know.

Ashley:
Real quick, what are some ways that you’re like, besides… So you’re looking through Facebook groups, you’re stopping places. What are some other ways that you’re sourcing deals besides just telling anyone and everyone what you’re doing with real estate? Are you doing any kind of mail campaign? I guess you’re kind of doing door knocking, stopping contractors.

Lawrence:
I did one mail campaign, and I did it myself. I handed all of the letters. I think I did maybe 50 because I was like, “I really want them handwritten and stuff.” I think probably after the 10th letter I was like, “I’m over it.” But I gave myself a goal, and I sent out about 50 letters. I didn’t get any deals from it, but I end up connecting with a realtor who said, “Hey, did you ever send a letter to one of my clients? Because I think he received a letter. He definitely doesn’t want to sell, but he had never received a actual handwritten letter.” She’s like, “We’ll keep you in mind if he decides to ever sell something from his portfolio.”

Ashley:
Lawrence, what is your why for all of this? Why are you grinding and hustling to become a real estate investor? What’s the purpose behind it?

Lawrence:
My why is to break generational poverty in my family. I was born in the housing projects of New Orleans, the Calliope Projects. It’s probably one of the worst housing projects probably in America. I was raised by a single mother who was not lazy. She worked about three jobs, but just with a barely high school education, maybe up to ninth grade. She had to become a janitor in hospitals. So what she did, as a single mother, she tried to help me and my sisters. I’m one of seven. I have six sisters. She didn’t have a financial literacy background. My work ethic comes from her, but she didn’t know you can’t just get wealthy from working.
My why is to break that curse because I’m the only one that’s mainly in my family who understands financial literacy and practice it. So it would be a full circle moment to be able to leave a legacy that’s beyond me, so my future nieces and nephews and great nieces and nephews and possible children wouldn’t have to be born into poverty. So that’s my why.

Ashley:
Lawrence, I’m so proud of you. Just stating that you’ve taken the initiative to educate yourself, that’s very hard to change how you’ve known everything for your whole life to change and to want to take action onto something else. I think that is a great why-

Lawrence:
Thank you.

Ashley:
… and it seems like it’s definitely motivation enough for you to keep going and to really create that generational wealth.

Tony:
Lawrence, I love hearing the story, and I think it’s proof that where you start obviously has a big impact on how far you can go, but it definitely doesn’t cap what you’re capable of. I think my follow-up question is, what do you think it was that sparked that idea in you? Because so many people who grew up in certain environments, it’s all that they know, it’s all that they’re exposed to, they can’t even fathom anything beyond what they see around them. So what was it in your upbringing that allowed you to see beyond that?

Lawrence:
Of course. Like I said, my mother worked about two or three jobs. What she did was she wanted to expose our mind, and so she sent me to private schools. So I was one of the few kids from the projects going to a private school with children whose parents were doctors and lawyers and stuff. When I would leave this poverty area, I would go into these neighborhoods or suburbs. I started to fall in love with these single family homes, and my little brain kind of associated that with a better life. We know that there’s crime and criminal activity that happens anywhere. But I was like, I need to get my family there, and I never want any one of my family members to not live in a, quote/unquote, safe environment. So being able to go into those neighborhoods when I was going to private school, I associated those houses as a better life because that environment was completely different than the criminal gunshots and activity that I witnessed as a child.

Tony:
Well, kudos to your mom for having that insight to help you expand what you were seeing because all you have to do is see it and then immediately now it becomes something that that’s attainable. So a couple things. First, I love that you’re focused on creative finance. Ash and I, that’s not our super specialty. I think both of us have kind of dabbled in the seller finance space. There are a couple of episodes on some other BiggerPockets shows I want you to go listen to. This will be part of your homework. On the Market, Episode 29, Pace Morby’s on that episode, and then BiggerPockets Episode 527.
Then for those of you that are BiggerPockets pro members, Lawrence, I know you are, but this is more so for our rookies that are listening. If you guys are pro members, you actually get access to as a pro member to Invelo, which is the software that helps you find off-market deals. You can send mailers, you can do [inaudible 00:33:13], all kinds of great things to help you find off-market deals. Lawrence, you already got access to that, but for our rookies, it might be a good thing for you guys to check out as well.

Ashley:
Well, Lawrence, thank you so much for sharing the start of your journey with us. Tony went over your homework a little bit, to listen to those Pace Morby episodes. Then I’d also challenge you to put together a sample offer. Even if it’s just a property you see on the MLS, go ahead and actually write up what you would offer for seller financing. How much would you put down on the property? What would be the interest rate you would do? How many years would you have it amortized over? Would there be a balloon payment? Would it be callable? So put together a sample offer. Then I want you to bring it with you next time we’re on a call, and we’re going to go over it and look at it. We’ll look at the numbers on the deal, and we’ll look at how you set up the seller financing on it and what number actually makes sense to purchase the property at.

Lawrence:
Awesome. That sounds great. I’m ready to get to work.

Ashley:
Lawrence, what is your Instagram if anybody wants to connect with you?

Lawrence:
My Instagram is Lawrence, common spelling, L-A-W-R-E-N-C-E, underscore Briggs, B-R-I-G-G-S. You can’t miss me. I have a big smile and a bow tie.

Ashley:
Lawrence, thank you so much, and we cannot wait to spend the next 90 days with you and provide as much value as we can to help you continue your investing journey.

Lawrence:
Me too. Whoo!

Tony:
Melanie, welcome to the Real Estate Rookie Podcast. You’re our third and final mentee for this episode. We are super excited to share your story with our audience here and get into what’s going on over the next 90 days. Quick background on you, Melanie, you’ve already got two properties in Colorado, which is amazing. You spent the last month in Florida looking at some short-term rentals out there, so excited to dive into that. You already have your real estate license, which is great. The long-term goals for you is stepping away from that W2 and spending part of the year in somewhere that’s a little bit warmer than Colorado. So excited to have you on the podcast, Melanie. Welcome to the mentee group.

Melanie:
Thank you so much. I’m so excited to be here. I couldn’t have introed myself any better, and really, really excited to be part of this cohort. Lawrence and Brandon are wonderful. We’ve been chatting offline. Just very grateful for the opportunity.

Tony:
Exciting. I know you’re looking at short-term rentals. How has that journey been for you so far? Because you already have the two long-terms in Colorado, and this will be your first short term?

Melanie:
One’s actually a midterm, part of our primary residence. We kind of stumbled into it. It was meant to be long term, but yes, this would be the short-term venture.

Tony:
What are some of those challenges you feel like you’re running up against as you step into this world of short-term rentals?

Melanie:
I guess to give you some background, I went to BPCon and sat in on Amanda Han’s session about tax strategies and basically learned about cost segregation studies and specifically the benefits of being a W2 employee and having an STR. So I left BPCon and just said, “Okay, I’ve got to buy an STR before the year is over.” I’m a native in Colorado, but I couldn’t hate being cold anymore than I possibly do.” So I thought Florida’s probably the place. We have family there. I am just going to be committed to that process.
I found an agent off the BP forums, and he’s been phenomenal. We’ve been talking a lot about what I was interested in and my budget. Pretty quickly off the bat, I realized I was feeling a little in over my head. My W2’s in the tech industry. When I started the process and thinking about it, I felt like I just had more risk tolerance in general, and I’m starting to feel like I have just a little bit less. So thinking about buying a $400,000, $500,000 property with a pool that would do really well on Airbnb just became a little more nerve-racking. So that was kind of the start of that.
We shifted a little bit. I changed my price range a little bit. We started looking at some other properties. But my current challenge there is I’ve been looking at a number of them, I saw a few in person, the average daily rate is, in some of my analyses, just not panning out to really show any profit, and, in many cases, it’s quite negative. I think that makes sense for my price point and just looking at some of the properties a little further off the coast.
What I would say my biggest challenge is, do I really need to reconsider this move for the current time that we’re in? I’m looking at occupancy on Airbnb properties all over Florida and just seeing much lower occupancy than I would expect and what I’ve heard to be peak seasons. So thinking about viability considering the state of the economy, economic headwinds and everything, I just want to be smart about this goal because ultimately the idea is to have a cash-flowing property. I can wait to escape winter for a few more years before I will just jump into a forced deal.

Tony:
Well, I appreciate all that background, Melanie. A few follow-up questions from you here. What would you say is more important to you? Is it getting a property in Florida, or is it getting the right property anywhere?

Melanie:
Great question. It is getting a cash-flowing property. The broader goal is becoming financially independent and finding cash-flowing properties. So I would easily sacrifice finding a property in any specific area if I could locate one that would add to a portfolio, my portfolio, and start to help generate real profit.

Tony:
One additional question, have you looked at any other markets outside of Florida?

Melanie:
Yeah, I follow The Short-Term Shop. I really love Avery’s podcast. I know some of the areas that they’re active in. I haven’t done any analysis there, but I looked at, besides the area I was in Tampa, some of the other Florida markets that they were looking in. I know they’re in the Blue Ridge Mountains, some areas in Georgia, Mississippi as well. I’m open to those. I think one thing I wanted to run by you all is it’s an investment. I want to make sure that I’m not getting spooked too early and I’m not giving up too early. Of course, the goal is find a property in the next 90 days. But the short answer is I’m open to considering other markets if it comes to the point where I just need to reconsider my previous decision.

Ashley:
Obviously, Tony is going to be way more value at understanding the short-term rental industry than I am. One common occurrence I’ve seen from guests that we’ve had recently is that you want to look at where there’s big attractions where people are always going to be visiting. We just had somebody on that talked about national parks, how they don’t ever see people stop visiting national parks. Tony, I’m interested to hear also what you think of that as to sticking in markets where there is that large attraction where people are always going to consistently visit. Then, Melanie, if you could follow up as to the markets in Florida that you’re looking at, do they have some big draw that’s maybe just more than warm weather and the beach?

Tony:
Obviously, both markets we’re super active in right now are centered around national parks. We’re in Tennessee near the Smokey Mountains. We’re in Joshua Tree near the Joshua National Park. So I do have a big love for the national park scene as well. Well, here’s my advice, Melanie, and I’ll let you answer Ashley’s question as well.
I do think that a lot of the more mature vacation rental markets, we’ve seen massive price increases over the last two years, but the average daily rates in those markets have not kept pace with those price increases. So a cabin in Tennessee might be worth 75% more in 2022 than it was in 2019, but the ADRs haven’t increased by 75% to offset that difference. So you are seeing profits in some of these bigger, more mature markets getting squeezed a little bit, which is why I asked the question around market selection. I think for newer investors going into some of these more secondary and tertiary markets where there is demand, something like a national park or some other kind of driver, but they’re not as popular as the Smoky Mountains where there’s 10,000 listings in that general region. I’ll let you answer Ashley’s question about what the other draws are to Florida.

Melanie:
To be honest with you, Ashley, what I did instead of… No, I wasn’t looking for other hotspots. I know that that is really vital advice that I’ve heard on a lot of podcasts, making sure you’re by hospitals or other tourist locations. My biggest consideration was just the ocean and personal preference at first. So I definitely have room to dig into that further. I was kind of picking areas based on, also… My second factor, as I was taking a step back, was to look at some analysis platforms. So STR Insights was one I was looking at quite a bit. Basically long story short, I was just thinking the prices are much lower in this particular area. Perhaps there’s going to be a higher margin here because you’re putting down less. But then I did a little more digging on the BiggerPockets forum. A lot of the feedback I got was that there aren’t draws to this area, and just these analyses, basically looking at data from specific locations isn’t enough. So it’s a factor I really need to take into consideration now if I continue with finding a short-term rental for sure.

Ashley:
My short-term rentals are all in very rural areas where the attraction is a very small hospital, or people just come and stay because there’s only one hotel in the town, so there’s literally nothing else. But also I’m doing Airbnb arbitrage where there’s very little risk. I’m not dumping $400,000 into a property. The ones that I do own are $50,000 to $100,000 properties, so they’re not these huge investments that, if for some reason people aren’t coming there anymore, it’s not that big of a deal that I can cover the cost of it for a while. But you had said that you’re getting the negative cash flow when you’re doing the deal analysis. How many offers have you submitted?

Melanie:
I have not submitted any offers.

Ashley:
Here’s what I want to challenge you for your homework is to put in some low-ball offers. So at the purchase price, you’re getting negative cash flow. So what would the purchase price need to be and what would the terms of the loan need to be to make it cash flow? Then just start throwing out an offer. Even if you just do one offer between now and the time we talk, just throwing it out at that low price.
Another thing you can do, too, is if it’s already an existing short-term rental is asking for 2019 data. We analyze campgrounds, me and my partner, and that’s one thing that every campground operator we’ve talked to has said is don’t use data just from 2020 and 2021 and now 2022. Go back to 2019 and pull data from there, too, before traveling exploded for those couple of years and see what it was like then. So see if you can get any of that data. Then even going back to… Tony on AirDNA, can you go back and look at data for markets to see what the daily rate was in 2019? Obviously, it’s not going to be the same, but you could look at what the occupancy is.

Tony:
Usually, the data I look at it only goes back, I think, 18 months, so I don’t know if that software goes back to 2019 or not.

Ashley:
Well, Melanie, we would love for you to submit an offer, even more than one, better, but just make it at the price point your offer and don’t be afraid to insult someone or to put in that low offer. Plus, it’s super exciting and so worth it if it gets accepted. Or even if they counter at you, you can see maybe there is another way to make this work, and we can talk about that, if that does happen. I think it’s time you’re ready to put in an offer at whatever that price point is that makes sense.

Melanie:
Thanks Ashley. I love that recommendation.

Tony:
My second piece of advice for you, I guess the homework here would be to choose at least two other markets. Florida is a very big, popular market with lots of competition. Regardless of where we’re at in the cycle, people are always going to Florida and just a very popular travel destination. So I want you to try and find at least two other markets that are maybe mid-size markets, somewhere where there’s 100 to 500 listings in those markets, so there’s still a decent draw there, but the competition is definitely softer in terms of how many people were submitting offers, and the price points will probably be a little bit smaller as well.
When you look into these markets, there are really three things you want to be looking for. This applies not just to you, Melanie, but to all of our listeners as well. First, you want to look at the policies. You want to understand what the short-term rental permits are for that city, for that county. Typically the county website or calling up there, you can get that information pretty quickly. The second is popularity. You don’t want to go too small. If there’s anything less than 100 listings, I probably wouldn’t touch that market. I want to see at least some active short-term rentals already just for proof of concept. I don’t know if I’d want to be the 10th listing in any given city because it might mean that who knows if the people are going to show up or not. The third thing is just the profitability. You want to make sure that after you check those first two boxes that you’re still able to find deals that meet your return.
When you’re actually looking at the properties themselves, you want to look at location. Every city has a hotspot where listings tend to do a little bit better, and through your analysis, you’ll starting to see where those better performing properties are. You want to look at amenities. What are the top amenities in that market? Does this property have those amenities, or do I have the ability to add those amenities? Then third is the value, the same as profitability. Are you going to get the return you want after factoring all those things? I know that’s a mouthful. Go back, re-listen to what I just said right now. But I think if you tackle those few things, you’ll be in a much better position when we talk next time.

Melanie:
Thanks for that. I have one follow-up question if that’s okay.

Tony:
Yeah.

Melanie:
I’m wondering, thinking about the year ahead, in calculations or just as you advise people, are you considering lower occupancy? Are you trying to factor that in just knowing that things are shifting in general?

Tony:
I definitely think you probably want to add a little bit of buffer to any ADR or occupancy calculations that you’re doing. How much is really hard to say because no one really has that crystal ball. But I think adding maybe a negative 10% on your ADRs or 15%, if you want to be super conservative, is realistic. Just know every dollar change in an ADR has a pretty big impact on your revenue at the end of the year. So somewhere around 10% might be pretty good.
Just know, every recession going back to the ’60s, most of them lasted, on average, just under 12 months. So it’s like, can you buy this property? Even if it maybe isn’t a home run over those first 12 months while there’s all this economic uncertainty, what happens in year two and in year five and in year 10 as you own the short-term rental? If you kind of check those boxes that we talked about where you’re hitting the location, you’re hitting the value, you’re hitting the amenities, more likely than not that listing is going to continue to do well. There will probably be some uncertainty in the short term, but I think as real estate investors, we have to roll with those punches and remember that we’re really investing for that long-term appreciation and cash flow as well.

Melanie:
Yeah, absolutely. That’s a great reminder.

Ashley:
Melanie, before we end today’s call, what is your why for real estate investing?

Melanie:
I really love my W2. I’m fortunate to have a wonderful team and be able to do what I do. At the same time, I just don’t want to sit behind my computer for the rest of my life. I really want to be able to build some of that freedom into my life, so financial independence is the ultimate why. It helps that real estate is so fun and challenging and exciting and interesting. So I’m just very motivated to continue learning and growing. I also have pursued getting my license on the side just because I really do evaluate or do enjoy evaluating deals. So I hope that that continues to be part of my career, but a little bit more flexible as time progresses.

Ashley:
Well, Melanie, thank you so much for joining us for the next 90 days. We’re super excited. Where can someone reach out to you if they want to connect with you?

Melanie:
I hate to sound just so dry, but I would encourage you to go to LinkedIn. I’m not very active on Instagram. I feel like I’m always on LinkedIn. So just my name, Melanie Wilmesher, and super responsive there. That’s probably got to be the saddest place for people to reach out to that you’ve ever heard.

Ashley:
One of my best friends, Lika, she is a LinkedIn queen. She nags on me all the time because I am not at LinkedIn. She has scored so many deals from there, private money lenders from there, and investors to work with. She has had huge success with it.

Melanie:
Okay, I’ll take it.

Ashley:
Thank you so much for joining us Melanie. Tony, we have just met our three mentees and went over their goals and gave them their first homework assignment. What are your thoughts?

Tony:
I think some of the things I’m seeing across all three of them is that the challenges that they thought were challenges weren’t as big as what they really were. When you take some time to unravel those, you understand the steps you need to take are a little bit more clear than what they initially anticipated. Honestly, I think that’s a big thing that a lot of new investors run into. There’s this emotional aspect that makes things a little bit scarier than they really are, but when you take stock of all of the things you already know and things you understand, it is a little bit easier to move forward than you give yourself credit for.

Ashley:
I think this can relate to me and you, too, Tony, is sometimes we know what we need to do. It just takes somebody else to tell us to do that.

Tony:
That’s why I love having a trainer in the gym because it’s like, “Yeah, I know I should be doing this,” but when they’re in your face saying, “Do it one more time,” then it keeps you motivated. Hopefully, we can have that same impact on our mentees here as well.

Ashley:
For all the rookies at home, we would love for you guys to set your own 90-day goals. If you don’t know what your why is yet, really try to define that and give you something that’s going to give you the motivation and really energize you every single day to keep pushing forward to actually reach that goal. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson on Instagram. We will be back with another episode. See you guys next time. (singing)

It’s a story that’s echoed across social media platforms from rental property owners across the nation: Vacation rentals are no longer generating the steady revenue investors grew to expect during the pandemic. The era of #Airbnbust has taken hold. 

Real estate investor Sabrina Must, who once rented her 2-bedroom condo in Encinitas, California, for $1,000 per night on a holiday weekend, has dropped her rates to $275 per night due to waning demand, The Wall Street Journal reports. Another couple who got into real estate investing during the pandemic saw strong bookings in the beginning, followed by low occupancy rates this past summer. 

It’s a problem for many everyday people who decided to try a hand at real estate investing during a period of booming demand, sometimes without a backup plan or the skills to remain competitive during a downturn. As the situation evolves, the short-term rental strategy is losing its appeal, especially as an entry point for beginners. 

Why the Short-Term Rental Strategy is Losing Steam

Oversupply limits cash flow potential

Airbnb occupancy rates have exhibited year-over-year declines for eight months straight, according to data from vacation rental research company AirDNA. It’s not because inflation has curbed the demand for short-term rentals. In fact, nights stayed are up 21.3% as of October when compared to last year. But the supply of Airbnb listings has surged 23.3% year-over-year. 66,000 new rental properties were listed this October, an increase that overshadowed the growth seen the October prior. 

What created the oversupply? During the pandemic, demand for second homes nearly doubled as low interest rates collided with remote work opportunities and the desire for more space. The skyrocketing demand for vacation rentals and record revenue data in 2021 also encouraged a new group of real estate investors to buy homes exclusively as rentals. And now, Zillow predicts the number of first-time landlords will grow significantly as second-home owners attempt to earn money from their properties while inflation persists and stock market expectations are bearish. Furthermore, homeowners who have locked in low interest rates may be tempted to rent their homes rather than sell when it comes time to move. 

Notably, occupancy rates are still up 12.8% compared to October 2019. AirDNA forecasts that supply will increase another 9% in 2023, despite high mortgage rates causing affordability pressure for would-be second-home buyers—but expects occupancy rates to stay elevated above pre-pandemic levels. However, if rising unemployment cuts into the demand for short-term rentals or if more homeowners decide to become hosts in an effort to boost their incomes, there’s reason to believe occupancy rates could dip even further. 

Growth in average daily rates and bookings slows

When compared to 2019, demand for short-term rentals has remained stable or increased all over the world. But Airbnb’s revenue growth slowed from 58% in the second quarter to 29% in the third quarter, and Airbnb predicts that holiday revenue won’t live up to market expectations. 

AirDNA also reports slowing growth in average daily rates. The 5.6% growth in average daily rates (ADRs) expected for 2022 actually represents a real loss due to inflation. And ADR growth is expected to slow to 1.7% in 2023, while inflation is predicted to remain elevated. The revenue per available room is also expected to decline because the slightly higher rates won’t offset the decrease in occupancy rates. 

Local governments are cracking down

Short-term rentals were relatively unregulated in the beginning days of Airbnb, and there are still plenty of cities that only require hosts to apply for a short-term rental license. But increasingly, local governments are tightening short-term rental rules due to criticism that an overabundance of vacation rentals limits the availability of affordable rental housing in a community. 

In New York City, short-term rentals of less than 30 days are prohibited unless the host is present and the guests are given unobstructed access to the entire unit. In San Francisco, short-term rentals must be primary residences where the owner lives for at least 275 days out of the year. Similarly, Denver only allows homeowners to apply for a short-term rental license for their primary residence. These are examples of a growing number of cities cracking down on short-term rentals. It’s evident that investors entering the short-term rental market now will need a backup plan because if large cities that depend on revenue from tourism are passing strict requirements for rental property owners, it can happen anywhere. 

How Investor Struggles Could Impact the Housing Market

New investors who snatched up rental properties during the pandemic based on forecasted ADRs at the time may not be able to cover their mortgage payments. As occupancy rates continue to drop, many may be forced to sell their properties. Widespread selling of properties intended for short-term rentals would increase the supply of homes, contributing to a downturn in home prices. Low supply is one factor currently preventing home prices from dropping too rapidly, even as prospective homebuyers pull back due to high mortgage rates. 

A more serious problem may occur if prices fall and new investors are left with underwater mortgages. Over the last year, debt service coverage ratio (DSCR) loans have become increasingly common, Bloomberg reports, allowing investors to qualify for larger amounts based on future income projections rather than a large down payment or personal salary. Some of these loans (it’s unclear how many) were packaged and sold to investors as mortgage-backed securities by Wall Street firms. Several lenders in the space have said they expect to issue hundreds of millions in rental-based loans this year, and a significant portion of borrowers will qualify based on projected Airbnb income. 

While most experts contend there won’t be a housing crash because lending standards are stricter now than they were before the 2008 financial crisis, these rental-based loans are another story. Without a full account of how many of these loans are out there, it’s impossible to say whether potential defaults could cause enough foreclosures to impact the economy. But certainly, the Airbnb slowdown could contribute to a larger supply of homes on the market. 

How to Stay in the Airbnb Game

The extensive supply of short-term rental properties means that investors in the space need to stand out as stellar hosts if they hope to maintain high revenues. Brian Egan, CEO, and co-founder of vacation rental management company, Evolve, tells The Wall Street Journal that the most successful hosts provide an outstanding experience by raising the bar for hospitality and ensuring the property meets or exceeds guests’ expectations after viewing the listing. 

Hosts should also research the algorithms each listing platform uses to try to expand their reach and enhance their listings to improve conversions. Prioritizing professional photos and offering competitive pricing and policies can increase the likelihood that guests will book your rental, and quick response times are also important. 

Ultimately, a backup plan is essential. You may not be able to achieve the revenue you’re hoping for if there’s an oversupply of properties in your market. A deep recession could curb demand for vacation rentals in general. Or local regulations could prevent you from listing your property as a short-term rental altogether. You may need to shift to a medium-term or long-term rental strategy, which you should ensure is possible in the area where you buy. You should also have enough cash reserves to cover your mortgage payments and maintenance if fair market rent won’t provide positive cash flow. 

The Airbnb boom may be coming to an end, but there’s still an opportunity to earn money from short-term rentals, especially for experienced and strategic investors. Even as occupancy rates have dropped from their peak, hosts are earning more money now than they were before the pandemic. But property prices and mortgage rates have skyrocketed since then, so new investors must proceed cautiously. Don’t expect any property you buy to be an automatic success. Understand the risks, make research-backed purchasing decisions, and be prepared to pivot in the changing economy.

Master the Medium Term Rental

The first-ever book on medium-term rentals, this guide will help you find the right markets, properties, furniture, and tenants to make you a successful medium-term rental host with maximum cash flow and minimum worries.

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

UBS Analyst John Lovallo joins ‘Power Lunch’ to discuss the ‘housing recession’ and a new survey that shows consumer confidence is beginning to rebound in the market.

Dave:
Hi everyone. Welcome to On The Market. I’m your host, Dave Meyer, joined today by Kathy Fettke. Kathy, how are you?

Kathy:
I’m doing great and so excited for this interview. I can’t wait to hear what he has to say. Hopefully, it’s great news.

Dave:
I know. Nick is an excellent interview, and I follow him closely on Twitter. He just knows everything about the Fed. I feel like I follow it closely, and every time I read something he writes, or listen to an interview with him, I learn something new. Hopefully you all will too.

Kathy:
Yeah, the Fed is for a lot of people, something they never really heard of until this year, or didn’t know very much about. It’s still this sort of mysterious thing. What is it? Is it a government agency? Is it a private company? How does it work? What do they look at? What we do know is that whatever they decide affects all of us a lot. I think it’s important for people to start to recognize what is the Fed, who are they, what are they doing, and how is it going to affect me? We’re going to learn a lot from today’s interview.

Dave:
I wonder if you did a poll of how many Americans know who Jay Powell is in 2019 versus today, it’s probably quadrupled or more.

Kathy:
Yeah.

Dave:
I feel like no one knew who he was prior to the pandemic, and now everyone waits on his every word. He’s like the most important person in the country.

Kathy:
Or even, did people know what a Fed fund rate was? Oftentimes, reporters would get confused between what a Fed fund rate was and what a mortgage rate was, and therefore the audience was confused. Again, hopefully that clarity has been made and that there’s more insight on how we as investors and consumers are really manipulated by this thing called the Fed, and therefore we really need to understand it.

Dave:
Absolutely. Well, with that, let’s get into our interview with Nick, but first we’re going to take a quick break. Nick Timiraos, who is the chief economics correspondent for the Wall Street Journal, welcome back to On the Market.

Nick:
Thanks for having me, Dave.

Dave:
Yeah. I actually looked this up before you came back. You are our first ever guest. The first two podcasts we ever did for this show was just the panelists and the regular occurring people, and you were the first external guest we had. Thank you for helping launch our show. I think we’re like 60 or 70 episodes later and going strong. We’re super excited to have you back.

Nick:
Thank you. Thank you so much for having me back.

Dave:
All right. Well, back then it was April, so we were sort of just going, and for anyone listening who didn’t hear that, Nick is one of the most, in addition to knowing a lot of things about the economy in general, and how the government plays a role in that is, one of the most foremost experts on the Federal Reserve, and we talked a lot about that last time. You’ve also written a book, Trillion Dollar Triage, about how the US responded to the COVID pandemic economically.
Back when we had you on the first time in April, we were just at the beginning of this rate hike journey that we’ve been going on for the last eight months. I think most people who listen to this podcast have probably been following along, but could you tell us in your own words how you would summarize what’s happened with the Fed over the last, basically over the course of 2022?

Nick:
Yeah. Well, really what we’ve seen in 2022 has been the most rapid increase in interest rates in any year since the early 1980s. When I was on your program back in April, the Fed had just raised interest rates by a quarter point. Of course, inflation was very high. It would get up to 9% in June, largely because of what happened in 2021, but then also the Ukraine War that started at the beginning of 2022. The Fed was just beginning to figure out how to shift to a higher gear.
The Fed raised interest rates a half point in May, and then three quarters of a point in June, which hadn’t done since 1994. They did four of those increases in 2022, and then they stepped down to a half point rate increase last month in December. That’s where we are now. Interest rates are now slightly below four and a half percent. The Fed is suggesting they’re going to raise interest rates a few more times this year in 2023.

Kathy:
Do you think it will work? Do you think they’ll get what they want? Lower inflation to 2%?

Nick:
Yeah, that’s a great question. Will it work? The Fed seems determined here to get inflation down and we already see some signs, of course, that inflation has been coming off the boil. We can talk a little bit about why that is and where that’s coming from. When you say will it work, I think the big question everybody has for 2023 is how bad is the recession going to be if we have a recession? How do you define success in terms of getting inflation down? I think for the Fed, they are resigned to having a downturn if that’s what it requires.
Of course, everybody hopes we don’t have a recession, but if you look historically, when we’ve had inflation this high, it’s never come down without a recession. Then, of course, if you’re in the real estate industry, if you’re in the housing market right now, we’re in a deep downturn already. I think the question really is, when does it spread to other parts of the economy, to manufacturing, to goods production, and then ultimately to the labor market and higher unemployment rate? That’ll be the big question for 2023.

Kathy:
I was going to say, didn’t the Fed jump in a little late though on all of this? There’s still so much money printing. Of course, I want to tie the money printing to all the inflation. Let’s start there. Would you agree there’s a correlation?

Nick:
If the question is did the Fed get started too late? Yes. Everybody I think agrees broadly, including the Fed, and there were reasons why they were late that made some sense at the time. There was a view that inflation would be transitory, that inflation was tied to the pandemic, that if the pandemic was something that would have a beginning, a middle, and end, so would the inflation. Monetary policy textbooks say you don’t overreact to a supply shock.
If there’s a big contraction in the ability of the economy to supply goods and services, and you’ve been successful in keeping inflation at 2%, a low and stable inflation, then you have that credibility. You don’t have to react to a supply shock. What the Fed misjudged in 2021 was that it was only partly because of supply bottlenecks. It was because there was a lot of demand in the system. They also misjudged, I think, the strength of the labor market and the imbalances in the labor market. The question now, a lot of people say, “Well look, inflation’s coming down.”
The goods prices, used cars went up 40% in 2021. They thought used car prices would come down faster in 2022. They are beginning to come down now. You are seeing elements of this sort of transitory inflation from the parts of the economy that were really distorted by the pandemic. The concern now is that high inflation is going to be sustained because incomes are growing, because wages are rising, and because the labor market’s tight. If you haven’t changed your job, you’re probably not getting a raise that’s keeping up with inflation. You’re getting a four or 5% raise when inflation was six, seven, 8% last year.
The way that you beat inflation if you’re a worker is you go change your job right now, because you can get more money if you go to a different company. That’s the concern the Fed has is that even though the labor market is not what started this fire, it could provide the kindling that sustains the fire. Yes, if the Fed had started raising interest rates earlier, maybe inflation wouldn’t have been so high, though you can look at other countries around the world. Inflation is high almost everywhere, in places that did a really good job dealing with the pandemic, and in places that didn’t; in places that provided a lot of generous support, and in places that didn’t.
It’s a tough time for central bankers, because they have egg on their face from waiting too long at the end of 2021 to raise rates. They played catch up last year. When you play catch up and you go really fast, it raises the risk that you end up raising rates more than you have to, and you cause unnecessary damage.

Kathy:
Again, coming back to the modern monetary theory and this policy that you can just print money without consequences, just looking at the money supply alone, it’s 21 trillion versus, what was it just a few years ago, 15 trillion with 7 trillion flooding the market. It seems like they’re trying to mop up a flood with a wet mop. How do you pull that? Is there again, is there a correlation between all that monetary policy, all that printing and inflation?

Nick:
Well, we printed a lot of money. It’s true, but a lot of that cash wasn’t lent out. Banks actually make money by keeping those funds, they’re called reserves. They’re basically bank deposits that you keep at the Fed, and they earn money on them. They weren’t lending out that money. Some of the correlations that were really popular, if you took a high school economics course in the eighties or nineties, the growth of the money supply would cause inflation. Since 2008, the Fed has changed how they conduct monetary policy.
You could say they’ve sterilized the money supply. Banks aren’t lending out all of that money. I think the big difference in 2020 and 21 versus what we saw after the 2008 financial crisis is that you didn’t have a lot of damage to the economy after the pandemic. Households were healthy, people were out buying homes, they were spending money on cars. You had a lot of fiscal stimulus. Even though the Fed was keeping interest rates low, the big difference this time was that Washington went and handed out money to people, gave money to businesses, and that is what really added to the inflation.
The Fed in 2021 was looking at the experience of 2008 and nine and 10, 11, 12, saying, “God, we really don’t want to do that again. We don’t want to have this really long slog painful recovery, where it just takes a long time to get the economy growing again. We’re going to commit to really provide a lot of support, keep interest rates low for a long time.” What ended up happening was that the economy was just completely different. This wasn’t the last war. The Fed fought the last war. 2022 was a story of catching up, raising interest rates a lot, and trying to pop some of these bubbles that you had seen forming in 2021.

Dave:
Nick, you noted that the risk now seems to be of an overcorrection. The Fed was late in raising interest rates, and now some people at least are arguing that they are raising rates too fast for too long, and that there’s a risk of overcorrection. I understand that inflation is still really too high. 7.1% CPI is ridiculous, but it is on a downward trajectory.
I’m curious, how does the Fed in your mind view inflation, and do they look at it all equally? For example, we’ve seen some segments of the economy, prices have come down, and prices are no longer growing. Other sections, notably to this group, shelter for example, inflation remains super high. Can you tell us a little bit about how the Fed evaluates inflation data and what they care about most?

Nick:
Yeah, that’s a great question. It’s true that the risk right now, there are two risks for the Fed. One risk is that you do too much. You cause unnecessary weakness. You push the unemployment rate up above 5% or 6%, and you have a harder landing than you might need to get inflation down. The other risk is that you don’t do enough, and you kind of get off of the throat of the inflation dragon too soon, and you allow a more pernicious inflationary cycle to take hold.
If you look at the 1970s, that’s what the Fed is worried about going into this year. In the early 1970s, inflation was very high. There was a recession in 1973, 1974. The Fed raised interest rates a lot, but then as the economy weakened, they cut interest rates. Inflation fell, but it didn’t fall that much, and it re-accelerated. That’s the worry the Fed has right now is yes, they could do too much. They probably will do too much. It’s a little bit like driving a car and not finding out where you were until 15 or 20 minutes later.
You’re going to miss your exit when that’s the way that you’re driving a car, especially if you’re driving very fast, which the Fed was last year. Those are the two risks, and they see the risk of doing too much as probably the lesser risk, the risk of not doing enough, and having what they called the stop-go rate rises of the 1970s, where you never really get on top of inflation. That’s the worry. Now, on inflation, what are we seeing right now? You can look at a speech that Fed chair J Powell gave at November 30th to get a really good idea of how they’re thinking.
Just to summarize it, he broke inflation down into three buckets. The first is goods: used cars, appliances, furniture, the things that really increased in price a lot over the last two years, because of what happened in the supply chain, because we were all stuck in our homes in 2020. We were buying stuff instead of spending money on restaurants and travel and so forth.
You’re seeing the deflation or the declines in prices that the Fed was always expecting to get in 2021, they are coming through right now. You look at the last couple of inflation reports, and inflation has printed soft. It’s been in part because of energy and in part because of goods. That’s a positive story for the Fed. They see that, they want to see more of that. That’s good news.
Then the next bucket is what’s happening in the housing market and shelter. Of course, housing inflation’s measured a little bit differently. The labor department, which calculates the consumer price index, they look at rents of primary residences, and then something called owner’s equivalent rent, which is basically the imputed cost of the caring cost to rent your own house. That’s how the government measures housing inflation. Now, rents have been decelerating a lot in the last couple months. They really came off the boil in the fourth quarter.
Household formation kind of exploded coming out of the pandemic. People were moving out on their own, wanted more space, work from home, made a lot of flexibility there in terms of where you could live. People bought and rented. Of course, a lot of your listeners know, that’s now slowing, but because of the way the government calculates these inflation, these shelter inflation readings, it’s very lagged.
Even though you see new lease rents declining right now, that won’t feed through to the government inflation measures for another nine to 12 months.The Fed is basically saying, “We see that. We know it’s coming.” On two of these three inflation buckets, they’re expecting progress. That’s one of the reasons they expect inflation to fall this year to about 3% by the end of the year. In their most recent reading, it was a little bit below 6% if you look at headline inflation.
That leaves the third bucket. The third bucket is basically everything else. They call it core services, so services excluding food and energy. Then they also exclude housing since we counted that in the second bucket. For the Fed’s preferred inflation gauge, which is called the personal consumption expenditures index, that’s about a little bit more than half. The reason it’s a concern to the Fed, that they’re so focused on this core services excluding housing, is because services are very labor intensive.
If you think about a restaurant meal or a haircut, pet care, hospital visits, car repairs, a lot of what you’re paying for is labor. If wages are rising, that can provide the fuel that sustains higher inflation, even if you think you’re going to get a lot of help from goods and housing. The Fed has a forecast right now that has inflation coming down to 3% by the end of this year, from close to 6% in the fall of 22. We may get more than that if housing really weakens a lot, and we get more goods deflation, if energy prices come down more, we may get more help there. That would be great news.
The concern for the Fed is that we could have a wage price spiral, which is where paychecks and prices rise in lockstep. I haven’t been keeping up with inflation in my wage. I’m asking for higher pay. Companies have pricing power because people are spending money, they have income, income growth, they’re getting jobs, they’re changing jobs, they’re getting more pay. The worry there is that inflation settles out at a lower level, but still between, say, three and 4% or maybe even higher than that. The Fed has a 2% inflation target.
The final point here is the concern for the Fed is if you think about a calendar year effect, where the end of the year you say, “Well, prices went up this much. Wages went up a little bit less, I need more.” We had that in 2021, we had that in 2022. If you now have a third calendar year here of higher wages, but not quite keeping up with prices, then you could actually bake in a higher wage growth rate into the economy, and that wouldn’t be consistent with 2% inflation. The Fed worries a lot about that.
They worry about expectations that what people think prices are going to be in a year actually determines what prices are going to be in a year. They’re trying to prevent a change in psychology where prices continue to rise. That’s the big question this year is are wages going to slow down? If wage growth slows, then the Fed will be able to really take its foot off the break and say, “Okay, we think we’ve done enough, on top of everything we’re seeing in the housing and goods sectors.”

Kathy:
Do you see that as a possibility when there’s such a severe labor shortage, that we would see wages decline?

Nick:
The optimistic story the Fed says, you hear about this soft landing. What is a soft landing? A soft landing is inflation comes down without a recession, without a really bad recession. Powell has referred to a soft-ish landing, which is basically, yeah, we might have a couple of quarters of negative growth, a technical recession, but we can get the labor market to slow down without a big rise in the unemployment rate. How would that happen?
One way would be for companies to cut back hours, but they’re going to hoard labor because it’s been so hard for them to find employees. They’re not going to let everybody go at the first sign of weakness. They could reduce job openings. Right now, there are over 10 million job openings. There’s about 1.7 job openings for every unemployed person. It was about 1.1, 1.2 before the pandemic. There’s room in their view to bring down the number of unfilled jobs without having a huge increase in the unemployment rate. That’s kind of the positive stories.
Maybe we can do this without as much pain as you would look back over history and see what’s been required to get inflation to come down. We only have seven or eight examples of business cycles since World War II, and we don’t have any examples of something like what we had with the pandemic, where we were basically asking people not to work, to stay in their homes for the sake of the public health infrastructure. It’s a different environment perhaps, but you always do get goosebumps when you start saying things like, “Well, this time is different.” We’ll see.
I think the concern here would be that when the unemployment rate starts to go up a little bit, it goes up a lot. These things are not linear. The economists call them non-linearities. Usually, when the unemployment rate goes up by a half percentage point, it goes up by a lot more than that because every time the unemployment rate has gone up by a half percentage point, a recession has followed. The idea that the Fed can fine tune this, they talk about using their tools, but they really only have one tool. It’s a blunt instrument, as people in the real estate sector have discovered over the last year.
That’s the challenge here is you want to moderate demand for labor without a recession. You want to slow consumer spending so that companies actually have to compete again on price. They have to lower their prices. They can’t keep passing along price increases to their customers. If you look at recent earnings reports, you don’t see a lot of evidence that that’s happening. I like to look at companies like Cracker Barrel, the restaurant chain. They’re reporting lower sales growth, but higher prices. They’re passing along higher prices.
They had a lot of food inflation last year, but they’re able to pass that along right now. They’re reporting 7%, 8% wage growth. That’s probably not going to be consistent with the kind of inflation the Fed wants. You do have to wonder if at the end of the day here, the Fed, they won’t say publicly that they’re trying to cause a recession, but they’re taking steps that have almost always led to a recession.

Kathy:
Whew.

Dave:
Yeah. It certainly seems like we’re heading in that direction. That’s super interesting and something I hadn’t exactly heard about, that potential optimistic case, but I agree that it does sound like everything would have to align really well for that to happen.

Nick:
Yeah, you would need good luck. After a year where the Fed had a lot of bad luck, the war in Ukraine was just really disruptive. Huge increases in food prices, commodities, energy, and so it’s hard to predict the future. Maybe things will start to go the Fed’s way, but you have to do a lot of charitable pulling the threads there.

Dave:
Yeah. Well, we can hope. I do want to get back to this idea of the 2% inflation target. I understand that some inflation is desirable, a low level, because it stimulates the economy and gets people to spend money. Where does the 2% number come from, and why is this the magical target that the Fed is aiming for?

Nick:
Yeah, that’s a great question. The Fed formally adopted this 2% inflation target in 2012. They’ve had it for about 11 years now. They had sort of behaved. They released all the transcripts of their meetings with a five year delay. Really since the late 1990s, they had sort of behaved as if one and a half to 2% was a desirable way to ensure price stability. Congress has given really two mandates to the Fed: to maximize employment and to maintain stable prices. They haven’t defined what price stability is. The Fed beginning in the late 1990s, but again, officially in 2012, decided 2% was how they would define Congress’ price stability mandate.
2% actually began in New Zealand in the early 1990s. The Central Bank, the Reserve Bank of New Zealand was the first to adopt a specific numerical inflation target. 2% at the time, there wasn’t like some great science behind it. I don’t want to say it was completely picked randomly, but it wasn’t as if there was a lot of study that said, “Oh 2% is better than 3%.” New Zealand picked 2%. A number of other central banks followed suit. As I said, the Fed was behaving as if one and a half to 2% was a desirable amount of inflation.
Alan Greenspan in 1996, there was a big debate behind closed doors at one of the Fed meetings in 1996, where they began to talk about, “Well, how would you define price stability?” Alan Greenspan defined it as price stability is where consumers just don’t pay attention to what’s happening with inflation, where prices are low and stable enough that you don’t take it into account in your behavior or your decision making. People thought 2% was about right. The reason they didn’t pick 0%, there were some people that said, and that still say, “Why not zero?” There’s measurement error, we can’t perfectly measure inflation.
There’s a concern that if you have prices too low, you could tip into deflation, declining prices, which is actually a much more pernicious problem, harder to fix for central banks. 2% was seen as something that gave you a little bit of a buffer. It was low enough to satisfy Greenspan’s definition of prices low enough, people just ignore what’s happening with inflation. That’s sort of where we were over the last 25 years. In fact, right before the pandemic, the Fed was concerned that it had been too hard to hit 2%, that they had provided all this stimulus.
They had kept interest rates very low after the global financial crisis, and they were just struggling to get their chin up to 2%. There was a lot of discussion around monetary policy not being powerful enough in the next downturn because of some of the things you had seen in other countries, in Europe and in Japan, where they had negative interest rates, they had low inflation, and very little scope or juice to squeeze out of the fruit when the economy weakened. You couldn’t stimulate the economy.
The discussion had actually turned towards, “Well, could we see periods where we might want to have a little bit higher than 2% inflation, because that would give you more room to stimulate economic growth in a downturn?”

Kathy:
Yeah, it seems like it would be really hard to measure because say, a bag of chips, I don’t know if you’ve noticed, but the chips, there’s a lot less of them. It might be the same price maybe, but you’re getting less. Would you say that, it was about a year ago that inflation really started to rear its ugly head, and now the year over year data might look better because of that? Do you think that’ll make a difference?

Nick:
Yeah, so those are called base effects, where you’re just the denominator from a year ago, when it was very high, now it’s easier to beat the number from a year ago. Inflation first spiked March, April of 2021. There was a hope that in 2022, as you began to lap those high numbers, the year over year readings would come down. That didn’t happen, again, because there was more strength in the economy, spending began to rotate out of the goods sector into services, and you had some of the effects of the Ukraine war.
Now, we’ve had two years really of high inflation. It is true if you look at the last few months, the year over year numbers are coming down, in part because the growth rates of inflation have slowed, at least in the last two consumer price index reports. Also because inflation a year earlier was much higher. You have seen the CPI fall from 9% in June to 7.1% in November. Next week, we’ll get the December CPI where we’ll see if now we have more of a durable trend of lower inflation. The Fed will pay attention to that. They use a different index as I said before, but you don’t have to look at the 12 month trend to conclude that inflation’s getting better.
You can look, and the Fed does look, at three month annualized inflation rates, six month annualized inflation rates. If the inflation report is good on January 12th, then you’ll now have three months, at least in the CPI, of much better behaved inflation. You’ve already started to see markets get very optimistic now that the Fed might be done. Mortgage rates have fallen through December, through the latter part of November, because of this much more constructive or bullish outlook for inflation.
If you look in different securities markets, there’s a treasury inflation protected security, so kind of a market you could look at as a market-based measure of where investors think inflation will be in a year. Investors are looking at inflation coming down to two and a half percent, maybe close to 2% a year from now. The market really has bought into this idea that even though inflation rose a bunch last year, it could come down pretty quickly. The market right now probably sees inflation improving faster than the Fed does.
I think part of that’s because of this view that the Fed has over wages, and they’re concerned that it may not come down quite as fast because inflation is high in categories that don’t come down very fast. They’re called stickier prices, they’re slower to come down.

Dave:
Nick, as we head into this new year, one question I’m curious about is how long do you think the Fed wants to keep inflation? How long does it have to stay under 2% for them to adjust policy? To your point about the seventies, what seems to have happened is that they’d see inflation come down to where they thought it was better, then they would cut rates, and it would just bounce right back up.

Nick:
Right.

Dave:
It seems like the Fed this time around is inclined to get it down to a level they find acceptable, below 2%, and then hold it there for a while, to really make sure that we lock in and squeeze out and push out inflation for a while. Do you have any sense of how long that sort of rest period would have to be?

Nick:
It really depends on what’s happening in the economy. When Powell talks about these three categories, goods, shelter, and then core services excluding shelter, that third category, really just think of the labor market. I think what the Fed is beginning to say is, “All right. For so much of 2022, we told you we were very focused on inflation.” I did an interview with Powell in May in New York. At the time he said, “This is not a time for overly nuanced readings of inflation.” Now, his November 30th speech, he was allowing for more nuance in inflation.
I think what they’re doing is they’re basically saying, “Okay, we see that inflation’s coming down but we’re worried about the labor market. The labor market is too strong, it’s too tight. Wage growth is not consistent with 2% inflation.” The answer to your question, how long do they continue to raise rates? How long do they hold rates at that higher level, whether it’s a little bit below 5%, a little bit above 5%, or whether it’s closer to 6%, how long they hold there? It depends on how long it takes for them to see some softness in the labor market.
Once they see that, then I think there will be more comfort. It’s almost insurance that you’ve done enough, because now if the labor market’s softening, you don’t have to worry as much about the stop-go of the 1970s. What Powell has said, including at his last news conference in mid-December, is the Fed wouldn’t cut interest rates until they’re very confident that inflation is on a path back to 2%. There are different ways you could define that. One way you could define that would be you’ve seen now six months of inflation that’s consistent with two or two and a half percent.
They would want to see something like that. We’ve had two months. Powell has said that’s not nearly enough to be confident. I think of the Fed’s policy tightening, interest rate increases here, coming in three phases. Phase one is over. Phase one last year was moving aggressively to get to a place where you could be confident you were restricting growth, where you were removing all the stimulus that had been put into the economy. That meant moving in large 75 basis point or three quarters of a percentage point increases. They dialed down to a 50 basis point increase in December.
We’ll see whether they do 25 or 50 basis points in their meeting in early February. Phase two would be trying to find that peak rate or that terminal rate, the place where you’re going to say, “All right, we think we’ve done enough. We can stop, we can hold it here for a while.” They really don’t want to have to restart rate increases once they stop. They’ll do it if they have to, but it would be quite disruptive perhaps to markets for the Fed. Once the fed stops, everybody’s going to assume the next move will be a cut. They’re going to try to find that resting place. That’s phase two. That’s where we are right now.
Phase three will be once they’ve stopped raising interest rates, when do they cut? Usually, the Fed cuts once the economy’s going into recession, but this time could be different. We haven’t been through a period in 40 years where inflation was this high. Markets right now I think have been primed to expect that the minute the economy looks like it’s really weakening, the Fed will cut a lot. The big surprise I think this year could come when the Fed, even if they do cut, they may not cut as much as they have in the past.
Again, I think part of that has to do with what they’re seeing in the labor market, and whether some of these labor shortages are going to be more persistent. They might actually be comfortable with an unemployment rate that is closer to four and a half or 5%. Right now we’ve been below 4% for the last year or so.

Kathy:
Yeah, they seem to be pretty clear that they’re not changing course for a while, and that they’ll be holding where they are if they don’t raise. With that said, so many of our listeners are trying to figure out what to do for 2023. Do they hold onto their money? Do they get a second job? Do they invest? What’s the outlook for 2023, say, for a real estate investor?

Nick:
It’s difficult. I think that I hear a lot of people asking me, “When are mortgage rates going to get back to something with a 3% or a 4%?” I don’t know, and I don’t know if you can plan on that happening again because this isn’t just something we’re seeing in the United States. Other central banks that had very accommodative monetary policy over the last decade, the European Central Bank had negative interest rates. The Bank of Japan has been trying to hold down long-term 10 year government bonds in Japan near zero.
What happens is as these other jurisdictions, as these other countries normalize their own monetary policy, all of a sudden, the returns in those countries start to look better. If you can earn a positive interest rate in Europe, maybe you don’t have to invest in US risk assets, buy US real estate, buy US treasuries. It’s possible that in the next downturn, we do get back to very low levels. I think you don’t necessarily, I wouldn’t make that my base case.
We don’t know if we’re entering into a different inflation regime here, where if some of the forces that held inflation down over the last 25 years and made central bankers look very smart, those forces included favorable demographics, more working age people coming into the global labor market. You had in the 1990s, a billion and a half people between Eastern Europe and China that came into the labor market and that was the tailwind for inflation. You had globalization, you had these amazing supply chains that allowed people to move production overseas.
Even though that was quite harmful for US manufacturing, American consumers, when you bought shoes and clothes and furniture, you benefited in the form of lower prices. If that’s facing a headwind now, if companies are deciding, “Well, maybe we don’t want to put everything in China because we’re not sure if that’s the best thing to do anymore,” and they began to have multiple suppliers just in case inventory management replacing just in time, that all means inflationary pressures could be higher. You could have more volatility in inflation, and in the business cycle, and in interest rates.
That just makes it even harder to plan for what the future’s going to be like if some of these positive tailwinds start to reverse. Maybe they don’t, and maybe we continue to benefit from a more globalized economy and better demographics. Maybe inflation does come back, and we end up looking back at the period of 21, 22 as sort of this freakish aberration. Maybe that wouldn’t be so bad.

Kathy:
A freakish aberration sounds about right. It’s very funny because just a few years ago, there were headline stories about, “Oh, the robots are going to take everybody’s jobs, but right now we could really use a lot of robots and automation.” We’re starting to see more of that with ordering food and so forth. How positive is that outlook that we might be able to solve some of these issues with more automation?

Nick:
Yeah, it’s a good question. There’s always concerns that you’re going to displace workers when these innovations happen, but banks still employ a lot of people, even though we have ATMs. I think the one occupation that probably was rendered obsolete by automation was elevator operators. You used to have all elevator operators and you don’t anymore.
It’s possible that as you have more of these kiosk ordering, that just allows those businesses to hire people to do other things, stock shelves, help customers, but we’ll see. That’s a big wild card for the economy in the years to come.

Dave:
Nick, you mentioned this low period of inflation over the last 25 years. We’ve also been in a very low interest rate environment for the last 15 years at least. I think everyone knows during the pandemic, it went down, but even during the 2010s, we were in a pretty historically low level of interest rates.
Do you get the sense that the Fed wants to change the baseline interest rate and that the average interest rate, we’re talking about cuts and hikes and all this stuff, but do you think the average interest rate, I don’t even know, I know this is a hard forecast to make, but over the next 10 years will be probably higher than they’ve been since the Great Recession?

Nick:
You do see markets expecting that. The 10 year treasury, if you take the 10 year treasury yield as a proxy for where interest rates might be in 10 years, then yes. Markets do expect higher nominal interest rates. For the Fed, I don’t think they have an objective here that we want to get higher interest rates. When they began to raise interest rates in 2015, you did hear some people saying, “Well, gee, it would be really nice to have, they call it policy space, but basically means we’d like to be able to cut interest rates if there’s a downturn.”
When interest rates are pit near zero, you can’t do that unless you want to have negative interest rates, which are not popular at the Fed, not something that the US is eager to try out anytime soon. Yes, you did hear some of that. I think now the Fed is much more focused on meeting their mandate, which right now is getting inflation down. Even before inflation was a problem, I think their view was if you just deliver on low inflation and maximum employment, then the other things will sort themselves out.
The big worry, of course, before the pandemic hit, was that we would go into a downturn and there wouldn’t be policy space, that fiscal policy wouldn’t engage, that monetary policy would be constrained. There wouldn’t be that much room to cut interest rates. Lo and behold, as I write about in my book, March, 2020 arrives, and you had this massive response. Washington really stepped up and said, “All right, we’re going to throw everything at this.” You do have an episode there where the policy response was really strong.
I think the question now is if we go into a recession, whether it’s the early part of this year, later in the year, or maybe it doesn’t happen until 2024, but what’s that response going to look like? This time the Fed will have a lot more room to cut interest rates than it did when the pandemic hit in March, 2020. Interest rates were a little bit below 2% when the pandemic hit, but what’s going to happen on fiscal policy? Will we see the same kind of generous increase in unemployment insurance benefits, child tax credits, sending checks out to people? Maybe not.
It’s possible Congress is going to say that really, we overdid it last time, and we’re going to kind of hold the purse strings. It’s always hard to predict where these things are going to go. Every recession is different, every shock is different. When you look back at the last couple of downturns, there was always a view when the economy was slowing that, well, we could achieve a soft landing.
You can see in early 2007 Fed officials talking about, “Yeah, we think it’s possible to have a soft landing.” Of course, that didn’t happen. We had a global financial crisis. Predicting these things is always difficult, but that’s kind of how I think we see it right now.

Kathy:
What grade would you give the Fed for the last couple of years?

Nick:
I don’t do grades.

Kathy:
No grades.

Nick:
I try to maintain objectivity as best I can, and it’s not easy, but trying to form opinions, I’ll leave the grading to other people.

Kathy:
Well, you got to get that Powell interview next time, right?

Dave:
Yeah, exactly. Jay’s got to pick up the phone.

Kathy:
Yeah.

Dave:
Well, Nick, thank you so much for joining us. You are a wealth of knowledge. We really appreciate you joining us. If people want to learn more about your research and reporting, or connect with you, where should they do that?

Nick:
I’m on Twitter, @NickTimiraos, and you can follow all of my writing at the Wall Street Journal.

Dave:
All right. Well, thank you, Nick. We really appreciate it, and hopefully we’ll have you on again to learn about what the Fed’s done over the course of 2023.

Nick:
Thank you, Dave. Thank you, Kathy.

Dave:
What’d you think?

Kathy:
My head’s exploding. I can’t tell if I feel more optimistic or less. What about you?

Dave:
Yeah. I don’t know about optimism or pessimism, but it helps me understand what’s going on a little bit more. When he was breaking down the different buckets of inflation, and why they care about service inflation because it’s stickier, that actually makes a little bit more sense. Sometimes, at least over the last couple months, you see the CPI starting to go down. You see these things that point to continuing to go down.
You’re like, “Why are they still raising rates?” I’m not sure if I agree, I’m not a economist and don’t have the forecasters they have, so I don’t know what’s right at this point, but at least I can make a little bit more sense of their thinking about inflation.

Kathy:
Yeah. The part I still can’t make sense of is why they were still stimulating the housing market this year, early this year with buying mortgage backed securities, that being the second bucket, that clearly, clearly the housing market was already stimulated.

Dave:
That’s a good point.

Kathy:
Yeah, he’s not going to grade them. I won’t share my grade, but it is disappointing. People who bought this year or trying to sell this year are going to be hurt by that.

Dave:
Yeah. That is really interesting, because I can understand when he’s saying that they thought, oh, it was transitory because of a supply shock. That all makes sense, but there’s a difference between going to neutral and stimulating. It seems like if you thought inflation was transitory, you could at least just go to neutral and see how things play out. They still had their foot on the gas for a really, really long time.

Kathy:
Yeah.

Dave:
You could probably guess where Kathy and I grade things. I do think that it is encouraging. One thing I really liked tearing was that they do look at some private sector data. One thing that my fellow housing market nerds complain about and talk about a lot is how that lag he was talking about in shelter inflation, and how it doesn’t show up in government data for six to 12 months.
It is encouraging to hear that at least the people are making these decisions are looking at some of the data you and I look at, and can see that rent, not only is it not going up 7% a year like they say, it’s actually been falling since August.

Kathy:
Yeah. Hopefully they do pay attention to that.

Dave:
Yeah. Well, do you have any guesses what will happen in 2023?

Kathy:
I kind of like to call 2023 Tuesday. 2020 was Saturday and it was a little bit scary at first to go to the party, but then it took off. Then the party raged through Sunday. Then Monday is like, oh, not feeling so good. That would be 2022 is Monday. It’s like party’s over, and you’re not feeling great.
Then next year just kind of feels like Tuesday, where I do believe things will kind of stabilize. It’s like, okay, everybody pick yourself up. It’s just back to work, and hopefully a little bit closer to what 2019 felt like.

Dave:
Yeah. Yeah, that makes sense. I think we’re going to see inflation moderate in a significant way, but per Nick’s comments, we’re probably, that doesn’t mean the fed’s going to start stop raising interest rates right away or start cutting interest rates. As we’ve discussed on this show many times, the key to the housing market reaching some level of stability and predictability is mortgage rates to moderate.
Until the Fed really charts a fresh course on interest rates, I think that’s going to be hard to come by, and maybe at best by the end of 2023, but maybe more likely the beginning of 2024 at this point.

Kathy:
Yeah, listening to my gut, it would be that they’re going to slow down the rate hikes, but what they’re saying is not that. It’s like, are they bluffing? All I know is like listen to what they say because they’ve been pretty serious this year. They haven’t budged from their plans. You got to assume that they’re going to keep rates high and maybe even keep hiking. My gut says that they’ll slow it down.

Dave:
You’re not alone in that. I think a lot of Wall Street is betting that they’re bluffing, that they just don’t want people to start reinvesting and stuff anytime soon. They have to keep signaling that they’re going to keep raising rates. Only time will tell though. That was fascinating. I learned a lot. Hopefully all of you learned a lot. Now as you hear new inflation reports come out, new reports from the Fed, you have a better understanding of what exactly is going on.
Thank you all so much for listening. We will see you next time for On The Market. On The Market is created by me, Dave Meyer, and Caitlin Bennett, produced by Caitlin Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Gendal, and a big thanks to the entire Bigger Pockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Matt:
This is the Bigger Pockets podcast show number 711.

Andrew:
I feel like we’re going to see opportunities we haven’t seen in 10 years. When I look back at 2012, 2013 and 2014, my only regret is I didn’t buy more. I didn’t have the capability. My mom wrote my first check as a syndicator and then it took a long time to get everybody else to join in. So I’m looking at this now as this is coming up, probably starting mid 2023 is going to be the time to scoop up deals that otherwise were unobtainable for the last five, six, seven years. And for those listening who the last three years have been frustrating because you can’t get in the market because there’s no deals out there, the deals are coming. And then also, not to be morbid, but you’re going to have a lot less competition.

Matt:
Welcome everybody to the Bigger Pockets podcast. My name is Matt Faircloth and I am the co-host of the Bigger Pockets podcast. And I want to bring in one of my besties, one of my friends, the host of the Bigger Pockets podcast today. Not really the host, but you and I stole the microphone didn’t we Andrew? We stole the mic and we are now running the Bigger Pockets podcast. Who knows what’s going to come out of our mouths today, right?

Andrew:
Yeah. David went off to Mexico and left his link live and you and I are going to jump in and see what we can do.

Matt:
Oh, what could go wrong? It’s great. But quick Andrew, tell me how you are today.

Andrew:
I am good. I am staying positive and testing negative.

Matt:
Can I steal that?

Andrew:
Yeah, give me credit the first time and the rest of the time it’s yours.

Matt:
Okay, cool. If we’re going to be stealing the microphone, do you promise me you’ll have lots of awesome Andrew Kushman analogies and cool straight faced humors and David Greene analogies as well we can use throughout the show?

Andrew:
Yeah, I’ll do my best. I’m a little nervous filling in for the Green and I forgot to put on my tank top so I’ll channel him as best as I can.

Matt:
No way I’m filling those shoes but I’m happy to hold his microphone for him just for a second here.

Andrew:
Sounds like a good plan.

Matt:
Andrew, before we get going, there is an awesome thing that happens at the beginning of every Bigger Pockets podcast. You and I know because you’ve probably listened to 710 episodes of it, you and I both. So let us get going with the quick tip.

Andrew:
Quick tip. I’m actually going to go rogue on you and give you two, right? Since I’m not wearing my tank top, I’ll have to make up for it.

Matt:
Hey, it’s our microphone today man. Give it.

Andrew:
So first of all, we’re going to reference an article that Paul Moore wrote for Bigger Pockets on the blog. If you’re listening and you haven’t read that article, go back to November 15th and read it. It’s going to give a lot more background on what we’re talking about and then lots of other important stuff for today’s market. Second of all, some of the stuff we’re going to talk about might sound a bit gloomy, but that’s really not the case. That’s the farthest thing from the truth. We’re going to talk about risks and how the markets are shifting and is our pricing going down? That’s all stuff that should be exciting for you if you’re getting started in 2023 or looking to scale your business. So now is the time to be greedy when others are fearful. So don’t let what we’re talking about scare you off. Use it to get excited about diving into all the resources that Bigger Pockets has so that you can learn and scale and grow your business.

Matt:
Double the tip. There it is. Thank you so much Andrew. I appreciate that man. Let’s get into the market man. Let’s talk about the current market status. What do you think, you want to go?

Andrew:
Yeah, let’s do it. There’s lots to talk about.

Matt:
I’m in, following you.

Andrew:
All right, Matt, welcome to 2023. We are in a rapidly changing market. It’s funny, Paul Moore put out a great article back in November addressing some things that we’re seeing now. What are your thoughts on what’s going on out there?

Matt:
I didn’t get a chance to read the article yet and you and I are both friends with Paul Moore and I’ve heard a lot of great things about the article. I’ve actually seen some people referencing it. And yes, absolutely things are changing it seems like daily as well. So what did you get out of the article? Tell me about it.

Andrew:
There’s a lot in there. We could spend a whole hour on it, but I’d say the most important if I were to condense it into one sentence is that interest rates are higher than cap rates. And for those who are listening, it’s like okay, well so what? That’s a big problem, and that’s a huge problem. We haven’t seen that in the last 10 years and maybe even for multiple decades. The reason that’s a problem is it creates negative leverage. So what it means is if you’re buying, let’s say a million dollar 10 unit property and it produces a net operating income of $50,000 a year, that’s a 5% cap rate, a 5% yield, and you go borrow money at 6% in order to do that, you are losing money by borrowing to obtain that asset.
So let’s pretend you bought it all cash and you’re getting a 5% yield and then let’s pretend, to make it simple, you get 100% financing instead at 6%. Your annual debt service is 60,000, but your yield is 50,000. You have a built-in operating loss just on your debt of $10,000 a year. That’s a problem. If interest rates are higher than cap rates, it screws up the market big time. And just for the listeners who are like, whoa, hold on, slow down Andrew. NOI cap rates, you’re tossing these terms around. Cap rate stands for capitalization rate. It is basically the unleveraged yield on a property. So I mentioned buying it all cash. A cap rate is you buy a million dollar property, it produces a $50,000 net operating income. 50,000 divided by a million is 5%, the cap rate is 5%. Net operating income is basically kind of just what it sounds like. It’s your gross revenue minus your operating expenses. And then that is what is left over to pay the debt. And so when that NOI is less than the debt, that creates a huge problem.
So how does this resolve? There’s a handful of things that can resolve it. Number one, interest rates would have to go back down. They peaked a couple of months ago at four and a quarter and then dropped 80 basis points. Who knows where they’re going to go now? I left my crystal ball in my pocket and it went through the wash so it’s permanently foggy. I’m not going to pretend that I can predict where interest rates are going to go. So interest rates could go back down. NOI could go up. If you can increase rent and increase that NOI, then you can overcome to some degree the fact that the cost of debt is higher, or prices could come down. My personal thought, Matt, is that it’s going to be a combination of all three of those things, but I would like to toss it to you and see where you think we’re headed here in 2023.

Matt:
I also put my crystal ball in the shop and I can’t seem to get it out. They won’t give it back to me. So what the future will hold, I don’t know, but I’ll tell you what investors like you and I can control. We can control an OI. We can control pushing revenue on properties. That’s one factor that’s in our favor. Okay, what I know is going to happen, I don’t know, but what I think is probably something different. So what I think is going to happen is something like… Rates have gone up drastically, a lot more than a lot of people thought. Are they going to go up at that rate of acceleration again? I don’t think so. I think we maybe are getting towards the top of the ceiling. I don’t think they’re going to come back down. And so I think that if rates stay up like this Andrew, it’s going to force cap rates to go up a little bit.
And so cap rates are going to come up, rates maybe creep down a little bit but it’s still going to be in the five, six, seven range, somewhere in there to borrow money I think for the foreseeable future. I just think that is what it is. So that’s what I predict is going to happen. And I think that on both sides, the buyers and sellers and investors, because you and I both work a lot with investors, limited partner investors, all three are going to have to get more realistic and everybody’s going to have to take a deep breath and settle down and realize that this is no longer a seller puts a for sale sign on the front of their property and they get 10 bids.
This is likely not going to be the future of what we’re going into. I think that sellers are going to have to get realistic, buyers are going to get a little more strength in their voice in what they can command from a seller, and thirdly Andrew, I think investors are going to learn to get more patient. I can tell you that the scenario you gave on cap rates and interest rates is all valid. But what the truth of the matter is people likely don’t buy a property either free and clear or 100% financed. What they do is they buy it with some sort of an equity check that gets left in there. And if cap rates are lower than interest rates, as you said, there’s no money left in the property and most importantly, there’s no money left to go to the equity side, whether that’s LP investors or folks writing a check out of their own pocket to go to the property.
So the property’s either not going to cash flow very much, talking like low single digit rates of return either for investors or for the owner direct. And that means that the equity’s going to need to be a little more patient if you’re buying a big value add property that is going to cash for a little bit in the beginning and then make more money in the long term. I believe the world of producing a six to 7% guaranteed aka preferred rate of return for investors right under the gate when you buy a property may go away all completely or it may change drastically. Because if you’re going to buy a property today, likely it’s not going to produce any cash flow at all if a little bit, but certainly not enough to pay a six or 7% preferred return.

Andrew:
Yeah, you’re absolutely right. All these changes and shifts are affecting different market participants in different ways. So like sellers that I talked to, or I mean, Matt, you and I are both in different multi-family masterminds and we either know or have heard stories of sellers who they’re having trouble making the mortgage payments because they had an adjustable rate loan that has gone from three and a half to seven and a half. And yes, some people have caps on it, meaning it hits a certain level and it doesn’t go up anymore. But lots of others don’t, and they have watched their mortgage payments double or even two and a half sometimes triple in the last six months, and that’s creating financial stress for sellers. Also on the flip side, sellers who aren’t having trouble paying the mortgage or have fixed rate debt, it’s slowing volume down because they’re just sitting back going, well, I’m not going to sell in this market. I want to get the price I got in January of 2022 and no one’s offering me that so I’m not going to sell my property.
It’s kind of like the kid at the playground who’s just like, that’s it, I’m taking my toys and I’m leaving. They’re out of the game. They’re going to sit there and wait and they’re not motivated to sell because operations are still really good. That’s another kind of weird aspect of this market is the distress out there is financial, it’s not operations. Now some select sub-sectors in some markets could see operational distress going forward, especially if we get into a real recession with real job losses. But at the beginning of 2023, the distress is being caused by the financial markets, not operations. And as an investor evaluating potential acquisitions, that’s a key thing to look into.
Why is the property distressed? Is it because the market here is terrible or is it because the owner made a mistake, put the wrong kind of debt on there and now they’ve got to get out of this and it’s an opportunity for you as a new investor to get started by picking up a killer property in a killer location that otherwise would not have traded if the debt markets hadn’t shifted? So if you can’t tell, this stuff is getting me excited because I feel like we’re going to see opportunities we haven’t seen in 10 years. When I look back at 2012, 2013 and 2014, my only regret is I didn’t buy more. I didn’t have the capability. My mom wrote my first check as a syndicator and then it took a long time to get everybody else to join in. So I’m looking at this now as this is coming up, probably starting mid 2023 is going to be the time to scoop up deals that otherwise were unobtainable for the last five, six, seven years.
And for those listening who the last three years have been frustrating because you can’t get in the market because there’s no deals out there, the deals are coming. And then also, not to be morbid, but you’re going to have a lot less competition. I already know of sponsors who are closing up shop because their deals have imploded and the equity is gone and they’re out of the business. The beauty of starting out now is you don’t have that baggage. You can come in at a fresh bottom, low point in the cycle, take advantage of these opportunities, not have 27 people bidding against you and build the foundation of a great business. Wealth is made in the downturns. In five to seven years from now, anyone who accumulates properties the next two or three years is probably going to be sitting pretty.

Matt:
Love it. It’s a great time to get started. It’s a great time to be a new investor in this market and it’s a great time to be established as well if you made the right decisions coming into this place.

Andrew:
So looking forward, Matt, I’m curious as to what you’re seeing this year. To me, I think the Feds, they’re going to at least pause, right? And I think just doing that will open up the market a little bit because right now when the Fed’s raising rates 75 basis points every other month, no one knows how to underwrite. What’s my exit cap going to be? What’s my interest rate going to be? So at least when it pauses, everyone can kind of take a breath and say, okay, what are the rules now? How do I underwrite? I think that’s going to loosen up the market. Two, we already talked about. There’s going to be motivated sellers, people who can’t make their mortgage payments, unfortunately. So that’s going to bring some deals to the table. And by the way, those deals aren’t going to go to the highest bidder, they’re going to go to the buyer or the investor who can offer the most surety of clothes.
So again, that’s something else we’re looking for is not paying the highest price but being the most savvy buyer, that’s going to get deals going forward. And that’s another thing that’s been really tough lately. So we talked about competition’s going to drop, there’s going to be more motivated sellers because people can’t make the payments. We’re unfortunately already seeing that. And then my guess is going to be we will probably see pricing off anywhere from 15 to 30% from the peak, and I would call the peak maybe January of 2022.
So I’ll give you a perfect example. We put in an offer on a property this week that when we first started talking to the seller at the beginning of 2022, they wanted 220 a unit and at the beginning of 2023, we’re now talking 165 a unit. The property is still running really well and it’s in a great market. However, the pricing expectations have come down and could they come down a little bit more? Yes they could. Can any of us perfectly time the bottom? No we can’t. So the key is to go buy properties that are in great locations and cashflow well so that five to seven years from now we look like stinking geniuses. So that’s kind of my thought and my plan for 2023. Matt, you disagree or what would you add to that?

Matt:
Well, I’m not sure if I want to look like a stinking genius. I mean, that’s just not-

Andrew:
Maybe a regular genius.

Matt:
Yeah, just a regular. Can I be a good smelling genius? You can be the stinking genius. Is that okay? Your [inaudible 00:16:02].

Andrew:
All right, fine.

Matt:
Yeah. Okay good. So I agree. I don’t know if I agree with the 30% and that’s only because I think that a lot of properties out there that are legacy holds that have been out there forever, a lot of multi-families been held for generations by people. So I think that those that bought properties in the last say three to five years are going to be in a position to need to sell because of debt that’s graduating or debt that’s gone up or because they just can’t refinance anymore or whatever it may be. But I don’t think that it’s going to be blood in the streets like it was in 2007, 2008. I don’t correlate the two things. I think what you’re going to have is sellers are going to need to get more realistic with their numbers.
And I think that for the longest time, Andrew, it’s been this seller’s market. That’s it. And when you go to buy a multifamily property, it’s like you’re going to prom. You’ve got to get your best suit on, you got to do your hair and everything. You’ve got to wave your hands in the air to get the attention and everything like that, and it’s you and 17 of your best friends bidding on a multifamily property. Some buyers may get a little skittish and go away, but I think that the buyer conversation between buyer and seller is going to become more give and take. We’re looking at a property right now. Believe it or not, we’re actually looking to buy a multi-family property right now, Andrew. We’re looking at a deal and for the first time that I’ve ever seen it in the last five years anyway, there’s no concept called money hard day one. I’ll explain what that is.

Andrew:
Oh, beautiful thing that’s going away.

Matt:
It is, it’s going away and that never should have been a thing. Again, you had said before, you get two things in real estate when you’re making an offer, you get price or you get terms. Money hard day one is a term that gets negotiated in the purchase of real estate. What it means is if I’m buying a property and it’s a million dollar 10 unit multi-family property or something like that, I may lay down, say 50K is my earnest money deposit and they’re going to go get a mortgage beyond that or whatever. So I’m going to have to bring more to closing, but that earnest money deposit is something that goes along with a contract that shows I’m serious and here’s my money and if I do something wrong that’s outside of this contract, the seller may have the right under certain terms to claim that money. Likely through a court action, but they may have the right to claim that money.
And this happens in small real estate transactions and buying a three bedroom, two bath, you might write a check for $5,000 as your earnest money deposit or something like that. Bigger multi-family properties have bigger numbers that go for earnest money deposit. What money hard day one means is that a certain percent of that money, and sometimes in more aggressive markets all of it, is nonrefundable the day you sign the contract. Here’s the problem with that, Andrew. You don’t know what you’re getting yourself into. And that’s why there’s a concept called due diligence. Like Andrew’s got a 10 unit apartment building or a 30 unit or a 300 unit for sale, the buyer needs to have time to get their head around this thing to make sure that what I’m buying is what this seller told me it is, meaning seller says, yeah, my roofs are in good shape, all my sewer lines are in good shape, all my tenants are paying their rent and there’s only this much vacancy or whatever it is.
All the factors that the seller states, the buyer should have a period of time to go and validate those things. It’s called due diligence and the buyer should have the right to confirm. What money hard day one means is that, say it’s a $50,000 deposit, 10k of that or more is, oh, you found that my sewer lines were crushed or that my roof was leaking or that my vacancies was higher than I said it was. So sorry, I get to keep that money hard. And it was there in more aggressive seller markets to hold that seller and buyer to closing and to make the transaction happen. But as we’re normaling out the playing field, it was never a fair thing to begin with. Do you agree Andrew? It never should have been in the contract to begin with, but it’s been the way the game was played so we had to do it begrudgingly. But now I believe it’s going to go away personally.

Andrew:
It’s starting to, and for everybody listening, rejoice that the risk of hard money should hopefully not be something that you have to worry about anymore. And I love all of what you said, Matt. And something else I would add for those who are starting to evaluate properties, and this is again, not something we had to worry about as much in the previous 10 years, but look at your debt service coverage ratio. And Matt, I’m going to push back on you just a little because I think this, unless rates change dramatically, I think this is one of the things that’s going to lead to probably a temporary decline in prices is that when the cost of debt goes from let’s say three and a half to six or six and a half percent, the income coming off that property is no longer there to make the mortgage payment.
And so the lender’s going to say, well at 3%, at three and a half percent, I could have given you a million dollar loan, but at six and a half percent I can only give you 550,000. Sorry. It is what it is. And so then as a buyer, you go to the seller and say, well look, my lenders only going to give me 550. I’m only going to offer you 700 instead of a million. So I think that is going to be a piece of what’s going to lead to some decline in select properties in markets. Again, people who have had generational properties with low leverage, they’re not going to accept that. They’re just going to hold on. But there’s going to be some motivated people that have to sell.
And speaking of generational properties, Matt, I want everyone listening, keep in mind, this is a long game. It’s been a really, really popular business model, especially with syndicators for the last five years to do the whole two to three year buy it, do a quick fix up, flip it out and sell it in a short period of time, two to three years. That business model isn’t dead, but I’d say it’s going into hibernation for the short term. That is not going to be anywhere near as easy as it was in a rapidly rising market. When we’re looking at properties now, we’re looking at five, seven, 10 year hold times. And I would add on top of that, if you’re buying for your own portfolio and you’re going to hold for 15 or 20 years, what’s happening today, you’re not even going to remember it when you get 15 to 20 years down the road.
That property is going to be worth a whole lot more than it is today and you’re going to be glad that you bought it, especially if you buy the right property in the right location, good demographics, some of the things we’ve talked about in previous episodes. And then Matt, just to clarify, you’re talking about hard money. You’re referring to the non-refundable deposits, right? So the minute you put that into escrow, even if you find out that the seller is lying to you, the roof’s bad and half the place is vacant, they get to keep your deposit.

Matt:
They can try to, yeah. And remember, it’s a court action. The check actually doesn’t get written to them. It goes to a third party escrow and that escrow company can’t release it without both parties permissions and if both parties don’t get permission, then it’s got to go through court action. So it’s not as simple as it sounds, but yes, in the contract it will say that that money becomes the property of the seller if for any reason the buyer decides that they don’t want to do the deal. But just I think that things sway back towards the middle and I think that that’s what I believe the pendulum is going to swing towards. And you’re right about properties being debt yield restricted where you used to be able to borrow 80% loan to value for a multifamily. You did, even 75, 80% loan to value if you wanted to.
Now the best you’re going to get because rates are higher is 55, 60, 65% loan to value. That means you’ve got to raise more equity to go into your deal and that means you can borrow less, which is maybe a little conservative way to look at it, but if your equity investors are looking for a six or 7% rate of return on a deal that’s selling at a 4.5% capitalization rate, guess what? You can’t give them that rate of return. It’s just that the money, just the numbers aren’t there to pay a rate of return on properties. We’ve looked at deals that are producing like one to 2% cash on cash return for us and me and the investors have to split that, right? We have to carve that up from there. There’s just not enough yield to pay investors a reasonable rate of return. So I think that, as I said before, that everybody’s got to get more reasonable, buyers, sellers and our investors.

Andrew:
All right. So Matt, you mentioned you’re out making offers, you’re in the thick of it, you’re not on the sidelines. What are you doing that the rest of us and that everybody listening can duplicate or learn from or do to prepare to either start from scratch or start scaling in 2023?

Matt:
Well, the worst thing that somebody could do right now, Andrew, is sit on their hands and wait for things to change, right?

Andrew:
Yeah, agreed.

Matt:
I have young kids as you do and I read them the Oh, the Places You’ll Go! sometimes. And that book talks about a place called the waiting place where you’re waiting on a phone to ring, waiting on a train to come, waiting on this, waiting on that. Life continues to pass you by if you wait. Those that want to make things happen are going to get ahead of the curve and get out there and maintain relationships with brokers. Don’t just wait for prices to drop before you start calling brokers. What you can do now is to initiate, build or even just maintain broker relationships. Call brokers up. Hey, I’m Joe, I’m Jane, I’m looking to buy and I’m waiting on the right deal and this is what I’m looking for. Whatever it is.
Obviously don’t tell me you’re waiting on the market to crash before you buy a deal. They’re not going to want to hear that. But you can use the time now to build and deepen relationships with brokers and also with investors. Stay in communication with your investors. Your investors are going to forget about you if you don’t communicate with them on a regular basis. Even if you don’t have a deal, that’s okay. Call them, check in, call them and wish them a happy holidays. Send them a holiday card, send them a newsletter as we do. Stay in regular communication with people so they know that you’re there and that when a good deal comes up from that broker that you’ve maintained or built a relationship with, you’ve got an investor pool that’s there to hop in. The last thing you want to do is to have to rebuild your business.
When the great deal that Andrew and I are talking about shows up in three or four months, you don’t have to rebuild or restart your airplane engine to get it off the ground again. You want to be rip roaring and ready to go with investors lined up with debt that you’ve been maintaining relationship with and position and with brokers that are willing to give you the first look at those great deals when they show up.

Andrew:
Yeah. And I mean, that’s a whole other episode that we could spend diving into that. And for everyone listening, I want to reiterate what Matt said about not sit around and waiting. Waiting and sitting on the fence does nothing for you but hurt your crotch. I mean, now is the time to streamline your systems, build your team, add investors, and that’s what we are doing in our business. It’s slow right now. So we’re going back through, we’re cleaning up simple things like cleaning up our file systems so our team spends less time going, wait, wait, where’d that document go? We’re getting ready to hire another person, add to the team. Like wait, you’re hiring in a downturn? Yes, now is the time to find the best people and get them trained so when the deals come, you’re ready to jump on them like Matt said. And we’re still out there looking at a lot of deals and we’re talking with new lenders, we’re looking at new markets and we’re evaluating new… Well, not new but creative or different ways to buy properties, right?
BRRRR is coming back. When I started this in 2012 or 2011, we’d buy properties all cash, we’d get them running great and then we’d refinance it and give investors 100% of their money back. The last five years, we’re lucky to give investors 25% of their money back at refinance because we had to pay so much in the beginning. In this market, one way to eliminate interest rate risk is to go find a 10 unit for 500,000, raise 700,000, buy it all cash, fix it up, and then two or three years from now when the debt markets are hopefully improved, refinance it, give your investors all their money back and now you’ve got an asset that you can just sit there in cash flow with basically no risk. Those kind of opportunities are coming back.
We’re also looking at seller financing. That’s coming back. Assumptions are coming back, longer term holds. There’s no such thing as a bad market, just bad strategies. So think beyond the quick three year I’m going to buy this, fix it and sell it. Look at alternate ways to buy, alternate ways to finance and longer hold times and that can make for great deals to be found. And that’s kind of the quick version of what we’re doing in 2023.

Matt:
I love that. We’re hiring too and we are cautiously making bids on deals that makes sense to us. And I’m kind of having to straight face offer somebody 80% of what they’re asking and it is what it is. And I find that properties are still in the market. There’s one that the guy was asking 125,000 a unit on and he laughed at us when we offered them 115, and then they came back to us, they said, “Hey, is that 115 number still good?” And we looked at it and guess what? Rates had gone up a little bit since then. So we’re now talking to a manager at 105. And so there are still deals to be made, there are still conversations to be had in that. And one more thing that we’re doing on top of everything Andrew said, we’re doing a lot of that as well and I love the BRRRR is back stuff. That’s awesome.
The one thing we’re doing as well, and I know we’re talking multi-family today Andrew, but guess what? There are actually other real estate properties you can buy. They’re, believe it or not, Andrew, not multi-family apartment buildings.

Andrew:
That’s blasphemy.

Matt:
There are other kinds of real estate. So we’re looking at diversification for us and our investors in other asset classes such as Flex Industrial. Believe it or not, we’re looking at hotels. And not like swanky, boujee, boutique hotels. I’m talking about a courtyard Marriott like I’m standing in right now. Those kinds of things. We’re looking at that. We’re looking at unanchored retail. Not that we want to lead multi-family. Multi-family is where my heart and soul is, but I also want to be able to offer things to our investors that make fiscal sense. And while I’m waiting a bit for multi-family to start making more fiscal sense, we’re going to keep making bids, but we’re also going to be looking at other asset classes to diversify a bit so that our investors can diversify so that we can diversify too.

Andrew:
Yeah, that makes a lot of sense and I see a lot of operators doing that. And especially if you can kind of dovetail things together. A lot of times self storage right next to a multi-family, there’s a lot of cross pollination there that can work really well. And we’ve actually acquired apartment complexes that had some self-storage onsite and that’s a whole other revenue stream. And so if you’ve got that self-storage skill or tool in your tool belt, there’s ways to bring those two things together and like you said Matt, diversify a bit.

Matt:
Absolutely. Absolutely. And not that multi-family is not the core in that, but it doesn’t have to be the end, it doesn’t have to be the everything.

Andrew:
All right Matt, well that was a fun market discussion. I always love diving into that, especially with you. So I want to throw out a couple of my goals for 2023 and then I’d love to hear what yours are and then maybe we can see if we can help out some listeners and talk about some of theirs. So I know what I’m looking to do in 2023 is hopefully make four to eight significant acquisitions. That’s market dependent, they have to be great deals. But assuming the market shifts like we talked about, we’re looking to pick up hopefully four to eight.
We’re also looking to add a team member or two because if we add that many deals, we’re going to need more bandwidth to do a good job asset managing them. And then we’re looking to actually expand markets. Right now we’re in Georgia in North Florida and whenever people ask me where do you invest? I say Georgia, North Florida in the Carolinas, but we currently don’t own anything in the Carolinas. We’ve sold everything we had in Texas a couple years ago. We’re going to refocus that energy on the Carolinas and try to expand into markets and put some of the principles that we talked about into play and execute on those. So curious, Matt, are you similar or what are you up to?

Matt:
Yeah. Well, just as you said, we’re hiring. We’re going to hire two key folks this year. We’re going to be hiring a marketing director whose job is to get us eyeballs and get us attention and do super creative stuff and whatnot on online socials and things like that. Also, we are lucky enough to own a few multi-family properties in North Carolina so we want to expand there as you do as well. So come on and be my neighbor, it’s great. The water’s fine, come on in. We also want to hire an asset manager in North Carolina that can be regionally focused in the state that can go to the properties we have on a regular basis and make sure business plans being upheld in that. It’s great to have acquisition and capital goals and marketing goals, but above all else we want to take what we have performing and keep it performing and tighten up.
And as the market changes and things like that, it becomes more important to make sure the boats you have are floating properly. And so we are installing KPI programs and performance metrics and things like that into what we own already, which is already thousands of units of multi-family. But we’re going to keep that running well and it’s important whether you own thousands of units of multi-family or you own one property, it is very important to keep what you have running well. Too many times people focus on acquisitions goals and you and I just talked about that too, so we’re just in the same boat. But you should also talk about setting goals about performance of what you currently have. And so we’re going to be setting performance metrics and goals for our current portfolio just to keep it running healthy because that’s really what matters the most is what you already own, not what you’re going to buy but what you own already.

Andrew:
You know what? Man, that’s my mantra. I actually forgot to mention that. So that’s what we’re doing while things are slow. We are getting better at implementing EOS, we’re becoming better asset managers, we’re putting those systems in place, we’re doing additional training for everybody involved and as you said, making sure that the boats you already have are in really, really good shape.

Matt:
EOS, traction, quick plug. You and I are both raving fans of that book and it’s important for small and large sized businesses as well. And we’ll throw one more thing out about goals up by the way Andrew. If someone just happens to be listening to this episode and it’s not January and it’s like, oh okay, it’s not New Years so I don’t have to set goals, guess what? There’s actually not a rule. There’s not a law that says that you can only set goals on January 1st. You’re actually allowed to set a goal anytime. You can set a goal on December 31st, December 1st, or on your birthday, whatever it is. Anytime is a good time to make a goal or to set a hurdle for yourself. Go pick up Brandon Turner’s 90-day intention journal and use tools like that to help you meet that goal over a 90-day program whenever you decide you want to plant that flag and make it. You don’t have to say, oh, I can’t set a goal today because it’s not New Years yet. You don’t have to do that.

Andrew:
I thought once you hit February 2nd and it was Groundhog Day, you were doomed to just repeat that year for the rest of the year and then you couldn’t set any new goals.

Matt:
Right. If you haven’t taken [inaudible 00:36:06] on your goals by February 2nd by Groundhog’s Day, then you’ve got to be like Bill Murray and live that day over and over again. That’s the rule, right? So Andrew, listen, talking about mine and your goals, we need to help people achieve what they’re looking to manifest for their goals as well. So lots of folks have pumped in tons of questions on multifamily on the awesome Bigger Pockets forum. Quick plug by the way, quick tip, put questions in the Bigger Pockets forum because you never know where those questions are going to go, including right here on the Bigger Pockets podcast. So there are awesome questions here on the Bigger Pockets forums that I’d like to take a minute and go through with you. Are you down? Are you ready?

Andrew:
Oh, I love answering questions. Let’s do it.

Matt:
All right, let’s speed round some of these. Ready? Let’s go.

Andrew:
I’m going to pull a couple of questions and if you haven’t gone in there and posted questions yourself, please go do that. Let’s see, we’re going to start with this one right here. Question is, how do I confidently assess property class from out of state and how do I align my business strategy to the property class? Quick definition, when somebody is talking about property class, they’re often referring to A, B, C, and D. A is kind of the nice new shiny stuff. B is kind of more your working class people who can either rent or buy but are choosing to rent. C tends to be someone who might be a renter for life. They can’t afford to do anything but rent. They’re employed, they have good jobs, but they’re kind of in that workforce housing. And then D is often kind of referred to as if you’re going to be collecting rent in person, you might want to pack heat to do that. So it tends to be kind of the higher crime, much rougher, much older properties.
So that’s what they’re asking about when they talk about class. How do you assess that from out of state and how do you align your business strategy with it? Well, the first thing is go read David Greene’s long distance real estate investing. It is geared towards single family investment businesses. However, the same principles apply to multi-family in terms of how to operate a long distance real estate business. Building teams, selecting markets, doing due diligence, all of those kind of things. Now, when I am looking at a new market or even a sub market that I haven’t owned in, there’s a long checklist of things that I go through to do this very thing, to figure out, well, what class property is it and what’s the class of the neighborhood?
So one of the main things that I check is the median income, right? Higher median income is going to lend itself to more A and B class properties. Lower median income is going to be more C or possibly D. And you might ask, well Andrew, what’s the cutoff? That’s going to vary depending on what state you’re in. Some parts of California, $120,000 a year is poverty level. In Georgia, that’s an A class neighborhood. So you need to look at all the areas around your property, get a sense of what the spectrum is, and if you’re on the high end of the spectrum, you’re probably A, B. If you’re on the low end of the spectrum, you’re probably C and D. Also, look at year of construction. If it’s built in 2000 or newer, it’s probably B or A. If it’s built 1980 to 2000, that’s probably a solid B. If it’s 1960 to 1980, you’re probably looking at a C class property and if it’s older than that, it could be C or D depending on the neighborhood.
Look at relative rent levels. We talked about earlier, if you’re looking at a suburb of Atlanta, for example, and the median income ranges from 40,000 to 75,000, you’re going to see a similar pattern with rent. If you look at all of the apartments in that market, you’ll see, well, some two bedrooms are renting for 800 and other two bedrooms are renting for 1600 or 1800. Well, odds are the ones at the bottom of that spectrum that are renting for 800, that’s probably your class C property. And then if you look the property up, oh, it’s built in 1975, oh, okay, that’s another data point, probably a C class property. Then you’re going to look at the amenities. If it doesn’t have a pool, if it doesn’t have a playground, if it doesn’t have a dog park, that’s probably C or B because most A class properties are going to have fitness centers and grilling stations and pools and are going to be highly amenitized. So the more amenities, the more likely it’s class A. The less amenities, you’re getting down the spectrum, B, C, possibly D.
I would also evaluate the neighbors. So if you look at your property and then you jump into Google Street View and you take the yellow man and drive around and you see brand new retail or a nice new Sprouts or Whole Foods or Kroger, you’re probably in a B or an A neighborhood. If you see old kind of rundown strip mall centers with a cigar shop and a tattoo parlor and eyebrow threading and all this fun stuff, that’s probably class C. So again, that’s another data point. When you’re trying to figure out is this class A? Is this class B? Is this Class C? One of the frustrating things about it, especially as a new investor, is you can’t turn to page 365 of a book and figure out, oh, here’s what it is. It’s a spectrum. It’s a little bit vague. And so what I’m trying to do is give you the data points that we use to figure that out.
And then finally talk to other property managers and lenders and other people who know that market and they can give you a tremendous amount of insight. The best thing of course is to hop on a plane or get in the car and go drive to that market yourself. It’s amazing what you can gain with the internet in long distance these days. It is so different than it was 10 years ago, but nothing beats being there in person. So if you’re going to invest in a market, make sure you at least get out there once so you have a real good feel of it. So that’s kind of the short version of what I would do. Matt, have you got anything else that you would add on top of that?

Matt:
Andrew, every time that you answer a question before me, I find myself saying, I agree with Andrew because everything you said was so thorough, right? I really agree. I mean, honestly. And I love the end, I’m like, do I have a cigar shop or a tattoo parlor near any of my properties? I may, but what I’ll say on top of all that is that you the listener need to decide which angle of attack you want to get yourself into. There is more money to be made ever, but you’re going to have thick skin to do it is to buy underperforming really, really poorly run D class property where Andrew said you might have to wear a sidearm to go collect rent and turn that into a C or a B class property. Not everyone has the skin for that. Not everyone wants to take the risk, enormous, enormous 10 pounds of risk that it would take to take down a property like that.
So if you do not have the chops and the business plan and the team to do a D to a B or a D to a C conversion, then that’s not the right business plan for you. Everything Andrew said is correct in identifying property classes and determining neighborhoods, but you as the investor then need to figure out which business plan works for you. Do you want to set it and forget it? Maybe make a lot less cash flow, but that could be class A or class B for you. Maybe there’s small little tweaks in the business plan you can do over the years to make the property make more and more money and hold it for a really long period of time. So maybe higher class properties are the right fit for you. It really just has to do with what risk factors you’re willing to take on and the team that you can bring to the table.

Andrew:
Philip Hernandez, welcome to the Bigger Pockets podcast. How are you doing, sir?

Philip:
I’m doing well. I am super stoked to be here. Yeah, thank you so much, Andrew.

Andrew:
You are part of the inaugural group of the Bigger Pockets mentee program.

Philip:
Yes, sir.

Andrew:
And you’re here with a few questions that hopefully we can help out with today. Is that correct?

Philip:
Yeah, that’s right. Yeah, no, super stoked and thank you guys so much for your time. So as I’ve been reaching out to brokers and developing relationships with different brokers in markets that I have a good sense of how things should look, I have had a couple times those same brokers send me deals in smaller cities in MSAs, like tertiary markets with less than 50,000 people. And I don’t have any presence there. I don’t have any connections, I don’t really know anybody there. But when I run the numbers, it works. The deal works. But I’m also like, okay, I have no idea what I don’t know. So what would a deal have to look like for you to invest in a tertiary market where you don’t necessarily have a presence and how would you mitigate the risk of taking an opportunity like that? And yeah, let’s assume everything looks good about it, people are moving there, there’s diverse jobs, the property’s in decent condition. Yeah.

Andrew:
First off, tell me about this market because I want to know where it is. So we could do a whole podcast on this. I’ll try to just hit bullet point, real high level. Number one, I have passed on many opportunities like that because of the challenges of small markets. So keep that in mind. One good asset in property management is where the money is really made and that is one of the biggest challenges that you have in those small markets. Some of these challenges are why those properties look so good on paper because the prices are lower because of the challenges that are inherent with those types of properties in those markets. So not only are you going to have more trouble getting good management, you’re also going to have trouble getting contractors and vendors and staff and all of those kind of things.
But your question wasn’t hey Andrew, what are the problems I’m going to have? It was, how do I fix that? Right? So number one, like I said, in many cases I just pass even if it looks great on paper because sometimes the juice just isn’t worth the squeeze. Second of all, if I am considering doing it, I might say, well who can I partner with that solves these problems? Is there somebody else I can partner with that already has a presence in this market that knows the market, can just move this property into their current portfolio and manage it better than anybody else out there? If you can do that, that can turn a weakness into a tactical advantage. I have seen people do that very thing, go into markets that are fragmented and that they don’t have a presence in, find someone who is just local and knows that market inside and out, partner with them and all of a sudden they’ve got an advantage that just no one else has.
And then another question that I would ask is, how is the current owner managing it? And if they’re doing it well try to copy what they’re doing. If they’re not doing it well go look at all the other properties in town, find the ones that are the most well run, and either try to hire those people, maybe it’s the same management company, or contact the owners and say, hey, can I partner with you? Maybe there’s an opportunity there. That would probably be the biggest thing I would recommend is find some local connection, partner or advantage to help mitigate those risks and then that return might actually have a higher chance of actually coming true.

Matt:
So yet again, everything that Andrew said I agree with. And to expand on that, when my company DeRosa invests in a market… And this is why I wouldn’t do the deal you’re talking about Philip. So the short answer is no, I wouldn’t do that deal because we invest in markets first, and that’s for everything Andrew said. Labor, access to… Everything from the contractor that’s going to turn units over and upgrade them for me to the workforce that’s going to live in the property, access to jobs, those kinds of things, to the property manager themselves. You don’t want them commuting an hour to your property from where they personally live to your property. You want them to live in a reasonable sized metro, that there’s middle income housing for them to live in, that they can come to your property to work for your property as well.
So for those reasons, I wouldn’t do the deal. And above all else, when we invest in markets, it’s market first. And the reason for that is so that I can buy not one, not two, three properties, three multi-families in a market that we can expand. I mean, our goal is to get to at least a thousand units in every market. And that doesn’t have to be your goal, but you should never look at a deal and say, I want to do that one deal in this market. If you can’t see yourself doing at least another 10 deals in that market, if there’s just not the inventory to do 10 more deals, or if you’re not sure if you believe in the market that much to invest 10 more times in the market, I wouldn’t do the deal.
And what investing 10 times in that market does for you is it accesses everything that Andrew talked about. You get the best access to labor, you can really sway the market that way. You can really control the market a bit and direct what rents and amenities should look like, what really awesome housing should look like in that market if you’re a large owner. If you’re not willing to do that, then you’re going to be on the peripheral and you’re never going to be able to really control it or negotiate great labor contracts with folks to do the work for you or to really access full exposure to what that market can yield for you if you’re only willing to go in a little bit.
So everything you said does not get me excited about the deal that you have. It’s just, hey, this deal looks good on paper, it’s a market I know nothing about. That’s just what I heard. This deal looks good on paper, it’s a market I know nothing about, I don’t know anybody there, it’s kind of out in the middle of nowhere kind of thing. I’m saying that, you didn’t say that. But if it’s close to a big market, then maybe look at the big market and look at this tertiary as kind of part of a bigger picture you want to paint for yourself. So that’s my short answer. Cold water on you is no, I probably would not do that deal.

Philip:
No, that’s all good. Any shiny objects that I can take off of my radar will I think help my journey in the long run.

Matt:
It feels like a shiny object to me.

Andrew:
And I’d like to quickly reiterate two things. Number one like I said in being most of those I pass on. And then number two, I really like what Matt said for everybody listening, if you’re going to do that, if it’s a one-off deal, probably pass. But if you can do five, six, seven, 10 and grow it, you can turn that into an advantage. So Philip, we appreciate you coming on real quick and then also just asking questions in front of a quarter million people audience, takes some [inaudible 00:50:53] so we appreciate that. Other than storming your classroom, if people want to get in touch with you, how do they do that?

Philip:
So on Instagram, it’s the_educated_investor, and then I have a website, www.educatedinvest.com. Thanks for that shout out Andrew. Appreciate that.

Andrew:
I like it. Good stuff, man. Well, you’re going to do well. I think we’re going to be hearing a lot more from you here in the near future.

Philip:
Awesome. Thank you.

Matt:
Andrew. We’ve got another question lined up here. I’ve got Danny. Danny Zapata. Danny, welcome to the Bigger Pockets podcast man. How are you today?

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

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

Daniel:
Yeah, I had a thought around raising money. So I’ve had some success raising some friends and family private money. I wanted to get your thoughts on what are the pros and cons. I guess going to the next steps, I either go and I kind of tap out all of my friends and family or do I go and broaden into more less familiar folks. So I wanted to get your thoughts around how do you expand that.

Matt:
Danny’s passing a hat around at Thanksgiving dinner, right? Okay, pass the Turkey and then also pass your checkbook.

Andrew:
Go partner [inaudible 00:52:16] Philip.

Matt:
At the end of the day, Danny, most investors, I know I did and I believe Andrew, you’d be able to say the same, started with friends and family as their investors. And the reason why you do that is because people that are friends and family like and trust you because you’re you. You’re Danny and you’re awesome and they know that, not because you’re Danny, the awesome real estate investor, but because you’re their son and they love you or you’re their brother or they trust you because you’re you, not because you’ve developed this phenomenal real estate track record, whether you have or not. So most real estate investors should and do start with friends and family as their investor base and I highly… And if it gives you the heebie-jeebies talking to friends and family, I’m talking to listeners, not you Danny, but if it gives folks the heebie-jeebies talking to their family members… And in my book Raising Private Capital, I talk a bit about how to overcome personal objections you may have internally and objections that friends and family may have with you as well.
Bottom line, treat them like investors, whether they’re your friends and family or not. Don’t give them special treatment or oh, it’s okay, we don’t need to put this in writing. I’ll just take your check. No, give them every rights and benefit, including full documentation that you would anybody else. Everyone needs to expand beyond friends and family. If you’re going to grow Danny, you need to go beyond that. The way that I did it was to go to friends and family and then start asking them for referrals. Like, hey, who else do you know Uncle Charlie? Who else do you know person I went to high school with that may want to invest with me or may want to consider doing what I do as a passive investment vehicle? That’s how I grew. And then once you’ve done that, then you can expand to tier three, which is social media, picking up the big megaphone, talking into it about what you’re up to and attracting more and more folks.
But it sounds like Danny, you’ve achieved a certain level of success with friends and family capital. Awesome. I would go next level and start asking those folks that are happy for referrals to other folks that they think may be happy too working with you.

Andrew:
Well, that was fantastic. I can’t really add a whole lot to that. Matt, you should write a book about money raising or something and Danny, when he does, you should go order it and read it. Maybe another tip is raise money from pessimists because they don’t expect it back. But beyond that, I did the same thing. My first check as a syndicator was from my mom, and so shout out to mom for believing in her son. And Matt laid it out beautifully. You do that first, maybe skip the uncle if he’s going to bug the heck out of you at Thanksgiving or make life miserable if it doesn’t go perfectly. But other than that, friends and family are the place to start, and then ask for referrals.
And then even beyond referrals, it’s really tough for LP investors to jump in to be the first guy to jump into the pool with you. But if you’ve already got eight or 10 people at your party, then you don’t have to go tell everybody else that it’s your family. You can just say, hey, I’ve already got these eight investors, we’re 70% of the way there. It’s going to be much easier to get people you don’t know or that don’t know you as well to come in for that last 30%. So exactly what Matt said, start with friends and family, then go to referrals, then use that as a base to reach out to people that you don’t already have that relationship with.

Daniel:
I guess I shouldn’t also tout that my mom’s my biggest investor, right?

Andrew:
Hey, you know what? That’s a great thing.

Matt:
That’s a good thing. You shouldn’t discount that, man. I go telling people all the time, and by the way, my mama was one of my first investors as well, by the way. And I tell people that because it is a testament to your belief in your business, Danny. All joking aside, my mother has invested in my business. You should tell people that. I got my mama’s money. Not just somebody else’s mama’s money, I got my own mother’s money in my business and that’s how much I believe in what I do, that I’m willing to put my mother’s livelihood, my mother’s future wellbeing, her wealth goals into what I do. I tell people that all the time because it’s something that I… Not to get emotional about it, but I’m proud of that. I’m proud that I can take a bit of ownership of my mother’s financial future through what I do.

Andrew:
Matt, that’s beautiful. I tell our investors this. I tell them, I say, look, I can’t screw this up because I would have to get a new family and new friends because they’re all in this and I’d have to go out… Yeah, I can’t afford to do that.

Matt:
Yeah, I’m control alt deleting at that point, right?

Andrew:
Yeah.

Matt:
Danny, your thoughts, man. I hope this has been of value. Any final thoughts before we let you go?

Daniel:
No, that was awesome. Thank you for your insights there and I’m glad I was able to make you a little emotional during the podcast.

Matt:
Danny, been awesome having you here, man. Listen, you’ve delivered a lot of value today in your questions and your thoughts. Please tell those listening how they can get ahold of you if they’d like to hear more about what you’re up to.

Daniel:
Sure. I think the easiest way to get ahold of me is on Bigger Pockets. So Daniel Zapata is my legal name on Bigger Pockets. Also, I have somewhat of a Twitter presence, DZapata, my first initial and last name on Twitter.

Matt:
And that’s Z-A-P-A-T-A. I will not ask what your illegal name is. That’s your legal name only. So if you guys want to reach out to Danny and find out what his illegal name is, you can do that now. Good being with us today, Danny. Thank you.

Daniel:
Thank you.

Andrew:
All right. Take care, man.

Matt:
All right, Andrew. If people are living under a rock and they have no idea how to get ahold of the Andrew Kushman, how would they reach out to you to find out more about you as a person, a real estate investor, a visitor of Antarctica, all those kinds of things? How would they find out more about that?

Andrew:
Best way, connect with me on Bigger Pockets. You can also connect on LinkedIn or just Google Vantage Point Acquisitions. Our website is VPACQ.com, and there’s a contact us form on there that comes to my inbox.

Matt:
And folks can find me on our website from my company DeRosa Group, that is D-E-R-O-S-A group, derosagroup.com. They can get ahold of me and anybody on my team there to hear all kinds of cool stuff about what I’m up to derosagroup.com or follow me on Instagram at theMattFaircloth.

Andrew:
All right.

Matt:
All right, folks. This is Matt Faircloth here with my host Antarctica Andrew, and ask him more what that means. Signing off.

Mindy:
Welcome to the BiggerPockets Money Podcast, Finance Friday edition, where we interview Chris and talk about fi when you own your own business.

Chris:
I found out that the real problem there is in sticky garbage cans. It’s that, old ladies and grandmas don’t want to climb ladders. So, that’s pretty much what we do is, ladder related home maintenance for grandmas living in these communities where we do their home maintenance so that they ultimately have the opportunity to maintain their independence in the place that they love the most. And, graduated college, came back home to grow it. We’ve, as you’ve described, hired employees and doubled every year largely since I came back home. So, that put me on the, kick-started me to interpersonal development and find it all about podcasts, and real estate and investing, so here I am today.

Mindy:
Hello, my name is Mindy Jensen, and with me as always is my way too corporate for a startup, co-host Scott Trench.

Scott:
Thanks Mindy. Unlike our guest today, I never had to climb the corporate ladder.

Mindy:
No, you quit the worst company to work for ever.

Scott:
Get it? Because, he’s got a ladder bus.

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

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own ladder business, Mindy, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I apologize for missing your amazing pun. You’re so great at these amazing puns. I am excited to talk to Chris today. He has started a really cool business right out of high school. I think that he shows an enormous amount of initiative, and he continued to go to school while running the successful business and now is looking towards his financial future to determine when he’s done running this business what he wants to do. He wants to set himself up for financial freedom, but he’s not that interested in the early retirement part of fire, which I think is great, because I don’t think you should focus on the retire early part. I think you should focus on getting enjoyment out of your life, but I did enjoy talking to him, Scott.

Scott:
I thought it was really interesting. I think that, look, Chris has a services business, and a challenge in the services business for somebody who starts off as a self-employed entrepreneur just themselves, which is what Chris started as, is that when you begin to expand, you inevitably erode your profits. Because, if I’m billing out, if I do a service for a $100 an hour, and then all of a sudden I hire somebody for $20 an hour to do that same service, unless I’m getting more hours in, I’m eroding my margin, I’m losing at least 20 of those dollars. And so, that’s the challenge that Chris is facing right now, and I think it’s just a really good framework and lesson and thought to think through. If you have a services based business and you want to expand it, you have to take this period of sacrifice and there has to be a clear path to making more than you were in the first place. Because, running a services business is much harder than being an individual service provider.

Mindy:
It is. I think we gave him a lot of things to think about, and I think he has a good business head on his shoulders and now it’s just balancing the very different goals of growing your business and showing a lot of income to qualify for a new house purchase.

Scott:
Absolutely. Well, should we bring them in?

Mindy:
Well, we can’t yet, Scott, because we have to satisfy our attorneys. They make me say the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate. All right, before we bring in Chris, let’s take a quick break. And we are back. Chris is a 26-year-old entrepreneur who started his business right out of high school as a way to graduate from college debt free. Who knew it would turn into such a successful actual company that employs eight people providing handyman and home services throughout the year. Now, he’d like to think about his retirement plans so he’s financially ready when he’s actually ready to give up his handy manning. Chris, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Chris:
Thanks so much for the opportunity, Mindy and Scott.

Mindy:
Before we jump into your conversation, let’s look at your money snapshot. I see self-employment income that varies, of course, because it’s self-employment income, but $75,000 approximately for the year with additional income from a house hack of 4,350 per month. We have monthly expenses that total around $2,100. So, we’ve got 1,200 for rent or your portion of the house hack, $66 for utilities, 250 for gasoline, 250 for groceries, 50 for restaurants, 50 for household, gym membership is $10, clothing $20, car about a 100, gifts 15, mostly for Christmas, entertainment $20 a month, travel about 25, and internet Wi-Fi $85. Those seem good. I just want to caution you that those are your actual expenses, but you seem to have a good handle on them. Your investments, I’m sorry, your debts, let’s look at your debts, oh, nothing but the mortgage.
That’s a great position to be in at 26 years old. And, investments, you don’t have a 401(k). You can bet I’m going to talk about that later. You do have a Roth IRA with approximately $44,000 in it at 26, that’s awesome. A SEP IRA with an additional 39, that’s also awesome. Personal brokerage of 106, which makes me eat my words about that 401(k), but we’re still going to talk about it anyway. So, 106 in a personal brokerage that’s fantastic. $1,500 in cash reserves, I would normally want to have a conversation about this, but you do have a business where you can take business draws if you need to, so I’m not going to harp on that too much. So, Chris, I would like to know your biggest money pain point, your goals and a brief history of your money story?

Chris:
So, I think really my money story started out of high school. I didn’t have the greatest choices for college, fortunately in hindsight, really the best decision I ever made was going to community college. It wasn’t where I wanted to be, but it helped me get to where I wanted to go, which was ultimately transferring to UC, Santa Barbara, that was my dream school. And I was a caretaker and a paperboy at the time, kind of alluded to at the precipice from high school to community college, and I needed more money. And I was working as a caregiver for a grandma, and I got that job from a friend who went door to door cleaning garbage cans. So, at that time I was trending towards almost graduating and transferring to UC, Santa Barbara, and I realized, I need to make more money than I can make us a paperboy or a caretaker.
I thought back to my friend and I said, well, I’m above nothing. I’m going to go clean garbage cans. So, I started doing that in a local retirement community, it’s what called a 55 plus active living retirement community. I found out that the real problem there is in sticky garbage cans, it’s that old ladies and grandmas don’t want to climb ladders. So, that’s pretty much what we do is ladder related home maintenance for grandmas living in these communities, where we do their home maintenance so that they ultimately have the opportunity to maintain their independence in the place that they love the most. And graduated college, came back home to grow it. We’ve, as you described, hired employees and doubled every year largely since I came back home. So, that put me on the, kick-started me to interpersonal development and find it all about podcasts, and real estate and investing, so here I am today.

Scott:
What’s the revenue and profit from this business, and how much do you take in salary?

Chris:
So, interesting. Historically it’s been structured as a sole proprietorship. So, I think my net income last year was really good because I was the epitome of being self-employed. I was doing almost all the work. Our payroll was very little, so last year I made about 103 in net income. This year, effectively we’ve grown a bit, but our expenses are outpacing our growth. So, I’m going to take home a little bit less this year, probably closer to 54, 55, something like that. But, top line, last year we did 164 and we grew a little bit this year.

Scott:
And you do not take a salary then? Is it all distributions?

Chris:
Currently, right now I do not take a salary, I just take distributions, exactly right. I think over time we’re going to be implementing a different business structure and I’m going to have to pay myself a reasonable salary, but I’ll let my CPH choose that.

Scott:
Awesome. And can you walk through the employees? So, these are not full-time employees. They sound like hourly contracted guys.

Chris:
So, we have several really part-time employees. Most of our staff are current college students. We have one full-time operations manager, so he’s on a salary. I think there’s one other full-time person, one close to being full-time, but you’re right, about five or so are pretty part-time.

Scott:
Awesome. And then, can you walk us through anything about seasonality in the business?

Chris:
Absolutely. We do four core services, gutter cleaning, window cleaning, solar panel cleaning, and Christmas lights. So, we do really well during this time of the year, November and December. We do a lot of gutter cleaning and Christmas lights. Grandma’s have a high willingness to pay for those services during that time of the year, and during spring and summer it’s more about window cleaning, but it is a clearly seasonal business. We have a couple lulls, shoulder seasons between those two.

Scott:
Awesome. What do you bill at, and what do you pay your staff?

Chris:
So, I know the operations manager. He’s salaried exempt in the State of California, so he makes two times a minimum wage. The other staff, they’re all being paid living wage, it just depends on the role, but somewhere typically around $20 blended across all forms of compensation.

Scott:
Well, you’re paying these guys 20 bucks on an hourly basis. I presume you’re billing the client more than $20, otherwise you wouldn’t be in business. So, I’m wondering how much that spread is.

Chris:
Absolutely. We don’t typically really bill by the hour in that case, we bill by the project. Typically our revenue per man hour is north of a $100. It really depends on the service, but about that.

Scott:
Awesome. So, you got a profitable unit economics, very profitable on a services based business here, and the challenge is filling up as many man hours as possible on that. So, Chris, what’s driven growth over the last couple of years, and what are the plans going forward for your business?

Chris:
So, I’d say what’s driven growth is, obviously the first several years it was me doing the work. I maybe played the role of the ideal grandkid where I was actually there to help them. So, we had a lot of great referrals and word of mouth in these communities. They gossip like teenage girls. These communities are largely 65 to 85-year-old retirees, and they oftentimes socialize and talk to their neighbors and friends. So, I’d say that’s what really allowed me to get the foothold in these communities is, we take every opportunity to advertise in these communities, newspapers, publications, store hangers, signs, et cetera, but nothing really beats word of mouth. And I’d say that’s what allowed us to initially succeed. And ultimately we use those other forms of print media as I already explained, to expand out to the other 55 plus communities in the area. There’s about 20 of them, and we’ve so far serviced about half of them.

Scott:
Awesome.

Mindy:
I was telling Scott before we started this show, I’m so excited about this idea because I live in a neighborhood where there’s probably 30 or 40% of the people who live here are still original homeowners from the ’70s, so they’re in their 70s and 80s and 90s, and this would be an ideal neighborhood for you to come in if you lived here. But, how much did it cost you to start this business? It was probably very low startup. You need a ladder, that’s not that expensive.

Chris:
Exactly right. Initially really to start, I got a pressure washer to clean garbage cans, and then over time I found out, oh, they need this thing done and that thing done. And it’s very asset light, it’s equipment light, so it’s really a business pretty well positioned for an 18-year-old to get into. That also makes it a very competitive space that there’s a low barrier to entry. But, absolutely, it costed very little to get into this business. I literally think it was a $200 pressure washer that I just put in the back of my car and started going door to door.

Mindy:
And you use their water, their electricity?

Chris:
Exactly, pretty much. So, there’s really no cogs to put a business word to it besides obviously the cost of service as we were talking about.

Mindy:
Have you thought of franchising this idea?

Chris:
Absolutely. I initially pursued the idea of franchising the last couple of years. Early in COVID I called, I’d say played the role of a college student doing a marketing project or a class project for an entrepreneurship class and talked to a bunch of franchisees in the space. So, that gave me good insight as to maybe the expectation of the size of a franchise to really justify going that route. I don’t think there’s enough territories for the markets that we really target with type of business. Ultimately the most opportunity are in places like Florida or Arizona where they have a really high density of these types of communities. So, ultimately long term, three, five years, our plan is to expand out to those other places, Florida and Arizona to offer the same services. Because, if we can target and convert a 75-year-old lady that lives in Sacramento area, 55 plus community, we can do the same in Florida and Arizona and really go the corporate route ultimately.

Scott:
How many total billable hours did you bill last year?

Chris:
I could look up our KPIs. We probably did about 500 appointments. Each appointment is going to last somewhere between two to four hours. So, I’d probably say, how many billable hours? If we’re doing, we did about 164 last year in revenue. We do about a 100 or so plus or minus per man hour. So, what would that be? 1,500, something like that.

Scott:
So, here’s a question just to be frank with you and, well, a statement and a question. This business has to scale for you to continue operating the way that you’re operating, because the work year is 2,000 hours. So, that simple math says you could just do all of those hours yourself, you don’t need any employees, and you would’ve made $164,000 last year instead of 54,000. And so, that I think is something to noodle on conceptually and say, is there a path to getting this thing there? Because, on paper at least you don’t need any of those employees and the time is there. You have another 500 hours on top of that as bonus to actually schedule, and coordinate, and market and all that stuff to get that time. So, what’s your reaction to that observation?

Chris:
I would argue that half of our staff, four of the employees are really part-time, and they’re what I call a canvasser. So, they’re really stirring up leads and marketing for us, distributing the door hangers, the banded sign. So, I need them to get some proportion of the leads that we already generate. And this year was a big step in my business, because I recognize exactly what you’re talking about. This type of business is really profitable when you do it all yourself, what also happens, you get burned out. That’s what happened last year with me. I was overworked. I was working way too much, spending too little time with friends and family, and this is the messy middle in terms of the size of this business.
We need to get to 750, a million dollars to really get back to the level of profitability that we were prior, where I can take as much home as I was when I was doing all the work on the ladder. But, I think it’s a natural progression with this type of business is, the cost structure changes as you start to hire employees. We need to continue to grow to justify that change in that cost structure instead of just reverting back to what I had done the first six or so years and doing it all myself.

Scott:
How long will it take you to get to that point, 750 to a million where this business brings in more than if you just did it yourself?

Chris:
Sure. So, I think, I’m confident there are five or so businesses in the Sacramento area that do the same exact services like us that do a million dollars plus, so I know it’s a possibility, and so much so that there’s franchises in this space, so that really is what validates the opportunity. So, I think realistically, to get to the size that I had stated, 750, a million dollars, that’s going to take us locally here probably three, five more years. It’s tough to continue the pace of doubling what we’ve done historically, but I think we could get to 360, 400 this coming year. And if we have two or so years of slower growth, we could get to that 750 or so mark.

Scott:
I think that’s too vague, would be my observation. I believe you. This is a good business model. You’re clearly solving a problem. Your customers clearly like you, you’re getting word of mouth referrals, things are good. You’ve got something here. But, I think that this is a major problem we’ve uncovered in your personal financial situation, which is the purpose of what we’re trying to do here, where you could be making way more money by just going back to what you’re doing two years ago, and your outcome is five years away and we’re way too vague about how we’re going to move forward in the near term. I think that some suggestions I’d have for you are, let’s boil this down to a process perspective. I like the approach in a general sense. You don’t want to just be getting on a ladder and dealing with all these maintenance issues, hanging on Christmas lights for the next five years. We don’t want to do that.
But, the business side of it has to make sense in order to justify spending the next three years building your business, which is maybe even harder than that. So, let’s boil this down to a process. I think you should document, what are the steps to getting a lead in my business? We have door knock, door hangers, we have word of mouth, we have all this. Do I have a system to track all of that and understand the ROI? What if I’m paying these guys to hang door knockers, and that was a complete sinkhole for me. I got one deal out of it last year and I spent 20 grand. Do you know that in your business?

Chris:
Absolutely. You bring up a valid point. And I think one thing, one challenge historically is we’re very print marketing based because demographically we serve 75-year-old ladies. And what do they respond best to? You could argue physical print media instead of Facebook ad. I think the digital media strategies that we’ve yet to really undertake are probably easiest to grasp, like cost of customer acquisition ultimately is what you’re getting at. We’ve done a poor job of tracking that historically. We are using a CRM. I have an office manager. She’s asking that on every call that she receives is, ultimately where did you find out about us, so that we can do an analysis on, what are the most cost effective marketing channels so we can pull the right levers.

Scott:
Great. And then, what’s the process once you do get a lead? How many of them convert into appointments? What’s your process for setting an appointment, quoting the job if you have that, completing the job and then getting feedback?

Chris:
So, I’d say historically our close rate was about 40% blended over all of our services. Well, this year it’s gone down a bit as our prices have changed because the cost structure has dramatically changed to the business as I described. So, how it currently works is, most commonly we get 75% or so of our calls from these 55 plus communities. Typically, they see us from some print media, a door hangar, a sign. They see us at an in-person event perhaps, but some community-centric form of advertising. They see our number, they call our office manager, they say, I need gutter cleaning, how much do you charge? She gets a few questions asked. She prepares a quote that same day, very likely in the next hour or so after they had called. We send that quote via the CRM that we recently paid for and utilized. And from there they receive the quote, receive follow-ups, et cetera. And once it’s approved we contact them to book the service, so that’s the customer journey from prospect to book deployment.

Scott:
So, is this all automated? Are you a part of any of that?

Chris:
And as explained, this year’s been a dramatic change of me stepping operations and not doing all the cleaning, all the hanging Christmas lights, et cetera, and same with answering phones. Historically I was answering every phone call until I hired my office manager. And these maybe overhead costs are to explain some of the change in profitability, but I would much rather be where I’m at right now and make less money and not be burdened with doing everything in my business than reverting back to where I was.

Mindy:
So, I have a couple of customer acquisition ideas for you. You said that there’s what, 20, 55 plus communities and you’re in about half of them?

Chris:
Correct.

Mindy:
So, have you considered having an age appropriate brand ambassador in each one of these neighborhoods? You go and you clean Gladys’ garbage cans for free, and she’s so delighted that you did this, that she tells all of her friends and then all of a sudden you’re in that neighborhood now too. Are there services that your clients are asking for that you don’t currently offer, or have you pulled your clients to see if there’s anything else that you can help with? Because, you already have a client, getting that client to spend more money with you is going to be easier than finding a whole brand new client. You already have them, they already appreciate your services. Ask if there’s anything else that they would like around the house. Maybe you can help move heavy stuff, or rearrange furniture, or get rid of stuff or something like that.
And have you ever done a, like we are going to be in your neighborhood. We’re going to bring eight guys into your neighborhood this Saturday and we’ll take, we’ll clean anybody’s garbage cans for 10 bucks, or a 100 bucks, I don’t know how much it costs to clean a garbage can. But, some ideas where you’re already there, how much time does it take to clean yet another can? And that could be another way to introduce your services to people. Obviously you can’t hang up Christmas lights in a 5,000 house community in one weekend, but introducing people especially on some of those slower weekends.

Chris:
Absolutely. I particularly love the idea, that brand ambassador. I haven’t thought about that particular phrasing. We definitely do get great referrals on these communities. We could probably do a better job of catalyzing and asking for the referral, so that’s super valid. And ultimately lots of the people in these communities, they’re widows, they’re widowers, they’re vulnerable. They really rely on people that they can trust and they most trust who they’re referred to, so I think that’s a very valid point. Other services, we’ve definitely thought about adding on different types of services. I think one of the reasons we’ve really niched down on what we do is because they’re the things around the house that are the most physically demanding that we most frequently get asked about.
So, we do some small things like moving, or yard work, or changing a smoke alarm battery, air filter, name your other task that an 80 year old woman might struggle with. But, I also don’t want to get too spread out and going inch wide in a mile deep, or an inch deep and a mile wide, I want to do the opposite. So, in terms of other services, I think one hesitation is that it’s just operationally complex. This is already a very operationally intensive type business. I’m confident we can do what we currently do great, but lesser so if we continue to expand our set of services.

Mindy:
Sure, and that’s a great point. But, if you ask all of your customers, hey, is there anything else you would want us to do, or are having trouble finding somebody to do? And everybody asks for the same service, that shows you that there’s a demand. So, I love polling customers and asking, what are you looking for? If everybody wants 19 different things, well then, oh, we’ll look into that. But, if everybody wants the exact same thing, that’s something really valid. Now, you just mentioned something I think is very interesting, changing out smoke detector batteries. Those are always way up on the ceiling and they’re very difficult, and lights too. I don’t know if these neighborhoods have big high ceilings. I think they’re more like manufactured homes, aren’t they, some of them?

Chris:
Manufactured isn’t right. They’re stick built single family residences, but it’s a normal suburb just full of elderly folks largely. But, absolutely, we have done all these little things around the home. They’re not revenue drivers for the business. What’s really most profitable are the four main things that we do, the gutter cleaning, the Christmas lights, the window cleaning, the solar panel cleaning.

Mindy:
So, these non-revenue drivers are super helpful for these little old ladies who can’t get up on that ladder themselves. So, you go in on a Saturday, we’ve got eight guys for 20 bucks, we’ll come in and we’ll get all the cobwebs and change your batteries, and change your lights, and do all this stuff for 50 or whatever. And then, you go and you bang out all these houses and they’re so pleased that you were there. They call you back to do their gutters, and to do their, hey, by the way we offer all these services too. If you ever need anything, please give us a call. It’s not a revenue driver, it’s a lead gen. But, anyway, just something to think about. Another thing is with the referrals, like you said, you can get 10% off of your service and 10% for me, if you use my name, just tell them that Gladys Smith sent you.

Scott:
Well, is there anything else you’d like us to cover from the business perspective?

Chris:
I think one topic that I was thinking about is obviously insurance, and as it relates is I could start to offer that as a benefit over time. I think the thing that you’re probably going to point out is, we need to continue to grow to really justify doing that, but that’s something that I’ve entertained, but I think we’ve pretty well covered the business front.

Scott:
I agree. I don’t think you’re ready to offer health insurance as a benefit to your employees yet.

Mindy:
That’s really expensive.

Chris:
But, would love to do it over time.

Scott:
You could join a PEO if you need to, for you and your one full-time employee.

Mindy:
Well, let’s talk about this house hack. Give me the numbers. What did you purchase it for? What is it rent for? All the things.

Chris:
Absolutely. So, over the last several years I’ve really tried to prioritize getting my financial life in order. So, over the last couple of years I was obviously increasing my net income. Trying to show to a lender that even in the State of California I can buy a home, you can trust me. And last year was really the first year in which I met the threshold that they look at in terms of debt income and supporting the mortgage more or less. And during that time I had contacted a friend because I was under the impression that he was house hacking based on a Facebook post that I had seen. And I hit him up about a year ago, maybe a little more than that. And he was describing that, yes, he was house hacking currently. He was in contract to buy his second property with a friend, and that friend happened to drop out and he was put in a tough spot and he needed some help.
So, I was in the perfect position. It fell in my lap and we bought the home together, my first home. I currently live here. We bought it for 740 purchase price at the end of August, 2022. So, 740 purchase price, we put 10% down. Our rate was 6.125. We went with the preferred in-house lender because they give us some credit. Over time, we’ll very likely be five, hoping that rates eventually dip below five. And, so far I rent, I live in the master. The other five rooms are rented. So, how we qualify and count income varies, but it cash flows in a sense greater than the pity payment, which I think is a little over $4,900.

Scott:
Awesome. If you did not live in the property, how much total rent would you collect?

Chris:
I think it’s 5, 550. It’s a little over 5,500.

Scott:
And your mortgage is 4,900?

Chris:
Correct, hair over.

Scott:
Awesome. And how much do you think it will rent for in a year or two?

Chris:
Each of the rooms, we probably increase each of the rooms by 25, 50 bucks. I don’t think dramatically, but some marginal amount greater than it is today.

Scott:
So, we’re probably close to break even when we factor in CapEx, vacancy, turnover and maintenance on it. But, we’ve got an asset that we can hold here probably without bleeding on a monthly basis for the long term in a good spot.

Chris:
I would hope so. And really my plan here is to do the same thing over the next couple of years, is to qualify for primary residence, live in it for 12, 18 months. I don’t have a kid or any dependents, a wife that can tell me otherwise. So, I’m at a stage where that seems like a worthy sacrifice to make, and ultimately that’s one big reason I wanted to go on this call was just to make sure that I’m positioning myself to do so and ultimately achieve my goals of reaching some semblance of financial independence so long-term I can take the entrepreneurial risks that I desire.

Scott:
Awesome. Whose name is the mortgage on?

Chris:
So, we’re both on title, so it’s my buddy and I.

Scott:
Great. So, your question is, how soon can you purchase your next house hack?

Chris:
I think that’s one major concern is obviously that’s something to figure out with my CPA, is how we report income, et cetera, and meet the DTI requirements. But, that is definitely a point of maybe contention or conversation that I need to navigate, because as someone that bought a home with someone else, from a lending perspective, I’m liable for the whole mortgage. But, renting rooms doesn’t count income wise from what I’m familiar with. So, I think that puts me in a tough position DTI wise, but that is definitely some challenge to circumnavigate if I want to follow through on the goals that I just explained.

Scott:
That’s new to me that renting the room would not help you count on a DTI perspective.

Chris:
Perhaps you’re right. I trust your expertise more than my own. I know that-

Scott:
I’m not a 100% confident, I’m just surprised to hear it. So, I should know that probably, but I don’t. So, are you pretty confident, or has a lender told you that?

Chris:
From what I understand about living in a single family residence, they’re not going to count renting rooms as income, like income for their purposes. But, if I lived in a multiplex and I rented other units or, they would count some proportion of it, I’ve heard 75%. It probably depends on the lender, and the time, and that might change, but that’s what I’m familiar with, with the income reporting.

Mindy:
Oh, I’m not sure. I know you face challenges just by being self-employed. Even though you’ve been self-employed for a long time, lenders are very squidgy about that. I don’t know that you can’t count any of this rent towards your debt to income, and I would definitely speak to more than one lender. I have a lender based in California, but they’re licensed at all 50 states, and they can do self-employment after one year. You’ve got multiple years and you have shown a profit and you’re growing. I don’t think they would have an issue with your source of income. I think that we are looking at a problem with the amount of income based on the rent, so that’s where you would need to have the rental income counted in order to qualify. What would this whole property rent out for if you rented it out completely? If you moved out, and all the people moved out and you rented it as one property instead of by the room?

Chris:
I would need to look at comps to really verify this. We haven’t really considered going other than rent by the room, because we knew we could make more money doing it that way. I’m pretty confident somewhere in the realm of 3,000, probably a hair more would be my intuition, but you guys probably have a better pulse on that.

Mindy:
So, then rent by the room is definitely the way to go. Now, once you don’t live there, rent by the room is just, it’s still a rental, so I would think you could qualify that. And then, having a year of rental history, even though you’re living there, you still have a year of rental history to show the lender, look, I’ve been renting these rooms for 5,550 consistently over the course of this whole year.

Scott:
I think that’s right. This is something, we’re getting into really a place where the tactics really matter in terms of your timing for when that will hit. My guess, and you got to talk to a lender and your CPA about this, but my guess is, you want to report the income from this property on your tax return as much as you can, that makes sense. So, you don’t want to play games to reduce the income liability because, well, that way save you a little bit on taxes. You’re probably going to have a loss on the property for the first couple of years given what you just shared with us, a taxable loss once we factor in depreciation, so there won’t be much of a tax benefit, there’ll be some. But, more important to you it will be the income qualifications. And if you can show two years of tax returns with this rent income hitting there in a way that will qualify for the lender, you’re going to be in good shape.
So, if you can get that rent on your tax return in year 2022, which it sounds like you will, that’ll probably be in pretty good shape. And what that does is, it has a multiplier effect on your ability to borrow once you are able to report that income. Because, not only does the current rent from your property help you with this debt to income challenge, but as a landlord with experience, you’ll also be able to count the potential income on your next property as helping you with your debt to income.
So, if you buy a duplex, for example, next and it’s empty, but it would rent for three grand, 75% of that will help you qualify for your next conventional mortgage, which it won’t right now. So, somehow some way we got to figure out a solution to this problem. I would talk to a couple of lenders and I would not just listen to your CPA on this. Your CPA is going to give you great tax advice, but sometimes the consequence of getting great tax advice can be there’s less income to borrow against. And so, you want to make sure that you’ll also run that by your lender and get good advice from a lender who knows what they’re talking about in this area.

Chris:
Absolutely. More research is needed for your point.

Scott:
Is that a helpful starting point? We’re not quite answering your question, but is that a helpful starting point to think about how you get the two years of tax returns or at least one year of tax returns on there with the highest number possible for rent collections?

Chris:
Absolutely. I know I need to talk to lenders because probably different firms are going to have different lending criteria and such, and I know my situation is probably peculiar relative to a lot of the situations they deal with. But, absolutely, I agree. I need to talk to multiple lenders and ultimately brokers probably have the best source of the plethora of options that I can explore.

Scott:
It may be as simple as this as well. It may be that you live in the property this year and then you move out and you rent a place, half your buddy’s bedroom or something like that. I think you said there was some arrangement like that, that you had worked out. And so, you use that situation, you say, I have a true rental right now. It’s fully booked, and I’ve got the income on my tax return last year, I’ve been doing this. So, now you may be three months, we’re recording this in December 2022, you may be three months away from being able to qualify, because you have the cash for a down payment or you could access it from the brokerage side. So, that might be a really powerful booster there if you can create that situation. Because, it may be, I got the rent on my tax return for 2022, but I can’t be living in the property while I’m actively looking for the next one and using rent from roommates essentially to qualify.
But, I have a true rental. I don’t know, I’m getting really way in the weeds here, but I have a true rental because I’m actually renting another place right now and that is operating as a standalone rental property, or I have half of it, or whatever it is that you’ve worked out. So, that’d be the path I’d go down exploring this, and I wouldn’t be surprised if you’re not too far away from at least having a substantially brighter outlook on the debt to income side.

Mindy:
Oh, I was going to say, I wouldn’t be afraid to ask lenders, do you have any creative solutions? Do you have any suggestions for me? I’m willing to do a lot of things. I’m not married to anyone’s solution. I’m looking for ways to expand my rental portfolio, to expand my home ownership, to get into a property sooner, to do a lot of different things.

Chris:
Absolutely. I need to have these conversations with lenders, brokers, et cetera. I think the last resort option is ultimately to probably circumnavigate the 100% liability that I face with having two people on the title and me being really a 100% liable from the mortgage at the end of the day from a lending perspective is, either sell out to my buddy or vice versa and get one or the other off the title to circumnavigate these DTI challenges.

Scott:
Or just don’t repeat the problem the next property.

Chris:
I would agree.

Scott:
So, I think from a bird’s eye view, from my standpoint, you just got this place, it seems like it’s going reasonably well. You need to set yourself, start thinking about the next property purchase, but I think it boils down to make sure that you file your taxes. Probably the earlier the better with that. You think through if there’s new ramifications. If you do have any options in that, you probably don’t. But, if you do have any options, you want to report in such a way that your lender will be aligned with that.
And then, you want to ask, well, does that rental income, if it doesn’t count from roommates for my next loan, does it count the day after I move out of the property towards my DTI or what? And, I think that, at this point I wouldn’t fiddle too much with the structure you’ve got with your friend, that’s done. The property’s purchased and you’re going to have to transact the property in order to change things that has all to do on sale ramification ramifications potentially and would potentially give either one of you trouble if you couldn’t qualify for the mortgage on an individual basis.

Chris:
I absolutely agree. It’s a last resort, but it is a resort if needed.

Scott:
So, Chris, we’ve talked about your business, we’ve talked about your house hack. What else can we help you with today?

Chris:
I’d say, as a 26-year-old, 20 something, I’m relatively healthy, but the responsibility of insurance was recently bestowed upon me as a 26-year-old, so that is something that I’d love some advice on. I’ve heard some harsh criticisms of perhaps, like medical sharing programs, but I know I recently signed up for a Kaiser bronze high deductible plan so that I can start contributing to an HSA, but if you guys have high level thoughts, I’d love to hear them.

Mindy:
I have a lot of thoughts. First off, you’re healthy, that’s great. We have posed this question several times. We have made comments a lot on this podcast, and somebody reached out to the Facebook group and said, Mindy, you always say that unless you have a chronic condition, you should have a high deductible plan. He said, except in some very specific cases, even if you have a chronic condition, you should have a high deductible plan. And he was talking about the difference between the high deductible plan versus a regular plan. I’m talking about the difference between the high deductible plan with the HSA versus the health sharing plan. Because, the health sharing plan isn’t health insurance, and the health sharing companies haven’t negotiated with the healthcare providers to provide any healthcare.
And you can’t deny somebody who is in an emergency state. You can’t deny them health services, but you don’t have to take their health sharing money. So, essentially the way it works, and I’m really paraphrasing, but you go in with a broken leg, you go to the hospital, the hospital treats you, then they send you a bill for, let’s call it $20,000, because I don’t know, and that sounds good. Then your health sharing company sends them $2,000 and says, hey, would you take this for it? The healthcare provider can say, no, it’s $20,000. And then, either they negotiate back and forth, or ultimately you’re responsible for this until it gets paid. And traditionally they will take the negotiate with the health sharing provider back and forth, but they don’t have to. And things are not great in the insurance industry right now. So, having a high deductible plan, you’re footing the bill for the first, what is it, 3,500 or something like that, and then healthcare kicks in.
And the insurance company that you have that plan with has negotiated with this provider, provided you a network and make sure that you are, and you mentioned Kaiser, and there’s people who don’t like Kaiser. I think Kaiser’s fine. You go to a Kaiser doctor. If you don’t go to a Kaiser doctor, then you’re on the hook for it. So, just make sure you go to a Kaiser doctor. Step number one when you have health insurance is, read the rules of the health insurance. The book’s only about this thick, so it’s great reading, light reading, but it’s super important to understand what you’ve signed up for. And my favorite, Brandon, the mad scientist, has written an article called the HSA is the ultimate retirement account in 2022. He’s updated it several times. It is a fantastic account, especially if you can cash flow your expenses.
I have a medication that I take every night and I can cash flow that because it’s $5 or something for a month’s supply. And then, I save my receipts and in several years I will cash those in and collect some money for that. And the same with my copays, and the same with minor surgery if I need it, anything that I can cash flow, I just save the receipts and then down the road I can cash those in after my HSA has grown so much. You don’t need to take your expenses in the same year that you incur them. So, you can allow your account to grow and then take out the money when it’s less of a hit. If you’ve only got a $100 in the account and you take out $50 for the expenses, then you only have $50 to grow.
But, if you can cash flow these expenses right now and then allow this to grow, it can be a great way to pay for expenses down the road. It can be a great way to just recoup some of your expenses down the road, or you can even wait until you’re actually retired and then you can start withdrawing this money without the expenses attached to it. It’s a really great plan if you qualify, if it’s available to you, and I’ve used it every year that we have had it available at BiggerPockets.

Scott:
So, the only thing I’ll add to Mindy’s great points here is that, there’s no good solution. Healthcare in this country is very expensive and you’re going to go from not paying for it, presumably because of the, you turn 26 Obamacare protections and all that stuff where you were on your parents’ plan most likely, are going to go away and you got to start paying for this. So, it’s expensive and it’s just terrible, and it’s something that we got to fix in this country and we have not. And so, the answer is, the bronze tier plan with the high deductible and the HSA qualifier probably sounds like the least bad option at the highest level for this. That health share ministries can be one option that can be worth exploring. However, there’s a lot of issues that some people have with those types of plans.
One of which, at least at 26, would’ve been for me is, if you don’t live in accordance with those values and those sometimes Christian organizations, certain things won’t be covered. So, just something to think about there. So, I think that for most people, for your situation, this sounds like a great option. I don’t know the details about it, but the bronze tier is clearly not the gold tier. You’re a healthy guy. Get something that’s as affordable as you can, max out that HSA if you’re interested, if that’s something you want to do and take it from there. So, not great, not a fun answer, but that’s the truth I think.

Chris:
An answer nonetheless, thank you.

Scott:
Well, Chris, this has been great. Thank you very much for coming on the BP Money Show. We really enjoyed talking to you and hopefully this was helpful.

Chris:
Thank you guys for the opportunity, and I know it’s helpful for me, hopefully it’s applicable to someone else out there too.

Scott:
Absolutely. I think a lot of people will learn from this.

Mindy:
Chris, this was a lot of fun. I’m super excited for your old lady ladder job. I think that’s a really great opportunity and a really great service that you’re providing because like you said, older women and ladders don’t mix.

Chris:
Not a great combo.

Mindy:
Not a great combo. Well, this has been a lot of fun and we really appreciate your time. We’ll talk to you soon. All right, Scott, that was Chris. I thought you had some good advice for him for his business. I am excited to see the possibilities for his business, and I do think that he will be able to grow it. I think he’s got, like I said in the beginning, I think he’s got a really great business head on his shoulders, and now he’s just in that weird little, I want to grow, I’m not quite sure how to grow or let me try a few different things period of service-based growth that you have to get through before you find what works and grow from there.

Scott:
I love that he’s experimenting with it. I think that the plan for achieving that growth needs to be more aggressive and more specific. And, I think that’s the big homework I’d have if I’m Chris. And, Mindy, I thought you had some really good advice as well and some great tips.

Mindy:
Oh, thank you, Scott, I try. I think that there’s a lot of value in a brand ambassador who is the same age or similar age as other people that he’s trying to target and they all speak the same language. He can give her a free garbage can cleaning or whatever, and then connect with her, she’ll connect with other people. Just having somebody that you trust, like he said, that’s going to pay off in spades.

Scott:
Absolutely. Should we get out of here?

Mindy:
We should, Scott. That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench, and I am Mindy Jensen saying, park your truck rubber duck.

Scott:
If you enjoyed today’s episode, please give us a five-star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kalin Bennett, editing by Exodus Media, Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.

Ashley:
This is Real Estate Rookie episode 250.

Jamil:
Right now, the lenders are all tricking us into thinking that 5% is going to be a blessing. So when we hit 7%, 8% where we’re at right now, and they finally start creeping down towards five, five and a half, do you know what kind of pressure cooker is going to exist in this market? So all the real smart investors, they are buying cheap and they’re holding. They’re buying cheap and they’re holding, they’re just waiting for this 12 to 18-month cycle to do its thing. And then as soon as the rates go back somewhere around 5%, it is going to be bananas.

Ashley:
My name is Ashley Kehr and I am here in person 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 from the rookie audience who goes by the username, KissTheNewbie, which I like name. But anyway, KissTheNewbie gave us a five-star review on Apple Podcast and this person said, “I’ve been researching the wrong way for way too long. YouTube and Google are not always as helpful as it seems. The information is mostly brief and summed up. Listening to other points of view and scenarios helps a lot. The episodes in particular dug into some questions I have been looking for.” So KissTheNewbie, we appreciate the five-star review. And if you haven’t yet, please leave us an honest rating or review on Apple Podcast, Spotify, or whatever it is you’re listening. All right, cool. Well, Ashley Kehr, what’s going on? We’re here in person.

Ashley:
Yeah, we are in Phoenix, Arizona for a meetup tonight.

Tony:
Yeah, it’s actually my first time in Phoenix, and so far so good. I got some Chick-fil-A last night. Actually, you know what? Last night I landed, and I tried to get some food, and it was like a mission trying to find somewhere there was open at 10:30, which I feel like is crazy for a city as big as Phoenix. So Phoenix, help me out, stay open just a little bit later for the food spots.

Ashley:
Someone DoorDash Tony tonight some food.

Tony:
But we did get this place called Insomnia Cookies. We were walking by, and this place was open. And have you heard of Insomnia Cookies before?

Ashley:
No.

Tony:
They’re open until midnight, and it’s a cookies spot that’s open until midnight, but they felt like it was really cool cookie… Anyway, Insomnia Cookies in Phoenix. I appreciate you for being open at 11 o’clock when we were looking for food.

Ashley:
And it was good?

Tony:
It was great.

Ashley:
Yeah? And then this morning we were late because you had to get Chick-fil-A.

Tony:
I had to get Chick-fil-A on the way in. Yeah, so the food escapades have been probably the biggest thing today.

Ashley:
Yeah, yeah. So besides the food, we’re super excited. We are recording a live podcast tonight, so if any of you who are listening to this now are actually there, thank you so much for coming.

Tony:
We appreciate you guys.

Ashley:
And if you guys want us to come to your city next, send a DM to the Bigger Pockets Instagram account or you can send it to Tony or I, or when you leave a podcast review, let us know where you would like us to come. So today on our Rookie Reply, we have four questions. We talk about real estate agents and lenders, as to how to build that relationship or to even break off that relationship. And then we’re talking about closing, going to the closing table, but you’re wholesaling the property, and Tony gives two different examples of how you can actually handle that.

Tony:
Other things we talk about are building long-term relationships with your lenders and your agents, and how to tow that line the right way. And then some other questions we talk about are the differences in expenses on your primary residence versus your investment properties, or some sneaky little things you might not be thinking about. And then the last one is, what is a dual agent, and should you be using one? So we’re excited to get into today’s questions. Guys, you guys, this is the first time ever that we’ve really done something like this. So we just want to say we’re super excited to be here, and welcome to the Real Estate Rookie podcast. We got some special guests for you guys. Pace and Jamil, if you guys can come out?

Ashley:
Bring them out.

Tony:
Yeah. Clap it up for Pace and Jamil. So guys, first, thanks for inviting us to your home state. This is actually my first time in Phoenix, Scottsdale, anywhere. Other than layovers at the airport, this is the first time I’ve ever been here. So I appreciate you guys inviting us out, man.

Jamil:
We’re happy that you’re here.

Tony:
Yeah.

Jamil:
First and foremost, isn’t it cool that Bigger Pockets came all the way to Phoenix, Arizona?

Pace:
Yes!

Jamil:
To film a live podcast? Y’all are incredible.

Ashley:
I do have to say one thing, coming from Buffalo, I’m very disappointed in the weather. I did not pack appropriately.

Jamil:
Did you bring a jacket?

Ashley:
This right here is my jacket.

Jamil:
Oh, you thought you were coming to summer, hot?

Ashley:
I thought like 90 degree dry heat, nice weather-

Jamil:
No, no, no, no, no, no. The desert gets cold in the winter.

Tony:
So both of you guys are super experienced investors and I just want to tap into that knowledge a little bit. I know one of the questions I get asked super often about I invest in short-term rentals. That’s what we do. That’s all of our portfolio right now. And a lot of questions come up around, Tony, with where the economy is going, with where everything’s headed, do you think short-term rentals are still a good investment? And I know what the risks are that short-term rentals present. The economy softens, and people travel less, people spend less on vacations. So we know what we’re doing in our business, trying to mitigate those risks. But you guys have unique strategies as well, wholesaling everything with creative finance. What are some of the risks that you guys see with those strategies going into next year, and how do we mitigate those?

Jamil:
So risks with respect to wholesaling, or risks with respect to Airbnb?

Ashley:
I would say-

Jamil:
Or short-term rentals?

Ashley:
Specific to the Phoenix market.

Tony:
Yeah. With wholesaling, and with creative finance.

Jamil:
Okay. So right now I think that the greatest risk that people have in the wholesaling space, I’ll let Pace speak to creative financing, for would-be wholesalers or people embarking on a wholesaler journey, or doing it right now, if you have not made adjustments to your numbers, you’re spinning your tires. You’re literally wasting your time. The market has shifted and buyers are baking in the depreciation, they’re baking in where they’re expecting the market to land. Because the fact is that we know where it’s going here in Phoenix, we overshot and so we saw about a 20% uptick, and we’re going to hit that 20, we’re going to come down about 20%. So all the buyers that I’m working with right now, their volume has picked up dramatically. The last 30 days, the number of deals that we’ve turned is as much as we had in the peak.

Tony:
That’s so crazy. I would think the opposite would be true almost, right? As the economy’s starting to shift, that things would slow down, but you’re saying-

Jamil:
No, because we’re buying deals so cheap right now that… And let’s just think about what’s happening, okay? As soon as the market started to shift, interest rates went up. What did builders start doing? Stop building, okay? We were already short on inventory. You also have all these people that have all this cheap debt at 2% and 3%, and they’re looking at the market thinking, “When am I ever going to get a loan like this?” So what are they going to do with their property? They’re going to hold it, which is going to remove that inventory from the market. You’ve got builders depressing building, you’ve got inventory shortages already.
We’re already walking in with inventory shortages, and right now the lenders are all tricking us into thinking that 5% is going to be a blessing. So when we hit 7%, 8% where we’re at right now, and they finally start creeping down towards five, five and a half, do you know what kind of pressure cooker is going to exist in this market? It’s going to be insane. So all the real smart investors, they are buying cheap and they’re holding. They’re buying cheap and they’re holding, they’re just waiting for this 12 to 18 month cycle to do its thing. And then as soon as the rates go back somewhere around 5%, it is going to be bananas. That’s my thought process.

Tony:
All right, so what about you from… Yeah, first clap it up for Jamil. That was a great answer.

Pace:
As far as creative finance is concerned, creative finance is so diverse, in the sense that I look at real estate as a pile of logs in a fireplace. Creative finance is the gasoline you pour on top of it. It doesn’t matter what you guys want to do on acquisition or in disposition, creative finance amplifies everything you do. So if you’re acquiring deals, I can buy sub two seller finance, lease options. I can buy on innovation agreements, MOR B method, all sorts of things. I can dispo 10 different other ways that don’t exist in traditional real estate. So right now, everything is amplified. So last week I closed my biggest seller finance deal, 264 units.

Ashley:
Congrats.

Pace:
And yesterday I put in my largest offer, I think we’ll go under contract tonight, $52 million, 600 units, seller finance deal. And then today we closed another big deal, 192 units in North Carolina. So in two weeks I bought 500 units, and I have literally not a dollar out of my pocket. Follow me on YouTube. So I’m being overwhelmed right now. We did really well the last five, six years with creative finance. But right now people are, I’ve got agents texting me and going, “My seller’s willing to let this house go.” I mean, in what other market do you see sellers just saying, “Get rid of this house. I just can’t take care of the payments anymore.” So in Arizona, Phoenix specifically, we are just going for houses that are 90 days on the market or longer and saying, “Hey, if I can get your commissions paid, can I just take over the payments?”
I could buy two houses every single week if I wanted to. Now what is amazing about that, the amplification process, is not only can I hold those, and we do Airbnb as well, but the way we’re mitigating a lot of that is we’re diverting to sober living right now, a lot of sober living, because it’s government money coming in rather than tourist money. But the other way I’m amplifying what I’m doing is I don’t just buy and hold, creative finance deals. What happened to buyers? The buyers got priced out of the market because of the interest rate. So I can assign my sub two and seller finance deals to an end user, or I can wrap them and sell them at a higher interest rate or whatever. A little bit more strategic, but it is like rocket fuel right now. Everything for us is rocket fuel. Who’s the sub two student in here? Okay, so we have people who are being overwhelmed with creative finance. It’s the perfect storm for us.

Ashley:
So that’s how you’re mitigating and taking advantage of the market right now. But for a new investor, what are some of those risks that you’re seeing, that that’s the reason they should be using creative financing and doing seller financing and subject two? So what risk in the market, being that [inaudible 00:10:37]?

Pace:
Okay, so I’ll give you on our cash stuff. So this year we had a couple of houses we thought the ARV was about 500,000. And we’ve got people offering now those houses are fixed up, ready, on the market, I can’t sell them for 390. That’s happening. That’s been happening this whole year. So the risk is I got to refinance some of these deals. I got to bur into some deals that I didn’t want to bur into. Instead of me stroking a check for those, I’m going to hold onto them and I’m going to wait until the market comes back.

Jamil:
But the smartest thing that he’s doing is, because he’s got the capacity… See a lot of fix and flippers, they have to sell. Pace has money, so he can refinance these and hold them, but continue holding right now is the key. If you are in a bad fix and flip that you can’t disposition, hold that sucker.

Pace:
Yeah. So if I’m new, one of my risks is being in that situation, I would not want to be in that situation without a good partner. So if I’m brand new and I’m looking to do my first deal, I would look for somebody that’s done 10, 15, 20 deals, and partner up with them. So when the market does its little thing, you can go, what are we doing partner? And the partner goes, oh, this is no big deal. We’re going to refinance and hold it.

Ashley:
Okay. What’s the best way to find a real estate investing partner?

Jamil:
So for me, I found my partners in places I would never be, never hang out at. I needed people in my life that weren’t like me, that didn’t listen to the same music as I did, that don’t like the same things that I do, that don’t have the same skills and qualities that I have. I wanted people that were very much opposite. In fact, one of my previous business partners and still a very good friend is in the audience here, Patrick. And Patrick and I couldn’t be more different from each other.

Ashley:
Because of your strengths and weakness.

Jamil:
Because we have different strengths and different weaknesses. And I’m always looking for people that can compliment my shortcomings, which we all have them. Every one of us have strengths, things that we’re phenomenally good at, and there’s things that we just couldn’t care to do. And so what a lot of us do is we make business partnerships with our friends and we have these incredible campfire conversations with people, and we share our dreams and our aspirations, and then all of a sudden we find that there’s an alignment between what they want in life and what we want in life. And we say, “Should we do it together?” But we’re both the same person, and then what ends up happening is disastrous. So find places where you don’t necessarily hang out, business situations where you wouldn’t normally go, and go and find your counterparts that have the strengths that you don’t have.

Ashley:
What’s an example of, where are places you have found your partners?

Pace:
COO Alliance, Chief Operating Officer Alliance. Because visionary, visionary, visionary, visionary. We should not be operating, managing, onboarding, doing any of the SOPs. Zero. Do you know that Jamil and I are not partners in any business whatsoever?

Ashley:
Actually I did know that. Yeah.

Pace:
Is that surprising?

Jamil:
We 100% compete on everything.

Pace:
We compete on everything.

Jamil:
In fact, get the hell out of here.

Pace:
So we collaborate, but he’s right. I mean the best man at my wedding, I don’t talk to anymore. My very best friend I brought into my business because that’s who was in my circumference, and I was like-

Ashley:
It’s easy, it’s comfortable.

Pace:
Oh yeah. And the funny thing is you see eye to eye on all your ideas, but when it comes down to rubber hitting the pavement, a visionary is not going to do any of the actual nitty gritty.

Tony:
Can you, just for folks that aren’t familiar with that phrase, define what visionary is?

Pace:
In my opinion, the best book you can ever read in business is called Rocket Fuel. And it talks about all the greatest business partners in the world all had a visionary and an integrator. And so Jamil and I combined have about 1000 employees. And the reason being is because we have integrator partners that actually manage the office. The only time I go to my office is when there’s a Christmas party. And so because of that, because we have integrators doing all the things, hiring, onboarding, managing the books, paying the payroll, looking out for the problems, it allows us to go out and raise capital, find the deals, recruit opportunities, and recruit people.

Tony:
How did you guys find your COOs, your integrators?

Pace:
COO Alliance.

Tony:
Oh, so that’s a real thing.

Pace:
That’s a real thing. The funny thing is all of us visionaries all go to these really fun and charismatic, beautiful meetups and masterminds. The integrators don’t go to anywhere where we go, so they go to something called the COO Alliance. It’s where all the cool people that are actually going to run the business, they go to those masterminds.

Jamil:
That’s a phenomenal resource. For me, it was a little different. We were looking for a C-suite that could handle our franchise growth. And so we actually ended up getting a very high level individual that was in the franchise department at IHOP that ended up coming and helping us with structuring our franchise, and creating the growth that we’ve had over there. And it’s been an incredible, incredible run with him.

Ashley:
Awesome you guys. Thank you so much for sharing. I think Pace actually had somebody write this question specifically for him. What is a good way to invest in multi-family for the first time safely?

Pace:
Okay. Two easy ways. Either A, become an LP on somebody else’s deal, like the 264 unit deal I closed last week, I had zero partners so I didn’t raise money, seller financed. But the one I closed today, we brought on LPs, or limited partners. So that’s the easiest way. The second easiest way to get into multifamily is through something called the fund of funds. Very few people actually know what that is, and if you knew what it was, you’d write it down. Fund of funds. And you’d go research it, and you’d go, that was worth a million dollars right there. Fund of funds is the easiest way to get into multi-family investing.

Ashley:
Can you elaborate more?

Pace:
Do you want me to?

Ashley:
Yes, go ahead. We’ll give you more time.

Pace:
Okay. So let’s say Cara has a multi-family deal and she has to raise $20 million for a $100 million purchase, hypothetically. And Cara goes, “I can only raise $10 million on my own. I need somebody else to help me raise some money.” So she goes and finds 10 other people to do what we call a fund of funds.

Ashley:
So basically other syndicators who are used to raising money, they build their own fund that’s going to invest in her fund.

Pace:
Right, it’s a fund underneath your funds. So it’s a fund of funds. And so instead of having to find the deal, operate the deal, manage the deal, raise all the capital, I could go leverage Cara’s credibility, and just literally the first fund of funds I ever did was five years ago, I raised 100 grand for somebody’s deal that needed 20 million and I got all the credibility and experience of actually going through the deal as if it was mine.

Ashley:
Super interesting. I was at a multi-family meetup in Philadelphia a couple weeks ago, and that’s what they were pitching at the meetup, is that’s how they were pivoting their strategy. They were building a fund to invest into other deals.

Pace:
Would you rather raise $20 million all by yourself or find 20 people to raise a million dollars each?

Ashley:
Oh yeah. And you have less people to have responsibility to. Okay, so we have our last question here that we have time for. Where do you like to find data? So where are you going to find information on properties?

Pace:
The data deli.

Jamil:
Data deli is obviously the number one choice, but if I’m looking for market information to try to understand where are buyers buying at right now, where are deals selling at right now? There’s a software called Privy that has been a game changer for Pace, myself, our entire community. I mean this algorithm runs comps, it’ll identify what deals are on the market right now that are an actual value. And it also shows you what percentage of ARV fix and flippers are buying at in this specific pocket. It’ll tell you what percentage of ARV buy and hold buyers are buying at, and it’ll even tell you if this buyer is buying on market deals or off market deals only. And so it really just gives you all of the information that you could possibly want to understand, whether or not… If you guys want to know more about it, go to runprivy.com. Runprivy.com, runprivy.com.

Pace:
For me, I go to these two websites every morning. Same two websites. Landwatch.com.

Ashley:
I do love that one.

Pace:
It’s so good. Hey, do you know how many owner finance listings are on there right now?

Ashley:
Yeah, there’s even a button to push to see all of them, too.

Pace:
There are currently 12,644 listings on landwatch.com, all on owner financed. Just owner financed. And then for multi-family or commercial is, I love crexi.com. I used to love LoopNet but I feel like they just haven’t innovated, and Crexi just has kicked their butt. And then also Dave Meyer.

Ashley:
Well thank you guys so much for coming on to the Q&A.

Pace:
Thank you guys.

Ashley:
And thank you so much for having Tony and I.

Jamil:
Love you all.

Pace:
Give it up for these guys!

Jamil:
Let’s go!

Pace:
You guys are the best!

Tony:
Guys, pop it up one more time for Pace and Jamil.

Ashley:
Yes. Okay. So our first question today is from Dimitri Andre. And his question is, “I’m curious how the wholesaling process works. Does the seller know that the initial person they go under contract with is not the end of buyer? Do they show up at closing and find someone else, and feel like something shady happened in the process?”

Tony:
Yeah, so this is a great question, Dimitri. And I think it depends on the wholesaler, depending on who you talk to, every person kind of handles it in a different route. So I’ll give you the two options that I’m familiar with, and let you make the determination of what makes the most sense for you. So option one is you be very clear with the seller upfront to say, “Hey, my job is to help you find an end buyer for this property. And when we get to the closing table, there will be another party that’s actually going to be purchasing this property for you. I’m just here to help play the middle man, and connect you with that person. In exchange for me doing the service for you, I will collect a small assignment fee.” And typically when you do that process you’re at the closing table, it’s a single closing, and you just get cut a check for being that person in the middle. So that’s one way to do it. You’re just open and honest with that person at the outset.
The other way to do it is to say, “Yeah, I’m going to buy this property from you. And then when you go to the closing table, instead of it being one closing, it’s a double closing. So say at 10:05 AM you buy the property from the seller, that closing closes, and then at 10:10 AM you turn around and have a second closing where you’re selling that property to another buyer. Now there are benefits and cons to each one of those approaches. If you do a single close, you don’t have to come out with any cash out of your pocket because you’re not actually purchasing the property, you’re just getting a fee for connecting the seller with the end buyer. If you do the double closing, typically you will have to come up with the funds to actually purchase the property. Even if it’s just for that hour timeframe in between those two closings, you have to actually pay that person up front, and you immediately get repaid shortly thereafter, when you get that second closing. So those are the two options I’m familiar with on the wholesaling side.

Ashley:
And Tony, have you ever shown up to a closing table with the seller? Because I don’t think that I’ve ever actually been in a room with the seller.

Tony:
I was going to… The very first real estate investment that I purchased, this was one of those properties in Shreveport, Louisiana, that one I actually… Just because I was so excited, I literally flew to Louisiana, sat at the closing table, and the sellers were there. I shook their hands. Outside of that, I haven’t seen any in person. Usually, Dimitri, when you close on a property, you’re either going to a notary’s office or they’re sending a mobile notary to you.

Ashley:
And even if you’re going to, so when you use a mortgage on the properties, it’s more likely you have to be in person. So when you’re doing a cash deal, which a lot of times a wholesale deal is, you can sign ahead of time, like Tony said, with a notary at mayor, maybe at your attorney’s office, something like that. So you don’t even see the seller. But if you’re doing, I did a closing at the city hall so that we could file it, and the sellers were there but they were at a completely different table buying the property that they were closing on, once I signed that I was buying their other property. But we didn’t even see each other really at that point. So I don’t think that’s something really to worry about. I think the big, as long as that property does close, the people aren’t going to care who is actually the end buyer on it.

Tony:
Yeah, and again, it’s up to you. You’ve seen wholesalers do it both ways. So you think about what makes you more comfortable, and what you feel might help you to get the deal closed and go with it.

Ashley:
This next question is from Elisa Serrano. “I’d love some advice about business relationship etiquette. I’ve been reaching out and starting to create relationships with real estate agents and lenders. I’m 100% the type of person to compare several different options to get the best choice for me. Although I know it is part of their job, I’m struggling with taking up their time, knowing I’ll have to go with one agent lender and I might not use them. What’s a professional, respectful way to say thank you so much for your time, however I’m going to go with someone else, but I’d still like to keep this connection with you in hopes we can work together in the future. And at what point do you say this? Do you wait until the very end to see what they can do and tell them, or try to save their time?
“I just don’t want to burn bridges and make anyone feel like they have wasted their time. Having worked in sales commission before, I know that there is a tasteful and not tasteful way of going about this. And this is my first deal, beginning of my real estate journey, so I don’t want to make any bad impressions. Any advice is very welcome.” So the first thing I think of after reading this is it is great to get to know who you’re going to be working with, and maintaining those relationships. It is going to be somebody that’s helping you build your team, build your rental portfolio. So you do want to know more about them and what they’re willing to offer you. I definitely think on the real estate agent side, there is some etiquette as to if that person is bringing you the deal. If they bring you the deal, they take you to the showing, then I think it’s proper etiquette to go with that person to purchase the deal.
As far as mortgage lenders, whenever I have a deal I am reaching out to any of the mortgage lenders I’ve worked with, any that I have wanted to work with, and I ask them what options they have. And I don’t waste a lot of their time because I ask them right away, “If I close today, what would the terms be? What can you offer me?” And then I also look at who actually responded to me in a timely manner, because I want a mortgage officer who’s going to be able to close on the property quickly and timely. So what are your thoughts on that, Tony? As far as getting to know agents and lenders, as to how to not waste their time, but get to know them and make sure they’re the right person for your team?

Tony:
I mean, I think Elisa here said it the exact correct way. She said, “What’s a professional/respectful way to say thank you so much for your time, however, I’m going to go with someone else, but I still like to keep this connection open,” that is a perfect way to say it, right? I think as you said, most people in this industry understand that a lot of their customers are going to be shopping around looking for the best person for them. So I think they do understand that.
I think your point though about the agent is super important to point out, because it’s like, if this agent brought you the deal, it would be shady for you to then go out and bring in another agent to close on that same property. However, I do think it’s fine to work with multiple agents at once, and if one agent brings you this deal, another agent brings you this deal, I think that’s fine. And I have different agents in the markets that we work in, and different ones are sending me different deals, and I think that’s fine. But to Ashley’s point, it’s like if one agent brings you that deal, you should close that deal with that person.

Ashley:
And also too, if you happen to be scanning Zillow and you find a deal, and now it’s your turn to pick which agent you’re going to ask to take you to the showing, start thinking about what are those agents’ strong suits? Maybe you want to do creative financing, does your agent have experience helping you structure that if you need help with things like that? So look at the deal and think about, what will I need help with through this deal? Is it maybe just getting to see a showing? That’s it, you don’t need any help with anything else, no market research analysis, then it’s probably the first agent that can get you into the property, and then that’s the agent to go with because you can do everything else on your own. So think about that, too, as you’re deciding which agent to use for a deal, as to what value they’re bringing, and what you need from them.

Tony:
And on the lender side, I think it’s very reasonable when you start that conversation to say, “Hey, you are lender one that I’m talking to, but I just want to be super clear that I’m also working on getting pre-approval from this other lender.” And when you get those initial term sheets back, I think that’s when you can make a more educated decision around which lender you actually want to move the process with. Because a lot of lenders, just by giving you that initial pre-qualification, they can give you a ballpark on what your final terms might look like. And I think that should probably be enough information for you. I probably wouldn’t get to the point where you have two closing disclosures out with the same lender, because at that point they’ve done a lot of work to get you to that point. But I think that initial pre-qualification is totally fine to be shopping around.

Ashley:
Yeah, I actually had one of my business partners on a deal, him and his wife did actually burn a bridge with a lender, where they waited until the morning of closing on their line of credit on a property to call the bank and say they could no longer go through with it, because they’d found out this business they were purchasing wanted to use that house as collateral for their SBA loan to purchase the business, so they could no longer get this line of credit. And they completely burned that bridge with that bank. That loan officer, he actually retired this year, but I’m pretty sure it’s a very small bank, that they would not be able to go there and get a loan. Okay, let’s move on to our next one.

Tony:
Let’s take the next one.

Ashley:
This question is from Bill Ackeridge. “Hello fellow rookies. I don’t own any properties yet besides my primary residence. I’m wanting to know if there are any additional costs of ownership for rental properties that I wouldn’t necessarily experience at a primary residence. How do things like insurance on the property differ between a primary residence and an investment property? Thanks.” Ah, insurance. I love it and hate it. So I actually got my insurance license and I dreaded every single part of it. I did it just to help somebody open an insurance company.

Tony:
So if you need insurance claims, Ashley Kehr is your girl, hit her up.

Ashley:
This was, I think maybe three years ago, maybe four years ago now that I went and did that, and I can’t even tell you one thing anymore. I don’t know. So now I just send referrals. But so with the insurance we’ll address that first, and we can go over some of the other differences. But the insurance is very different because you’re not covering the contents, like the personal items of the tenant that is renting the property. So if you were doing a short-term rental, then that would be different because you do own the furnishings in the property. But as far as a long-term rental property, you are just going to be covering the structure, the building of the property, and then you want to have some liability on the property. And then if there’s any outbuildings, like a shed on the property, you want that covered too. So in my experience, it is usually cheaper to get insurance on an investment property than your primary residence, because you’re not covering all of the contents and other things inside of the property, too.

Tony:
From a short-term rental perspective, the opposite is actually true. Insurance companies I think see more risk with a short-term rental, because the number of people coming through that property on a regular basis is higher. You have people that are on vacation, sometimes they’re maybe having a good time, they’re drinking and other things. So I think the risk for short-term rentals are probably a little bit higher. So we do see our insurance rates and our STR is higher than our long-term rentals typically. But to go back to Bill’s, the initial part of his question is what are some of those other expenses? I think this is a great question for rookies, and one that a lot of people are probably thinking. And my first piece of advice, Bill, is that when you go to analyze a property, use one of the Bigger Pockets calculators because I think the calculators force you to think through all of those expenses that come along with your rental properties you don’t really think about.
So a lot of times you analyze a property yourself, you’re just going to think about the expenses that come to your mind, but the BP calculators actually force you to say, okay, put a line out in for this, put an amount in for this, put an amount in for this. So some of the other things that might come up when you own a rental property. I’ve seen, and it depends on the property, but I’ve seen some owners where they bake in the cost of utilities. If you have multi-family where things aren’t separately metered, sometimes it’s hard to account for the utilities costs. If you’re doing a house hack where you’re renting out the rooms, most people just bake in the utilities for the flat, or they’re as far as a flat rate for utilities. So utilities is one thing to me that you might want to consider, depending on what kind of rental property you’re going with.

Ashley:
And you know what’s really funny, did you ever hear the saying the shoemakers kids never have shoes because he is so busy making other people’s shoes?

Tony:
I’ve actually never heard that.

Ashley:
Okay, well my dad, he owns a mechanic shop and that was the big joke when we were growing up, is we all had these cars he gave us, but our cars never got fixed. It’d be like, “Oh, it’s leaking oil, just dump more in. I’ll get to it sometime.” And even my sister, just recently, she said she made an appointment with my dad on November 7th and it just got in four weeks later. So I think about that a lot from my rental properties. My dishwasher at my primary residence has not worked in over a year, and I just will not spend the money. It’s just not that big of a deal to me yet. Or the hassle of having somebody come in and replace it, and to find the matching piece to the rest of my set. I can’t go through the company that we usually use for appliance maintenance, things like that. But a rental property, it’s like-

Tony:
You got to do-

Ashley:
Oh, it’s done that day, get a new dishwasher in there.

Tony:
It’s so funny. So even for us, our short-term rentals, from a design standpoint, are so much nicer than our own house. And me and Sarah keeps saying, “Why do we have these nightstands from college still?” We’re in our thirties now, why do we still have these? But same, it’s just something about spending money on your own house, I don’t know.

Ashley:
Yeah, so when I read that question, that’s what I thought about is that there will be expenses that could be in both sets of houses, but you will choose to put them into your investment properties to keep them a good investment. And then other things to think of is just seasonal maintenance that may happen. So if you own your own residence and you live where there’s snow, you could snow blow it yourself, have your kids shovel it, whatever it is. But if it’s a rental property, you may have to pay for somebody to come and do that, or even cut the grass, or maintain the pool. Things like that too, that maybe you could do yourself since you’re the primary owner.

Tony:
Other things are big capital expenses. So we’re looking at a property right now, we have to replace the roof, the septic system we have to replace on a few of our properties. We have to install new HVAC systems on some other properties. So some of those bigger capital expenses that aren’t going to happen every single year, but you know they have some type of shelf life, those are things you want to set aside money for as well to replace as you own that property.

Ashley:
Hey, our fourth and final question is from Christina Haws. “I am considering buying a six-plex. I never bought multi-family before, just single family. What are your thoughts on using the same realtor who is representing the seller, so the realtor would represent both buyer and seller?” So this is called being a dual agent where the agent represents both of you, and in New York state, at least, you as the buyer, and the seller, have to sign stating that it’s full disclosure that this is a dual agent working for both. So I don’t think that I’ve ever used a dual agent before. Have you?

Tony:
I love doing that. Yeah. So for me, and it depends on where you’re at in your investing career. When I first started investing, one of the things that was super important to me was to have an agent that could educate me on the market, that could really advocate for my best interest because I wasn’t super familiar with what I was looking for. I wasn’t familiar with what some of the pitfalls were. Now typically, if I’m looking in a new market, I will go directly to the listing agent and say, “Hey, it’s just me. I’m the investor. Here’s my offer, let’s work together.”
I think the benefits of that are, A, the agent is, I think, maybe a little more incentivized to work with you, because now they’re not splitting that commission with a buyer’s agent and B, it’s going to be an easier transaction, because they don’t have to worry about this telephone game between the buyer, themselves, or the sellers agent and all these different people. So I typically do do that, and I think in California you have to sign that document as well. Some agents though won’t do that. I’ve reached out to some agents, and they’re like, “Hey, I don’t do the dual agent thing, but I have someone in my office that I can recommend to you.” But I honestly have done that. And my agent at Joshua Tree, I found that way, and multiple agents I’ve found have been just by going directly to that listing.

Ashley:
Yeah, I feel like I’ve had more trouble, and this is more on the commercial side. So recently we looked at, it was an old welding warehouse and we’re going to use it for self storage for boats and RVs, and just trying to contact the listing agent was… Look, we showed up twice and she was a no show. And I’m sure that can happen with all kinds of agents, but then we ended up just contacting an agent we had worked with before and he was like, “I’ll get you a showing.” And then he ended up taking us to go see it. But I think especially on the commercial side, if you built that kind of relationship with that broker, it’s going to go a lot easier, and you’re going to be more of a priority instead of just, “This person just reached out to me for the first time ever. I don’t really know if they’re a serious investor.”
Things like that. But as far as in this circumstance, if you think it will be easier for you, and Tony has obviously had a good experience, there’s not a lot of reasons not to. The only thing that I can think of would be if negotiations start to come up during the due diligence period, where the agent becomes the middleman and now it’s like who is the agent really representing and fighting for? Especially if you are a new investor, which Christina, it seems like you’re a pretty experienced, you’re a single family, but if you’re a new investor, I think it’s beneficial to have an agent that’s on your side, and going to be fighting for you if it does get to that circumstance where during the inspection period, things come up, and they’re on your side. Where maybe if you’re there’s a dual agent, they might lean towards more of, oh, the higher price, the higher commission. I’m on the seller’s side.

Tony:
That’s a great point. And I think the way that you can combat that, Christina, is by really sticking to your numbers. When you analyze that deal, there was some number where that deal made sense. And if you get to that negotiation phase doing your due diligence, and the seller’s agent is really playing hardball and doesn’t want to give you what you want, that’s true. You want to walk away and say, “All right, hey Mr. Seller’s agent or Mrs. Seller’s agent, great working with you, but I know what my numbers are. Unfortunately this deal doesn’t make sense so I’m going to walk away.” And at that point, either the agent is going to work with you and compromise, or they’re going to say, “Hey, wish you the best of luck,” and that’s the end of the deal. So I think for us, that’s what we’ve leaned on is to say, “Hey, we know what our drop dead number is,” and use that as our backstop.

Ashley:
And I think you have to look at what type of person you are too. Because I would say early on in my investing career, an agent probably could have persuaded me that, “Oh this is the way to do it, you should do this, you’re getting a great deal,” where now I know better. So think about if you’re easily persuaded, or I know I struggled with low ball offers when I first started out. I felt like I was offending someone if you get into the circumstance where the agent’s almost making you feel guilty for asking for those things. So think about how tough you are, and how much you can stand your ground if you are going to hold yourself up, and not give in to just being influenced by an agent, I guess.

Tony:
You talked about low ball offers, so I just want to mention this really quickly. So I submit multiple low ball offers on a regular basis.

Ashley:
Yes.

Tony:
Just because you have to try and find deals, especially for our rehab properties. I’m just trying to pull up because we just got a… I was just telling you yesterday, we have a property under contract with a pool. So this, it’s a probate property hasn’t been taken care of in the best condition. There’s a swamp cooler on the roof that pretty much caused a mat, like the roof almost-

Ashley:
What a swamp cooler?

Tony:
You haven’t heard of a swamp cooler?

Ashley:
No. I feel like this is when I tell you about a well.

Tony:
So a swamp cooler, it’s an old school HVAC system and it’s super popular in the desert. I don’t really know the inner workings of it, but it’s significantly cheaper than a traditional HVAC system. However, if they’re not maintained properly, because something about water running through the system, they can leak.

Ashley:
Okay.

Tony:
So you see a lot of properties in the desert where these swamp coolers are placed on the roof, when ideally they should have been placed off to the size somewhere. But anyways, they’re placed on the roof and if they weren’t maintained they start to drip and drip and drip.

Ashley:
Oh, and leak through.

Tony:
So we walked into one of the restrooms here and you could literally see skylight coming through the restroom because of all the damage that had happened. So anyway, I just want to pull it up, because I can’t find the property. Anyway, the property was listed for something like, I don’t know, 370 or something like that. I offered 312.5, and they accepted that offer, and now it’s under contract, we walked the property, got the inspection report, I’m probably going to ask for another 12 to $15,000 in price reduction. So anyway, my point is, sometimes just because a property is listed as a certain price, that doesn’t even necessarily mean that the sellers believe the property’s worth that price. They just want to see what they can get. And we were one of the only people that offered on that property because it didn’t need so much work. But for us, we’re not afraid of the work because we know we have the crew, as long as we can get it for the right price. So that’s a big thing.

Ashley:
And they didn’t even counter at all, they just accepted?

Tony:
They accepted it. Our very first offer they accepted. So it gives me the indication that there’s probably some wiggle room there as well, which is why we’re going to go back with what we found from the inspection report.

Ashley:
Right. And you put in that inspection contingency too.

Tony:
Totally. Yeah.

Ashley:
So that’s safety net, having that too. Okay, well thank you guys so much for joining us for this Rookie Reply. I’m Ashley at Wealth Firm Rentals and he’s Tony at Tony J. Robinson, and we will be back next week with a guest.