February 2023

David:
This is the BiggerPockets Podcast Show 733.

Rob:
I’m looking forward to the spring market. It’s already heating up. We’ve been helping a lot of first time home buyers house hack and that’s been big for us in this market. I think there was a lot of fear towards the end of last year and that fear is now broken and we’re seeing a lot of those buyers coming to us, so we know it’s going to be a good time for first time home buyers that are interested in house hacking to take that step forward.

David:
What’s going on everyone? This is David Greene your host of the BiggerPockets Real Estate Podcast, joined by my co-host today, Dave Meyer, as we get into a special episode for you all. In today’s show, me and two other real estate agents that you can find through the BiggerPockets’ Agent Finder system are sharing deals that we helped clients buy, getting into the nitty-gritty, the details, how we found them, what we’re doing, and why these strategies worked today’s market. Mr. Dave Meyer, welcome to the show.

Dave:
Thank you. I’m excited to be here. This was a fun show.

David:
Yeah, this was a really fun show. So if you’re trying to figure out, “How do I work with an agent, how do I find a really good agent to work with me and what strategies are actually working in this complicated crazy market we’re in today?”, this is a show for you. Dave, what were some of your favorite parts of today’s show?

Dave:
I think the most important takeaway for me is that there’s good opportunities right now. Our guests show that if you’re patient and have a good understanding of your local market, there’s great stuff to buy. I know, David, you talk about this, I talk about this, that there are opportunities, but sometimes it just sort of seems theoretical. And today we really sort of put the numbers behind it and show how people are finding deals, what kinds of deals are working in today’s market. I think I was pretty inspired by it and I think our listeners will be as well.

David:
That’s exactly right. The goal of today’s show is to show you practical steps that you can take to get a great deal under contract and then turn it into an even better one. So before we get into that, today’s quick tip is brought to you by Dave Meyer himself.

Dave:
Thank you. Well, our quick tip today is to use the BiggerPockets Agent Finder. If you want to meet investor friendly agents like my friend here, David Greene, who is the friendliest of all real estate agents… Look at that smile right now. If you can’t see right now, he is cheesing it up right now. But if you want to meet people like David who are experts in their field, experts in their local markets, and know how to work with investors, BiggerPockets has a completely free tool that you can use to match with investor-friendly agents. You can find it by going to biggerpockets.com/agentfinder. It’s completely free, it’s easy, and it’s biggerpockets.com/agent so go check that out.

David:
And then check out our show while I work on continuing to improve my smile. My goal for 2023 is to give the girl from the Orbit’s gum commercials a run for her money.

Dave:
You’re going to have that little like ding when it goes up? Well next week… So everyone listening to this, next week we’re going to be in Denver doing a little podcast host retreat. I think we have a photo shoot that we need to do. So I’m ready to see you smiling and doing the professional head shots over there.

David:
I’ll be hitting the arm curls as well as the lip curls.

Dave:
Oh, okay. Nice. I’m really looking forward too. I don’t know if they make you do this too, the really stupid YouTube faces, like how everyone’s YouTube thumbnails are now hands on the face or shock. So that’s what David and I are going to be doing next week.

David:
All right. Let’s get to our first agent.

Dave:
Okay. Well, Dahlia Khalaf, David Greene, and Rob Chavez, welcome back to the BiggerPockets Real Estate Show.

Rob:
Thanks for having us, Dave.

Dahlia:
Thanks for having us.

Dave:
All right. If you all didn’t listen to episode 697 where we had this group of three real estate agents on to talk about their different markets, we compared and contrast them, if you weren’t here, just so you know, Dahlia is in Tulsa, Oklahoma, David is all over the California region, but we were specifically talking about the San Diego market, and Rob is in the DC area. We had a great show. It was a really popular show where we talked about the different benefits to each type of market, what pros and cons there were, and so we wanted to follow up on that episode and actually talk about the specific deals that are happening in each of these markets right now. So we’re going to go through each of the markets and our guests are going to share with us deals that they are working on right now with their clients.
Dahlia, we’re going to start with you. So can you tell us a little bit about a deal that you’re doing right now in Tulsa?

Dahlia:
Absolutely. So it’s actually not a deal that I’m currently doing. It’s a deal that closed on last month.

Dave:
Great. Congratulations.

Dahlia:
Thanks. I would say this was kind of a double dip in terms of the numbers being great on both ends of it. It was what I would consider a wholetail. The buyer approached me about a property in his neighborhood that had been sitting for a long time, owned by an older couple that was moving on and wanted something that was easy, had been sitting, not a whole lot of traffic just because the property was really needing too much work for someone who wanted to own or occupy the property, but too expensive for an investor. So it was in that spot where properties don’t move when they fit into that spot.

Dave:
What was the list price?

Dahlia:
The list price when we offered on it was 295,000. I’m sure it had been more than that at some point. It had been dropped but still was too hot. It’s just too much work for an owner occupant to… It was super dated, needed a lot of work. So my buyer approached me and said, “Hey, this property happened to be in his neighborhood,” so he was keeping an eye on it, seeing that there was no activity, been sitting forever and wanted to try to make a significantly lower offer on it. So we went in at 210,000 with cash offer, can close as fast as titles ready and as fast as they’re ready to close and no inspections. So that really helped it. They accepted, so we closed at 210,00. This was actually back in October.
He wasn’t sure exactly what he wanted to do with the property yet. He thought, “Maybe I’ll flip it. Maybe I will make it a rental. Maybe I’ll tear down and build new construction” because it’s happening a lot over in that area. Then he told me, “I’m seeing there’s not much inventory in my area. What is coming up is moving pretty well. What if we just clean it up and put it back on the market and see what happens?” So that’s what we did. We put it back on the market, got under contract within a couple weeks. We ended up closing at 297,00 on that one actually back in January. So within a couple months I think he spent maybe 10K just taking out some trees, cleaning up the yard. That was it. Nothing was done to the interior. And so made a nice little chunk of change there in a couple month period. I’m not going to lie. I was jealous.

Dave:
Yeah, I am too. There’s a bunch of stuff in there I want to jump into. So you said that when you first offered on it, list price was 295,000. You got it for 210,000, which is nearly 30% below less price, which is remarkable. How did you do that?

Dahlia:
This doesn’t happen all the time, but sometimes you get into a unique situation where you have a seller that just needs to get out and they want something quick and easy and that’s what this was for them. Especially when you remove your inspection contingency, and I’m not recommending that people always do that, but this was a situation where the numbers made sense where he could do that and felt comfortable with it. So this fit all those elements that the sellers were looking for. We did negotiate back and forth a little bit before we leaned it on the 210,000 and that being our final number we closed with.

Dave:
Wow. And how, as a real estate agent, did you advise your client in this situation? Did you come up with the 210,000 number? Where did that come from?

Dahlia:
Well, we took into consideration what comms were and what we estimated rehab would be if he was going to flip, and that was how we came up with that number. And then obviously you’re just always trying to get the best price possible. So that’s where we landed at based on those things.

Dave:
Great. And so it sounds like he thought about flipping was… What went into the decision then to do a minor cosmetic repair, which you called the wholesale? So maybe actually can you just… Or wholetail, excuse me. Can you explain to the audience what a wholetail is and why your client decided to go with that strategy?

Dahlia:
Well, wholetail is when you basically get something under market price and you basically don’t do anything, barely anything to it and then put it back on the market. I don’t think he initially had that plan, but because of the lack of inventory and what was coming up moving well, he thought, “Why not try?” And obviously it’s a lot nicer to be able to do no rehab and make money versus the time and effort and expense of doing a full-blown rehab.

Dave:
Yeah, well it sounds like he netted, I’m just trying to do this math in my head here for a second, netted something like $87,000 off of it must have been probably 50K investment for a very short hold period. So that’s an excellent ROI there. Is this a common strategy used in Tulsa?

Dahlia:
Not necessarily. I think it just depends on if everything makes sense to do it. If you have enough equity play there in the deal and if you feel like… Especially when you have low inventory, it just opens up the options for a lot of things. But it’s not necessarily super common, but it’s great when it happens.

Dave:
Yeah, absolutely. Do you think there are other opportunities like this? You said it was sort of an older couple they had been, it had been sitting on the market for a little while. But you’re also saying that in Tulsa, generally speaking, there’s not a lot of inventory. So do you think other people are finding deals like this?

Dahlia:
I mean, it’s still possible. The big thing is focusing on those properties that have been sitting on the market for a while and a lot of times overpriced. That can be a hidden gem. People will overlook a property because it’s priced too high. Well, it’s been sitting on the market for two months, try giving them a significantly lower offer and see what happens. The worst people can do is tell you no.

Dave:
Yeah, absolutely. And so then you re-listed the property and you said it went quickly. How fast were you able to move it once you listed it?

Dahlia:
Yeah, just within a couple weeks. I think the thing that worked to our advantage too is at that point the property was vacant so it could be shown as much as possible versus before that they had really limited the showings, they didn’t want a lot of people coming in, so that helped us as well.

Dave:
Wow, that’s great. Can you just tell us a little bit, since we last talked, I guess that was maybe November, how has the Tulsa market changed at all? Are you still seeing good deals, low inventory? Or how would you describe it right now?

Dahlia:
We’re still low inventory. The good thing is we can negotiate more versus we couldn’t do that before. So we have more negotiation room so you can make deals happen, especially for properties that have been sitting. It’s not multiple offers and bidding wars every deal like it was before. The biggest thing is just battling the interest rate, but what I like everyone to know is you can refinance, you can’t change your purchase price. So be patient, get the deal. And then down the road when the rates are better, you can refinance.

Dave:
Yeah. You said something about being patient and I really agree with that. When you’re looking at a market like the one we’re in now where prices are falling in certain markets, are you advising your clients to continue to buy at list price? Are you offering under list typically?

Dahlia:
Yeah, I’m always offering under list. If there’s no other offers, I’m offering under list. Now, it’s one thing if the property just came on the market. Then you know you don’t have that strong negotiation tool. But if it’s been sitting, I’m offering under list. Absolutely.

Dave:
And has there been a uptick in the success rate of offering under list price?

Dahlia:
Absolutely. Yeah, there has. Especially properties I’d say in that over 200,000 price point, those properties have definitely began to sit more. So 230,000 and up, we have a lot of negotiation room and there’s just a lot more inventory in that price point.

Dave:
Awesome.

David:
That’s a good point to notice that different markets have sort of an equilibrium price point where properties below that number tend to sell quicker, properties above that number tend to sell over more time, right? I break it up into three categories. I say every market has starter homes, step up homes, and luxury homes. Luxury doesn’t mean extravagance, it just means a price point that is so high, a smaller percentage of buyers can afford to get into that. Step up homes tend to be something you had to sell a starter home to get enough money to buy it. You’re not going to save up the down payment for that on your own. Starter homes will always be the first ones to sell. So when that isn’t explained, people use some of the strategies that work on luxury homes and they try to apply it to a starter home that has a lot of competition. Or they assume luxury homes you have to pay over asking price just like you had to on a starter home. And that’s not the case.
So I love your point there that 230,000 is your breakeven level, right? And beneath that, certain strategies work. And above that, different strategies work.

Dave:
Yeah, I’m sure Rob and David would both love their breakeven point to be $230,000, but… Well, it sounds like a real home run, Dahlia. It’s an awesome deal. Thank you for sharing that. Let’s move over to Washington, DC. Rob, thanks for coming back. Can you tell us about what deals you’ve been working on?

Rob:
Yeah, the DC metro area, which is where I’m at, it’s a huge market, Dave. There’s so many different pockets. One of the areas that we’ve been focused on a lot for our investors is kind of like this Airbnb game. One of the things that we’ve been doing recently because there’s not a lot of inventory on the market is marketing for off-market properties, to identify off-market properties.
And so we started these postcard campaigns looking for properties and we had somebody raise their hand that was behind on their mortgage payment. So their first and their second were both behind. Believe it or not, their second had not been paid on in five years, right? Five years. Don’t ask me why the bank had not foreclosed, but they hadn’t, right? It was originally a $30,000 lien and it now had ballooned up to 75,000, right?
And so this seller was at a point where she just wanted the problem solved. This had been an investment property with her and a business partner. The business partner had passed away and she wasn’t able to manage it from afar. I think maybe her business partner had been local. So I entered it with my buyer. My buyer, we looked at the asset itself, we said, “There’s a lot of work that needs to be done to this thing. There had been a lot of deferred maintenance.” With that second note that was on there, it was still a decent deal with that second note that was on there. So I’ll give you the numbers. The fixed up, it’s worth about 350,000 with the first and the second totaled about 170,000. Somewhere around there, 170,000, 175,000. But that second lien, he now made it… He still had to put another 50,000 to 60,000 to extract the value, right? It kind of made it difficult to make it just a complete home run deal.
So back in the day, Dave, I had done a ton of short sales and I said, “Well, there might be an opportunity for us to short the second position note. And it doesn’t hurt just like it doesn’t hurt to try.” And so what we did was we talked to the seller, we negotiated a price on that property. The price essentially was making all the back payments up on the first and gave a little bit of equity on the front end to that seller because she was mentally already gone. This thing was going to go to foreclosure in 25 days. We then proceeded to take that contract to the bank and we were able to get that $75,000 lien to $7,500, right? So think about that. We offered it just one time, right? We thought that they might go back and forth, they accepted. They knew that the bank was going to foreclose on the first, and so they were like, “Hey, we haven’t been paid on this thing for five years. We’re going to get somebody $500.”

Dave:
Rob, can you just explain that for a second for everyone listening who’s not familiar with the difference between a first and second position lien and what you did basically to convince the second position lien to short sell?

Rob:
First position lien was the original mortgage that they took out on that house. Somewhere along the way, they had gotten an equity line on that property because there had been some equity in that property. So they’d gotten an equity line against that property and had tapped it for $30,000. So now it was in a second position under the first position note that they had originally gotten the first loan that they’d gotten. And for whatever reason, they stopped paying on the second, long time back. Now there was motivation for that second position loan to take something less than what had originally been taken out on, because the first position was now foreclosing. So five years later, she had also fallen behind on the first position note. So that prompted the second position to say, “You know what? We need to do something.”

Dave:
Just so people know, the difference between first position is like, the way it works is first position gets first access to the benefits of a sale. So basically what happens if there is a foreclosure with the first position loan, then the person who has a second position loan is at risk of not getting any money out of the deal, right Rob? So that’s why they’re motivated because they’re all of a sudden thinking, “They’re going to sell this house. First position’s going to foreclose and I’m going to be left with nothing.”

Rob:
I’m left with nothing, right? Or very low. Thank you, Dave.

Dave:
No, of course. That’s what I’m here for.

Rob:
And so the second was highly motivated to do something. They knew that they were going to get stuck with it if they didn’t. So hence the reason why they took what was owed, the $75,000 total owed to them, why they only took $7,500, right? Which you’re like, “Why would they do that?” Well, because like you said, Dave, if it went to auction, they may not have done better. Maybe they would’ve done better, but maybe not, right? And so this way they knew exactly where they stood. They wanted it, the debt, off their books. More than likely, Dave, that second position note had been sold to a creditor for pennies on the dollar and that creditor might have made money on that, right? That’s a whole different thing we won’t get into. But more than likely, that’s kind of what happened. And so it took a good deal and made it a great deal, right?
Now there was another element to it. The other element to it was we realized that the first position note had a 2% interest rate. 2%, right? That’s value in itself. And so I just happened to mention to my buyer, I said, “Listen, there’s this tactical subject to. You essentially get the deed subject to the existing first loan that’s there.” I worked through the mechanics with him, wrapped his mind around how that looked. We were able to purchase that property subject to the existing note that was there. There’s always a risk that I warned him of the risk, that loan could get called, that could get called because there is a due on sale clause. Now it was only $90,000, right? So we were like, “Okay, well if it does happen, we had the ability to get them access to the money in order to get that covered.” But we said, “Well, let’s try it” because again, it doesn’t hurt to try.
We essentially shorted the second, took over the first, made all the back payments for the first loan, settled on that property, in it completely for about 120,000 after all cost. The way it sat, just like David and I had talked about this, we bought the equity because when we shorted that second, well it was now probably worth about 170,000 sitting the way it was. And now we’ve got it for 120,000. So we got that 50,000 in equity. We created that, right? Now we’re going to put in 50,000, which he’s in the process of doing. It’s going to be worth… We might be into it for 60,000, 65,000, but it’s now going to be worth 325,000, 350,000. He’s going to Airbnb it. The payments, he’ll probably collect somewhere around $3,500 a month, maybe as much as $4,000 a month. It just is a great little deal, right?
Like Dahlia had said, these don’t happen all the time. There was just a lot of different circumstances, but because we understood the different moving pieces that we could put together in this puzzle, we were able to help structure this deal for our buyer in a way that was just a complete home run for him, right? And so the points that I want to bring on it, it was an off market deal and it took some creative thinking on how to structure it. And then we also helped him raise the capital to help renovate the property, which is one of the benefits that an agent investor brings to the. It’s just our contacts, our resources in order to put these things together to help our buyers build wealth in that process.

Dave:
That’s awesome. I mean, it sounds like an incredible, incredible deal and sounds like you added a tremendous amount of value to your buyer. I do want to just say to everyone listening that not every agent has off market deals and sub 2, and that does take a good deal of effort to find and they’re not all like that. But that’s a remarkable deal. Sounds like a great one. Is this a buyer that you’ve worked with before?

Rob:
It is. It is. We work a lot together, and so we understand the market that we’re going after. I know exactly what he wants. We have a great relationship. That’s actually one of the benefits, is these clients become our friends. They become sometimes our business partners. We have the ability to understand what they want, so I could pick up the phone and say, “Hey, this thing just came across my desk. I think it’s great for you.”

Dave:
Yeah, it definitely makes a huge difference. I’m going to crash at my real estate agent’s house for three nights next weekend, so it’s true. Rob, can you just give us a little update on the DC market too? And as you said, it’s huge. But just generally speaking, is this representative of deals that you’re seeing, like a lot of distress in the market? Or how would you characterize the majority of the deals you’re seeing right now?

Rob:
It’s interesting because I was so wrong about like, there was a lot of doom and gloom last September, October, November. The beginning of the year literally it opened back up in our market and we started seeing multiple offers in our market again. I was shocked, to be honest with you, Dave. It just goes to show you the resilience of the market that we’re in. Yeah, so there’s still low inventory. Number one, inventory’s low. Buyers don’t seem to be deterred. They’re out there and they’re actively looking. I think people wrap their mind around the new reality, “Hey, these are the interest rates. I may have to shift my expectation of what I’m able to buy, but I think that that’s now occurring.” And the beginning of the year was a good time for our market for sure.

Dave:
I’ve been hearing that across the board. I mean, not everywhere, not Phoenix, but a lot of markets were hearing people saying that beginning in the year it corresponded with low a bit lower interest rates and not that much lower, but it shows, like you said, the real resilience. I think it peaked at 7.4% for the average 30-year fixed rate mortgage. It dropped down to low 6s, still double where it was the previous year and people were still just jumping back into the market. So super interesting to see that. Now, they’re going back up again. So we’ll see how it goes, but glad to see that there’s a little bit of thawing in the market. From just the deals you and Dahlia have shared so far, it shows that if people are committed and patient and willing to think creatively, that there are absolutely still good deals in this market. So thank you for sharing that.

Dahlia:
I have a question for Rob. So in your market, are you seeing people able to cash flow right now? Because that’s the biggest thing. The biggest question I get asked all the time is, “Can I buy and cash flow?” And I tell people it’s possible, but it’s tight. So I would love to hear how it is in DC right now in your area if you’re seeing that.

Rob:
Yeah. Our area is not a cash flow market unless you’re going to a house hack or you’re going to do something in some of the outer areas of the DMV area when it comes to vacation rentals, right? So otherwise the answer is absolutely no.

Dahlia:
So people are just banking on appreciation?

Rob:
Well, they’re either house hacking and they’re playing that game, or they’re buying vacation rentals, which you can absolutely cash flow on. So you just got those two. But if you’re looking to cash flow in a single family house or a townhouse in the DMV area, that is really tough at today’s prices in today’s interest rates.

Dahlia:
Okay. I was just curious.

Rob:
I’m sure it’s like that for David.

Dahlia:
Oh, I’m sure it is.

David:
Yeah, I think part of the cash flow versus appreciation debate that always goes on, we’re always having to deconstruct that and then re-understand it under different concepts. Appreciation used to be like speculation. You are just speculating that the price will go up and you’re losing money every month. With as much as inflation as we’ve seen, it’s just kind of wrecked havoc in the markets markets and we’re all trying to understand how do we make sense of the new rules that have been created.
One of them is that appreciation actually affects cash flow just as much as it affects the value of the asset. So you’re seeing that you bought a property, like for me I bought a property five years ago, six years ago, and it rented for $1,400 a month and now it rents for $2,200 a month. So it’s not cash flow or appreciation. It’s appreciation within cash flow, if that makes any sense. You sort of have to think a little more… It’s like, now we got to play chess when real estate used to be checkers. I missed those days. I liked it much more when it was like, run your numbers, see the ROI, put your money towards that, buy the house, you’re done.
Now we’re sort of having to think several steps ahead and use more complicated strategies, which is why podcasts this become more important because it’s not as simple as, “Oh, I read a book, the book on buying rental property by Brandon Turner and I bought a house and I’m done.” Now we’re constantly evaluating this stuff and trying to figure out what markets is the demand going to be flooding into, where’s the money going to be going, where are the job going, what can I expect my cashflow to look like in five years and do I have enough to get me to that point.

Rob:
That’s what makes it so much fun, right? That’s what I love about it.

David:
Yeah, if you love it, that’s right. But it’s not for the faint of heart. This isn’t like the people that buy stocks, they just put money in their 401(k) and they let it sit and they look back 20 years and “Oh, I have a bunch of money.” The market fluctuates so much more. You really have to pay attention to your investments. It’s becoming something that takes more attention than just the pure passive income that it was when we first started talking about this even six or seven years ago.

Dave:
But it offers better returns than the stock market. Just throwing it out there.

David:
That’s the thing. It offers better returns than everything. It can offer better returns than your job, right? It just isn’t passive returns. Like Rob’s point that cash flow will come from a vacation rental, yeah, but vacation rentals are more work. It’s not the same as just set it and forget it, right? So that’s what I mean by we have to reanalyze what we’re getting into. You have to count the cost going into this to know “Do I want to do this? And what is it going to require of?”

Dave:
Being an entrepreneur, it’s not just sitting back and doing nothing. All right, well David, I’ve hogged the microphone on your show long enough. Tell us about your deal in San Diego.

David:
So our deal came in the San Diego market, which is one of those markets that is very hard to get into. You are all but guaranteed to make money over the long term. It appreciates quickly. Rents go up, values go up. There’s a limited supply in that market, so it’s constricted. And so you’re likely to see increasing demand there. If you’ve ever been to San Diego, if anyone went to BPCON, you see why. It’s just gorgeous. Every time I go, I’m like, you talk about San Diego as being nice, but it’s underrated how nice it is when you actually go. It’s like I call it the Bermuda Triangle. You never want to leave. You just go there and you’re like, “I’m never leaving this place ever.”
But it is a notoriously hard market to invest in because you’re competing with primary home buyers. Everyone wants to live there. The people that are moving there have good money because it’s an expensive place to live. So as an investor who’s on a budget, you’re trying to make a dollar out of 15 cents, you’re competing against people that have a dollar and they’re fine to get only 15 cents in return as long as they can live in San Diego.
So what we did was we’re targeting short-term rentals because obviously the cash flow is bigger there. You’re going to need that to make sense in this market for our clients. But there’s a tier system in San Diego where they only issue so many permits to do short-term rentals because all the investors flooded in there and started doing it. So then people who live there go put pressure on the local politicians who say, “We’re going to limit how often this happens. Now we got to be creative to figure out how to make it work.”
Well, one loophole that we found on the David Greene team, specifically representing clients in San Diego, is if you own the property as your primary residence, you jump to the top of that permit system. You don’t have to go to the bottom and wait. So what we’re doing is we’re looking for properties that either have or we can develop a small ADU for this young married couple to go live in and then they rent out the main house, right? So it’s almost no different than if you were an investor and bought the main house to then go use as a short-term rental, but you’re getting to live in part of it and you’re also putting less money down. You can get in for 3.5%, 5% down and you have to put the 20 or 25% down your competition does. Or in this case, no money down.
So we’re actually working with the VA buyer, which to be honest with you, there was a time maybe just a year ago, trying to be a VA buyer in San Diego, don’t even try. Which is funny because it’s military town, but you don’t have a chance to use a military loan to get in.

Dave:
Because the sellers just didn’t want it, right? They were just looking for cash? Yeah.

David:
No, the sellers had 12 other offers and they could be cash. The minute they see VA, it’s just, “No, thank you.” It gets thrown out. But in this market, we’re seeing some opportunity. And so we found a property that was listed at 925,000, but they really listed it too low. Now, this is usually the job of a good listing agent. This is like a smart agent who didn’t price their home too high and then have to chase the market coming back down. But what happened is they were expecting a bidding war that didn’t come because everyone’s sort of hesitant right now, like, “I don’t know.” So we were able to get in there early and no other offers came. So now VA doesn’t look bad, it looks good. They’re comparing us to nothing as opposed to comparing us to 12 other buyers.
It’s not a situation where we have tons of competition. There’s a couple other buyers sniffing around. They didn’t want to go take our asking price offer. So what we did is we negotiated a higher asking price, 940,000, but we have the sellers paying for 100% of the closing costs as well as buying down our client’s rate. So they’re getting a lower rate and they’re saving a bunch of money they would pay in closing costs. And for almost a million dollar property, those closing costs get pretty high. We’re not talking about some change here. We’re just borrowing the extra money from the lender because my borrower doesn’t have to put any down payment. So they’re getting to borrow 100% of the money from the lender. They’re giving that to the seller to lock this thing up at what really it could have been at the peak, it could have been listed at 1,000,050. If they really wanted to go hard, that’s where they would’ve listed it. They were much more conservative.
So we’re still getting a deal that’s going to appraise for less than what we’re buying even though we went over asking price. The benefit here is our clients are getting to save more capital to put in towards improvement of the property rather than throwing it at closing costs that you get no ROI on. So even though we’re paying over list price, the property’s going to appraise for more than the price that we’re putting in under contract for.
So the plan here is to take a two-car garage and convert that into an ADU using about… It’s going to be around 80 grand we think, and so probably 1/3 of that money is going to come from closing costs that the seller is contributing that we don’t have to. It’s budgeted for something else. And then they’re going to put the rest of the money into that garage, which they don’t have to put a down payment on the property. S.
O even though they’re spending money on the rehab, they’re still coming out of pocket for less than they would have if they had to come in with a down payment because they’re getting to use this VA loan. They’re going to convert that two-car garage into an ADU. They’re going to live in it, which makes it a primary residence. And then they’re going to rent out the main house. They’re just going to do some upgrades in there. Things like making the bathroom nicer, adding some new countertops, adding some new cabinets, stuff that isn’t super expensive, but that’s why the property was available at that 925,000 price when it could have been listed for more, because it’s outdated and it’s kind of not at the top of the other buyers who were looking for homes list.
San Diego is going to let them jump to the front of the line to get short-term rental permits because they’re going to be living in the house. So this is sort of like… What’s that Disney line fast pass thing that you can get where you don’t have to wait on the lines? It ticks off everybody else who doesn’t have it, but it’s nice when you do. The money that they think that they’re going to get out of the short-term rental is going to cover about 85% of what their mortgage is going to be when they start off. So they’re going to be living in one of the most expensive markets in the country where wages are very high and they’re going to be paying about 15% of their mortgage in year one, which I mean a lot of people mess up house hacking because they expect to cash flow and live for free. I just think that’s unrealistic expectations unless you’re in a very cheap market.

Dave:
Saving money is the same thing as making money. Keep more of it.

David:
It’s even better because you don’t get taxed on money that you save. When you make money, you still got to pay taxes, right?

Rob:
I love the whole ADU game that you guys are playing. I’m actually in Anaheim for our Keller Williams National Conference and I’m staying in an ADU right now. It’s awesome, right? Found her on Airbnb and they’re making some extra cash doing it. It’s just phenomenal.

David:
That’s what we say you can’t find a good deal in today’s market or it’s much harder to, but you can make a good deal. It’s learning to look at these properties and seeing what they could be. Kind of that cheesy, highest and best use stuff that you hear about in the appraisal game that everyone used to make fun of, but it now actually makes sense, like, “What is the highest and best use for this property? Why do they have that huge detached two-car garage when no one even puts their car in it anymore?” It should be converted into something that could be useful. And we can do that because we’re not putting a down payment on the… So they saved all this money for their down payment. They don’t even have to use it. They get to immediately improve the property, add square footage to this 1,100 square foot house, which is going to make it worth a whole lot more. At some point, they could refinance if they wanted.
There’s so many benefits here. Part of the reason that we were able to get this property is we move faster than everyone else did. When it came on the market, we saw this could be listed for much higher. We know what they’re normally worth. You never see something at 925,000 that’s in this neighborhood in north San Diego. Jumped on it right away and then we made rapport with the seller. So when our agent was walking the house with the client, they noticed that the seller had a lot of University of Wisconsin memorabilia hanging around, and our buyer had moved from Wisconsin. So when we set up the next showing we had them wear Green Bay Packers Gear and the seller was at the house, it’s like, “Oh, what do you know? We’re also Wisconsinites” and that’s a game that, as the agents on this thing know, we play that game for everything that it’s worth however we can. And then we played up the whole… This is a military family and it was an older lady who owns the house, so she was excited about the fact it’s military.

Dave:
That’s awesome. I love that trick. I’m going to just start researching everyone and wearing their team colors. But I did want to ask you something, David. With these permitting systems in San Diego and they’re popping up a lot all over the place, it seems to me that it’s daunting, but if you get one of those permits, it’s actually kind of like the best case scenario, right? Because are you seeing average daily rates and revenue potential for the people who do have permits hold steady, go up, or are they performing pretty well?

David:
This is something important to notice across the country. I recently stepped into a big pile of doo-doo when I bought my 18 properties over 60 days. A lot of them were short-term rentals and I got into the short-term… I only bought in two previous to this. They were both in Hawaii. They were both pretty simple. I didn’t realize how incredibly complicated and slow the permit process had become specifically with short-term rentals. And then when you amplify that by adding in construction permits, it’s been hell for me with these properties just sitting there in the city. I almost think the city is purposely taking a long time out of spite because all they get is complaints from the Karens, the neighbors, the NIMBYs that call in to yell, and so they start to hate investors too. And if they have an opportunity to push your file off for a long time, I think that’s happening sometimes.
I didn’t realize how bad it was. So to your point, Dave, if you can get a permit, there’s actually value in that permit itself because what’s hurting the short-term rental market is how much inventory is flooding in a lot of these places where they’re popular. You have investor inventory flooding there and you have people who live in these homes instead of selling them. They just turn it into a short-term rental, let a property manager take it over and then they just move. They don’t even sell their house and then go move somewhere and they end up making more on that short-term rental than two of their mortgages on the house they move into. It makes more sense to do that than it is to sell their house and put the money into a lower mortgage, just a better use of capital.
So you’re seeing a flood of inventory in these short-term rental markets where you analyze the deal, it makes sense, you go off the numbers you have, you buy it and then a year or two years later, you’re dropping your price every month because there’s so many other people that are competing. So in the cities where they make it hell for you to get the permit, it is like you mentioned, Dave, an upside because it restricts how many other people can come, and that buried entry actually protects your investment.

Dave:
Yeah, I know someone who has a short-term rental in this kind of rural town and has no intention to buy more. It’s like sort of a use it for personal use, rent it out sometimes. They’re trying to stop all new permits for short-term rentals, but he would be grandfathered in and he’s kind of like up in arms. He’s like, “Oh my God, they’re trying to come after our business.” I was like, “That’s kind of the best possible thing for you. It’s like they’re just going to stop all of your competition and you still keep getting to do it.” So I’m just saying I know the regulations are a little bit daunting, but if there are ways like David is suggesting to sort of get in when there’s going to be limited supply, it could be really powerful.
So unfortunately, we do need to get out of here, but I would love to just part with one question, or two questions actually, I’m going to pose to each of you. One is what’s something that you’re looking forward to in the housing market or your specific market in 2023? And then where can people listening to this connect with you? Dahlia, let’s start with you.

Dahlia:
I would say the biggest thing that I’m looking forward to is just being able to continue to get more and more deals. That would probably be the biggest thing. As the rates come down, I’m sure we’re going to start seeing a spike in buyers again as long as this inventory stays on the low side. So hopefully in the meantime, just continue to get more and more deals and we’ll see how 2023 goes. I feel like it’s been hard to predict these last couple years, but excited to see what happens.

Dave:
I like the sound of more deals. Where can people connect with you if they want to?

Dahlia:
Yeah, absolutely. My website is asnrealty.com. They can find me on Facebook at ASN Realty, and then of course on BiggerPockets.

Dave:
Great. All right, Rob, what are you looking forward to?

Dahlia:
I’m looking forward to the spring market. It’s already heating up. We’ve been helping a lot of first time home buyers house hack and that’s been big for us in this market. I think there was a lot of fear towards the end of last year and that fear is now broken and we’re seeing a lot of those buyers coming to us. So we know it’s going to be a good time for first time home buyers that are interested in house hacking to take that step forward. The market feels good. So I’m feeling good about it. I’m feeling good about it.

Dave:
Great. And if people are also feeling good and want a house hack in DC, where should they connect with you?

Rob:
They can find me on Agent Finder, right? They can find me on Agent Finder or @robchavez on Instagram.

Dave:
Yeah. If you want to find what Rob is talking about and identify a investor friendly agent in your area, you can do that completely for free at biggerpockets.com/agentfinder. It will match you with investor-friendly agents completely free. It’s a no-brainer if you’re looking to get into the market right now. David, take us away. What are you excited about?

David:
I think this spring we’re going to see, like I mentioned, the three tiers of how most markets are broken up. I think luxury markets are still going to stay a little bit slower. I think some of that money is, they don’t have to buy a house, they wait. They time it right and they’re going to be a little scared. And the higher priced homes, the higher interest rates affect them asymmetrically more than lower priced homes. So I think starter homes, you’re going to see a lot of turnover, a bit of a frenzy like you normally see in the spring to get them. The step-up homes, less. And the luxury homes probably aren’t going to look much different than what they look like right now.
If people want to find out more about me, they can listen to this podcast. By the way, you guys are doing a great job of that right now. Or they could go to my new website, davidgreene24.com. I’m pretty much @davidgreene24 on every social media, whatever your favorite is. But check out the new website. See some of the stuff that I have going on. I’m putting retreats together now. We do Friday night YouTube lives as well.
So the market’s changing really quick. Here at BiggerPockets, we’re putting out as much information as we possibly can for you guys. Now is the time to be consuming more real estate information than ever. This is not our grandpa’s real estate where you could buy a house, forget about it for 20 years and then hand it to your grandkids.

Dave:
All right. Well, thank you all so much for being here. This is super fun. I really like doing these kinds of deal analysis. Hopefully everyone listening to this is inspired by the types of deals that all three of these agents have brought to us and seeing that even though that this is a different and challenging market, as David just said, there are still great opportunities out there. Thank you all again for being here.
Everyone should visit the Agent Finder at biggerpockets.com/agentfinder to connect with David and our guests on today’s show, Dahlia and Rob, as well as other investor-friendly agents who can help you take the right steps to close your next deal. It is fast, it is completely free, and it’s super easy to use. You can search for a market like San Diego, DC, Tulsa, or any other market that you’re interested in. You enter your investment criteria and then you just connect with the agents that you want to connect with. So check it out biggerpockets.com/agentfinder where you can match with experts in their market just like Dahlia, Rob, and David, or an expert in your local area.
All right, well thanks again everyone for listening, for Rob Dahlia and David, the friendliest of all investor-friendly agents, Greene. We will see you next time on the BiggerPockets Real Estate Podcast.

No one enjoys having difficult conversations—especially with their boss. However, whether it’s about a problem with a co-worker, a mistake that’s been made or a disagreement on a project, difficult conversations are often necessary in the workplace and can help you and anyone else involved move forward and grow as a professional. But, that doesn’t make approaching your boss with a problem any easier.

To help you learn how to do it right, eight leaders from Young Entrepreneur Council offer their advice. Here, they share tips from a leadership perspective for how to approach your manager or boss with a difficult conversation in a way that reduces your anxiety and allows you to succeed.

1. Write It Out First

If you aren’t sure how to broach a subject, it can help to write it out as a letter first. That way you can organize your thoughts and order them by which one you most want to communicate. If you’re concerned you’ll have trouble communicating your needs in a meeting, you can just turn the letter into points and send them within the email requesting the personal meeting. – Matt Doyle, Excel Builders

2. Focus On The Problem And Not The Person

The most effective way to approach the conversation is to focus on the problem rather than the person. Instead of making it personal, it is better to express how the problem affects the work or the team and propose a solution. It can also be helpful to have an objective, third-party perspective, if possible, to provide a different view of the situation. It’s also important to be open to feedback. – Kazi Mamun, CANSOFT

3. Stay Calm And Composed

Maintain composure and remain calm when approaching your boss with a difficult conversation. That’s all there is to it. Respecting your manager or reporting authority is a good thing, but that doesn’t mean that you should be intimidated by them. Just stick to the agenda and be transparent with what you say. Recommending potential solutions that can fix the concern under discussion would be great. – Stephanie Wells, Formidable Forms

4. Come Prepared

These conversations can be challenging, but they are a necessary part of any successful working relationship. Employees should prepare ahead, schedule a meeting, be specific and respectful, focus on finding solutions, listen actively and follow up after the conversation. Approaching tough conversations in a prepared manner helps alleviate anxiety so you and your boss can process effectively. – John Rampton, Calendar

5. Be Direct And Succinct

Be direct and to the point with just the specific information that the conversation needs when you communicate with your boss or manager. Learn to value the time you are investing in that conversation. Being a leader, I always hate difficult conversations with my employees. But, I always like a genuine conversation that is essential for both my employees and me. – Kelly Richardson, Infobrandz

6. Leverage The STAR Method

When approaching your manager or boss with a difficult conversation, try the STAR (Situation, Task, Action and Result) method for a positive outcome. First, discuss the situation followed by facts. Second, describe your role in the scenario or how the situation affects you. Third, come up with suitable recommendations to address the situation. Fourth, share expected results. – Jared Atchison, WPForms

7. Stick To The Facts

It’s critical to avoid blaming others or being defensive. Instead, prepare yourself in advance and figure out what you want to say. When it’s time to have the difficult conversation, talk about facts rather than highly charged emotions. It is possible to express discomfort without being hostile. By staying positive, you can also win your boss’s trust and have a productive conversation. – Syed Balkhi, WPBeginner

8. Admit Your Discomfort

Try to focus on the reality of the situation and what you hope to achieve from it. If you’re nervous or angry, this will only make it harder to communicate clearly. If you’re feeling stressed about an issue, you could start the conversation by admitting your discomfort. Your boss is human and has had similar feelings, so they will be more likely to empathize if you’re up front about it. – Kalin Kassabov, ProTexting

Dave:
Hello everyone, and welcome to On the Market. I am your host, Dave Meyer, and today I am doing the show alone. We’re going to be doing a deep dive into a question that has been coming up on my newsfeed like crazy over the last couple of weeks, and I’ve been kind of surprised by it. And so I decided to look into this topic, and I’m going to share what I’ve learned about it and my opinions about it over the course of this episode.
Now the question that I researched and we’re going to talk about today is, has the housing market already found a bottom? And honestly, for the last couple of months I didn’t really think we were going to be talking about bottoming out of the housing market until at least the second half of 2023, maybe into 2024. But there has been a rash of headlines from reputable organizations talking about this. Just as an example, Mike Simonsen, who’s the CEO of Altos Research, a pretty prominent, very reputable real estate data firm, put out an article called Has the Housing Market Already Found a Bottom, pretty straightforward. We also saw The Wall Street Journal run a headline that says The Housing Market is Showing Signs of Thawing. Yahoo and Fortune ran headlines asking if demand has already hit bottom in November, and Goldman Sachs, one of the largest banks and most prominent economic forecasters in the entire United States, actually upwardly revised its housing market forecast for 2023.
And that’s really noticeable, because most forecasters, at least in the second half of 2022, were making their forecasts go down. Zillow kept adjusting their expectations downward. We were seeing other big banks, other real estate firms downward. We were seeing other big banks, other real estate firms downward. So this question is something that sort of fascinated me. Are we close to the bottom? I looked into it, and what I’m going to do today is share with you the data that I found. This way, you can decide for yourself whether you think that the market has already bottomed, if it’s going to start growing again, if there’s much more downside risk, and I’ll share my opinion with you at the end, but for most of the show what I’m just going to talk about is why these businesses, why some of these reputable firms are saying that the housing market may have found its bottom.
And you don’t have to agree with that. I’ll let you know my opinion at the end. But I will just say that there are fundamentally sound ideas why they’re saying this. It’s not just fanfare and cheerleading for the real estate industry. There is actually economic and real estate data that has come out recently that has suggested that maybe the worst is behind us. I’m not saying that’s true, I’m just saying there are some indicators that are pointing in that direction, and therefore it is worth understanding. Things are shifting and I want to help you understand what has shifted, and then you can decide for yourself if you think that means the housing market has bottomed out at all. And again, at the end I will share my opinion and let you know what I think is likely to happen.
Okay, so that’s what we’re going to talk about today. But before we get into that, I do want to thank everyone who wrote us a review on Apple or Spotify recently. We asked people to write reviews because it really helps us a lot here at On the Market, and we got some amazing reviews and I’m really grateful for everyone who took the time to do that. We appreciate it. We read every single one of them. We appreciate your feedback. And if you haven’t given a review but you love the show, we would appreciate even more of them. So thank you all for being listeners, members of our community, it is a huge help to us when you do something like that. So again, thank you. Secondly we do have to take a quick break to hear from our sponsor, and then we are going to get into our topic, has the housing market bottomed out.
All right, so when I started to look into this question of has the housing market bottomed out, I basically sorted my research into two different sides, demand side and supply side. As with all things economics, it really comes down to supply and demand. Let’s talk about demand side, because I think first, because I think that is sort of what has driven market behavior over the last six months or so. Basically since May or June, when interest rates and mortgage rates start to skyrocket, we’ve seen the housing market enter a correction. And that is basically because rising mortgage rates has reduced demand. People were happy to buy homes even at elevated prices when mortgage rates were 2%, or 3%, or 4%. Fast-forward to June when they went up to 5 or 6%, people could no longer afford it, and so they drop out of the housing market because they’re no longer looking for a home. That reduces demand, and that puts downward pressure on housing prices. That’s basically what we’ve seen since May, June of 2022.
And just to give you an anecdote here, at the beginning of the pandemic, housing affordability was one of the highest it’s ever been back in 2020. It was easy for people to buy homes, because prices hadn’t gone up that much but mortgage rates were super low, and that’s what sort of started this frenzy that went from 2020 to the middle of 2022. Now, in the second half of 2022, we actually saw that housing affordability, and there are different ways to measure this, but by one of the more reputable ways to measure it, housing affordability reached a 40 year low. And what happens when that happens, when affordability goes down is pretty obvious right? People just back out of the market. And so again, that is what we have seen.
But an interesting thing has happened since November, and that is affordability has actually started to improve because mortgage rates have gone down. Mortgage rates, the average for a 30 year fixed rate mortgage actually peaked for, so far, it definitely could still go up but so far in this tightening cycle, it peaked at around 7.4% back in November, and recently in January, it was down as low as 6%. Now, that’s still double where we were a year ago, so it’s not like we’re all of a sudden at great mortgage rates again relatively speaking. But in the context of understanding whether the housing market has bottomed, some of the pressure from the housing market has been taken off because mortgage rates have come down. And we’re not going to get super far into this, but just so you know, some of the reasons mortgage rates have gone down is basically because the pace of inflation has declined a bit, and people basically don’t think that the Fed is going to keep raising interest rates that much. And there’s also a lot of recessionary fears, and when recessions come, mortgage rates go down.
And so there’s a complex factor of things going on, but what you need to know for this conversation is that they are now sitting in about the mid-six percents, still super high, double where they were last year, but lower than where they were in November. And that has helped take some, not all and not even close to all, but some of the pressure off of the housing market in terms of affordability. Now, we’re going to talk about this a little bit later, because of course this whole context of this conversation is about whether the housing market is bottomed. There is absolutely, and I just want to be clear about this, there is absolutely no assurance that mortgage rates won’t just go back up in the near future. I’m going to talk about some different scenarios in a little bit.
But I just want to say now, TLDR, skip forward to the end, there is a very reasonable chance that mortgage rates go back up. So the is something to factor in when you’re thinking about if the market has bottomed. But just know that right now, houses are more affordable in January and February of 2023 than they were in October, November, and December of 2022. So that is something that suggests, and probably one of the main reasons all these companies are thinking perhaps the housing market has bottomed.
Now, just to supply some more evidence about how impactful just this modest decrease in mortgage rates is, there is something called the Mortgage Banker’s Association Mortgage Purchase Index. That’s a mouthful, let me just say that again. Basically there’s an organization called the Mortgage Banker’s Association. They send out a survey every single week to figure out how many people are applying for mortgages, both refinance and new purchases. What I’m talking about here is new purchases, and there’s basically an index. And so it doesn’t give you the exact numbers, it’s all relative to each other, but the index has been sitting between 185 and 205 over the last few weeks.
That probably makes no sense to you unless I give you some references, so let me give you those references. It was at at 160 at the end of October. That’s the relative number of people who are applying for mortgages in October was 160, now it’s 185 to 205. So that’s like a 10 or 15% increase in the number of people who are looking for mortgages. And if you’re wondering what this all means, it means that if more people are looking for mortgages, that means more demand in the market, which could have upward pressure on prices. Again, one reason why the housing market could have bottomed out. Now on the other side of course, a year ago it was sitting around 300, and we’re at 185 to 200, so that’s significantly down from where we were a year ago.
But nonetheless, demand has picked up in 2023. We’ve seen increases in the Mortgage Purchase Application Index five out of the six weeks in 2023, and no one’s saying… I don’t want you to think I’m saying there’s a lot of demand compared to last year, but what we’re talking about here is not, is the market as robust as it was last year. We’re talking about whether it has bottomed out, and the fact that it has grown five out of six weeks in 2023 is significant. So that’s just something that you should know, is that we have seen mortgage rates come down, that has actually gotten people back into the real estate market, more demand is entering the market right now, and that is probably one of the main reasons why some companies are forecasting that the market has bottomed and is likely to grow over the next couple of years. Again, I am not saying that personally, but that is one of the reasons, one of the sound fundamental reasons why people might be saying this.
And I just want to be clear that what I’ve been talking about is that demand, talking about demand, and some of these companies like Forbes and Fortune specifically said that they think demand has bottomed, but that prices might not have necessarily bottomed. And we’ll talk about that in a little bit, but that could be true, that more people could be getting back into the market, but if inventory goes up, prices could still go down. We’ll talk about that in just a minute.
So let’s actually just talk about inventory and the supply side, because that’s sort of the counterforce here. We’re seeing that demand has gone up, nowhere close to where it was last year, but has gone up a bit since October. And to know if the housing market is bottomed, we need to know if supply is rising in a corresponding way, or if that’s still down, or what’s going on. So I’m going to go through a couple of supply side metrics here, and you can decide for yourself.
So the first one is active listings. This is basically just how many listings are on the market at any given time. And according to Redfin, active listings are up 20% year over year. That is a pretty significant increase in the number of active listings. They’re still below 2021 levels, and they are far below 2020 level. So just for context, that means that we’re nowhere near active listings during pre-pandemic times, or even the first few years of the pandemic. But they are up from their lows in 2022, which is really significant. We just talked about that demand is about half of what it was a year ago, and even though it’s going up a little bit, it is still really far down. And then we’re also talking about how supply has gone up. And this is basically the argument counter to what these companies are saying. The argument that housing prices are going to continue to go up is that even though demand might be ticking up a little bit, that inventory is just too much. And when there’s too much supply relative to demand, that means prices are going to go down. So that is one thing that you should take note of, is that active listings are up year over year, but still far below where they were pre-pandemic.
Now there are two other measurements of supply I want to share, and those are days on market and months of supply. These are both other ways of measuring inventory. If you want to figure out how to calculate months of supply yourself, it’s basically inventory, the number of houses that are on the market in any given month, divided by the total number of home sales. That’s what months of supply means. In other words, it’s basically like how many months would it take to sell all of the houses on the market right now? And just for context, we have seen months of supply go up pretty consistently over the last couple of months, and we are nearing, at least this is according to Redfin, three months of supply. Now, for some context, this is up a lot from where we were in 2021 and 2022 when we were at about a month or month and a half of supply. On the other hand, we’re still below where we were in 2019 where it was above 3% months of supply.
And the reason I like months of supply and I think it’s such a key metric to watch is it measures the balance between supply and demand, right? So it doesn’t just say, this is how many properties are on the market, or this is how many people are looking for properties. It shows how quickly those properties are actually finding buyers. And it is still below the 2020 levels, the 2019 levels, but if you look at the graph, I’ll just describe it to you. It is almost directly shooting up. It is going up very, very rapidly. And to me, this is a very important metric to watch, because even though, again, even though demand may have bottomed, we don’t know, but there’s some evidence that it might be improving.
If this trend of supply and inventory is going up, I think there’s still a lot of downward pressure on pricing. Right? Months of supply have gone up from about 1.5 to almost three. It’s almost doubled in about six months, and there’s no sign yet that that has slowed down. If you look at days on market, which is a very similar metric to months of supply, they both measure how quickly things are coming off the market, you see basically the exact same thing. It has shot up rapidly over the last six months, still below pre-pandemic levels, but we’re seeing very significant increases to inventory.
So when you take all this information together, basically what you have is evidence that demand may have peaked, may have hit bottom in November or December. We don’t know. But there is some signs that we’ve hit the bottom at least for now. But on the other hand, when you look at inventory which is an equally if not more important metric right now, it is still going up at a rate that suggests to me that the housing market has not yet bottomed.
So I personally believe that it is way too soon to call a housing market bottom. I said this at the beginning, I kind of wanted to go into the data before I shared my opinion, but I think it’s kind of crazy honestly to start saying that the housing market has bottomed with all the economic certainty that still remains out there, right? We still don’t know how many more interest rate hikes the Fed is going to do, we don’t know what the “terminal rate” is. Terminal rate basically just means the federal funds rate that the Fed holds interest rates at for a while. We don’t know what that’s going to be. We don’t know if we’re going to go into a recession. We don’t know how quickly the economy is going to grow or shrink. There’s just so many questions that to call the bottom of the housing market right now seems extremely premature in my opinion.
Now, I get what they’re saying, and that’s why I sort of dug into this is like, I get that if mortgage rates have in fact peaked, and that’s a big if, but if they have in fact peaked, there is a case that people will jump back into the housing market in 2023, maybe inventory will level out, and the housing market is bottomed and we’ll grow. That is possible, but personally I don’t think it’s the most likely scenario. And I get in trouble for not explaining this enough when I’m forecasting, but when you’re forecasting stuff, you really need to think in probabilities. There is a case that the housing market has bottomed. I’m just going to say that maybe that’s a 20% chance, maybe that’s a 25% chance.
I think the far more likely scenario is that for the remainder of 2023, we see downward pressure on housing prices, and maybe that’s a 50% chance, and maybe there’s a 25% chance that we enter a full-blown crash where it’s 15% declines year over year in housing prices or more. So those are all possibilities. But I will just say that I don’t think that the housing market bottoming is very likely at this point. To me, there are really different scenarios that we have to think through, and you for yourself can decide whether you think which one is the most reasonable. So I’ll just lay out three or four scenarios, and you can decide for yourself. Because basically, I think the real big variables, the two things that we need to understand, is one, what’s going to happen with inflation and what’s going to happen with a recession.
So scenario one which could happen is that there is lower inflation. We’ve seen inflation fall five, six, seven months in a row. And so if inflation stays on that trajectory and there is also no recession, those things are independent. They don’t necessarily have to go together. But scenario one is there is lower inflation and no recession, which is probably the best case scenario for the economy as a whole, for the country as a whole, because people’s spending power gets preserved, and there’s no recession so less people lose their jobs, there’s more economic opportunity. That’s probably the best case scenario for the economy as a whole. But in that environment, rates could actually go up. Mortgage rates could go up, because if the inflation is lower but there’s no recession, the Fed could keep raising rates. Because if the economy is growing, they have more leeway, they have more cushion basically to keep raising rates without breaking something.
So without a recessionary environment, you could see bond yields rise. That could take mortgage rates up higher, and perhaps go above 7% again. I personally have a hard time imagining them, get above seven and a half percent, let alone 8%, but I’ve been wrong about interest rates, mortgage rates quite a few times in 2022. So take that all with a grain of salt, but because I’ve been wrong I’ve really been studying this a lot, and I think this is probably the case that the worst case scenario for mortgage rates in 2023 is that they go up seven and a half, maybe 8%, but that is accompanied by relatively good economic situation where there is lower inflation and no recession. So in this scenario, I don’t think the housing market will have bottomed right? Because if mortgage rates go back up, that’s again going to damage affordability, which pulls demand out of the market. And so scenario one, which is lower inflation no recession, although good for the economy as a whole, I do think could keep downward pressure on housing prices for the foreseeable future until mortgage rates come back down. So that’s scenario one.
Scenario two is lower inflation but with a recession. So again, we’ve seen inflation come down, it’s on a trend where it is declining. And again, I want to make clear to people when I say inflation is lower, that doesn’t mean prices are declining. It means that they are going up less fast, but that’s what the Fed cares about. Other people might want prices to go down, but what I’m talking about here is trying to predict Fed behavior, because mortgage rates are so important for the housing market. And what I’m saying is that what they want to get to is a rate of 2-3% inflation. And so if inflation gets lower and there is a recession, which to me is a relatively likely scenario, this is the best chance for mortgage rates. So unlike scenario one, this isn’t a great situation for the economy as a whole, because we go into a recession.
But this puts downward pressure on mortgage rates for two reasons. One, because there’s lower inflation, this will slow down the Fed’s rate of hikes. And also, recessions put downward pressure on mortgage rates. I know this is kind of hard to understand, but basically mortgage rates are based on bond yields. And when there is a recession, people want bonds. And when they want bonds, that pushes down the yield on bonds, and that takes down mortgage rates. I’ve done a couple of episodes on this, I’m not going to get too into it right now. But what you need to know is generally speaking, when there is a recession, mortgage rates go down. And so if we see the combination of lower inflation and a recession, this is likely to get mortgage rates down into the mid-fives by the end of the year, so it could go down even further.
So this scenario, I think this is the scenario that people who are saying that the housing market has bottomed are envisioning. They see inflation going down. They also see a recession coming, and that means that they think mortgage rates are going to go down even further, and that’s going to add more fuel to the fire for the housing market, and prices are going to have bottomed and go back up. Now, I think that is a very reasonable situation. I’m not saying it’s the most likely situation, but lower inflation with a recession, those are two things that a lot of people think are going to happen. And so I do think there are fundamentally sound, very reasonable ideas that the housing market could have bottomed. I personally just think it’s way too early to make that call. I’m not ready to say that there’s going to be a recession, or that there’s going to be lower inflation well into this year. But people who are forecasting that out, there are fundamentally sound reasons why they are saying that.
Okay, so that’s scenario one and two. Scenario three is higher inflation with a recession. So remember, scenario one was low inflation, no recession. Scenario two, low inflation, yes recession. Scenario three, we have higher inflation with a recession. Now, this will probably keep mortgage rates in my opinion close to where they are right now, because higher inflation means that the fed will raise interest rates higher. That puts upward pressure on mortgage rates. But a recession, as we just talked about, puts downward pressure on mortgage rates. And so these might in my mind cancel each other out depending on the severity of the recession, depending on the severity of the higher inflation. You could see mortgage rates stay sort of close to where they are.
Now, scenario three could happen, but the trajectory of inflation does not make it look like this is one of the more likely scenarios right now. We’ve seen inflation drop several times, seven months in a row or something. And so I think personally it could go back up, inflation, but it would take another geopolitical shock. Like a year ago inflation was starting to look like it could go down, and then Russia invaded Ukraine. That sent inflation up way, way higher on top of all the other causes of inflation. That was just sort of one more catalyst. We’re now seeing the supply side shock, a lot of the money printing has slowed down, and so we’re starting to see inflation get under control. But there’s a lot of geopolitical turmoil right now, and we’re seeing balloons, they’re shooting down stuff left and right. Who knows what’s going to happen, and if that continues that could put other inflationary pressure and lead to scenario three, which again, is higher inflation with a recession, probably keep mortgage rates close to where they are now.
So I think those are the most likely scenarios. The three things that could happen. I don’t know which one’s going to happen. I personally think one or two are the more likely ones, because inflation has shown signs of coming down. I just don’t know if there’s going to be a recession or not, but I just want to be clear that if there is a recession, there is a good chance that the housing market will rebound relatively soon, because mortgage rates will probably go down. And I know some people think, oh, when there’s a recession people don’t want to get into the housing market. I personally believe that the housing market is really about affordability right now, and that if mortgage rates make it more affordable for people to buy, even in a recessionary environment, we will see demand go back up.
So that’s just, those are three scenarios. You can decide for yourself what you think. There are probably other scenarios, those are just the three that I think are the most likely. There’s obviously a fourth scenario here which is higher inflation without a recession, but that to me just seems very unlikely. If inflation starts going back up, we’re almost certainly going to go into a recession. I could be wrong about that, but I think that is much less likely. So to me, I still think that it is possible that the housing market is bottomed, but unlikely. I think personally, I’ve been saying this for a while, but I think the first half of 2023 is going to be more of the same. We’re going to see a lot of mortgage rate volatility. We’ve already seen it come up a little bit off of where it was in January, and I think with that volatility, people are not going to jump back into the housing market as enthusiastically as they may in the second half of 2023, depending on what happens with inflation and recessions.
So I still think the most likely scenario is that housing prices fall in 2023 but don’t crash, but that’s just my opinion. As things develop, we’re seeing new data come out every single day. And as things develop, I am going to continue to share with you what is going on so you can make decisions for yourself, and I’ll share my opinion. Hopefully I’m right, a lot of times I’m wrong. But my goal with these types of episodes and sharing this information is to help you understand the different scenarios that could happen. You may think scenario one is the most likely, or scenario three is the most likely, or whatever it is. My hope is that you can help understand some of the macroeconomic, some of the behavioral elements of what’s going on in the housing market and the economy right now, so you can make your own informed decisions.
With that, I am going to get out of here. Thank you so much for listening. If you have any feedback or questions about the show, you can always hit me up on Instagram where I’m @TheDataDeli. We will see you next time for the latest episode of On the Market.
On the Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Gendal, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets Podcast, show 732. I don’t want you to ever compromise on excellence. I do want you to think about where excellence is being applied within the goals of your life. You can continue to do the work yourself and run a great business and get a lot of dopamine, but as you recognize, if you want to scale, if you want to build wealth bigger, you need to be excellent at different things, and this is the struggle many of us get into. Once we get good at something, we don’t want to let it go.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with a Seeing Green episode. You’ve never been to one of these. They’re pretty cool. We bring in listeners just like you to ask questions, sometimes verbal and sometimes on video about struggles they’re having with real estate, knowledge they want to gain, or what they can do to make more money as a whole, and I’m passionate about helping y’all make some more money. So let’s get into it.
Today’s show is fantastic. We had really, really good questions. We talk about picking a market and the order of operations, like what should you look for when choosing a market. We talk about when it’s better to pursue equity and turn it into cash flow and when it’s better to just start with cash flow. We talk about insecurities, when they show up, why they show up, and how to deal with them for different parts of real estate. And we talk about how to make a BRRRR work in this market or an individual market where it just doesn’t seem like they’re making sense. So we get into some brilliant advice from me if I do say so myself. If you’ve been a BRRRR investor and you’re being frustrated, you might like where we go with this one. Want to thank you guys so much for being here. I know you’re going to like this episode. I’m excited to get into it.
Before we get to our first question, today’s quick tip is BiggerPockets is a website, not just a podcast. And on this website there are many things that you can do, one of which is how the website was started. We call it the forums. You go to the forums and you will find more investors than you could possibly imagine, asking really good questions that you’ve probably thought of yourself. You also can ask questions of your own and you’ll probably be amazed at how many members jump in and answer them. And this is all for free. Highly recommend you getting a membership set up with BiggerPockets and checking out the forums because there’s so much you can do. Calculators, networking, finding real estate agents, learning more about me. You can look up my profile on BiggerPockets and send me a message. All right, hope that happens and let’s get to our first question.

Johnathan:
Hey David, thank you for taking my question and appreciate what you do for the BiggerPockets communities with the Seeing Green. My question is what real estate side business should I start based on my background, my strengths and the current market? I just bought my first duplex in the Raleigh Durham area as a house hack living in one side, and I’m currently working as a railway design engineer and I’m also a United States Air Force Reserve as a aircraft mechanic. I was considering doing home inspections as I think I have a skillset that would be work towards attention to detail as well as following standards, but I’m curious about what you would recommend in this market with you having multiple businesses in the real estate industry. Appreciate you.

David:
Hey there, Johnathan. That’s a pretty cool question. I appreciate you asking that. I would probably like to have a little more info on what your skillset is. You mentioned you’re aircraft mechanic, so obviously you have mechanical aptitude. I do think a home inspector would be something you could pick up pretty quick. That’s a cool side hustle. I don’t know what’s super lucrative. So if that’s something you enjoy doing and you’re just looking to make a little extra coin, I do think that’s actually a great idea. It might have been one of the things that I would’ve recommended. You may also, it sounds like you’re a pretty intelligent guy. It may be worth looking into architecture, maybe becoming an architect or some form of engineering within real estate if you were designing plans for homes.
I know one problem that I’m having right now is submitting plans to the city and they’re frequently saying, “You need to have an architect draw this up. You need to have an architect draw this up.” And it’s very hard to find architects. So I think that there is a need for that, especially if you were able to do it remotely. If you could find a person that you could send to the site of different states and have that person go take measurements for you and then bring it back, put that into a software and draw that up. Not sure if that’s something that you have experience with, but that could be a pretty cool side hustle also.
And then if you’re also good at being a handyman, I think that there’s money to be made in being a handyman. Every investor I know is always looking for someone that can show up and fix things. The people that manage properties are always looking for someone that can show up and fix things. Most of the time we don’t want to pay a licensed contractor to go and tighten a pipe or fix a door that’s hanging wrong or repair some dry rot or even put down flooring. So if that’s something that you’re skilled at and you very well likely could be from the job that you have right now, I think that that is another opportunity you could get into.
But yeah, you mentioned you’re a roadway engineer. I think that if you could look into real estate engineering, that would end up much more lucrative for you than just becoming a home inspector. Although being a home inspector might still have some value if you really like real estate, I think it’s a cool thing to pursue. But I think if you’re looking for a new career, becoming an engineer within real estate would probably be more fulfilling and you’d make more money.
Thank you for this question, Johnathan. Be sure you follow up and let us know what you ended up deciding. This is cool stuff.
All right. Our next question comes from Alan in Indianapolis. Alan says, “I understand that most people get into real estate investing as a way to build wealth and get out of the rat race. I have a lot of liquidity available and I want to find a better place to invest it. I don’t qualify as an accredited investor, but I’m fast approaching those qualifications. My high-earning W-2 will make it difficult at this point in time to replace it with REI. So I want to get some direction on what is a good place to get started. I have over $400,000 in a 401(k) that can be rolled into an SDIRA. I also have about 30K in cash and expecting another 40 to 50K in performance bonus coming. If I can grow efficiently, I would entertain the idea of leaving the W-2 in the future. Where should a mid-career high-earning W-2 person with liquidity get started in real estate?”
All right, this is cool. We got a little puzzle to put together here. Thank you very much, Alan.
First off, with the way the economy’s looking, I would not be in a huge rush to get out of your W-2 job. We don’t know what the economy’s going to do, but it very well could get worse before it gets better. And so, one of the things I learned when I was a police officer working overtime in the last recession, not only was I able to stay employed during a recession, but I was able to make more money than other people. So making more money than other people is always going to be great, but it’s extra great in a recession when everybody else is making less because you have access to opportunities and deals that other people don’t. So I really like the idea of keeping a high-earning W-2 when we’re going into a bad economy. I’m more open to the idea of leaving it and starting a business or quitting and getting full-time into real estate, whatever that might be when the economy is doing amazing because you catch some of those tailwinds that are going to kind of propel you forward.
As far as what are some ways that someone with good money could get into real estate investing if you wanted to quit your job, it would depend on what your skillset is. I’m very big in not saying real estate itself will sustain you, but what do you do within real estate? Are you incredibly analytically sound? Are you someone that could start a fund and you could start looking for commercial or multifamily property to buy? Do you have a really strong construction background? Could you literally start a business in construction doing rehabs of properties?
I really think you and other people need to look at what is your skillset, what are you good at? And then ask, how would that work within real estate, as opposed to saying, “I want to quit my job and I want to replace it with real estate.” If you have a lot of money, you could consider private lending, but you probably wouldn’t have to quit your job just to do that. You could do that while working the job, but again, you don’t want to get into it if you’re not good at analysis, if you’re not good at underwriting, if you can’t look at the risk associated with private lending and make sure it’s something that you want to take on.
The other obvious answer could be home flipping or wholesaling. So if you’re good at sales and that’s why you’re making so much money, which is a possibility because you mentioned a performance bonus that’s often associated with sales, you could start a business of sending out letters, making phone calls, getting the word out, getting motivated sellers putting properties in contract and either flipping them, holding them, or assigning the contract to other people as a wholesaler.
So congratulations on the position you’re in a financial strength, that’s awesome. I think you got some opportunities that should be coming in the future. If you can, write us back again or send us a video and let us know what your skills are and I will dive deeper into the advice I give you on what different positions you could take to get out of your W-2 job.
Oh, one last thing I’ll say. Not everybody gets into real estate investing as a way to get out of the rat race. I got out of a rat race, but I’m in a different race right now. I’m not working as a law enforcement officer. Now I’m working as a business owner, but I’m still working. And I don’t know that real estate investing is intended to get you to never work, especially because you often need to get approved for loans based off income that you have and because things go wrong. You have problems, things break that you weren’t expecting, you get vacancies that you weren’t expecting. Unexpected expenses pop up all the time. It actually works better when you’re still making income. I look at real estate investing more as a way to grow wealth that you’ve already created and to prepare for retirement not to immediately replace income that you’re currently making. Like some people do; I’m just saying my perspective is a little bit different, and today we are Seeing Green, so I’m going to give you the green perspective.
Our next video clip comes from Ryan Spearman in New Zealand.

Ryan:
Hey David, thanks for taking my question. Thanks for all the education over the years. It’s been amazing. I live and invest in New Zealand on the other side of the world from you guys. I’ve got a portfolio of small multifamily properties which I’m looking to expand upon. I want to try and increase my cash flow, so I’m looking to invest in the states. I’m in a unique position of not being tied anywhere so I can invest anywhere, which takes me to my question.
You have always sold the idea of starting first by finding the market that suits you, working your way down, finding a team, and then finding the property. What I want to know is how do I find the market? How do I do that research? I’d love a systematic approach to look at all the markets and figure out which one suits me best before I drill down and find myself a team and then find myself a deal to get some more larger multi-families and exchange some of the equity I’ve built up for slightly more cash flow. Any information or advice, I’d love to hear it. I listen to it all and like I say, it really helped me and my family and our journey towards financial freedom. Thanks. See you.

David:
All right, Ryan, another great question. You guys are crushing it today, asking really good questions. So looks like I see my book, Long Distance Real Estate Investing, I think it’s right there behind your left ear. You have some other books on your shelf that I have too. Extreme Ownership, The Millionaire Real Estate Investor, some Cal Newport works there. So good that I can’t ignore. He’s one of my favorites. So well done.
All right, let’s talk about choosing a market because that’s what your question is here. The first thing that I advise everyone to do that I do myself is I look into the strengths of different markets. So if someone said, “Should I invest in Miami or Dallas or the Bay Area, California?” Each of those markets has a strategy that will work good in that market. The thing that I want you to start with is just asking, “What am I looking for?”
Now, you mentioned something else that’s worth highlighting that you’ve built up equity. Now you’re looking to exchange that for cash flow. My opinion that is generally a superior approach to building cash flow than just focusing on cash flow right away. And I’m actually writing a book right now and I’m giving an example about this. It’ll be called Pillars I believe, and in that book I talk about how there’s one example of a person that chased after a Midwest turnkey property and they make $600 a month, so that turns into $7,200 a year. It’s a 12% return and they’re really excited. The other person goes and buys a property in South Florida and he sees above average growth and he does a value add on the property and he gets it below market value and he uses a lot of different strategies, builds up about $350,000 worth of equity, exchanges that for only a 6% return, even if he can’t get the 12% return and still makes three times as much as the person that chase cash flow in the beginning.
The goal is definitely cash flow, but the order of operations can be different. And you have more control over building equity than you do over actually building cash flow because cash flow only increases when rents go up and we don’t control that. So good on you for getting to this point where you’ve got that equity and you’re looking to invest it.
You’re probably going to be looking for either a cash flow heavy market with a lot of opportunities for cash flow, or maybe you’re looking for another equity run. You’re going to invest that money into a market that gets more cash flow than you have now, but still has a lot of growth. And what I’m getting at here is every market has their own strengths. If you’re going to go invest in South Florida right now, you’re probably going to see continued growth over time and continued rent growth, but you might not be crushing it in year one on the cash flow. Conversely, if you want to go invest into the Midwest, there’s probably a lot of places where you can still get cash flow, but you’re probably not going to see nearly as much growth. That’s one thing to look at. Is this market more likely to experience very solid cash flow in the beginning or above average growth over the long term? And if the answer is neither one, probably not a market to invest in.
Another thing that you want to look at is how much competition is in this market? So you want to go buy properties in Malibu, California. They’re probably guaranteed to do well over a period of time, but you’re going to be fighting with a lot of other people to get those properties. It’s very difficult. On the other side, you can go invest into Indiana where there’s tons of properties everywhere and it’s super easy to get them and they’re not very expensive, but they don’t have as much upside potential. So you want to be looking at competition within a market. Am I okay with a lot of competition if the upside is better, or do I want to avoid competition and just have an easier way to enter into that market?
What you’re telling me is you’re pretty experienced at investing. So I would be looking for markets that were a hybrid market. Dave Meyer and I talked about this on an episode we recently released on our State of the Market Podcast. Dave defines hybrid markets as markets that will cash flow but are also likely to have higher growth than normal. Denver, Colorado was one example of that. When you’re looking to pick a market, the first question that I think you should be asking is where are people moving to? Where are the populations going and where are they leaving? Okay, so San Francisco was red-hot. There was a point in my career a couple years ago, you couldn’t get somebody a property in San Francisco. It was impossible. Couldn’t happen.
Well, COVID came, everything shut down in San Francisco. People started leaving San Francisco and all of the demand that was in SF moved into the East Bay. At that point. It was very easy to get anything you wanted in San Francisco, but it became almost impossible to get any of these bigger single family homes in the East Bay where everybody wanted to move to. Same is true of New York. New York had red-hot real estate for a very long time. It’s been struggling since COVID. Political decisions, the weather and then the overall value that that location offers have decreased because there’s not as many people that want to live there. There’s not as many thriving businesses and a lot of the Wall Street opportunities that drove people to New York in the first place have moved where? South Florida. That’s why that market’s exploding and it’s becoming harder and harder to buy real estate.
So if you wanted to get ahead and buy in these markets that were going to go up before they went up, you got to look at where people are moving and then you got to look into why. So it’s not so much as doing research and just trying to find the website that’s going to predict where things are going to go. It’s more looking at the news overall.
Did you know that Hollywood has been slowly moving into Atlanta, Georgia for the last eight, nine years? You’re seeing a ton of movie production that moves there. I believe that the Entourage was filmed in Atlanta. All that stuff used to be done in Hollywood, not the case anymore. If you knew that, you would not have been surprised that Atlanta real estate prices soared. And if you’re paying attention in the last five to six years, they soared. Atlanta became every investor’s dream. Everybody was putting money into there, and many cities have had their runs. Memphis, Tennessee had a run for a long time that everybody was buying there. Birmingham, Alabama was the flavor of month for a little bit. Also, what happened with Austin, Seattle, San Francisco? They had huge runs. Now they’re cooling off. Phoenix and Las Vegas have their ups and downs too.
So what I want you to do is to start pay attention to where are people moving in the states? What states are they leaving? What states are they going to? Once you identify where people are headed, ask yourself, what is the strength of that market? How do you make money there? Is this a long-term buy and hold for rent increases? Is this a long-term buy and hold for the value of the asset increasing? Is this an area that has a lot of homes that I can add value to? Is there a big discrepancy in the sale prices? Do an ugly home sell for 600,000, but a gorgeous home sells for a million where you can go in there, do some construction and add a lot of value to the property? Or is every house somewhere between 120 and $140,000? That would be much harder to add value to, but it might be easier to find more cash flow.
Last, ask yourself what type of people are moving here? Just because humans are moving there doesn’t mean it’s automatically good. You’re hoping that humans are moving there to experience higher wages. If industry is moving into an area that pays more than other areas around it, you can be sure that rents will eventually increase. So if you’re looking for cash flow right away, you’re going to look for a different market than if you’re looking for cash flow over the next five years.
In general, my strategy is always to delay gratification. If I have an opportunity between a place that will pay pretty good right now or a place that will pay really good in the future, I always push it down the road and I take that gain in the future and I’ve never regretted. I’ve made much more money in my real estate that I made less money on the first couple years, but did way better on later than the people that took the opposite approach, which was like the tortoise and the hare, where they got cash flow right out the gate year one, but then they stayed there forever and eventually that tortoise passed them up. So hopefully this advice helps you to pick some different markets. I’d love to see you continue to delay gratification as well. Buy into areas with the population moving into, buy into areas with rising wage growth, and start looking at real estate from a deeper overall level as opposed to just an individual property that you’re running through a calculator a hundred times in a row hoping that you end up striking gold. It usually doesn’t work like that.
Thank you very much for your question, Ryan. Loved it.
At this part of the show, I would like to go over some comments from previous shows we pull off YouTube. Now, if you do me a favor, pull us up on YouTube yourself and like, comment, and subscribe to this show so other people can find out more about it. I want your comments because I want to read one on a future show. So if you could do me a favor and pull us up on YouTube, you’ll find BiggerPockets has a lot more to offer than just the podcast. There’s lots of other podcasts and there’s lots of videos that we air on BiggerPockets YouTube, many of them from yours truly that you won’t hear on the podcast.
Our first comment comes from Veronica O., right out of episode 714. “Hi David. You are so good at explaining complicated things. It would be nice to have a full episode on micro and macroeconomics explaining the correlation between the prime rate, stocks and bonds, unemployment, recession, inflation, and its effect on the real estate market.” That would be fun. I will take a note there that maybe we should put another episode together that talks about those kinds of things and how they affect the market as a whole. Because Veronica, you’re pretty smart. Everyone looks for the individual property they think is going to make them rich. It’s much more about understanding the bigger factors that determine whether real estate goes up or down as a sound financial strategy.
Kimberly Smith says, “David is my favorite. I’m buying my first duplex next month reading his BRRRR book on the daily.” Thank you for that, Kim, and I’m glad I’m your favorite. It’s pretty cool. Congrats on that duplex. I will keep an eye out for you to see how it went.
From episode 690, TJ says, “I always look forward to Seeing Green episodes. I like the format of having different personalities answering questions. This is a great episode. I learned a lot. Thanks.” Well, thank you TJ for that comment.
Derek and Melinda Decken say, “The bar has been raised in this video. I want to hear more commentary from special guest star Batman.” That’s kind of funny. All right, you guys got to go check out episode 690 to see what Derek and Melinda are talking about there. You will not regret it.
And our last comment comes from episode 690. “Respect to you, David, for still going strong on the podcast. I’ve been listening for four years now.” Well, I didn’t realize it had been four years, but I did just have a birthday yesterday and I am getting older. That is for sure. So thank you very much for acknowledging that and for the respect that you’re showing me. I’m thrilled to be a part of BiggerPockets ever since Brandon Turner first brought me on and I vowed to never ever, ever let him regret that decision. I’ve done my best and I’m glad to hear that you guys like it, so thank you for that.
We love and we appreciate the engagement all of you give on our YouTube comment, so please go in there and leave another comment. Tell us what you like. Tell us what you don’t like. Say something funny. I thought that Batman reference was really good, and tell us what you want to see more of on the shows and we will make those shows for you. Our next video clip going back to our questions comes from Wade Kulesa in South Dakota.

Wade:
Hey, David, Wade Kulesa here from Sioux Falls, South Dakota. I am a contractor here in my local market. I own a few properties and looking to expand this next year. My biggest question is as a contractor, I love doing the work. I like getting my hands dirty. I love seeing new projects being accomplished and that kind of thing, but I know that in order to scale that I kind of have to get past that mindset and handle those things off to other people. Do you have any advice for me as to how do I change my mindset or get past that feeling of giving up control more or less to other people to do some of those lighter construction tasks in order to scale and grow my business? Again, construction is my passion. I love the accomplishment and the feeling I get from flipping in a different property and making it better for people to rent, but need to get over that home. I just need some advice. I appreciate all you do. Thanks

David:
Wade, thank you for your transparency there. My goodness. I can tell you I struggle with the same thing. All right, we’re going to pull back the sleeves. We’re going to get to brass tacks. I’m about to get real everybody, so buckle your seatbelt. This problem you’re experiencing, Wade, is never going to go away. If I understand you correctly, you are a person who’s passionate about doing things the right way and we need that in contractors. Like you see the different ways a contractor can solve something. There’s always corners that can be cut, easy roads that can be taken, things that can be skipped that maybe for the first couple years won’t show up but will absolutely cause problems later for the person whose home that is. And you have a passion against seeing that happen.
You probably had a really good mentor that trained you in the right way and you get that feeling of a job well done, which becomes addicting. It’s literally releasing dopamine in your brain. Now, in the role of home contractor, this is a blessing. This is why you’re good at what you do. I already know you have a thriving business. You’re buying rental properties. People know you do good work because you’ve got this value system in place that makes sure you do good work. You’re now experiencing the problem where your value system is getting in your way as crazy as that is.
I don’t want you to ever compromise on excellence. I do want you to think about where excellence is being applied within the goals of your life. You can continue to do the work yourself and run a great business and get a lot of dopamine, but as you recognize, if you want to scale, if you want to build wealth bigger, you need to be excellent at different things, and this is the struggle many of us get into. Once we get good at something, we don’t want to let it go. You raised a little baby, it’s finally great and it’s time for it to go off to school, and you don’t want to let go. This is normal, but it’s something you’re going to have to deal with.
I can see your problem. Clearly, you’re in a small bubble of excellence within construction and you’ve got a bigger bubble over here of excellence within real estate investing and you know need to leverage off some of the work that you are doing so you can spend more time in this other bubble. The problem is you know the people you’re going to let do the work are not going to do it as good as you and your conscience is screaming at you that that can’t happen. The only ways that I know to overcome that have to do with stepping back and seeing a big picture. If you’re giving people lesser jobs to do, and I wish I knew more about construction to give you better examples with this.
Let’s assume that maybe the siding on a home is not as important as the framing of a home. I hope I’m not wrong. And every contractor out there screaming it’s the other way around, please just give me some grace here. For the purpose of this assumption, you want to make sure your best guys are doing the framing and your new guys are doing the sighting. If mistakes are going to be made, you want it to be on the stuff that’s not as important. And as those mistakes get made, your job as the business owner is to increase the standard that you expect from every person so that they do not continue to make mistakes. Like it’s going to happen; you just don’t want to see the same mistakes continue to happen. So there are strategic things you can do like putting your new people on the less important jobs with the goal not being a job as good as you would do it, the goal being a job better than they did it before. That’s what you’re trying to do.
When you become a business owner, this is a position I’m at, you stop doing the work and you start putting the same energy towards creating the standard. You have to hold them all to the standard and you got to know they’re not going to hit it. They’re going to fail Just like at one point you failed, they’re going to fail maybe more than you did because they don’t have your level of drive, ambition or talent, but you still have to keep pushing that standard higher and making them rise to it. Now as you see that maybe they don’t do it as good as you, but they did it better than they did before, you will notice progress and that will help break the chains of your enslavement to doing the job yourself. When you see their progress, it will help a lot. That’s half of it.
The other half is getting over into this other bubble that we talked about that has to do with getting excellent at real estate investing. And in that bubble, you will start to realize excellence within construction is not really relevant. I don’t do any construction and I still built up a really big portfolio of stuff myself. When you get deeper into investing in real estate, the dopamine connection, the emotional relationship you have with the work you’re doing in construction hands on yourself will be weakened, as you replace it with dopamine that comes from doing a good job within being an investor. Negotiating deals, closing on deals, finding the better deals, coming up with the plan for the property, improving upon the results you thought outperforming what you thought was going to happen will start to feel good and it will make it much easier to let go of the bad feelings of seeing the work not getting done.
If you wait for other people to do the job as good as you, it’s never going to happen. You’re never going to get out of that bubble of being a contractor. I think that you recognize that. So don’t make them do it as good as you make them do it better than they were before. And at the same time it will be easier to relate to those people screwing up when you step over into this other bubble because guess what? You’re screwing up. You don’t know how that bubble goes.
I talk about the three dimensions of leadership. The first one is learn. You’ve learned how to be a good contractor and now you have to step aside because you went from zero to a hundred. You’re at a hundred, you have to step out of that. The new guy’s starting closer to zero, he’s not as good as you, and that’s where the struggle is because you have to let go of doing the job yourself. Now you’re in leverage, you’re in the second dimension. You’re going up instead of left to right. And in the leverage, you’re starting off close to zero also, you suck at that. Or maybe you’re stepping out of learning into learning a new category, which is actually real estate investing and it will help a lot how humbled you get when you make mistakes. You will have more patience and show more grace to the other people that are showing mistakes. It will make you connect with them better and it will make this journey much easier to do than you’re imagining right now.
Your problem is you’re trying to step from a hundred percent skill level into a new area of 0% skill level at the same time that you are trusting your work to people that also have low skill levels. When you are doing something new with a low-skill level and you’re supervising people with low-skill levels, it will be much less frustrating than when you’re operating as a black belt trying to work with a bunch of white belts.
Thank you for the question. Keep us apprised of how this goes and my thoughts are with you and your success in this endeavor.
All right, our next question comes from Cali in Missouri. “How can I make the BRRRR method work in my area? My husband and I have been looking to use the money from our first flip to purchase one or two more homes that we want to BRRRR. The problem is that within our area, red values are too low for us to cash flow after we refi. Most of the homes we analyze seem to negative cash flow. How can we make this work? Do we need to look to different areas?”
Great question, and I haven’t talked about BRRRR in a while, so I’m glad that you asked it. All right. Your problem as weird as this sounds is not a BRRRR problem, it’s an area problem. I think that your subconscious had diagnosed this for you.
One of the first things you should look at when doing a BRRRR is acknowledging it’s going to be a buy and hold cash flowing property, which means before you look at how much of my capital can I get back out, how do I add value to it? You have to look at do the rent support the price at the end?
Now, if you’re operating in a market that doesn’t support the cash flow, it doesn’t work to look for a BRRRR because you wouldn’t be looking for a long-term traditional buy and hold rental there. If it’s nowhere near the 1% rule and you know that that area doesn’t cash flow for that type of asset class, it’s even harder to make it cash flow on a BRRRR. So right off the bat, if you’re operating in an area that’s not good cash flow, but known for equity growth, the BRRRR method is not the best place to work there. I don’t do it very often in the high-growth areas. In fact, I only do it in high-growth areas if I’m doing something unique. I’m adding a lot of units to the property. I’m transitioning the property out of a long-term rental into a mid or a short-term rental that’s going to make more income. You got to do something creative here. That’s the first thing I would say.
So yes, you look for a different area. You start with an area that I call in the BRRRR book, a target rich environment. You want an area that has a lot of homes that are close to the 1% rule. That does not mean they have to be the 1% rule. Please, everybody calm down. I know that nothing’s hitting that right now. What about 0.7 or 0.8? That’s close enough that you can actually look at the deals. When you find the area that does have them work or you find the asset within the area, maybe triplexes work, maybe short-term rentals work, but not long-term rentals, whatever it is. You find the pattern of what properties will cash flow in that area, then you only look at those properties as potential BRRRRs. You don’t even bother looking at stuff that’s like right out the gate ready to go. And you don’t bother looking at fixed upper properties if you know they’re not going to cash flow in that area after you buy them.
So before you worry about the rehab and the value add of a BRRRR, you worry about the end result. You start with the end in mind. So yes, you start with the area, you find the area, you find the asset class within the area. Then you start individually analyzing the individual properties to see which ones could work as a BRRRR. You’re asking the right questions there, Cali. Congrats on that and good luck in finding your next deal.
Our next question comes from Casey Christensen in Utah. Casey says, “Hi David. Thank you for the awesome content you put out each week. It’s motivational and uplifting. I currently own three duplexes. I had four and I just sold one that I closed on last week. Currently have the funds held at a qualified intermediary with the intent of doing a 1031 exchange. However, I’ve recently been thinking about not doing a 1031 and instead using the money to get into a syndication or coaching mentorship program. My tax bill would be about 10 grand if I didn’t do the exchange. I started buying about two years ago and I’ve realized that building a portfolio this way will get me to the point where I can leave my W-2, is going to be a long and arduous road.”
Side note, this is not coming from Casey. That’s what a lot of people realize and it’s what I talk about all the time. You’re probably only going to hear that here. “I’ve always wanted to get into the syndication route, but I felt I had to go smaller first. Do you feel it’d be a mistake to take the tax hit and invest in a mentorship program? I’ve also hesitated to go to the coaching route because of an insecurity that I will fail in the program and find myself worse off for having thrown 20 to 40,000 at a program that got me nowhere. Do you also have suggestions on how to deal with such insecurity? Thank you again for all you do.” Wow, Casey, this is really good.
All right, let’s break it up into little pieces. First piece, I don’t think paying $10,000 in taxes is the end of the world. I might not do a 1031 to save 10 grand just because they can be stressful. So if you’re worried about the 10 grand, I don’t know that I would say you have to do a 1031 to save 10,000 in taxes. You might put the money into a bad deal that you lose more than 10 grand, so it doesn’t actually help you. 1031s are not foolproof.
Now about the coaching program, I don’t know that that’s the best use of your money either; and about your insecurity, that’s a third issue that we’ll talk about next. So here’s the thing with coaching programs. They can be good, but I think people look at them the wrong way. How do I want to say this? I’m trying to be sensitive because I know a lot of people that run coaching programs, some of them are good, some of them are not, but even good ones, I don’t know if it matters. Let’s say that I have a personal training program. You’ve been watching me. You’re like, “Oh, David’s starting to look a little better. He’s hitting the weights. I wonder what he’s doing.” And I’m like, “Hey, I’ll show you what I’m doing. I’ll show you what I’m eating. I’ll show you what my workout is. I will even check out with you once a week to see how it’s going.”
People sign up for programs because they want the result. They want the body or they want the weight loss or they want the improved gains in whatever they’re trying to lift, but the program is not a guarantee of the result. This is where it gets tricky. It’s a guarantee that they will give you the information, and I guess it’s not a guarantee because they might be bad, but if it’s a good coaching program, all that it can guarantee is the information. I can tell you what I’m lifting. I can tell you what I’m eating. I can check in with you every week, but I can’t make you go to the gym. And when you go to the gym, I can’t make you lift hard. And if you think you’re lifting hard, I can’t convince you that you actually could be lifting harder. I’m going to stick with this weightlifting analogy because I think it’s working out here.
I’m a little bit older now, so working out is harder, but I still recognize there’s a difference between going to the gym and getting through my workout and going to the gym and giving it everything I have. I finally got to the point where I can start lifting heavy again, and what I’ve noticed is that it’s freaking hard. Like to get through my set of six or eight or whatever I’m trying to do, I’m focusing, I’m really focused. Sometimes I’m praying, “God, help me get through this because it is so hard I don’t know that I can.” That is the only way that I’ve guaranteed that I will get stronger. It’s that level of effort. Now, it’s not complicated. You grab a weight and you move it from here to here, only moving these muscles, but just because it’s not complicated doesn’t mean it’s easy. It’s still difficult. Coaching programs are the same way.
Paying 20 or $40,000 for a coaching program could do amazing if you’re going to go in the gym and work out incredibly difficult or maybe you already have a baseline and work it out, you’re just trying to get back into it. Maybe you already have a pretty good understanding of real estate and you just need a little bit of information to get you over the hump that then you might earn a lot more money than that coaching program is going to cost. However, if you join the program thinking that you’re going to get information that’s going to make you wealthy, it’s like signing up for a fitness program thinking that information is going to make you fit. It’s not. The information is a guideline. Your effort is going to make you fit and then other genetic factors and other things you have going on.
Now, you might start a fitness program and be in terrible shape. You’ll eventually get fit, but it will take you longer. Same as you have a coaching program. It might take you a lot longer to figure out the stuff that some of the other students learn quicker. That is how life works. But I want to caution anybody against starting a coaching program because they’re wanting a result. You’re not buying a result. You’re buying the information and the result will be determined on what you do with that information.
Now, the last piece of it has to do with your insecurity, and I’m hoping that my answer to the second piece also answered your questions about the third. Insecurity is an interesting thing, isn’t it? We all don’t like it, but it definitely serves a purpose. When we’re feeling insecure, it’s our subconscious telling us something. You might have the feeling inside that you’re not ready to take action that they’re going to tell you to do, and so the insecurity is just your subconscious saying, “Don’t sign up for this because you’re not going to do it.”
If you know hate lifting weights and you know don’t like sweating and you’re not really, really hungry to get in better shape, it’s dumb to sign up for a personal trainer that’s going to teach you to lift weights. If what you really love is running, but you’re trying to get bigger and put on bulk, so you sign up for a personal trainer but you’re not going to listen to them, you’re going to feel insecure about that. It’s not going to sound like a good idea. Don’t do it. If you know that the only thing you’re going to do is run, then run and just let go of the expectation that you need to get bulkier. And if you know that you don’t like working out but you’re still committed doing it, okay, that would be a reason that you should sign up for the personal trainer.
I want you to be honest with yourself about why you’re insecure about this. You could easily throw 20 to $40,000 at a program and it will get you nowhere. If you’re not good at the stuff they’re teaching you, you don’t pick up the skills, you don’t have the opportunities, you don’t have the money, you’re not driven, it’s not going to help. So that’s my advice. You had three questions there. Gave you all three of those. I want you to really do some deep thinking. And for everyone else who’s listening to this who’s in a similar position, please remember that information does not get you a result. Actions get you results.
All right, everybody, that little motivational line from me will wrap up our show. I don’t really get to answer questions like that very often. That was pretty cool. You guys have some great questions. I got to say, from when I started Seeing Green to now, the questions are consistently getting better and you deserve all the credit from that in the BiggerPockets community. If you would like to be featured on the show, I’d love for you to be, please go to biggerpockets.com/david and ask your question. Now if you’re someone that I know, even cooler. Fricking show up in this thing when I’m recording the episode, I’d love to see that. So if we’ve met at a conference or you’re a friend of mine, I’d love to have you go to biggerpockets.com/david and submit your question. And even if not, if you’ve ever been driving in your car and thinking, “Why don’t they ever ask about this, or why does no one ever talk about that?” This is your chance to get it talked about.
Thank you so much for paying attention. If you would, please give us a five-star review on Apple Podcasts, Spotify, Stitcher, wherever it is that you listen to your podcast. Means a lot and it helps us out a ton. I would really appreciate that. And if you’d like to follow me, you could do so on Social Media @DavidGreene24. I do live YouTubes every Friday night where you can come and ask questions. Those are youtube.com/@DavidGreene24.
That’s our show for today. Please send us more questions. We’d love to do another one. If you have a minute, listen to another BiggerPockets video. And if not, I’ll see you on the next one. Don’t forget, in the meantime, you can go to biggerpockets.com and check out the forums where people are asking questions all the time, where you get to learn for free. See you guys.

There’s nothing a politician likes better than a mantra – a phrase that can be repeated again and again until, possibly, thought becomes reality.

And one of the latest mantras to trip off the tongues of U.K. government ministers is “science superpower.” It’s been around for a while. In 2021, former Prime Minister, Boris Johnson said his government’s aim was to restore Britain’s place as a scientific superpower. More recently – at the end of 2023, to be precise – Finance Minister, Jeremy Hunt told members of parliament that his goal was to ensure the U.K. could rival Silicon Valley. This year, the Prime Minister reorganized the machinery of government and set up a Ministry for Science, Innovation and Technology. Naturally enough, startups and scaleups are expected to play a vital role in a flowering of commercially exploitable science.

So how skeptical should we be? It’s tempting to think of the science superpower agenda as a kind of figleaf for a government at a time when the wider economy isn’t looking particularly healthy.

That would be overly cynical. For one thing, the U.K. tech sector is performing pretty well. It continues to attract high levels of foreign and domestic VC cash. In the first half of 2022, £14.7.7 billion of VC capital flowed into Britain. And although investment dropped sharply to £8 billion between July and December, the U.K. tech sector is still a magnetfor capital. Perhaps more importantly, it’s important economically for the U.K. to ensure that it is not left behind in the commercial development of key technologies. So no one should argue with the ambition.

But as Science Minister George Freeman has acknowledged, Britain is not yet a science superpower but rather – in his words – a “science powerhouse.” Achieving the former status would involve becoming an “innovation nation.” Essentially what he meant was creating an environment in which scientific research could be successfully industrialized.

How can that be achieved? I spoke to two scaleup CEOs at the heart of the science and technology sector to get their take on the measures required to support their industries.

Scott White is CEO of Pragmatic Semiconductor. Founded twelve years ago, it has developed a microchip technology that doesn’t require silicon. Today, it produces low-cost and flexible chips that can be used in multiple contexts. Its business model revolves around manufacturing – with a facility in the North East of England – but also plans to offer compact manufacturing equipment to customers. In addition, it designs its own RFID chips for tracking goods in transit.

Pragmatic has just commissioned a poll of 250 technology business leaders. When asked whether the government could meet its objective of being a science superpower by 2030, a healthy 68 per cent yes but only 40 per cent thought enough government support was on offer.

Unbalanced Investment

As White sees it, the UK’s cash-rich ecosystem remains unbalanced, with much of the funding going to early-stage businesses, rather than scaleups. Most of the capital that is invested at later stages comes from overseas. “We did a Series C in 2021, 2022- that was for $125 million. Eighty per cent of the investment came from outside of the UK,” he says.

So in that respect, there is a need for capital that will allow tech businesses to remain in the UK in terms of both location and control as they grow.

But what can the government actually do? Well, one way forward is to make it easier for institutions to invest. White welcomes changes to insurance industry regulation that will allow pension funds in particular to allocate money to tech.

He also acknowledges the progress made in providing public funding through the British Business Bank and its venture arm, British Patient Capital. In addition to investing alongside VCs, the organization has created Future Fund: Breakthrough, with £375 million earmarked for deep tech ventures. “That’s good but the scale needs to be much bigger,” says White.

Mostafa ElSayed agrees. He is CEO and co-founder of Automata, a company that provides automation technology for laboratories, mainly in the life sciences sector. The company’s products are designed to speed process such as diagnostics and clinical trials while cutting down on human error. He argues that some sectors are better served with others when capital is allocated by VCs, with deep tech having a particular problem. “We all talk about the importance of deep tech, but access to funding in the deep tech sector is hard.”

And the UK may be falling behind its European competitors. “The biggest backer of deep tech is BPIFrance (a sovereign wealth fund), after that its Germany and then Scandinavia,” says ElSayed.

ElSayed says change could be coming. He cites comments from the new head of the British Business Bank who recently floated the idea of creating a sovereign growth fund to support innovation.

Relatively small changes could also deliver benefits. White points to existing programs, such as the Enterprise Investment Scheme(EIS) and Venture Capital Trusts. By offering tax breaks to those who back eligible companies, these vehicles have encouraged investors to back startups. However, once companies get to a certain size, the tax breaks fall away, meaning the schemes don’t benefit scaleups.

Boosting Demand

It’s not all about the money. “There is also a need to support domestic demand,” says White. “For instance, you can use government procurement to drive adoption.”

Indeed, in some sectors, the government has a huge amount of power to make things happen. ElSayed, uses the example of clinical trials. The U.K. has a hugely important resource in the form of a National Health Service that serves more or less the whole population and can gather data accordingly.Potentially, this makes Britain one of the best countries in the world to carry out clinical trials. However, although a national service, much of the decision-making is at the level of local health trusts. “There needs to be a national strategy,” says ElSayed. There is a precedent in that Britain already has a national strategy for genomics research.

Another important piece of the jigsaw is visa policy. ElSayed stresses the need for a regime that allows science-based businesses to recruit quickly. “When a company is moving at our pace, you struggle to find people who have the right to work in the UK,” he says.

Scott White says Britain has the potential to become a science superpower, but clarity is required around what that actually means. In terms of government support, the pieces of the jigsaw are not all in place.

Ashley:
This is Real Estate Rookie, episode 264.

Tony:
But oftentimes if you do a new build in 2023 versus a rehabbed house that was built in 2005, the value of that property, especially if you’re looking at it as a short-term rental, which is what we do, is typically higher. We can rehab a house that was built in 2005 to the nines, but the construction style, the aesthetic of a house built in 2023 is going to be more modern than a house that was built in 2005 even if it was rehabbed really nicely.

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

Tony:
And welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. I want to start today’s episode by shouting out someone by the username of lukster8891. Lukster left us a five star review on Apple podcast that says, “Encouraging podcast. Tony and Ashley, their podcast is extremely informative and encouraging. Thank you for creating a space to give people like me the knowledge and extra nudge to feel confident about investing in real estate.”
I like the way you phrased that, Lukster, “for giving and creating a space to give people like me that space to feel confident.” That’s really what the Real Estate Rookie podcast is about. There’s obviously a ton of information out there about investing in real estate, but sometimes it can feel overwhelming, sometimes it can feel, I don’t know, just too much to try like drinking from a fire hose. The purpose of the Rookie podcast is to give every single listener digestible, usable pieces of information and stories to really help move them along in their journey. So if you all are listening and you haven’t yet left us an honest rating and review, please do. The more reviews we get, more folks we can help, and helping folks is always our goal. Ashley, how’re you doing today?

Ashley:
Good, good. Well, first of all, if we haven’t said it enough, thank you guys so much for those of you that have left reviews. We love reading what you like about the podcast and how it’s benefited you and especially when you guys leave us your wins, what you have accomplished. So when you leave a review, makes sure you share that with us what you have learned from the podcast from one of our guests. Who was your favorite guest? Who do you love, or maybe who do you want to come onto the show too? We’ve been having a lot of production meetings as to who are some of the bus guests we can bring on for you guys that will bring the most value. Believe it or not, it’s just not boring banter, we actually do try and plan things out and really strategic about how we operate the podcast. Yeah, so Tony, what rehab, what are you working on, anything?

Tony:
Yeah, we got some big plans for 2023. I know we had our goal setting episode a few weeks ago, but a big focus for me is I still do want to close on my first big commercial property this year. We’re looking at hotels, boutique motels around the country. We learned a lot last summer with that deal that we had on our contract but didn’t end up being able to close on. And really it was the purchase price. We had raised a couple million bucks, we needed a couple million more. And it’s like, “Well, man, how many deals could I have bought with the two something million that we had already raised?” There’s a lot of properties out there that we could have bought. So I think we’re going to go back and probably just reduce our purchase price a little bit and try and find something that makes a little bit more sense in that price range.
And then another big goal for me is launching our property management company on the short-term rental space as well as our short-term rental cleaning company. So trying to find the right COOs to run point on those ventures for us, but I think those are two big gaps in the short-term rental marketplace. There is no nationally known brand in the cleaning space for short-term rentals. There definitely are property management companies that are big, but I feel like we’re in a unique position where we’ve built a portfolio of our own first. We’re host first and property manager second, so we have a different perspective from a lot of these other companies that have been around for a while.

Ashley:
Are you going to start out with just offering it in the markets that you operate in now? What is your plan to grow and scale it? Will it be more of a franchise model eventually, or is it something that you want to continue to oversee the markets and you’ll select which markets you’re going into and continue to grow yourself?

Tony:
Yeah, that’s a great question. We haven’t really decided yet. The franchise model is something that I think might work, but I also do the idea of really retaining control over certain aspects of the brand. But I think initially we just want proof of concept. We already have the infrastructure, so we have the operations team to do all the guest communication and working with the maintenance crew and the cleaning staff. So really we do feel like we can take that infrastructure into any market, we just need to find the right cleaners and handymen in those markets to support us. I think our biggest focus is just finding the right properties and the right owners to work with and then we’ll let the markets take care of themselves.

Ashley:
For me, I’m taking back my property management we’ve used for the past three years, property management company. And now what I’m doing is just building out a property management company again, where last time when I first started, I was self-managing, so I was the property manager, I was the leasing agent, everything. And now this time I’m hiring a property manager. I think she’s actually going to be signing her contract this week, which is super exciting. And then I’m just going to oversee everything and basically just have it done the way that I want it. But we’re not taking on any clients, it’s just my properties and the properties of my business partners. That is one thing, I don’t want to have to deal with owners. Tenants can cause issues and things, but sometimes the owners are worse than the… And I know this because of other owners talking about how they interact with their property management company.
Me as an owner to my property management company, I don’t want to deal with that. I always think of teachers an example, having to deal with the students in their class but then having to deal with the parents and sometimes the parents are worse than. So part of my big vision and goal for 2023 is figuring out what are the things that I don’t want to deal with that feel heavy to me, and one of those things is being responsible to other owners. I’m very confident that I could start this property management company and right away I already know that I have these owners that would come in that I can share overhead with, but I just don’t want that responsibility of there’s something that’s happening and going on, okay, it’s my cash flow, it’s me saying, “To take care of this problem, I’m just going to spend this amount of money to have it taken care of.” Where if it’s an owner, it’s somebody else’s property, I can’t just, say, go and spend this money and take care of it because that’s their cash flow that’s decreasing, that’s their issue.
So I like having control over making the decision that is going to impact me and my properties and not that it’s going to impact an owner and not having to really worry about that I guess.

Tony:
That definitely is a concern for us as well is that as you scale, there’s a lot of personalities that you have to deal with. But I also think that’s why we want to be pretty selective with the owners that we work with. If that person is… I don’t want to say a pain because I think that’s an unfair representation. But if that person maybe is looking for a level of involvement in the day-to-day operation that is not in line with the kind of involvement that we want from our owners that maybe it’s not a good fit. I think that’s what we’re trying to scale up pretty slowly to make sure that… We want people to trust us and that are coming to us for our expertise and not people who feel like, “Hey, I can do a better job than you can,” and trying to teach us how to be short-term rental operator. So there’s a fine line there.

Ashley:
You just described me as an…

Tony:
And that’s a good point-

Ashley:
[inaudible 00:08:29].

Tony:
Because I think you were in a position where you honestly could do a better job than-

Ashley:
Yeah, and I would.

Tony:
… that property manager that you have.

Ashley:
Yeah. And I [inaudible 00:08:36] that experience. I think in your situation you’re vetting the owners too. You’re not just going to grow and scale so fast that you’re taking on anybody just to maximize your client base and maximize your revenue, that you are going to be selective. And that also gives you that exclusivity too, as to you want to be an owner… and not to use the word train, but as you take on new investors, new owners as setting those expectations as to, “This is what we expect of you, and this is what you expect of us. If either of us vary from that, that’s where we have a situation as to how do we work around that.” Or maybe the partnership isn’t working because really it is a partnership. Especially when it’s your investment property, you’re no longer in control of the day-to-day operations of that property and maximizing cash flow and things like that, you’re trusting your partner, the property management company, to oversee all of that and really maximize the performance of your property. And that’s one thing I didn’t understand when I hired a property management company, is I should have asked a lot more questions.
One example is, okay, the water bill. It goes into their billing department, their payables. Somebody’s there scanning in the bills. They go ahead and pay it and then it’s taken care of. Great, I don’t have to pay bills, things like that. But there’s also no one going and saying, “Wait, the water bill was $100 last month. Why is it all of a sudden $250? Is the toilet running? Is there something going on?” Just because it’s going into a general department that doesn’t know your property, things like that. I feel like I’m getting way off on a tangent.

Tony:
No, but that’s such a good point. It’s like how do you set those expectations up correctly at the onset or not even at the onset, before the relationship even really begins? There’s a great book that I just read, and it’s called Never Lose a Customer Again. The book really focuses more so on larger companies, but it’s like, when you are looking for customers, how can you have conversations at the beginning and then how can you structure those first 100 days of that relationship so that, A, your customer has a really amazing experience and they stay a customer for a long time, but, B, that the expectations that you have of them and that they have of you are super clear on both ends, that way both of how to operate effectively within that partnership. So Never Lose a Customer Again, I can’t recall who the author was, but it was a great book that I really enjoyed.

Ashley:
I think that would’ve helped me work with the property management company better, is if we both had expectations of each other and had set that ahead of time. I’m sure they do a great job, they’ve grown and scaled so much over the past couple years that obviously they have a successful business model in place, but it was just different than what I expected, and we should have had those clearer expectations up front.
Okay, so our first question is from Annie Johnson, and this is through the Real Estate Rookie Facebook page. If you haven’t already, make sure you guys join the Facebook group. There are over, I think, 60,000 members in it right now. It’s a great way to ask questions, get information, or to even share your own advice and wisdom. Okay, so Annie’s question is, “Has anyone partnered in an LLC for out-of-state investing? Did you use an attorney in your state or the state you were investing? Does it matter? Any insight on this subject is helpful. This will be our first partnership and LLC. We decided we do not want to do a legally-documented partnership agreement.”
Okay, so I’m wondering why as to that last question because when you create an LLC, you have to create an operating agreement, which is the terms of your partnership anyways. So I think that if you do, no matter what, if you create your LLC, for it to be a legal LLC to function the way you want it, have to do the operating agreement, which is basically a partnership agreement in itself.

Tony:
Really quick, I just want to shout out to Annie who’s asking this question. This is actually Annie Hatch Johnson who was a guest on episode 46. I recognize the face and the name there. Shout out to Annie. I think last we talked to her she was somewhere here, I can’t remember, in the Midwest somewhere, but she actually ended up moving to Alaska. Her and husband were doing some short-term rental stuff out in Alaska, so shout out to Annie.

Ashley:
So Tony, do you want to actually answer this because you’ve done this a lot more? I think you actually do joint ventures, but the only out-of-state investing I did was with James [inaudible 00:13:32], and we did a joint venture agreement where we had our own separate LLCs and they came together in the joint venture agreement. So we had my New York LLC and then his Washington State LLC, and then did the joint venture agreement through that. And we had the whole operating agreement documented as to how the partnership worked for that one deal.

Tony:
Yeah, it’s a great question. The majority of our partnerships are through joint venture agreements, not necessarily new LLCs that we set up either. But Annie, I’ll give you a little bit of insight based on the conversations I’ve had with my attorneys and different SEC attorneys and things like that. Every state is different. The information that I was given, and again, I’m not an attorney so please consult with an attorney to make sure that this information is accurate, but for us, we were looking to purchase property that was in California using a new LLC. Your question around is it in your state or the state where you’re investing, there are some limitations. For example, there’s better tax treatment in states other than California obviously. But say I wanted to create an LLC in Delaware but, say, I was in California, the partners in California, and the property’s in California, I can’t create a Delaware entity to hold title and collect rents on that property in California.
So depending on what state you live in and what state the property’s in, there are some laws you have to follow around where to create that entity. So my first piece of advice, Annie, would be to ask an attorney in your state or in the state where the property is located to get their advice on where you should structure that entity and what state it should be focused in. Have you seen anything different on that front, Ash?

Ashley:
No, no, I really haven’t. I also haven’t looked into it that much though, but that’s kind of what I’ve heard, I guess.

Tony:
I mean, so yeah, that’s the first thing, is talk to your attorney to identify what state it is in. I think the second question, this kind of goes back to Ashley’s piece, is you said, “We decided we do not want to do a partnership agreement.” I’m assuming when you say that, Annie, is that you don’t want to go the route where we went of just having a joint venture agreement, you actually want this entity to be in place. But to Ashley’s point, I think you still want to go through all of the same thought processes or exercises that you would if you’re doing that partnership agreement to make sure that if, for whatever reason, there’s not tension, but every partnership’s going to have its bumps and maybe disagreements, and the more time you spend upfront answering those questions, the better.
There is a fantastic book that I read last year called The Partnership Charter by someone named David Gage, and it was one of the best books I’ve read on partnerships. It’s not specifically geared towards real estate, but it is a business partnership book, and it is just chock-full of questions that you and your partner should be asking one another before you really enter into this partnership to make sure that there’s clarity around how you are going to handle certain problems in that partnership. So read that book, talk to an attorney, I think those are my first two pieces of advice.

Ashley:
Okay, so onto our next question, and this one is from Sia, “Has anybody bought a land and built a house instead of a rehab? Really having a hard time finding a deal because people are overpaying. How is it getting a refi on a newly built house?” I think maybe the market might be changing a little bit where you’re not going to see so many people overpaying, so hopefully you can have a better chance at finding deals. But I’m in this real estate text message thread, and one of the investors sent on a message that quarter four of 2022, he’s a house flipper and he was having property sit for sale for over 60 days. Soon as January 1st hit, he saw a huge increase in showings. I think he said they tripled, the amount of showings he was getting tripled, and he had four go under contract just in the first two weeks in January that he’s seeing just this huge uptick since the first of the year. So maybe people are going to start overpaying and overbuying again.
So with doing this building a house, I’ve built my personal residence, but I’ve never went and bought an investment property or built an investment property doing it from the ground up. The first thing I think that you should really do is your research on what that property is going to appraise for when you are done doing the build of it. Is it going to appraise for what you put into it or even more so you can pull all of your cash back out? The second thing is how are you going to fund that? Are you going to do cash? Are you going to get a construction loan? So if you’re paying cash, one thing you’ll have to do is you’ll have to look and talk to banks, and we answered this on another rookie reply, I think it was the one that aired last week as to the seasoning period. Because if you’re paying cash to have this house built and then you’re going to the bank to refinance it, they may say, “You know what? You haven’t owned this house for a year, and we’re not going to refinance you for a year to do that cash-out refinance.” So those are some of the things you should definitely look into before you actually go through the build process.

Tony:
A couple of points from my side. Just like Ashley, I’ve never done new construction myself on the investment side. We have purchased quite a bit of new construction, but it was from the builder who did the work to identify the parcel, they got all the permits, they managed the ground of construction, and we were essentially purchasing a finished product from that builder. I just want to talk about the pros and cons of that approach and why we decided to go that route. The first pro that we saw was that we were able to get a superior product. Oftentimes, and it depends on the level of the rehab, but oftentimes if you do a new build in 2023 versus a rehabbed house that was built in 2005, the value of that property, especially if you’re looking at it as a short-term rental, which is what we do, is typically higher.
We can rehab a house that was built in 2005 to the nines, but the construction style, the aesthetic of a house built in 2023 is going to be more modern than a house that was built in 2005 even if it was rehabbed really nicely. And that’s what we’ve seen a lot, is that our new constructions tend to do better than our rehabbed homes even though the quality is just as nice, but it’s just that frame of the home is a little bit more dated with that older stuff. That was one big pro for us.
The second reason why we went with a lot of the new construction from this builder was that he had already identified and permitted multiple parcels in this city that we were looking to invest in. So for us, it allowed us to scale exceptionally quickly because he had already done the hard work of… The permits take almost longer than building the house in California. So the fact that he had already done that hard work on multiple parcels meant that we could build this machine to just start acquiring these properties as soon as he was done. And for us, we were in a really strong growth phase, that was a big goal of ours, was to scale quickly, and having that relationship allowed us to do just that. So those were the two big pros: we got a really superior product and we were able to acquire those units relatively quickly, much faster than if we had tried to do it ourselves.
The cons to that approach is that we were definitely paying more for the finished product than if we had done the work ourselves of identifying the land, pulling the permits, and building that property out ourselves. There’s no question about it. He wouldn’t be selling us those homes if he was selling it at a loss every single time. He was selling it to us because he was making a healthy profit. We knew that we were, not overpaying because it was still market value, but we know that we were spending more than had we done it ourselves. I think those are the two things you have to weigh. Do you have the skillset to do ground-up construction, because it is definitely different than doing a rehab. Those are similar skillsets but still different. And then the second piece is do you have the time to really manage something like that as well? So the ability and the time are two things to look at.

Ashley:
Yeah, that price that you’re paying extra is really the project management fee, is like the general contractor fee is like them taking the administrative role, the management of the whole project is what you’re paying. So even if you were not to go with the builder and you did it yourself, you still may be paying a general contractor a little buffer percentage because they’re going to be the one getting the subs in and things like that to actually take care of the project too. But if you’re going to act as the general contractor and you’re going to manage the whole project and you’re going to hire individually each contractor that needs to come in, then, yeah, that’s where you’re going to save a lot of money. But like Tony said, do you have the time and the knowledge of doing that too? If you are going to try it and you don’t have the knowledge or experience and you just want to learn, it may end up costing you more than it would’ve to actually build it.

Tony:
Just buy it from them.

Ashley:
Yeah, just to buy it from the builder. So that’s definitely something to consider.

Tony:
I just want to share some of the headaches that come along with trying to do the ground-up construction yourself. We’re good friends with this builder now because we’ve purchased I think 13 houses from him at this point. We were out of the site one day and I was just asking about the permitting process. Typically what he does is he’ll submit plans for multiple parcels at the same time, same exact floor plan, same exact floor plan, just different parcels, and he’ll submit them to the county. Each plan, remember they’re identical plans, get submitted to four different… Gosh, who are the people review the plans in the county?

Ashley:
The code enforcement officer?

Tony:
Yeah, I can’t remember the name of the folks that are looking at the plans or whatever it is, it escapes me right now. But anyway, it goes to four different people, all the same job, just four different individuals. Each person will look at the same exact set of plans and come back with different notes. Person A will say, “Hey, you need to fix this thing.” The second person won’t see what the first person saw, but they’ll call out something different. So it is the same exact thing, but four different people have a different interpretation of what needs to be fixed. So he’ll get those plans back and then he has to make four separate sets of changes, some of them back to four different sets of people, so it is definitely a very arduous and sometimes frustrating process to go through the whole new construction thing on your own.

Ashley:
Or you can just live out in the country in rural areas where you get to know the one code enforcement officer, the one building inspector, and yeah, that’s it, that’s all you have to deal with is one person. And then the planning board, I guess.

Tony:
What’s even crazier, Ash, is we were looking at some places in Arkansas, and there are certain counties in Arkansas where there is no approval process. It’s like you can pretty much just build whatever you want to build. So depending on what city or county you’re going into, the ability to build something new is probably easier in some places.

Ashley:
Yeah, we definitely got remote areas like that. I haven’t invested in one yet, but it’s like you can put up whatever. There’s no approval process or anything like that, no permits to put in.

Tony:
Your land, you do what you want with it, right?

Ashley:
Here’s a story that’s going to frustrate some people is, on the building that my liquor store is in, it needed a new roof. So Daryl went out and he got somebody who’s going to do the roof, we got the bid, everything, and he is like, “I can start tomorrow.” And so I said to Daryl, I was like, “Well, we don’t have a building permit. Did he get in?” He texted the guy and the guy’s like, “No, I didn’t get one, but I can start tomorrow.” So we drive… It’s 15 minutes away drive to the town hall and like, “We need to get a building permit, we want to get this done.” She was like, “Okay, fill out this form,” and it was a hundred dollars and did it. She’s like, “Okay, we’ll have it ready for you tomorrow. Just come and have the contractor pick it up and we’ll put it in the window.”

Tony:
Wow. Let me tell you a story on the opposite end of the spectrum. We have hot tubs we began installing at most of our short-term rentals in Joshua Tree. It was a very similar process where you have to submit plans for the hot tub like where’s it located in respect to the house. You have to get an electrical permit inspection done to make sure that it’s all done the right way. And then there’s certain safety features you have to add to the hot tub. It was a very similar process where they would send out a different inspector every time.
So the first inspector goes out, he gives us a list of things we need to fix, and we fix 1, 2, 3, and four. The second inspector comes out to validate that the first four things were done, but then he calls out other things that the first inspector missed. Then a third inspector comes out and he calls out something totally… So it was just like this game of musical chairs trying to fill all these boxes for these different inspectors, and it took months for us to get some of these hot tubs permits, so it’s definitely frustrating.

Ashley:
Oh my gosh.

Tony:
Anyway, we got off topic, but hopefully see that that was helpful for you. I think long story short is think about the pros and cons and your own skillset in terms of rehabbing a home versus the new construction phase. And then to Ashley’s point on the refinance, just make sure you’re talking to banks on the front end so that way you have a good idea of what the seasoning period is and what other maybe hoops you might have to jump through if you do go the new construction route to get that refinance done and complete it on the back end.

Ashley:
Yeah, one last thing I’ll add to that as an example. Not in my market, a different market, but this friend that I have, they built patio homes, like small apartment complex, just one story. They paid cash for the whole thing, built it ground up, did all this site work, everything. And when they were done, they rented it out, and it actually didn’t appraise for even what they put into the deal. I think they had to leave in maybe 40% of what they paid for it because the bank was only going to lend them 70% of the appraised value. Actually, it was more than that, it was more than 40% that they left in it. I don’t know the exact numbers, but that’s something to be very cautious about, is making sure that it’s going to appraise for what you want because you could be stuck with leaving hundreds of thousands of dollars into a deal that you didn’t expect to do especially if you were are borrowing money from a private money-lender, a hard money-lender to fund that deal and then it doesn’t go and appraise for what you want.
With this investor, fortunately, he was in this situation where he set up a contract with the builder where he was making payments to the builder for some of that gap. So he was able to mitigate that and then just use the cash flow. And it all worked out where it’s still a cash flowing property even after having these two loan payments. So make sure you have multiple exit strategies and different ways to fund a deal.
Okay, so our next question is from Joey Stout, “How does rental income get taxed as opposed to a W-2 salary? Thanks, Joe S.” Well, Joe, your W-2 income is going to be earned income, and it’s going to be based off of what tax bracket you are in, so how much money you have made. Let’s go ahead and let’s pull up the tax brackets for 2022. Okay, so if you are… Let’s look at here. If you make zero to $10,000, you’re paying 10% taxable income, and then 12% for 10,000 to 41,000. 22% is going to be what your income is taxed at from 41,000 to 89,000. Your tax rate is going to be 24% from 89,000 to 170,000, and so on. So the more you make of earned income, your W-2 income, the higher your tax rate gets. So you jump up to over half a million, you’re going to be paying 37% in income taxes.
You look at that and be like, “So I want to stay under 539,000 because then I’m going to pay 2% more in taxes,” and really having to figure out where’s that threshold where it makes more sense. So if you’re right on the border of one, so let’s say 24% to 32%, okay, that’s quite a big jump, that’s 8%. And if you make $170,050, you’re at 24%. But say you go and you make 180,000, you’re getting pushed up to the 32% tax bracket. Is it even worth taking that extra 10 grand because now that whole chunk of money is going to be taxed at 32%? So something everybody should be cautious of with their income.
Those are just some examples of the brackets and they go up. When you’re in a bracket, so say 170,000 that’s taxed at 24%, that 170,000 is going to be taxed at that 24%. But then if you make another 10 grand more, that 10 grand is going to be at the next tax bracket, that 32%.

Tony:
So it’s just your income that falls into that bracket that’s taxed at that percentage, right? So if you make $500,000, that entire 500,000 won’t be taxed at 37%. The first 10,275 will be at 10% and then up to 41,000 you’ll be at 12%. And then each one of those different falls into those different buckets. That’s why taxes are so confusing, which is why everyone should definitely get a really good CPA to help you navigate all those different nuances.
But you made the statement earlier, Ash, that your W-2 salary is earned income, and earned income gets the worst tax treatment out of all income. You’re going to be taxed the highest based on your earned income. Rental income gets one of the more preferential tax treatments. We actually had Amanda Han back on episode 255, and right at the end of that episode, she even within the world of real estate investing categorized which strategies get the best tax treatment, which strategies get the worst tax treatment. Flipping was at the bottom of that tax preference treatment because that is still active earned income. And then things like short-term rentals and long-term rentals were at the top because that’s more considered passive income.

Ashley:
One thing to note I think with earned income is that like, okay, you’re going to work so much hours, but if you’re right on the edge of one of those brackets, is it worth working those extra hours and then now you’re going to have those hours tax at 37%? And so $37 of that $100 you’re going to work extra for is gone. But you guys can pull up if you actually want to look at what tax bracket you’re in. Some of the examples we use for first single filer, but they changed for married filing jointly, filing separately, head of household. So go and take a look at those, and you can actually figure out what your income is going to be. It’ll show, like, okay, if you made $95,376, your taxable income is going to be $16,290 on that. Then anything over that would be that 24%. So it’s like the sliding scale I think is the best way to put it. As you move up to each bracket, that income going higher is going to be taxed at those different rates.
I think there’s a huge advantage to passive income because of that and then also being able to do a 1031 exchange where you can actually defer the income from your rental property if you do go ahead and sell it.

Tony:
So long story short, Joey, you want most of your income to be passive from your rentals and the smallest amount to be active and earned income if you want to be able to really maximize your taxes. Now, there’s so many different strategies out there, Joey, to help reduce your tax liability even from your W-2 job. Again, I’ll mention episode 255 again because Amanda talks about this, but there are ways that you can use passive losses from your real estate portfolio to offset your W-2 income. Most people achieve this by using short-term rentals. It’s significantly harder to do it with long-term rentals, but there are ways to say, “Hey, I have a $100,000 paper loss on my rentals, and I’m going to apply that to my $100,000 salary in my W-2 job since you have zero tax liabilities.” And I have friends that are paying zero on taxes using that exact same strategy.

Ashley:
I am not one of those friends.

Tony:
I haven’t matched with that yet either. I definitely had a tax bill last couple of years, but when you get a good CPA, hopefully you can start putting those pieces in place. We had a mad scramble at the end of 2022, the year that just ended, to purchase a property to try and get to more cost aggregation benefits as well.

Ashley:
Yeah, you know what’s also something that’s pretty good tax advantage is a farm too, is getting good tax advantages on that. Farmers don’t have to pay estimated taxes, they can wait until your tax return is due and pay your estimated taxes April 15th because when you’re making those estimated tax payments and having to prepay basically every quarter you’re paying as you go along, that’s money the government is getting interest free. So that’s a huge advantage. You get to keep that money until the actual tax time and pay it at the last minute. But yeah, there’s just a lot of write-offs you can do. And even property taxes, you can get an exemption on your property taxes to have them decreased if it used for agricultural uses and things like that too.

Tony:
There’s some weird things about farms. I have a buddy, his name’s Kai Andrew, he bought a farm, a lavender farm, and he bought it because of what you mentioned there, some tax benefits. But also, the zoning requirements, the zoning restrictions on farms are significantly lower or less restrictive than what you see on residential properties or even some other commercial properties. He was able to build multiple short-term rentals on this farm because of what the zoning allowed for in that market. There are so many little nuances to try and really get creative with it. But yeah, I think long story short, look for opportunities to really reduce your taxable income, and usually that happens by going the passive route versus the earned route.

Ashley:
One more thing to add too is a lot of farmers are tax-exempt too. So buying a truck for your farm tax-exempt, that’s huge sales tax that you’re saving on purchasing a vehicle. So lots of different little things like that.

Tony:
And so, buy a dairy farm is the more of the story. Before we move off of this question, so I mentioned Kay Andrew, but if you want to go back to listen to his episode, it was episode 107. We talked about land hacking, so 10 different ways to create income streams with one property. And Kai’s the master at that strategy and the whole buying a lavender farm was just one of the ways that he land hacked his way to success. So episode 1 0 7, if you want to hear more from Kai.

Ashley:
Okay. Today’s last question is from Hayes Holland, “If you sell your primary home after one year of residency, am I excluded from the capital gains exemption rule requiring two years, or is there any way around that?” Okay, so first of all, I think there’s a little misconception here is that you are only exempt from the capital gains rule if it is your primary residence. If it is an investment property, you have to pay capital gains on it unless you do a 1031 exchange. That’s the only exemption there. But if you’re just going out and selling, you’re keeping the money, you’re not doing that 10 31 exchange, you’re going to be taxed on that capital gain for an investment property no matter how long you hold the property. But if it’s your primary residence, you have to live there for two years, but it can be two of the last five years. So it could be any two years during that five year period. So it’s not just that you have to live in the property for two years and then sell it. You can hold onto it for another three as an investment property and then sell it at the fifth year and you’ll still be able to have that as tax-free income.
There’s an investor friend who has done this multiple times, I don’t even know how many times, but every two years he buys a new primary residence and takes this money tax-free. I think the rule is you can only take up to half a million tax-free off of it. I’m not sure exactly what that rule is, but there is a max amount. You can’t go and sell your house for $5 million more and get $5 million tax-free. It might even be a million if you’re a married couple, but you guys will have to look that up. Use Google because I don’t know it offhand.
So every two years he buys a property that needs rehab, him and his family live in it and slowly do the renovations over the two years, and then they go ahead and sell it and move to a new property. So yeah, definitely a good way to make income that is tax-free by doing that, as long as your family doesn’t mind up and moving every two years. But if you were to make half a million dollars in two years and all you have to do is move-

Tony:
Move.

Ashley:
… you’re not too bad. So it really depends on what market you’re in. Where I live, it’s hard enough to find a house for half a million dollars let alone to sell one that’s going to appreciate to half a million in two years.

Tony:
Same for me. In the neighborhood that I live in, it’s all a brand new neighborhood. Everything was built 2017 at the latest, so trying to go in and really find a lot of those opportunities are probably scarce as well. But the question does, and we talked about it a little bit already, but we should maybe elaborate on it, but on the investment side, you can defer your capital gains taxes by using what’s called the 1031 exchange. We did our first 1031 not last summer, but the summer before. We were able to tap into equity from one of our homes, and we took that and we used the proceeds tax-free to buy two different properties.
I have a friend who sold multiple of his single family residences in the Midwest and used that to buy… I think he’s at seven short-term rentals right now that he purchased with that. The 1031 exchange is a fantastic way to defer paying taxes, use all of your gains from a sale towards a purchase of another property. There are some restrictions around what you can do and there’s some pretty strict timelines around when you need to identify and close in that property, but this one strategy, some people call it swap till you drop, is what a lot of real estate investors do to continue to scale their portfolio up without paying any capital gains taxes during their lifetime.

Ashley:
So while Tony was talking, I went ahead and did the work for you, guys, for those of you that were driving and you couldn’t Google immediately, the rule is that a single homeowner, single filers can get up to 250,000 tax rate for the sale of their primary and then couples filing together up to 500,000. So that’s the profit based on it. I mean, not too bad over two years, half a million dollars tax-free.

Tony:
Yeah.

Ashley:
I mean you could do that as a full-time job.

Tony:
Totally, right? And you do that a couple of times a year. It also reminds me, we had the one guest, gosh, I wish I could remember what episode that was, but he was purchasing new construction. I think he was in Texas somewhere. He would buy phase one of the new construction and then two years later it’d be like phase 18 or whatever, and all of those floor plans had appreciated significantly and he was just selling those properties once they got to the last phase and he was just recycling that capital into the next one. So you buy a new construction, live there for two years, sell it, buy another new construction, live there for two years, sell it. I think he had done it like three times for the time he came on the podcast.

Ashley:
I think he was doing it in Austin, maybe Austin, Texas.

Tony:
Yeah, it was definitely somewhere in Texas.

Ashley:
Yeah, I do remember that. Yeah. Well, thank you, guys, so much for joining us on this week’s rookie reply. If you guys have a question that you want answered on the show, you can call us at 188-5ROOKIE and leave us a voicemail. Or you can leave a question in the Real Estate Rookie Facebook group where you will most likely get multiple responses and answers from everybody in the group, but also we may play it on the show and you can hear our response to it.
Thank you, guys, so much for joining us. I’m Ashley at Wealth from Rentals, and he’s Tony at Tony J. Robinson, and we will see you guys on Wednesday with a guest.
(singing)

Unlike the popular, and heavily hyped, assumption that unicorns would not be possible without VC and that getting VC means unicorn success, the reality is that most unicorn-entrepreneurs takeoff without VC interference because the VC portfolio has lots of flops, and very few flips and unicorns.

· The Flop: These are VC failures. Some never live up to the hope, while others, like WeWork, Theranos and FTX, don’t live up to the hype. The VCs may have been hoping for a Unicorn or a Fast Flip but ended up with a Fast Flop.

· The Flip: These are VC-Successes that are sold in a “fast” flip to corporate buyers. There are some successful fast flips like Instagram that was purchased by Facebook for 2x the valuation paid by the VCs one week earlier. The annualized return is mind boggling. Some flips are great for corporations, like Instagram and Facebook. Many, as evidenced by the high proportion of failed corporate acquisitions are not – 70-90% of acquisitions are estimated to fail. Some of these failures are likely to be VC flips.

· The Unicorn: These are VC home runs when the venture lives up to expectations and creates lots and lots of wealth.

Proportion of Flops, Flips, and Unicorns

To evaluate VC and VCs, entrepreneurs need to consider the proportion of flips, flops, and unicorns in the VC’s portfolio (Designing Successful Venture Capital Funds for Area Development: Bridging the Hierarchy & Equity Gaps Dileep Rao, Applied Research in Economic Development, 2006. Volume 3. Number 2). It is rare for VC funds to have unicorns in their portfolio, and when they do, these are mainly in Silicon Valley. VCs outside Silicon Valley mainly have flops and flips in their portfolio:

· Many VCs have no unicorns in their portfolio. According to Marc Andreessen, about 15 investments are said to account for ~97% of VC returns. The home runs and the top VCs are mainly in Silicon Valley

· A normal early-stage VC portfolio has about 80% failures (mainly flops), about 19% are deemed successes (mainly flips), and about 1% are home runs (mainly unicorns). However, although every VC fund has failures, the unicorns are not evenly distributed. That’s why Andy Rachleff, a successful VC, estimates that the top 20 VC funds (about 3%) generate ~95% of the industry’s returns.

· Analysis of a VC portfolio shows that without home runs, VC portfolios have low or negative annual returns (Designing Successful Venture Capital Funds for Area Development: Bridging the Hierarchy & Equity Gap, Applied Research in Economic Development, 2006, Volume 3, No. 2). This means that most VC funds fail, including many formed with good intentions of helping those who would not otherwise get VC.

The key question for you is whether your venture will be a:

· VC-Unicorn with long-term potential and a very profitable exit – about 1% of VC-ventures.

· VC-Flip, which is usually sold to a large corporation or an industry leader for a profitable VC exit.

· VC-Flop, which means that the VCs will quickly lose interest, try to get whatever they can, and move on.

Here are 5 strategies to increase the chances of becoming a unicorn:

· Find the right high-potential, emerging trend. If you are early on a high-potential trend, have kept control of your venture and are following unicorn strategies to find the fulcrum of the emerging trend, you have a shot at the brass ring. If you entered after the trend has taken off and the leaders have built a strong position, you may still be able to dominate a niche market and flip the venture.

· Takeoff without VC interference. Doing so allows you to keep control of the venture and decide whether your chances of success are better with VC as rocket fuel. If you do not have control of the venture, and if you have to pivot to find your growth strategy, you may have a flop because the VCs may not hang around. That’s why 94% of billion-dollar entrepreneurs delayed VC or avoided it to keep control (The Truth about VC).

· Focus on the business model, not product innovation. Entrepreneurs like Sam Walton, Bill Gates, Brian Chesky, Jeff Bezos, and others did not succeed by coming up with a “better” product. They came up with a better business strategy for the emerging trend. In fact, about 9 out of 10 first-movers fail to smart movers.

· Pray for good timing. Watch out for the phase of the stock-market cycle. If you are in the middle of a hyped-up market, when pigs can fly, you may be able to sell a mediocre company as a highflyer and have a flip or unicorn on your hand. If you are in a down market, watch out below.

· Prove your potential. Can you prove that you can dominate the prime segment of an emerging trend? VCs want proof of potential – not promises in pitches. Get the skills to prove potential. Wait until you prove your leadership potential for your venture and you to keep control of your venture and of the wealth you create.

MY TAKE: If you need VC to grow and want to avoid becoming a flop, wait until you take off and prove that you have the potential and the skills to dominate. Then your chances of building a flip or a unicorn are higher. But, even after Aha, make sure that you get VC from a fund that has a track record of building unicorns. Very few funds build unicorns. Lastly, keep control if you want to improve your odds of creating wealth and keeping more of it. Get unicorn skills, like Michael Dell.

TechCrunchWhy Angel Investors Don’t Make Money … And Advice For People Who Are Going To Become Angels Anyway
NytimesVenture Capital Firms, Once Discreet, Learn the Promotional Game (Published 2012)
Harvard Business ReviewM&A: The One Thing You Need to Get Right