February 2023

Dave:
Hey, what’s going on everyone? Welcome to On The Market. I’m Dave Meyer, your host. Today, we have a super cool new format for you. We are going to be bringing in a CBS News reporter to talk about an economic issue that has been making a lot of news recently, and that is that the United States just hit its debt limit. It’s this wonky but fascinating situation that’s playing out in Washington right now and could have potential impacts for real estate investors, all sorts of investors and just ordinary Americans. We wanted to help you all understand this issue in-depth so we’ve brought on Sarah Ewall-Wice, who is a reporter in Washington who covers this sort of thing in Washington DC and is going to teach us about the history of the debt limit, what’s going on in Washington right now, and what some of the implications could be for you and other investors. I really hope you like it.
We would love your feedback on this type of show. You can always go on the BiggerPockets forums and tell us about it. Or you can hit me up on Instagram where I’m @thedatadeli and let me know what you think of this show. With that, we’re going to take a quick break and then we’re going to welcome on Sarah to talk about the debt limit. Sarah Ewall-Wice, thank you for joining us On The Market today.

Sarah:
Hello. Good to be here.

Dave:
All right, Sarah, well, let’s start by having you introduce yourself to our audience and explain why you are here talking to us about this exciting, important, and somewhat nerdy topic.

Sarah:
Sure. I am a reporter for CBS News based in Washington DC. I cover both economic policy and also politics. The debt ceiling conversation is one that both hits on the economy big time depending on how long these talks go and also is a huge political talker for folks here in Washington, lawmakers, policymakers, experts all across the board. But we are back at that point where we’re talking about the debt ceiling again because the United States government hit the debt limit. So this becomes a conversation where members of Congress need to act now to avoid calamity.

Dave:
Okay. Well, that is definitely on my mind and many people’s minds. We’re going to get to that, but let’s just start at the beginning. Can you explain to us what the debt ceiling even is?

Sarah:
Sure. The debt ceiling, also referred to as the debt limit, is how much the United States government is allowed to borrow to pay the bills. This is very important to note. This is not how much the United States government is allowed to spend. This is the spending that’s already gone out the door across the board, across the federal government. It was actually first really saw the debt limit, it was back in 1917. There was a law and then it was expanded to cover all government debt right before World War II. But basically, Congress enacted this law and continually, every few years, they have to come back to it as the national debt grows and up that balance so that the United States government could continue paying the bills without going into default, which has never happened before in US history.

Dave:
Over the last couple of years, we are all hearing more and more about the debt ceiling. Has it always been of public interest?

Sarah:
It feels like it’s becoming more frequently and frequently talked about, and that’s because it’s become more of a political battle in the past couple of decades. Essentially, we’ve obviously always had this national debt and we’ve always really had a deficit depending on a few times where they’ve been able to balance the budget, but it does need to be addressed every so often. With that said, lawmakers have started using the debt limit to really come out as a tool to negotiate spending in Washington. We get to the point now every few years where we are hitting this limit and so that is when they come to the table and some lawmakers say, “Well, we need to cut spending.” Others say, “We just need to raise the national debt.” But the idea is is we get to this crisis point where it really needs to be addressed and then we kick it down, the can down the road rather than addressing the actual issue. And I say we, talking about Congress, rather than addressing the actual issue, which is how much the United States government is spending.
You keep in mind, the United States government has always really been borrowing to pay the bills. It comes down to tying the debt limit to the budget as they go, whereas these are two separate conversations that aren’t happening together. Then we get to this point where there’s a real freak out and a lot of concerns across the economy about what this means if the US stops paying the bills or is unable to pay the bills. So it’s become more frequent. It’s been used more of a tool lately. We saw in 2011, Republicans use this in negotiations with the Obama administration, and now we’re back here with the Biden administration, Republicans in a showdown over the exact same issue over a decade later.

Dave:
I do want to get into current events in just a minute here, but I just want to make clear. From my understanding, the debt limit has been raised dozens of times over the last couple of decades. The fact that it’s getting raised is not actually new. It’s just the political climate about it has changed a bit.

Sarah:
Yes. The debt limit has been raised dozens of times, many times in the past two decades. Just thinking back, we feel like we’ve had this conversation recently. It was raised in 2021, in December 2021. We had to reach a deal. Of course, it was raised or suspended three times under President Trump while he was in office over four years. So it’s an ongoing conversation. It’s raised multiple times in the Obama administration. Every time there’s this larger growing debt, they come back and they look at it and they move forward and they either raise or suspend it. Suspending it means they just kick the can down the road and it kicks back in later with the number at a higher level than it was when they suspended it.

Dave:
Okay. That makes sense. Obviously, we know during COVID, there was a lot of spending, but has the debt increased recently faster than it has historically?

Sarah:
I think it’s tricky really to say whose debt it is specifically. I think you can absolutely say during the coronavirus pandemic, the government, both under President Trump and then under President Biden, put out a lot of spending really to help save the economy from tanking, and that has added to it much more rapidly in the past few years. I would avoid saying, well, who’s added more to the debt, because it really is hard to tell because there’s been this accumulation of debt for so many decades in the United States. It’s tricky, but yes, I would say the coronavirus pandemic definitely did not help in speeding up the rising debt.

Dave:
Okay, great. You mentioned something earlier, which is that we have hit the debt limit. What does that mean?

Sarah:
Treasury Secretary Janet Yellen sent a letter to congressional leaders a little over a week ago, around January 19th. She said, “Hey, we’re starting to use these measures to move around money because we’ve hit the limit,” the limit being $31.4 trillion. That was the decide upon number back when they negotiated this last time in 2021. So they’ve hit that limit and now the Treasury Department is moving around funds to keep paying the bills. They call them extraordinary measures. It’s funny because these are not extraordinary anymore. We’ve used them many times starting in 1985 and onwards. We’ve heard it time and time again, but they’re so-called extraordinary measures still. Essentially, it means moving around money to keep paying the bills. But she did say that essentially, the ability to pay the bills would run out as early as June. There’s a lot of uncertainty because we do have revenue coming in, and as revenue comes in, the Treasury puts it out and pays the bills and is able to move things around. Starting in June, she says that could completely run out.
When it runs out and the United States government is unable to pay the bills, it’s the so-called X date. As we get closer to that timeframe, more policy experts will start to come out with their estimates on exactly what that date is. The Treasury Department will get a better idea of exactly what that date is. But when that date hits, the United States unable to pay its bills, and that is when the United States could go into default for the first time. That is where the real uncertainty happens. We’re in this period of this needs to be addressed and it’s a pressing issue, but we are not really sounding the red flags and the alarms aren’t going off at this stage. But of course, you know that Congress doesn’t do anything quickly, and so that is why it’s a pressing issue now rather than waiting till the last possible minute. Even if they reach a deal at the last possible minute, there could be repercussions.

Dave:
Yeah, absolutely. Let me just summarize that by saying basically, you’re saying that we have technically hit the limit and the implications in the long term are that if we can’t borrow more money, we can’t pay our obligations. As you said, the debt that we are financing is for spending that has already been approved.

Sarah:
Exactly.

Dave:
So that is the concern. But because the Treasury has some accounting tricks up their sleeves, they can continue to pay the debts of the United States even though we have technically hit the limit. Now, I think we were both about to just go to an idea that basically, I think it was 2011 where there was a negotiation over the debt ceiling and the United States did not default, but there were repercussions for it. Is that correct?

Sarah:
That is correct. There was a last-minute deal that was reached, and this was something that was negotiated between the Obama administration and House Republicans, which is a similar makeup to what we have now, where the White House is a Democratic president, but the House is run by Republicans. We have a Democratic senate currently. But they had to reach a deal and it came down to the wire where they were negotiating spending cuts to make this happen. Even though they were able to reach a deal, leading up to it, there was so much uncertainty that the stock market took a plunge and the US credit score or excuse me, credit rating was downgraded by S&P. So that had repercussions. There’s estimates that cost the US economy about $20 billion over a decade, which is one estimate that was done, but the S&P dropped about 6% leading up to that.
They were able to reach that deal, and we avoided a greater financial catastrophe, but that just goes to show that even leading up to this, as the clock ticks down to that so-called X date, or in this case, sometime in June as we’re seeing it, there are challenges and uncertainties that could lead to problems in the economy.

Dave:
That is something I think real estate investors in our audience will understand. Basically, what happened is that the credit worthiness of the United States was downgraded by credit rating agencies. When that happens, the debt, usually the person whose credit is downgraded has to pay more to get loans in the future. It’s a similar to taking out a real estate mortgage. If you have worse credit, you are going to pay a higher interest rate. What happened in 2011 is that the US basically became less creditworthy and had to pay a higher interest rate among other things and economic repercussions. That seems like just the tip of the iceberg. That is the tip of the iceberg of things that could happen if the United States were to actually default on its debt. Can you tell us a little bit more about what the repercussions could be if not just the debt ceiling has reached because we have done that, but the United States is unable to meet its obligations?

Sarah:
Yes. If the United States defaults, we started to get into it, this could be a catastrophe for the stock markets. We could see the stocks plunge across the board, not just the United States, but we’re looking at this from a global scale because the United States really sets the tone for the rest of the world. With that said, when you mentioned it, being able to borrow, this would boost interest rates on borrowing for the United States moving forward and that would cost the United States billions more on top of the trillions it already owes when it goes to pay its bills in the future. So that is one thing. The United States government, they’re supposed to be the most confident. It’s supposed to be risk-free investments. If it’s no longer risk-free and we’re facing all these challenges, what does that mean for everything else?
So that also has further waves or repercussions when it comes to how much Americans are borrowing because that boosts interest rates. When you’re going to get a mortgage, when you’re going to pay a car loan, now you want to buy a car, when you’re paying for credit card bills, your interest will go up across the board and this is on top of the already challenging time power in where we know inflation is high and the Fed is boosting interest rates. We’ve seen record high credit card interest rates already. So those are different things that are happening. At the same time, we have the repercussions that happen in the government itself because the government pays billions of dollars on a monthly basis to different parties across the board. Different groups of Americans receive different things. So for instance, if the United States is unable to meet its debt obligations, it will be unable to pay veterans benefits, for one thing.
Social security payments, one of the most important things for our senior citizens, those could be delayed, not go out in time when many people need those payments and rely on those payments. There’s also the things like the SNAPs program, formerly Stamp, so food benefits for low-income Americans. Different types of benefits that people rely on are going to stop and be delayed should we reach that point. The military would go unpaid, of course. We just hope they just continue working on the job. But that’s the reality and that has repercussions in the economy me because when they are getting the money, guess where that money’s going? It’s going out to businesses when they go and buy things. It’s going out for housing. It’s going out and it has this long ripple effect across other sectors of the United States coming from the government. So that is important to keep in mind. This won’t just impact those who rely on government payments, it’s anyone who’s relied on people who get any kind of government payment. Who knows really where this could go, but all in all, it’d be really, really bad.

Dave:
Yeah. That’s a question no one wants to answer. Yeah, no one wants to know what happens if the United States defaults on its debt. I think people on both sides of the aisle have basically said, we cannot default on our debt. But it does seem that given the importance of paying our debts, that that is basically why it’s being used as leverage for this broader conversation about spending and fiscal policy in the US.

Sarah:
That’s exactly right. It’s funny because it’s being used as a negotiation tool in a way where it’s really something that there should be no conversations about even going there. It’s just too risky to even consider, but it’s been tied into this political battle here in Washington that happens over and over again, when the reality is is lawmakers are setting budgets and paying for things and putting money out the door and borrowing to do it regularly anyway on both sides of the aisle. They have to come up with a budget every year, every couple of months, depending on how they go about it and that spending is happening anyway. So this just becomes one tool that has really brought people to the table, but in a way that could be really brutal and catastrophic for all entities. It’s a poor way of looking at the situation, but it’s the way that it’s come about for multiple scenario or multiple years now in recent decades.

Dave:
Yeah. It seems like basically, Congress has used this as a forcing function to talk about spending, even though it sounds like they’re not necessarily even related. The spending and what the Congress and the government is spending on is done during appropriations. That’s when they are spending money, but this is basically just a check mark to say, yeah, we will actually send you a check, basically for all those things we paid. So that’s interesting, but I think a lot of people feel that this is an important conversation to be had and I guess the debt ceiling somehow has evolved as the time when we talk about this. I’m just curious. You said House Republicans are negotiating with the White House. What is it that they’re hoping for and what are they asking for in exchange for raising the debt limit? That’s basically the conversation. They want reduction of spending in exchange for approving an increased debt limit ceiling.

Sarah:
This is the trick here. I should say the Republicans say they want to negotiate. We aren’t even at the point where they actually are negotiating yet. Just to be clear, there’s been a standoff on the start point of talks. I’ll talk about it in terms of the press office has said, the White House is not going to negotiate. This is not something they can negotiate on. This is a risk that will not be addressed and they need to raise the debt limit point blank. They’ve done it before under Republican presidents, why are they holding this hostage now? That is the White House messaging essentially on this. At the same time in Congress, Republicans are saying they absolutely need to negotiate on this and they also need to negotiate it in terms of spending cuts. They’re not actually saying specifically they want to see cut.
Democrats will point at them. Democrats in Congress point at them and say, “Well, they’re looking at Social Security and they’re looking at Medicare.” Some Republicans are in fact bringing up those two entitlement programs as a part of this conversation, but other Republicans are saying, “Well, no, we need to cut spending across the board.” So there’s really a standoff right now specifically on, well, what’s the plan? Who’s going to decide the plan? Because that’s where you can then go and point fingers depending on who actually comes forward with that plan and say, well, they wanted to cut this or that. So it’s still at the point where both sides haven’t taken a seat at the table and are asking the other side to sit down first and lay out a map of what they want to see. But that is where we’re at, where the White House wants it to raise the debt ceiling, we’ll talk about spending, but we’re not going to do it in this conversation. This is not where we’ll negotiate at this point in time.
And Republicans are saying, “Well, no. We have to negotiate spending at this point in time to address the debt ceiling and the debt limit.” So that’s where it’s at. I think in the coming months, coming weeks, really, we’ll get more information on where there could be places where there is a path to a compromise, but right now, it’s really a lot of posturing and not a lot of sit-down, hard conversations being had. There will be, I’m sure, other proposals about how to go about addressing this so we’re not in this situation again in two years moving forward between now and June, hopefully sooner rather than later.

Dave:
I’m guessing that you, being a reporter in Washington, you can describe a lot of things you cover as posturing.

Sarah:
Oh, most of it is posturing, I will say, and then suddenly something happens usually.

Dave:
Yeah. It just seems like what’s going to happen, is both sides are talking at each other, but there’s not really a conversation going on right now. What do you think happens? You said there’s posturing, but what do you think happens over the next couple of months? Is there going to be progress? Are the people like me who look at this very anxiously going to be worried for the next several months or do you think there’ll be steady progress towards a resolution?

Sarah:
I think people are going to remain anxious for a little bit of time. I will say, I think the White House and Republican congressional leaders are supposed to meet and start these conversations or just start a conversation in general. We are in a new Congress in the coming days and months. So that is a starting point. It’ll go from there. Every time this happens, there’s a standoff and at some point, somebody blinks. We felt that in 2021, where there was a standoff specifically in the Senate because they needed 60 votes in the Senate and that wasn’t happening. Then finally, essentially, Senate minority leader Mitch McConnell blinked, and in that instance, they were able to use just Democrats to raise the debt limit. So that’s going to be one of those situations where one side does have to blink. There are other ideas being floated out there about how this could go about where it doesn’t happen in this way moving forward.
I don’t know if they can reach any meaningful way to address this differently between now and June, but that is something that I think there’ll be another conversation so that we aren’t just kicking the can down the road. There will be a separate group. But the makeup of this Congress is different than it has been in the past and that’s why there’s different uncertainty surrounding this issue. In 2021, they needed to get Republicans in the Senate to step down so that they could pass it, but it was a Democratic-controlled Senate House and White House, so they were able to reach that deal. This time, there’s such a small majority of Republicans in the House that it’s harder to pass anything in the House, and there’s a group of very hard-line Republicans that are simply saying, “We will not vote on this.” So it comes down to they need to reach a compromise.
We’ve spoken to some Democratic congressmen who’ve said it’ll end up being a group of Republicans and a lot of Democrats who come and address this together to pass something in the House. So the makeup of how the House is made up has made this uncertain in a different way. Then of course, it comes down to what will the relationship really be between the White House and Speaker McCarthy and Congressional Republican leaders as they start to have these conversations, because like I said, we had a new Congress that came in in January.

Dave:
Yeah, it’s very interesting. It seems like one of the first tests of the relationship between the new Congress, the White House, and that everything that’s going on happening at a crucial economic period. We’ll have to see what happens, but thank you for explaining this to us. One of the options I’ve heard about, I really don’t understand this, have you heard of the trillion-dollar coin?

Sarah:
Oh, yes. I love this.

Dave:
What is that? I don’t get it.

Sarah:
The idea is there is a law in the books from 1997, which essentially says that the Treasury Department can mint a coin of absolutely any denomination. This has been floated by a former director of the mint. It’s been called for by some lawmakers, I believe more recently from some Democratic lawmakers. The idea is the Treasury could simply mint a trillion-dollar coin. It could be taken and that could be used to address the national debt.

Dave:
Oh, wait, so is that basically just money printing though, but it’s-

Sarah:
Pretty much. Well, the Fed has to step in and accept this.

Dave:
Okay.

Sarah:
So that’s one uncertainty. I can say point blank that Treasury Secretary Janet Yellen has been asked about this and she’s called it a gimmick, so not really onboard. So it can toss this out the window in reality, though it comes up every couple of years when we talk about the debt ceiling. She’s also said this would be one of those things where you’re overriding the independence of the Fed. So that’s part of it where it just comes down to, okay, so we are not going to get the Treasury secretary to say yes to this. Then at the other side of this is, well, if the US can simply mint a coin of any denomination, what does that mean for the markets moving forward and any future situation the United States might be in, period?

Dave:
Yeah, that seems like a terrible idea. Okay.

Sarah:
So if it is something that’s okay, it’s out there, it might be doable. It’s never been tried before.

Dave:
Oh, I get it. So it’s basically saying that normally, the Fed controls monetary policy. Just for everyone listening, when we talk about Congress and spending by the government, that is fiscal policy. When we’re talking about how much money is in circulation, federal funds rate, stuff we talk about a lot on this show, that is called monetary policy. Usually, the Fed controls money printing, that sort of stuff. So what you’re saying though is there’s basically a loophole where the Treasury, which is part of the executive branch, I don’t even know,-

Sarah:
Yes.

Dave:
Executive branch?

Sarah:
It’s the executive branch under, yes.

Dave:
Okay. So it’s part of the executive branch. Could get through a loophole, print a trillion-dollar coin. Glad to hear that’s not going to happen, but man, they would’ve to have a cool design. I feel like a trillion-dollar coin would have to look pretty cool.

Sarah:
That would be fantastic. I should add the specifics on this is that it has to be platinum.

Dave:
Ooh.

Sarah:
That is also a part of this rule,

Dave:
Baller. Okay.

Sarah:
So yes, a coin of any denomination, but it must be platinum and it must be cool-looking, I’m sure.

Dave:
Yes. Wow.

Sarah:
And the Treasury Secretary has been like, not going to happen.

Dave:
What weird law was like, yeah, you could print anything as long as it’s platinum?

Sarah:
I think it had to do with coin collectors and valuation on that front. That’s a really wonky random loophole and a really random law that just materialized as this debate moved on and now we have lawmakers who are like, that sounds like a potential way to address this ongoing crisis that we face every few years. But no one’s tried it. I think the folks, of course, the Treasury secretary also used to be the chair of the Federal Reserves, Secretary Yellen, so she’s gone mm-mm.

Dave:
Okay. All right. Well, we won’t know what happened, but glad to hear that a trillion-dollar coin is not one of the realistic options.

Sarah:
Not yet. We’ll see where we go in a couple of months, but I’m holding off on that for now.

Dave:
Okay. Well, thank you, Sarah. This has been super helpful. Is there anything else you think our listeners should know about the debt ceiling as it pertains to investors or just everyday Americans?

Sarah:
I think right now, it’s one of those conversations where the bigger problem will need to be addressed in how we go about spending moving forward, but that doesn’t seem to be something that is addressed when we get to this debt limit crisis and counting down the clock to the so-called X date. So big picture, I think there will be conversations about this, about how the US is spending money. But the other aspect of this, I think, is people will yawn when they hear about this now because it’s happened so many times, and it shouldn’t be something that people panic about at this moment. I really don’t think it is at the stage where there should be the panic, but it is a pressing issue and it’s one that will continually to become more and more dire as we get into the coming months. So that is where, take a deep breath now. Stay calm. Don’t change up your pattern so much yet in terms of how you’re spending or your investing at this stage.
I don’t think anyone, when we see these warnings coming out of the White House or Treasury secretary’s office specifically, or Congress are like, “Ooh, need to sell off immediately.” That’s not where we’re at right now, but it is something to keep an eye on moving forward. Everyone says we absolutely cannot default on our debt. Let’s see if they hold that up in Congress and keep on playing a game of chicken moving forward.

Dave:
All right. Well, thank you. This has been super helpful. I have learned a lot. I really appreciate your expertise on this. If people want to follow you and your reporting, where can they learn more about you?

Sarah:
Sure. Well, follow our reporting at CBS News at cbsnews.com, your local stations, our national news. We have the morning show and evening news as well. Then of course, you can always find me on social media @ewallwice. It’s my last name, E-W-A-L-L-W-I-C-E, on both Twitter and Instagram.

Dave:
All right. Thanks again, Sarah.

Sarah:
Thank you.

Dave:
Big thanks to Sarah for joining us for this episode. I learned a ton from this. I learned that I don’t need to be anxious about this just yet, and that we have a couple of months. Even though we had hit the debt limit, the US is still paying its obligations and there is time for Congress to figure this out. I would love to know what you all think about this type of episode. We’re trying something new just to help you stay on top of the important things that impact investors and ordinary Americans related to the economy. This is an important issue, and hopefully you learn something. You can always hit me up on Instagram where I’m @thedatadeli. You can find me on BiggerPockets and send that feedback as well.
Thank you all so much for listening. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

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The words you use in all of your work related communications can have a major impact on how others perceive you, as a leader. And as entrepreneurs, it is really easy to put yourself in the middle of it all, on a pedestal, as the person that founded the company. But as you all should know by now, you are not building your business by yourself, and credit needs to be shared with all, to keep everyone feeling respected and motivated in their day-to-day efforts as part of the company. That all starts with removing the word “I” from your vocabulary, effective immediately.

Defining “I” vs. “We”

According to the Merriam-Webster Dictionary, the word “I” is speaking to one’s SELF, possessing a personal INDIVIDUALITY. And the same source, defines the word “We” as “a GROUP that includes me”. Notice the stark difference between the two: using the word “I” makes it sounds like you are building your business by yourself, and using the word “We” clearly tells others that you are part of a team, that is equally invested in building your company’s success.

What Does That Mean For Your Communications?

Unless you are a solopreneur working by yourself, ditch the word “I”. And, even then, you are most likely working with other outside partners (e.g., investors, bankers, accountants, lawyers, contractors, agencies) in some capacity. And they too want to feel like they are doing their part to participate in your success. So, you too need to swap “I” for “We” when working with anyone that is involved with your business.

What Communications Are We Talking About?

ALL communications need to be amended to remove the word “I”. Verbal conversations by phone, written communications by email, corporate materials that describe the efforts of the business . . . basically everything. You should set up a “swear jar”, that every time you communicate with the word “I”, you have to put a dollar in the jar. For some of you, you may have just found your capital source for your next fundraising needs!!

What is the Result?

Making this change will have a lasting impact on your team. No longer will you be at risk of being perceived as an out-of-touch egomaniac. Instead, you will better motivate your team, instill a sense of self-worth into your employees committed to the company’s success, and promote long term loyalty to your business.

Who am I Speaking To?

You need to look in the mirror, as I am speaking to YOU. Take a look at your last few emails written to your team. Do you see the word “I” anywhere in there? You most likely do!! Stop doing that!! Before you send out your next corporate communication, proof-read it first to make sure the word “I” is nowhere to be found.

Closing Thoughts

For entrepreneurs that have been at the center of their worlds for years on end, this will be a really hard bad habit to break. But if you are religious about removing the word “I” from your vocabulary, your team will take notice, appreciate you including them in your COLLECTIVE success (not your INDIVIDUAL success) and want to work hard WITH you (not FOR you), as a leader that knows the importance your team has in building THE company (not YOUR company). As you can hopefully see now, the words you use with your team really matter.

—

George Deeb is a Partner at Red Rocket Ventures and author of 101 Startup Lessons-An Entrepreneur’s Handbook.

When it comes time to upgrade or replace your business’s equipment—such as computers, vehicles, tools or anything else your team may use to get the job done—it would be quicker and far simpler to merely purchase the newest model or renew your subscription without much thought. However, to truly ensure you’re getting the best return on investment in terms of cost and team productivity, careful research and reflection is necessary.

But what exactly should you consider before making a purchase? Here, nine members of Young Entrepreneur Council discuss just that, each offering up one factor you should consider first before upgrading or replacing your equipment and why it can ultimately help you make a better decision for your business.

1. What Your Team Really Needs

Ask your team what they really need. I can speak from the perspective of a marketing and software company. We used to buy all sorts of digital tools to make our processes more efficient, but we ended up canceling a lot of subscriptions because a tool is just a tool. It’s pretty much useless if people don’t know how to use it or simply find it inconvenient. Always check in with your team before you decide to upgrade or replace something. What might seem like a good idea to you may not necessarily feel like a helpful improvement for everybody else. – Solomon Thimothy, OneIMS

2. Your Time And Energy

We take the stance that if it will make you more productive or less frustrated, buy it. We work with accounting software and it alone can be annoying as you’re stuck watching the spinning wheel while your report is calculating. With upgrades to hardware, and particularly speed, it will improve the performance of your most expensive asset: your people. – Marjorie Adams, Fourlane

3. Support Availability

If you’re thinking about replacing business equipment, one of the first things you need to think about is support availability. In other words, is support readily available to help you or will you have to wait until Monday (if it’s the weekend)? If it’s a big problem and you have to wait for an answer, you could lose out on profits and the trust of your audience. With this example in mind, it’s easy to see why the way a brand offers support should drive many of the decisions you make for your small business. – John Turner, SeedProd LLC

4. The Impact On Your Clients And Customers

What will the impact be on your clients or customers? In some business areas, it is okay if you avoid upgrading your equipment because the impact on customers may be minimal. However, in other areas, such as technology or customer-service-related fields, it is important to consider your customer’s experience. For example, whenever Google makes a core update to its products, it has a powerful and immediate impact on how people interact with search engines and websites. So, you have to get on board and upgrade your processes or workflows or else you risk being left in the dust. Overall, it is important to consider the customer experience when upgrading or replacing business equipment. – Syed Balkhi, WPBeginner

5. The Cost Versus The Benefit

When it comes time to upgrade or replace business equipment, one factor you should consider first is the cost-benefit analysis. This involves weighing the costs of purchasing and maintaining new equipment against the potential benefits it will bring to the business. It includes the upfront purchase price of the equipment, any financing or leasing options available and the expected lifespan of the equipment. It’s also important to consider the potential impact the new equipment could have on the business, including any potential efficiency gains or productivity improvements. By carefully evaluating the costs and benefits of new equipment, you can make informed decisions about whether the investment is worthwhile and whether it aligns with your business goals. – Candice Georgiadis, Digital Day

6. Scalability

One factor worth considering when you need to upgrade or replace business equipment is scalability. In other words, is it possible to continue growing with the new iteration of the tool? Or will you need to upgrade again in a year or two? Understanding how well a new tool or resource scales is one of the most important things to examine when upgrading your business equipment. – Chris Christoff, MonsterInsights

7. Safety

One factor to consider when it comes time to upgrade or replace your business’s equipment is safety. No matter the equipment you use, it’s important to ensure that it’s safe for your employees and your business in general. It is important to ensure that the equipment meets all safety standards and regulations to protect your employees from potential harm or your business from any confidentiality breach. – Andrew Munro, AffiliateWP

8. The Timing Of The Purchase

Consider the timing. Is it the right time to replace your equipment? That’s a huge investment and your finances must be in good shape before you make such a decision. Not only that, but you must also look at the market to see if it is able to support your big investment. This doesn’t mean that you’re never going to replace your equipment—just that you have to wait for the right time. There are also seasonal reasons to wait because there may be a better time to purchase equipment, like when demand is low and supply is high. You also want to look at the loan terms because it would be practical to upgrade when interest rates are low. Moreover, you have to consider if the available equipment is the latest model because if the latest version is available in less than a year, you might as well wait. – Bryce Welker, Crush The GRE Test

9. Payment Options

Before you invest in costly equipment or technology upgrades, consider other options. For some equipment, leasing is worth considering. You have lower upfront costs and you may have certain services such as repairs included. Leasing is also good if you think you may want to upgrade again in the near future. The leasing company can often provide the upgrade and you don’t have outdated equipment to sell or discard. When it comes to digital services such as software, you can also consider a subscription service, also known as software as a service (SaaS). This is another case where you have lower upfront costs and can count on the company for support. In all such agreements, however, read the terms carefully so you know exactly what is and isn’t included. – Kalin Kassabov, ProTexting

David:
This is The BiggerPockets Podcast Show, live from Mexico.
My philosophy is that building wealth is a three-pillar system. There’s offense, there’s defense, and there’s investing. If you cannot save money, it doesn’t matter how much money you make, you’ll never be wealthy. You’ll just lose it. If you’re very good at saving money, but you cannot make money, you will be grinding your entire life and never being satisfied. If you’re one of those people that’s like, “I live off of $12,000 a year, but I make my own soap and I wear the same socks every day and I wash them with my hand,” you’re not getting the most out of yourself. Then if you’re good at making money, you’re good at saving money, you’ll die with the big savings account, but never have passive income, never have exponential growth, you have to build to invest the money.
What’s up everybody? This is David and Rob coming at you from Mexico where we are enjoying a wonderful getaway in Cabo. I believe this is… is it called Cabo because it’s Cabo San Lucas, or are those two different places?

Rob:
You know what?

David:
I’ve heard Los Cabos.

Rob:
I don’t know.

David:
[inaudible 00:00:53].

Rob:
I think it’s Cabo San Lucas. I think it’s just one area.

David:
I think there’s several Cabos. Maybe Cabo San Lucas refers to all the Cabos.

Rob:
Perhaps.

David:
Because somebody here has to know. It’s the most gorgeous place I’ve ever been. This is my favorite place in the world. Now, albeit I don’t travel a ton, but I love coming here. Kyla and I were actually talking about wishing that we could put events together at this place.

Rob:
This would be really cool. Yeah, there’s a lot of things. [foreign language 00:01:13].

David:
I see.

Rob:
[foreign language 00:01:16].

David:
[foreign language 00:01:21].

Rob:
[foreign language 00:01:22]. Very tasty, just like my face. That’s how that translates to.

David:
I always think of that, but like marvelous. You’re saying it’s very tasty?

Rob:
Well, I said the food is very [foreign language 00:01:33].

David:
I see. I was very [inaudible 00:01:34]. If you didn’t know, I speak a little bit of Spanish and Rob speaks a lot of Spanish and he’s been helping me with it while we’ve been here, but we’re having a blast. This is an awesome place and we thought that while we were here, we would record a show that basically digs into my origin story of how little baby David ended up with a big real estate David.

Rob:
This is a good one. This genuinely, if you have listened to the BiggerPocket show for many, many years, I don’t think the nuggets and everything, the origins or I don’t think we’ve talked about it in this podcast.

David:
We’ve never made me the focus.

Rob:
Yeah, this is really exciting. It was really exciting because the whole time I was just like, it’s very relatable. You’re a very relatable person. You need to tell us more about your origin story, man.

David:
Well, you did a good job pulling back the layers. It’s like Shrek. Ogres, “I don’t like onions.”

Rob:
And if you stick around until the very end of the episode, you’ll actually hear David pull off a Russian-Spanish accent.

David:
Yes, you will. I also learned while we here that Rob does not onions. Just like Josh Dorkin does not pickles. If you ever meet them in real life, don’t give Rob onions and don’t give Josh pickles.

Rob:
It’s so sad. It really is. I’m Mexican. It’s like a very staple food for us and my mom had to not cook with onion or she would lie about it when she made fun of us.

David:
A shame in your family for years. Don’t let our relatives know that Rob doesn’t like onion.

Rob:
Yeah. And then she would hide it from me. She’d be like, “No, there’s no onions in this.” I’m like, “Mom, I see the onions.” I haven’t talked to her in years because of it.

David:
Well, in spite of that, you conquered your fear of onions as you pulled back the layers of me and you got deep into how I got started in real estate, what I did before real estate, the philosophy that I take when I’m approaching real estate. You did a really good job.

Rob:
I’m a big fan of philosophical onions. Those I’ll chow down on all day. Well, okay, well, let’s get into it. But before we do today’s-

David:
Quicketh tippeth. Rob says, “Quicketh tippeth.” Now you have to say it in an old English accent. Today’s quick tip is, “Don’t try to figure out everything yourself.” If you read my book, Long Distance Real Estate Investing, I talk about my Core fFur. And part of the Core Four’s job is to use them to find other people in the Core Four, so if you work with a rock star agent or a really good property manager or contractor, odds are they know other rock stars that are really good. And you significantly increase the statistical likelihood you’re going to get a good person when you deal with a top producer who is a good person themselves. So, don’t try to do everything yourself. Look for the people that are in your world that are already good, and ask them who they can provide that will help you on your journey.

Rob:
That’s a great and quicketh tippeth, my boy.

David:
Thanks, pops. All right, let’s get to the show.

Rob:
Let’s do it. So, we are talking about David Greene today, right?

David:
All things green. It ain’t easy being green. That’s what Kermit the Frog once said.

Rob:
I’ve also heard that it ain’t easy being cheesy.

David:
That rhymes also.

Rob:
It’s Chester Cheetah.

David:
Chester Cheetah, yeah.

Rob:
I’ve heard a lot of your POV. I’ve heard a lot of your philosophies. I’ve heard about your journey in its entirety. You’re like, I’ll say your story to me is very much like Moana, where I’ve seen Moana 200 times with my daughter, but I’ve never actually seen Moana from start to finish.

David:
You’ve seen pieces.

Rob:
Yeah. I’ve never seen the entirety of Moana.

David:
But you don’t know how it all fit together.

Rob:
And I genuinely generally understand what Moana is about, but I don’t know the story, and that’s what this is for a lot of the listeners. We know David Greene, but we don’t know David Greene, Jr when he was starting out in the real estate world, so I wanted to dive into that today.

David:
Let’s do it. There’s no better time. We’ve been getting closer. We’re making memories. We’re sharing experiences while we’re in Mexico.

Rob:
How’d you feel about my analogy, by the way?

David:
Pretty good. It was very good.

Rob:
Thank you very much. I practiced that one in the mirror this morning.

David:
Ripped off on you.

Rob:
All right, so let’s jump into it. So, you have been investing for how long now?

David:
I bought my first property at the end of 2009. So, 12 years just about.

Rob:
Tell us, take us back to that moment. Where were you in your real estate? Where were you in your career? What were you doing? Were you wanting to do real estate full-time? Give us that painting. Paint that picture first.

David:
It’s so funny because we talk about real estate investing as you need to have a plan, a purpose, know exactly what you’re going to do, map it out, and then go execute it. It could not have been more different for me. I fell into real estate investing bassackwards. I had no intention of being an investor. I didn’t know what it meant. I was saving up money to buy a house because I knew at some point I was going to need to buy one. And this was between 2002 and 2008, where we had one of the biggest hottest real estate runs that we’ve ever experienced and it wasn’t related to quantitative easing. That hadn’t happened yet. It was just over-inflated bubble of an economy.
So, you couldn’t save up money fast enough to buy a house. It was very frustrating. And I didn’t want to buy a house during that period of time, but I knew I was going to need one. So, 2009 comes around. The market has pretty much crashed. A buddy of mine is in a bad situation because he’s got a place under contract in Lathrop, California, but he’s moving away to go to Bible College. He’s going to lose his earnest money deposit. So, he says like, Hey, this is a bummer. Can you pray for me?” And I’m like, “Well, let’s go look at the house. Just see what it looks like.”
He had it under contract at $215,000. It was a house that had been built three years earlier in 2006. It was big, probably like 2500, 2600 sq. ft. It just needed a vacuum run over the carpet. And I was like, “You know I might need to live in a house. Maybe I’ll buy it and I’ll just rent it out until I can live in it with my family.” That was my original plan.

Rob:
What were you doing at that time? What was your career?

David:
I’d been a deputy sheriff for maybe a year, maybe a little bit less than that. Before that, I had been a waiter while I was in college. And then I got out of college and I was a waiter for a year as I tried to get hired to be a cop. It takes a long time to actually have that happen. And then I finally got hired to be a deputy sheriff. I got through the police academy and then I had gone to work. And I’d been doing that for probably nine to 12 months when this opportunity came up.

Rob:
I’ve always wondered this, and I think a lot of people wonder this because we know that you were a cop. Would you consider yourself a cool cop? Were you a cool cop? Were you like the, “Oh, man, that cop, that’s a good… I like that guy. He’s funny?.”

David:
That is a complex question. If you were a person who was a good person that did a bad thing, I was a cool cop.

Rob:
Like running a stop sign?

David:
Running a stop sign. Driving too fast. Like little violation type stuff that we all know we’re not supposed to do, but it’s convenient to do it sometimes. If you were a bad person, human trafficking, anything to do with hurting kids, stealing from people, something that would ruin someone else’s day or their life if you did it, I was not a very cool cop.

Rob:
Perfectly fair. Perfectly fair. So, you were cool when you had to be?

David:
Yeah, and I was cool to the people that were like, if you’re walking up to their car, you’re detaining them for some reason and you see the look on their face like they’re just already miserable. Like, “Oh, this is the worst thing. I’m so dumb. I wish I wouldn’t have done that.” There was no reason to jump on you and make it worse and give you the whole, “What are you doing speeding down my road?”
I’d always, when my partners would do that, I would just shake my head. “You were taking yourself way too seriously, man. We all do that.” But if you were stealing something, if you were hurting somebody else, if you were looking to rob someone, if you were a professional deceiver, I was laser focused on catching you.

Rob:
That makes sense. I just got pulled over by a cool cop two months ago. I was in a minivan.

David:
Do you want to share your story of how you get out of every ticket you’ve ever had?

Rob:
That’s right. So, I’ve been work shopping this line when I get pulled over, the cop walks up to the driver’s side.

David:
And he says, “Excuse me sir.”

Rob:
He says, “Excuse me.” I said-

David:
“Do you know why I pulled you over?”

Rob:
I say, “You a cop. You got to tell me if you’re a cop.”

David:
And then he goes…

Rob:
“Ha, ha. That’s funny.”

David:
… “That’s good. You got me.”

Rob:
And then he goes, “Are you Robuilt? I love your YouTube channel.” That’s how it plays out in my head. I haven’t actually done it. I was like a cop pulled me over and I was like, “Oh, yes, sir. What can I do for you, sir?” And he was like, “Your lights weren’t on.” And I was like, “Oh, okay.” And then he proceeded to go back into his car for 10 minutes and then he was like, comes back, I’m like, “All right. My story checks out. You can look at my back. There’s like a lot of Trader Joe’s bags with milk in there.”

David:
Do you know what cops are doing when they go away to their car and they come back 10 minutes later?

Rob:
I assume they’re checking to see if I have any warrants out. Yeah. Okay.

David:
Looking to see if you have warrants, if you’re on probation, if you’re on parole, if you’re wanted for anything. Yeah, there’s all kinds of reasons people could be wanted. There’s sometimes people just aren’t paying child support and they’d just been getting away with it for a long time. There’s bench warrant issued so that…

Rob:
Dang. Yeah.

David:
… their baby mom can’t get paid or something like that.

Rob:
I’d like to think he was watching a Robuilt YouTube video in this car, just checking out how to learn how to get into Airbnb.

David:
Trying to figure out how to leave a comment on YouTube.

Rob:
That’s right, yeah. Anyways, okay, let’s get back to it. So, you’re a cop and at this point your buddy is trying to get out of this house and you’re trying to… you’re basically saving him from his-

David:
Losing his earnest money.

Rob:
From losing his earnest money. And were any of your friends on the force in real estate or was this really just a total shot in the dark?

David:
I knew no one, man. I didn’t know enough to even know what I didn’t know. I didn’t know what cash flow meant. I didn’t know how to analyze a deal. I mean, I had a basic understanding of being able to tell what property taxes and insurance and mortgage was going to be. And my realtor said she thought it would rent for $1500 a month, maybe $2000, which that’s a very big difference. And I wasn’t even intelligent enough at that time to know there’s a difference between $1500 and $2000. Clearly, she’s not giving me good information if it’s a 25% difference in the rent spread that she’s talking about.

Rob:
That’s funny because that’s how it is, the short term rentals. It’s like they’re very-

David:
So, that wouldn’t jump out at you, right?

Rob:
No. It’s all the returns are always good, so it’s like, yeah, $1500, $2000, it’s like you want to be dialed in, but it’s not a big deal. But on a long-term rental, it’s like-

David:
Wildly inaccurate. It’s “I should have known.” And then she didn’t tell me that this property was an area that had higher property taxes because it was like special assessments where it were levied on this part of town. So, my property taxes, I estimated to be a certain amount. They were like triple what that actually was. There’s a lot of things that I did wrong because I didn’t know that that was a thing you were even supposed to look for. But that is very common when you’re getting into a new endeavor.

Rob:
So, what was the plan? You were going to come in and you said it needed to be vacuumed. Obviously, this means that it needed a light renovation?

David:
Vacuuming was the extent of the renovation. So, I came in.

Rob:
Literally just vacuumed.

David:
Brought a vacuum from my parents’ house where I was living to the house. Vacuumed it. I didn’t even spray 409 on the counters and cleaned them. It was that good of shape. It was like a stain on the carpet that wasn’t even that big of a deal. Threw it up on Craigslist with some pictures that I took with an electronic camera and then uploaded via like a USB cable into the computer because that’s the way that we used to have to do things. I don’t remember, I think I just put it up for $1500 for rent because that’s what the realtor had told me. It sat there for a while and didn’t rent for $1500. I dropped it to like $1200 and I got my first bite.

Rob:
All right. Did he assign the contract to you or what happened? You said he was under contract?

David:
Yeah, that’s a good point, so I’m getting ahead of myself. I called his agent and said, “Matt can’t buy this house. I think I’ll buy it instead.” And this was during a time, for context, where every house on a street, every three or four houses had a “For Sale” sign. It was foreclosures everywhere you could look. No one was fighting to buy real estate.

Rob:
Because this was 2009?

David:
Yes. So, I called them and the listing agent was also the one representing him, which was common, they would double end it. But they worked for the bank that owned the property. It was real estate owned because the bank had taken it, the title back from the person that stopped paying the mortgage.
And I said, “Do you think you could help me on the price?” And she’s like, “Yeah, let me see what I can do.” She called me back the next day and said, Hey, we could do $195,000.” And it was a good deal at $215,000. I was like, “Oh, my gosh. Okay, I guess I’m buying it. What do I do?”
She put me in touch with her lender. It was like a Wells Fargo lender, so it was going to be more expensive than everyone else. I didn’t know the difference. Went through the process of getting the loan. Gave them all the stuff they needed. It was a pain in the butt because they were always asking for documents. I rented a room in a different part of town where I was working as a deputy sheriff and all my paperwork was at my parents’ house, so I’d have to wait till the weekend when I could go home and get the paperwork and then find a fax machine somewhere to try to send it in. It was very-

Rob:
I feel like 2009, we’re using fax machine.

David:
There was an app on your phone called Jot Knot where you could take a picture with your phone and the app would convert it into a PDF and that was magic. When I could just take a picture of the document and then send it as a PDF, it would save me a day of time. I didn’t have to go to Kinko’s and scan it and that was amazing to me. And now, we don’t even think anything of that. You just send a picture and send it in and that’s what you have.
So, I got this loan and then close on the house and the realtor leaves a key and I put the house on Craigslist. And the first tenant who said they wanted a house, I just signed him up and I had found a lease online for free somewhere and that’s what I printed out and had them sign it.

Rob:
Did you do any tenant screening? Because you obviously didn’t know much, but did you at least know the fundamental concepts of like, “Yeah, I lease it to a tenant. I do a background screening. I like charge a first month’s rent for the deposit.” How much of this were you knocking out on your first deal?

David:
I had read in a Landlording for Dummy’s Book, you should do that. And then when it came time to do it, I had signed up for much of overtime and I was in. The city was called Antioch, where I was living. It was like an hour away from Manteca where my parents lived. I realized I don’t have time to go home and do any of this stuff, so I’m just going to roll the dice and trust that if I’m good to him, he’ll be good to me. That’s how ignorant I was about managing property.

Rob:
Now, are you being hyperbolic or did you actually read the yellow…

David:
Yes.

Rob:
… landlord.

David:
Yellow book at a Barnes and Noble that said Landlording for Dummies. And like they said you should do any of that. And I was like, that’s-

Rob:
I love this. That’s good. This is good. David Greene, the BRRRR king, the real estate co-host of the-

David:
Hey, wait till you hear how this worked out.

Rob:
All right, so you get into this deal, you’re like, “I’m going to trust this guy. He seems like a nice guy. I’m going to be good to him. I’m a cop, so he can’t be that bad to me.”

David:
Yep. He knew that. And I actually was thinking in my own head, “Oh, he wouldn’t try to take advantage of me because I’m a cop. He’d be afraid of that.”

Rob:
So, what ended up happening?

David:
So, what ended up happening is he made his first three months of rent, payments and everything was fine and then on the fourth when he stopped paying. And I started to reach out. He had a new excuse every time. “Oh, I sent the check in the mail. I don’t know what happened. I’ll send another one. Oh, I don’t know. Yeah, I went and deposited it in your bank, in your account. I don’t know why it’s not there. Oh, I left it at your mom’s house. I put it under the welcome mat. I don’t know why that check is not there.”
It was like thing after thing after a thing and then four months later I’m like, “Dude, I’m going to have to evict you. I don’t know what to tell you.” At around that same time I got a… what was the… let me think about how this came to mind. I can’t remember the details of how it crossed my path, but I realized that the title company had sent… I know what it was. I remembered seeing my bills for property taxes were so much higher than I thought they would be because on the mortgage, they’re collecting it through escrow.

Rob:
And they’re basing it based on that year’s or the last owner’s taxes, too, right?

David:
And a special assessment. So, at first I thought it was just the special assessments. I expected them to be like $150. They were like $800.

Rob:
This month?

David:
Yeah.

Rob:
Whoa.

David:
Incredibly high. So, when I realized that’s not all special assessments, I called the bank and they said, “Okay, well, you have to go find out from the county why that’s the case.” I couldn’t figure out how to contact the county, so I ended up calling the title company to ask them what had happened. They’re like, “Oh, yeah, they’re not supposed to be that high. They’re collecting those based off of the house’s previous value of $565,000. Not what you bought it for at $195,000. We will fix that.”
A couple of months went by, it was fixed on paper, but they had told me they were going to send me a refund check. And I called to say, “Hey, where’s that refund check for all the money you collected at escrow when we closed?” And they were like, “Yeah, we sent it to you a long time ago.” And I was like, “Really?” Like, “Yeah, it shows it was cashed at this bank.” And so I went to the bank and they had a signature that was not mine and that check had been cashed.
It turns out that they sent the refund check to the investment property, not to my house and my tenant had cashed that check and been paying me rent for three months with my own money.

Rob:
So, you were paying rent?

David:
I was paying rent. My own rent of this house and getting lied to about where addition rent was going to be coming from. So, I realized that he had never paid rent. He had paid me rent with money he had cash from my check. He then got into a breakup situation with his baby mama and had told her he was paying the rent and he wasn’t paying the rent and she wasn’t paying the rent. So, when we tried to talk to her, she’s like, “Yeah, we’re paying the rent. I don’t know what to tell you.” And when I tried to talk to him, he didn’t talk to me at all. And I realized, “Oh, I’ve got an eviction on my hands now.”

Rob:
Wow. So, you stepped into real estate and on your first deal, you had an eviction come up.

David:
Eviction, being lied to, getting ripped off, having my money stolen from me, just like thing after thing after thing was going wrong here.

Rob:
It’s like even as a cop, there’s not really anything you can do because it’s like a civil matter, right?

David:
Yeah, and the rules for landlords, what I remember learning was there’s so many rules for how I’m allowed to go about getting this bad person out of my house, but there’s no rules that he can’t do this stuff.

Rob:
It’s so unfair, yeah.

David:
Serving the legal, getting the legal papers made was a pain in my butt. I had to pay all this money to do it. He didn’t have to pay for anything. And then serving the papers, I can’t actually serve him. I had to go find another person that was a neutral third party that would serve them. So, you got to go through all the people you know willing to do this. And then they had to go through weeks of trying to catch the baby mama to get her paper served, so that we could start the eviction process.
And then you got to wait for your day in court, which can take months to come. It was a very frustrating experience. I remember at that time I thought if the market had gone up, I would have sold that house and never invested in a real estate again.

Rob:
Man. Okay, so actually you said something that’s crazy. So, you bought it for $195,000. They said they were taxing you based on the previous real estate price of like $595,000?

David:
$565,000, yeah.

Rob:
Does that mean that that’s how much it crashed?

David:
Yeah. In ’06 when it was built and sold, it was sold for $565,000 as a brand new construction.

Rob:
Wow.

David:
Three years later I bought it for $195,000.

Rob:
Do you still have that house?

David:
Yeah.

Rob:
Do you know what it’s worth today?

David:
It’s probably like $525,000.

Rob:
It’s pretty close to that, the original.

David:
Yeah, it’s close to where it was.

Rob:
Wow. Man, that’s crazy So, you evict this tenant, you serve them and then you give up on real estate?

David:
Yeah, so what happened was I listed it for sale again and I was like, “Well, this time I’ll try to be a little…” or it was listed it for rent again. I showed it to a bunch of people. And then one of the people that I was really leaning towards was telling me how they had a property manager that told them they should come check out the house. And I said, “What is a property manager?” You think that the title would be self-descriptive, but I didn’t know.

Rob:
Yeah, I understand.

David:
And they said, “Oh, it’s this person that connects with the landlord for you and we pay them the check and then they pay it to the landlord and they take care of everything else.” And I was like, “Well, that sounds better than what I’m doing. Can I have their number?” So, I remember writing it down on a piece of paper because cell phones weren’t very common. And so, I called them and-

Rob:
It’s 2009, man.

David:
Yeah, I know.

Rob:
Not 1999.

David:
But it wasn’t like, I’m trying to remember it. You were still writing stuff down all the time. You weren’t just like, “Let me put your information in my phone type of a thing,” right?

Rob:
Yeah.

David:
There weren’t smartphones is what I should probably.

Rob:
I see. You didn’t have that.

David:
I had Nokia type phones. I had this flip phone with a keyboard that was super cool. Everyone thought I was James Bond when I would type with it.

Rob:
A Nokia?

David:
Yeah. And I called the person and he explained how it worked and he said, “I collect 8% of the rent, but I’ll do it for you for 7.” And I was like, “Okay.” This person was not a good property manager. It turned out he was addicted to drugs. His girlfriend was actually the one running the business. He was terrible, but he was still light years better than me being terrible. And I realized, “This is a thing I need to let other people do.”
It was so much better when I was collecting $1200 and I was giving him $100 of that or something like that. And I was keeping $1100 and my mortgage payment was probably like $850 or something. So, I was still making some money every single month and I had a person taking care of the problems. And it was my first experience with leverage and seeing how much better it is.

Rob:
Man, obviously, you’re still very active on the force and everything like that.

David:
Yeah.

Rob:
While you’re dealing with these landlord woes, I got to imagine was that relatively inconvenient for you? If you’re out in the field and you’re like yeah, I don’t know, I’m trying to catch a bad guy if you will, then you get a phone call that this is happening on your property? Or was it pretty separated from your day-to-day?

David:
Yeah. It’s not very often that you get a phone call from a landlord saying something’s going wrong when you’re not doing a short-term rental. It’s very infrequent. It’s usually an email like, “Hey, the fence is leaning over. What do you want to do? Do you want to fix it? Should I get a quote?” type of a thing.
What I do remember is that I was so worried about messing up at work, losing my job, not making the probationary period, as you should be when you’re a new employee, that how the property was doing was really not a priority in my life. I just didn’t want to have to deal with it. So, that-

Rob:
Break even was like-

David:
Happy to, yeah. I was like, “I should have never bought this house. I’m an idiot. If I could just break even, this is okay. I’m going to focus on working overtime. I’m going to focus on my career and I’m going to focus on being a better police officer, learning as much as I can. Earning the respect of my peers.” And the real estate thing is just like, “I don’t know what, I’ll figure that out later.”
Which was I think a healthier attitude to have because then when the things didn’t go like I expected, I did not internalize it and say, “I am the problem. I never should be doing this.” Which is very easy to do when you’re new.

Rob:
So, you get this property manager, you understand now, not just leveraging. It’s leveraging your time, right?

David:
Yeah.

Rob:
Well, what happens next? You get into your next property? Are you skittish about that thing?

David:
Super not intentional. My mom calls me and she’s like, “Hey, honey. There’s a house down the street and it’s really nice and it has a cute pool. And I just think you should take a look at it because wouldn’t it be nice if you live closer to home?” And I didn’t tell my mom, but I’m like, “Maybe now that I know how property management works, I’ll get another house.”
So, I go look at the house and this is again a foreclosure. It had been in contract. It had fallen out of contract twice already. I got a different real estate agent working on it. The pool had been completely empty, but it was a nice pebble-tech filled pool with a waterfall. The backyard was really nice. It had this deck in the backyard because it was a two-storey home, off the master suite. I liked the house. It was really nice and it was close to where she lived. And I wrote an offer. I think it was listed at like $230,000. But it had fallen out of contract a couple of times. I wrote an offer at $183,500 and they accepted it.

Rob:
On escrow?

David:
Yeah. And I was like, I didn’t know at that time if your first offer is accepted, you probably wrote too high of an up, right?

Rob:
Yeah.

David:
But I just thought, how do I turn that down if I could get it for $230,000. It’s worth more than the house I already bought at $195,000 and I can get it at $183,000. And it’s in a little bit of a better location. So, I ended up buying a second house at that time. Now, there was a refund that President Obama had come up with where if you bought a house during this time, you get this $8500 tax incentive, so I was getting that on top of it.
So, I bought the house. I got a different property manager company that was better. I still use them to this day that managed that property and it went way smoother. And I’m like, “Oh, I own two houses now.” The bad news is when I filed my taxes that year, I actually claimed it as an investment property like I should. And then I had to pay back the refund because it was only for primary residences.

Rob:
I see.

David:
You don’t know when you’re a new person how this stuff works. But the experience with that house was so much smoother than it was the first time because I had a better property manager that I thought, oh, real estate is not that bad.

Rob:
I think were you just saving up money as a cop? You were making enough money to just buy these houses?

David:
So, this is probably a better part of the story than just the buying of the homes. Because I think when people hear about a real estate investor or they hear about me as a real estate investor, the perception is they’re a brilliant genius when it comes to deploying capital and making the most out of their money and they analyze better than someone else. I don’t actually think that was my strength.
Where I had done well in life was I was very good at saving money. The whole time I was in college, I was working in restaurants and very focused on doing the best I could to make the most money possible. So, you’ll frequently hear me talk when we’re here at this resort about how impressed I am with the attitude of the staff. The person that was making my room this morning was so fast and so friendly and so happy and in such a good mood. You’ re like, “Are you on drugs? Is somebody holding you against your will and making you this happy? How are you so happy to be working?”

Rob:
It’s true. They are phenomenal.

David:
It’s amazing. But I think part of it has to do with this is a very good job to have in this area. It pays better than other jobs. It’s safer. They probably have some form of benefit. And their perspective is, “All I have to do is be nice to the guests and be good at my job. Making a room, cleaning a room, bringing up-”

Rob:
At this nice place.

David:
In a beautiful resort with the ocean view. It could be. So, they have a great approach. I looked at my job like that. “This is so much easier than basketball practice. There’s no pressure on me. This is so much easier than so many things I’ve done. I just have to think fast and move fast and give guests good service.” Being a waiter is the simplest. Now, this was at a nice steakhouse, so it wasn’t like I was at Denny’s. It was a little more challenging than a regular job. But my-

Rob:
You’re at a Sizzler.

David:
Yeah, exactly, yeah. At the TGI Fridays with all my flair. But I remember working harder and being very competitive with all the other staff. I wanted to be the best person at that restaurant. I wanted my boss to like me the most, so I wanted to be able to wait on more tables, give better service, make more money, work longer hours, work more of them. And I gamified that.
A lot of it’s in the book I’m writing for BiggerPockets right now called Pillars, where I tell this origin story of what I did. But what ended up happening, long-story short, is I had a goal of saving a minimum of $500 a week. This is back in like 2004 dollars, 2003. And then I got a better job at a better restaurant after I went through reconstructive surgery in my ankle and I could save even more. I was in college, but I was still working full time. I wasn’t like taking trips to Cancun and spending all my money. I never understood why 21-year-olds think they need a vacation so bad because most of their lives are not that hard.

Rob:
Their life isn’t.

David:
Yeah, that’s exactly right. You’re like mom and dad are paying for college and you don’t really have any responsibilities other than studying for a test. So, I would drive an hour to school, drive back, drive an hour to the best place I could find to work at a restaurant and I would save that money. And when I graduated college, I had my school paid for. No student loan. My car paid off cash and I had over $100,000 saved in the bank.

Rob:
Whoa. When you graduated college?

David:
Yeah, stepping out of college, and that wasn’t like trust fund baby. And also, I wasn’t like in an orphanage. I still had a pretty strong support system, but I made the most out of what was there. So, I came out of college with $100 grand and then I got a job as a deputy.
And I was like, “Well, what do I need to do on the weekends? I don’t have a family. I don’t have responsibilities. I could sit around at home or I could just fart around or I could go work overtime. And I could let some of the older guys that have families get some time off by picking up their shift for them. And so, that’s what I would do. And then I was making good money and saving money.
So, when opportunities came, which was the crash in 2009, 2010, 2011, or you see the house that was under contract for 230, you can get it for 183. I had enough money set aside that I could not only afford to buy it, but I didn’t have fears of “What if I go broke?” And there was more money that was always coming in. It was literally the management of money and the management of myself because that’s what money management is. It’s managing your own desires.
If you can’t control yourself, if you can’t delay gratification, you’ll never be good with money. Those two things are just tied together. And because I was able to do that, I had money to invest in real estate, which ended up growing and I ended up learning how that worked. But that’s why I was able to buy these houses that you’re talking about.

Rob:
That’s great. That is really good because a lot of people are like, “Whoa. Well, what if you don’t have money or it takes money to make money.” And it obviously it’s true in some capacities, but you were a broke college kid and you kept yourself broke by saving all your money. People don’t really ever put two and two together that making money is as important as saving money.

David:
Yes.

Rob:
You come out of college, you have 100 grand, then you’re working on the force, and then you’re working overtime. And now, you buy this first house and you get into your second house. What were the downpayments on these? Were they entry level 5% or were they like the 50%?

David:
No, they were like 25%.

Rob:
Wow, so you were really going. You were really putting a lot of your savings into real estate?

David:
Yeah. It feels it’s a lot of money when you’re that age and you’re dumping them. My first house $195,000 that would have been… what’s 25% of that? It’d be about $50,000, right?

Rob:
About 50.

David:
$50,000 down plus your closing costs. The next one went $183,000. It’s similar numbers to that. The third year my grandma passed away and the family was talking about selling the home. But because at that point my identity has started to rebuild self, “I’m a real estate investor,” not just “I’m a cop who owns a house.” I actually had the foresight to say, “Why don’t we get an appraisal and I’ll buy it from you guys for what an appraisal for. You can save the realtor fees.”
I wouldn’t have thought that way before my identity was shifted that way and I had the money. So then, I bought her property and then I used the property manager company. I had to rent that out. And now, I was this… this sounds weird because we interview people on the podcast so often that are 23 years old with 20 units.

Rob:
I know.

David:
Right?

Rob:
Yeah.

David:
Not the case before podcasts, before internet, before YouTube. There weren’t young kids that were owning a lot of houses. You’d hear these adults that would hear my story, “You have three homes? And you still rent a room from another cop for $500 a month, but you owned rentals.” I ended up having eight rentals before I ever bought a house.

Rob:
For yourself?

David:
Myself, yeah.

Rob:
Wow. So, were you renting at that time?

David:
Yeah, I was house hacking, but on the other end of it, where he owned the house and I would rent a room from him. I didn’t need a whole house. And I was like I’m a young guy. I’m working all the time. I need a bed to sleep in and a place to keep my stuff. I need a washer to wash my clothes and a kitchen to cook food. That was about all that I needed.
So, that’s how I lived. I rented rooms from other cops for a long time. And I got all the benefit of having a big nice house that, and we usually work different shifts, so we weren’t around each other very often. It was very comfortable, but I wasn’t spending $2,200 a month on rent, like the people who wanted their own apartment or wanted their own place.

Rob:
And the landlord or the cop or your buddy, they were probably like, “Man, I’m getting 800 bucks a month.”

David:
Yes, that’s true.

Rob:
And so, that’s my mortgage.

David:
He’s making 500 bucks a month for me. The first guy paid $300 a month for his room and he was just happy to have… he was lonely. He’s like, “Oh, I got a roommate. We get to hang out and talk. We would work out together. And it’s again, if your mortgage, if you bought a house during the downturn and your mortgage was like 1200 bucks, to get 300 bucks was like-

Rob:
It’s big.

David:
Yeah.

Rob:
Dude, my first house, even after I was 20… man, what was it? 2013, 2014, it was really not making a lot of money. I think I was making 40 grand and my wife and I just barely, barely squeaked into a home. I got enough money from my tax return, a couple of thousand, and then I had this guitar amp that I worked so hard. I was playing guitar gigs on sixth Street in Austin, Texas, and I saved up $5000 doing that. It was my dream guitar amp. And I remember being like, “All right, it’s time to get serious.”
I just remembered this couple of weeks ago. I was like, “How did I buy my first house?” And I sold the guitar amp and I got into this house and it was like $1100 bucks a month and my buddy was paying me $400 a month to live with this.

David:
That’s close to half of your mortgage.

Rob:
It was a game changer.

David:
More than a third of it.

Rob:
Yeah. I was just like, I cannot believe I’m making $400 on a room. House hacking is just such an enabler of wealth, I think.

David:
Well, I think the key is respecting money. And what I mean by that is it’s easy to think, I make this much money. I have to work. Money comes in. You spend it on the things you want. Not understanding you don’t actually have to work or you could work an easier job and make less money or a harder job and make more money. There’s a connection between the money that you’re earning and the amount and the quality of life that you may be struggling from.
Elon Musk has a quote that, “The amount of money you earn is in direct proportion of the quality of problems you solve.” If you solve complex, hard, stressful problems, you usually are going to make more money, but your quality of life is going to go down.

Rob:
Sure.

David:
We’d all rather not do hard things if we could help it. So, I had a clear understanding that money is related to me being tired because I worked overtime or not hanging out with my friends or pushing myself when I didn’t want to have to do something or just be in an environment I don’t like, so I didn’t want to waste it. It had an inherent meaning to me. And if I could figure out a way to save money by living with someone else or keeping my money in the bank, I saw that it was empowering.
Now, I did not know that planting these seeds in real estate would grow at the exponential rate they did and put me in a position of being a wealthy person. I had no idea this is how it was going to turn out, but I did understand that you need to respect money and if you’re throwing it around like it’s nothing, you’re not respecting your own time, your own energy, your own effort that you’re putting into life and the people that are supporting you. You’re never going to stop working and you’re never going to have a job that you like.
Now, we share the message on BP, “People, this is how it can work out. You should do this.” But I didn’t understand it was a journey of faith that I was taking. It worked out like this.

Rob:
Okay. That was your third house. It was someone in your family. There was-

David:
Grandmother passed away.

Rob:
Grandmother passed away. And at this point, things are clicking?

David:
Mm-hmm.

Rob:
And then you go into rehabs at this point or are you still just looking?

David:
I bought my first four-plex.

Rob:
So, you decided to multiply your problems times four?

David:
Yeah, yeah, I did. And it was such better cash flow that when I bought that four-plex, I didn’t know what ROI meant. I didn’t understand real estate math.

Rob:
Which means a return on investment.

David:
Thank you for that.

Rob:
Yeah.

David:
I’ve recently figured that out and now, I teach everybody something. I figured out 12 minutes ago. What I looked at, it was like when I did the math on it in my own, on my napkin or whatever, it’s like, “Oh, my God, I can make this money back in three years.”

Rob:
Because this was before cell phone, so we didn’t even have calculators.

David:
The calculators. Right.

Rob:
Yeah, like did on a napkin.

David:
Did it on a piece of paper.

Rob:
Then you fax it to yourself?

David:
And I was like, I didn’t know that was called return on investment, but it was like a 32% return on investment. And I just remember thinking, I’m going to get all this money back in only three years and I’m still going to have the property and the cash flow. This is cheating. How is no one else doing this? Even though I already owned three properties, they probably brought in a total of a thousand bucks a month or something.
That thing, I bought it, every unit was $700 a unit. There was four of them. I immediately bumped the rents up to $800 and it was cash flowing close to what all three of the other ones were.

Rob:
Wow.

David:
And it wasn’t the deal of the century. Yeah. It was listed at 250 or 260, and I bought it for 10 grand, less than that. My realtor that I bought it from, owned it. She had bought it as a foreclosure. I went in and I bought it from her. And I remember thinking, “I’m going to buy as many of these as I possibly can.” That’s when it really clicked and I got intentional about real estate. And this was 2013. And at that exact same time, the California market completely turned around. It took off. You couldn’t buy anything. And I was like, “No, my dream is getting away,” when I had started to figure it out.

Rob:
Dang. So, what was that like? Because I think you said you owned three and then you decided to get a four-plex. That’s a giant graduation, I feel like, to go from three homes to now doubling your portfolio. Were you super excited to get into that? Were you worried? Because this is where a lot of people get in their head where they’re like, “I don’t know if I’m ready to double up quite yet. I’m barely figuring out how to do.”

David:
No, man. It was easier to own that one than the other three.

Rob:
So, you felt that going into it?

David:
Yeah, I didn’t know that. I was just too ignorant to know it was a very big difference.

Rob:
I see. I see. So, you do it and then when you were mathing it out, you mathed it out before you made the offer and you’re like, “This makes a lot of sense.”

David:
Yeah.

Rob:
What comes next?

David:
So, after the four-plex, the market turns around in California. I can’t buy real estate anymore. I spent a year and a half, two years sulking. “I lost my chance. I can’t believe I didn’t figure this out until now. It’s too late to buy real estate. Nothing cash flows anymore.” I finally remember cash flow was just in time to realize I can’t do it.
And I’m watching this commercial and it was like they were advertising some finance thing that caught my attention. And then when the commercial ends, it was on Fox Business News, there’s a real estate agent talking to one of the talking heads of finance about the Arizona market. And her name was Tanya. And Tanya was a big shot agent that was like, “A lot of markets are correcting already.”
I’m like, “They sure are. Sister, preach it. This sucks.” “But the Arizona market really hasn’t yet.” I was like, “Huh?” “We still haven’t come out of our hole. We’ve got a lot of foreclosure inventory. Houses are selling. This is a great investor market.” And all these are key words that I’m listening to.
So, I look her up online. I find her phone number. I start calling her phone every couple of hours for a couple of days. I probably called that number 50 times. Because in my head, a big shot agent is like a celebrity. It’s very hard to get a hold of them. Like you’d think that I was a real estate agent, they’d want your business. She backed now that I am that one.
And I finally got a hold of her and I told her I own some property and I wanted to buy in Arizona. And she sent me some examples of properties and then I mathed them out and I was like, “Oh, the return on these is really good.” There’s somewhere between a 15 and 22% return on all these four-year-old houses. So, I flew to Arizona. I met with her. I got pre-approved with her lender.
I looked at a bunch of houses. I wrote offer after offer after offer. They were all very below asking price and nothing got accepted. And then after my third trip there, she sent me two homes that she had not shown me before, like they just hit the market. I wrote an offer on both. They both got accepted.

Rob:
Did they need any work or were they turnkey?

David:
No, they needed paint. And that was just because-

Rob:
It’s a little bit more than vacuuming the carpet.

David:
Yeah, ut not too much. That’s about it. The person who had lived there had just painted this one room green, this one blue, this one yellow, that type of thing. So, this needed to be painted. And I was like, “Well, which one should I buy? Screw it. I’ll just buy both of them.” And I remember I bought them each for $117,000. And then one of them appraised for 114. And I was like, “Oh, I got ripped off. I’m so dumb. I don’t know. I can’t believe I overpaid. I don’t shouldn’t be doing this. I don’t know that market.”
And so I just remember asking her, “Well, when I buy them in California, I need a property manager. Do you have one?” “Oh, yeah. We have one that works with our office.” “Okay. And I always need a contractor. Do you have one?” “Oh, yeah. We use this guy.” All right. And then she’d already introduced me to her lender and so, I just figured out, “Well, when I have one here, I use this person. I’ll just find one in Arizona.” And what do you know? The contractor of the property manager, the agent, they all happened to know the people that I needed.
Now, were they the best vendors ever? No. But I eventually found the best vendor by bouncing around from person to person until I had a couple of others. And then when I had a really good contractor, I got confident. I’m like, “Okay, I got these two houses rented out, the property manager company is managing them. Everything seems to be going okay.”
But the HOAs there are giving me headache, so I want to find something not in HOA. So now, I’m looking for houses with her again and I’m feeling better and I’m more aggressive. And I’m talking about real estate at work, and I’m intentionally working a lot of overtime to save more money because I want to put it into real estate now. I’m like doing it on purpose.
Finally, she stops accepting my calls. She stops responding to my emails. She goes dark. I call her broker. I can’t talk to you. What is up with this? I find out six months later, she had been arrested for helping the cartels launder money through real estate.

Rob:
Whoa.

David:
And the judge issued a gag order that she was not allowed to speak about real estate in condition of being let out of jail. And I found a video of her walking into court in orange jumpsuit and chains. I’m like, “That’s my person that’s hooking me up in Arizona. What am I going to do? I don’t have her.” So, I called the property manager. He is like, “Oh, yeah. We heard about that.” I was like, “What am I going to do?” He’s like, “I could connect you with another agent.” I was like, “Oh, I guess that-”

Rob:
Yeah, I guess that does make sense. There are thousands of them in Arizona, but-

David:
And that just goes to show when you’re a newbie, it is so common to freak out emotionally over these things that are not a big deal, but they feel like it when you haven’t done it before.

Rob:
All right. This is crazy, man. It’s really good. So, you see this TV commercial and there’s someone that’s like, “Do you need to buy a home? We buy ugly homes. I’m the best realtor in Arizona.”

David:
Yep.

Rob:
“Call me.” Boom, boom, boom. And it actually worked. You’re like, “Whoa, this is crazy. She’s on TV. She’s a celebrity. I got to call her.” And then she actually ends up being good.

David:
Yeah.

Rob:
And then she’s obviously so good that she catches the cartels.

David:
She goes for the cartels, yes

Rob:
That’s right. And then you need to buy more properties and she’s gone. So now, faced with this difficult decision, you have to find another realtor of crazy talk. At this time, you find another realtor.

David:
So, I find the other realtor by late at night working graveyard one night, looking up Arizona houses. I find a website that seems to have more homes for sale. This was called IDX. There was a technology that was new at the time where realtors could have their own website and they could stream what was available in the MLS through their site. This is before Zillow took off, so you didn’t go find a portal to look at homes as much as you would find a website of a realtor and you’d look for homes through their website and then they could see what you were looking at. It was like a sales funnel type thing.
For whatever reason, his name was Joshua Smith that his site just seemed to have a stronger price of rent ratio and nice houses. So, I reached out to Joshua Smith. He ended up being one of the top realtors in the country at that time. And then he connected me with Billy. And Billy ended up becoming my guy and his team, became my go-to Arizona agent. And then Billy helped me buy probably five or six houses in Arizona over the next three years.

Rob:
Billy from realtor that I? Wow.

David:
That’s good old Billy.

Rob:
He’s been around for a while.

David:
He was there. He was A one from Day 1, man. Billy connected me with better contractors. And now, I would look for houses that were really small, like a 1200 sq. ft. house in a neighborhood full of 2000 sq. ft. homes. And his contractor could add extensions to make them bigger. And back then it was like, I mean, literally, you could add a wing of a house for $35,000. Stuff that would cost you a $100,000 today.

Rob:
But wasn’t that crazy though to buy a house in Arizona when you lived in California? Because obviously people have done long distance investing throughout history. But I feel like it’s a way more popular thing now as technology applications.

David:
And that was a book that I wrote.

Rob:
That’s right. That’s what started it all.

David:
So, part of the problem, Rob, was I was too ignorant to know it was risky.

Rob:
I see.

David:
No one was telling me it was a bad idea until I told them I was doing it, and then everyone would say, “That’s a bad idea.”

Rob:
Got it.

David:
And I wasn’t arrogant. I was like, “Oh, my God. I can’t believe I’m doing this. It’s a bad idea.” But I just kept thinking nothing that they’re saying is going wrong. None of that happens. I haven’t been ripped off by a contractor because I just make him send me a video of the work he did before I send him the next drive. I’ve never sent a contractor the whole price for the whole construction that I don’t know right off the bat.
And I always ask my agent who he uses, and my agent is one of the top performing people in the state. He’s not going to give me a bum. He’s probably used these people before. And just all the things that people were telling me could go wrong, weren’t going wrong. And it was hard for me to believe that out-of-state investing was terrible and I wasn’t finding the cheapest market that I could.
I really believed in the fundamentals of Arizona at that time. It was still near the bottom after a big crash and people still needed a place to stay and rents were slowly going up and values were going up. And so, I kept doing it, but what I did have to do was build systems. I could not rely on myself to go fix the problem that was happening. I had to find the person to go do it, which was eventually what made it into Long Distance Real Estate Investing, the first book I wrote is, this is how you build systems and checks and balances to make sure that you’re not getting ripped off in real estate.

Rob:
Did you stop at Arizona or did you continue to buy around the country?

David:
I bought until Arizona was too expensive to make sense to cash flow. Same thing as California. I realized the pattern that coastal markets like the West Coast and the East Coast tend to fly up the highest and then they tend to crash the hardest. And then it’s like this ripple effect that moves inland from there in the middle of the country, nothing ever happens. It just stays static. Stuck in time, like Captain American in suspended animation forever. A couple states in, you got Arizona. Then that market gets too high and you kept moving in.
So, I had the same problem and this time I would talk to people and say, “I can’t buy houses anymore.” I got, what, I had four properties in California and then end up with five or six or seven in Arizona. And I met a guy through Go Buns that said, “My buddy is the VP of something at this bank in Florida. Let me talk to him.” And he came and said, “Hey, they’ll give you a line of credit for a million dollars to buy properties in Florida.” And I was like, “Well, I’ve done it in California. I did it in Arizona. I’m going to go do it in Florida. What do I need? Well, I need these four guys. If I got an agent, a lender, a contractor, and a property manager, my core four, I can figure it out.” And that’s what I did.
I bounced around. I found a couple of agents. I bounced around and found a couple contractors. I found two I liked. The bank in Florida was financing it. The property manager, I bounced around until I had one I liked. And that’s when I really started scale and grow a bigger portfolio.

Rob:
At what point does the BRRRR strategy start hitting with your portfolio?

David:
At this time in Florida. So, I realized at that point I could buy if I busted my butt and worked every day of the week, I could buy maybe three properties in a year. Because I-

Rob:
You’re working overtime, making extra money that-

David:
And just having no life. You’re just working every single day to do that. And I just thought, “I can’t do this forever.” And we didn’t have what was called the BRRRR, but something clicked where I rehabbed a house and it was worth so much more than what I had paid for it. And it wasn’t like a hard money loan. I had just bought it in a normal way. And then after the rehab, my realtor was like, “Dude, you’ve got like $100,000 in equity.”
And I was sitting at work one day and I remember thinking, something clicked in my head. Instead of trying to get money from the police department to go put in houses, what if I took the money out of the stuff I already have and put it into more houses? So, I refinanced that one house. We didn’t call it BRRRR, but I realized if I could add value to every house I bought, I could keep pulling money out and buying more. And that’s healthy because it forces me to buy better houses and add value to houses as opposed to being tempted to buy that turnkey property that’s already perfect and that adds value to it.

Rob:
And it pays those premium, too, right?

David:
Yep.

Rob:
For everybody at home, can you just walk us through the idea of a BRRRR? What is the actual step-by-step process there? Because I know we talk about it a lot, but there are probably a lot of people that are like, “I’ve heard it. I’m too scared to ask at this point because I don’t want to be judged.”

David:
Yeah, it’s an acronym, so the B is buy. My approach to BRRRR, which was the second book I wrote, is that you want to excel at five stages. It’s the only book you’ve ever read.

Rob:
It’s the only book you’ve ever read.

David:
No shit.

Rob:
In real estate. I’ve read other books. I also, I’ve told you I’m a big fan if you give a mouse a cookie.

David:
There’s five stages, so buy and I focus on buying right. How do I buy beneath market value? And how do I buy something that has a potential to add value to it? And how do I buy in an area that I think is going to appreciate more than average? Then you’re going to rehab. How do I a master the rehab? How do I add as much value to the house as I can, increase the rent, increase the value, increase the square footage, increase the appraised value.
Then I’m going to rent it out to somebody else. The n I’m going to refinance it where I’m going to pull the money out. And that’s where you find out if you did a good job buying it right and adding value through the rehab.

Rob:
The bank will refinance it to you because, even regardless of what your debt to income ratio is, they’re applying the rent that you get from a lease, they’re giving you like 75% of that value towards your DTI.

David:
They’re also looking at a new appraisal, so when you bought it probably… at the time these houses, I would buy them for around $60,000. So, I could pay cash for these or I could get a hard money loan. Then I would put around 30 grand into fixing it up, which went a lot further back then than today.

Rob:
Sure, sure.

David:
I’ve got $90,000 in a property. But now, the appraisal that when I bought it for maybe it was worth 60 because that’s what I paid. Now, that it’s been fixed up, it’s worth 120.

Rob:
Then you take how much from that?

David:
About 75%, which works out to be about the 90 that I was all in. So, you’re not always going to be getting your exact 100% of your money out. Sometimes, you get a little bit more, in this case, that’s about $84,000 as you saw. In some cases, you get a little bit less, but it’s close to the amount of money that you’re putting into the property, so it is 90.

Rob:
Yeah, it was 90.

David:
So, in that case, I’m pulling about all the money I put in. Maybe you leave a couple of thousand in there, but man, you don’t have to work much overtime to make a couple of a thousand. It is worth-

Rob:
And it’s a lot cheaper than just doing a down payment on a home, right?

David:
And you get equity built in. I have $30,000 of equity in that property I’ve added to my net worth. So, if I could do that three times a month, I’m adding $90,000 to my net worth every month, but not needing to earn more capital to go dump into more real estate.

Rob:
But how did you do that because you had three houses and then you got to your four-plex and you’re scaling up. But your idea was, “I want to work a lot and I’m going to do three houses a year.” But now, you’re talking about three houses a month.

David:
Yeah.

Rob:
What was that jumping point? Because this, I imagine there wasn’t a ton of education. I mean, obviously, it was possible to do this, but the BRRRR acronym did it particularly exist is what you said? Or like okay, so you were just like, “Oh, I understand this concept in the ether. I’m just going to keep doing it.”

David:
Yes. I just, I saw the pattern in how the thing worked, and I looked at how do I apply this pattern more efficiently without asking someone to teach me exactly what to do step-by-step. So, when I realized, “Well, I only have 30 grand in the bank and I’m going to need 60 to buy the house cash and I’m going to need 30 to put into it, I need more money. Well, if I wait two years, I can save that money up. But then how much money are you going to lose waiting two years?”
So, what I did was I looked. I went to my Arizona portfolio and I found my house where the rent had increased the least, but the value had increased the most. So, the ROE, the Return On Equity was the lowest on that property. I sold it. I probably made 40 grand in equity, plus I got my original down payment back out of it, which was 40 or 50. So now, I’m looking at $80,000 or $90,000 in cash, plus the 30 I had saved up. And I’m capitalized to where now I can go buy a house cash for 60. Use my own cash to fix it up for 30, get to 90. I get the appraisal. The bank that’s going to give me the line of credit gives me 75% of that 120. so I pull out the 90 I put in. I have that 90 against my million dollar line of credit that they’re going to let me borrow the money, so I’ve used up $90,000 out of the million and I can go buy the next house.
And then, so I had enough money that I could do that on maybe two houses at a time, but I kept working, I kept saving. And then I put some HELOCs on some of the other houses I had, so now, I’ve got capital like little bits from everywhere, some money from HELOCs, some money from savings, some money from more work, some money from rents that are coming in, some money from the refinances on my previous ones. And all of that created this really big snowball that got me up to three to five houses a month that I could buy, fix up, and then rehab, pull the money out and buy more.

Rob:
Wow. So, in your story, you just needed to figure out how to fund the first one or two?

David:
That’s the snowball. You get it pulling. And then each house progressively pays for the next one for you.

Rob:
Man.

David:
You can screw it up by buying a bad deal and losing money or losing equity and that shrinks your snowball. But as long as that doesn’t happen, it grows on its own as it rolls.

Rob:
Did you have any of those screw ups in that time?

David:
I had a handful that appraised for less than I thought, but they were balanced out by ones that appraised for more than I thought. I didn’t have any big, big misses.

Rob:
But you still did it really and money was just tied up in the house. Over time, it appreciates. And did that end up canceling out any bad appraisals you got?

David:
Well, I think that the good appraisals canceled out the bad appraisals. I think that the appreciation ended up giving me more money if I wanted to pull out from equity to buy new houses or more houses. The problem was that line of credit went from $1 million to $500,000. The bank changed their mind. They just got nervous about thinking the market was too high. This is funny, in like 2016. They were like, “It’s getting too frothy in there.”

Rob:
It’s getting started. Yeah.

David:
Yeah. So they said, “We can only let you borrow $500,000.” So, I hit a limit of how much I could refinance on this, out of this bank. So, then I would have to take that loan. I would go refinance that with a blanket mortgage of a commercial lender. That eases up my $500,000 limit. Now, I can start my process again and fill up another $500,000 on the bank’s line of credit.

Rob:
What’s the most amount of houses that you flipped in a month, you think?

David:
I rehabbed and pulled money at a five and I probably did that four or five times.

Rob:
Dang, while you were working a full-time job?

David:
Yeah.

Rob:
Were you ever like, “Hey, I got to go. I got a random tip in this neighborhood, I’m going to go check it out. Lots of crime going around.” And then you would just go check out of flip or anything?

David:
Well, no, because they were all out of state.

Rob:
[inaudible 00:53:20]. Yeah. Okay.

David:
Yeah. But that’s where the systems that I put together came from. I realized if the information is presented to me in the right way. It does not take long to look at it, especially if you know have a crystal clear criteria. If you know what you’re looking for, I could just train the agents. I could get a text that would say, “123 Main Street, ARV 120, rehab $40,000. Neighborhood B+ location, and then we can write an offer 80.” And I could look at that and say, “80 plus 45 is 125. ARV is 120. Why’d you even send me that?”
That I’d literally send a thumbs down emoji. I wouldn’t even say anything. And then at the end of the week when I wasn’t working, I would talk to the agent and be like, “Why are you doing that?” “Well, I got so excited. It’s in a great neighborhood.” “I don’t care. The neighborhood’s one criteria. It has to have these other ones. Stop sending me something like that or I’m not going to reply.”
Then she started to figure out, “All right, he’s looking for this number and this number equal this number, and if I get close to it, he’ll write the offer.” Or I might reply back either a thumbs up or a thumbs down or I might say when she had said 80, I’d say, “Offer at 55.”

Rob:
Did she have to provide the rehab budget as well? Because that’s like a big responsibility.

David:
She would spitball. I would write the offer and it would be accepted or not accepted. She’d negotiate it and once, it was accepted, I would then send the property to the contractor and say, “Go walk it. Tell me if you think it’s going to be within this range.” So, I would not take their word for it, but-

Rob:
It’s a starting point.

David:
That’s exactly right. Too many people try to analyze an entire deal before they ever had an offer and there’s no reason to do that.

Rob:
Really? So, you feel like just spitballing is fine on the rehab and then you’re in escrow, then you send your contractor [inaudible 00:55:05]?

David:
Yes, that’s where you verify. You do the same thing with property manager on the rents. You do the same thing with the contractor with the rehab. You send a home inspector to the house and I would try to time it, so the home inspector and the contractor were there at the same time, so that they could be talking to each other. The contractor could point things out to the home inspector. The home inspector could point things out to the contractor.
And they could come back and be like, “Hey, what you asked for is going to be this much, but you’re also going to have to do this.” And then I can take all that information and go back to my agent and say, “Reduce the price by whatever to make it work based off of these numbers.”

Rob:
That’s smart. I do that in short-term rentals, too, where I analyze a deal, but I’m not going to spend like 15 hours analyzing it. Because there’s a high likelihood that I’m not going to get that offer accepted. We know that, especially in the past few years. So, it loosely pencils out.
I put the offer in, they accept it, then I’m really running the cod. I’m doing all these analytics. I’m really making sure that it all pencils out. We do the inspections. We get our repair requests and everything like that, and then we close on the property. A lot of people are so scared to even get into escrow because they feel like they don’t want to spend 15 hours or 15 days [inaudible 00:56:10].

David:
They think asking the person on a date is committing to marriage.

Rob:
Yeah, you can walk. There are so many opportunities to walk away from.

David:
100%.

Rob:
We’re not saying, “Do it.” Don’t be dumb about it.

David:
Don’t date people that you know you’re not going to marry. But if you’re not sure, go on the date to get to know them, That’s how real estate works,

Rob:
Man, okay. I feel like this could be a five-part series. This is crazy. Have you ever talked about all of this on the pod before?

David:
No, not with someone as skilled and naturally talented interviewer as you.

Rob:
This was great.

David:
This is Barbara Walters.

Rob:
Honestly, I didn’t know any of this. I knew like… no, I don’t think I knew any of this. This is all very surprising.

David:
Really cool. Did you know I spoke Spanish before we came to Mexico?

Rob:
No, [foreign language 00:56:48].

David:
[foreign language 00:56:58].

Rob:
[foreign language 00:57:10].

David:
Rob was saying that I sound like a Russian trying to speak Spanish.

Rob:
You do. You have a bit of a… this is not my board accent. Just a little Ironman 2 reference.

David:
[foreign language 00:57:25].

Rob:
That’s good. It’s really hard to mat accent some…

David:
Put two together?

Rob:
… different languages. I’ve tried it. That doesn’t ever work out. But this is really cool because I think a lot of people see, they see how successful you’ve been, how successful you are. You’re the host of the Real Estate podcast here at BiggerPockets, so we assume that you’ve been that way forever. But really, your origin story here is very much what a lot of people probably experienced. Like, “Hey, I bought this. I was scared. I did this. I messed up. I scaled up here. I was jumping into this because I didn’t know any better.”

David:
100%.

Rob:
And then here you are, you’re a pro, because all the things that went wrong is what made you an expert. Not all the things that went right.

David:
And I would add, my success did not come just from focusing on investing in real estate. That was a piece that came later in the puzzle. It is just as important that you pursue excellence at the job you have, that you discipline yourself to live between your means. That you respect yourself, your time and your money when you’re getting into something. And then once you’ve made money and saved money, that you really learn how to invest it wisely so you don’t lose it.
I think people skip to the very end where they want the big home run win of getting the great investment property and they haven’t really built the foundation of saving up money or working a job and pushing to try to make more money. You had so many experiences that I’ve talked to you. Writing copy for other people. Dealing with a boss that you didn’t like, so that you could learn how marketing worked. And now, as a person who runs the program, you do writing copy, understanding sales funnels and marketing. It’s a huge component to being successful.
Even with your real estate, you don’t use real estate as a way to avoid doing the hard work. You use the hard work you’ve built through real estate and you can’t separate them. There’s too many gurus in the space that are not honest with the people that are listening saying, “You don’t have to know anything about life, money, resources, wisdom, delayed gratification. You can just skip it all and just take this pill of real estate and make a bunch of money.” And people will get their hearts broken when they find out it doesn’t work that way.

Rob:
Definitely. I think it’s so great. I love putting all the bad stuff out there. All my YouTube videos are effectively me crying about how my short-term rental business is always popping up with… well, you’ll hear about this more in our Scottsdale episode that will never air, but-

David:
This is when I forgot to hit record, obviously and just talked.

Rob:
That’s right. But I love putting it out there because I want people to be prepared. But I also think that the message here is that you figure it out. If you’re willing to figure it out, you will figure it out. And some people just aren’t, and then they get out of real estate. It’s like-

David:
But they get out of everything. Those are people that just bounce from thing to thing to thing. They end up falling for multi-level marketing. They end up falling for scams. They end up ripping off the people in their lives because they’re vulnerable, because they’re looking for a way to make money that isn’t hard.

Rob:
Yeah, yeah. You got to stick with it, man. Anything requires time, you are going to suck at something. Everything that you start, you’re going to suck, and then one day, you’re going to be like, “I’m okay at this.” And then one day you’re going to be like, “I’m pretty good at this.” And then one day, you’re going to be so good that everyone is like, “Whoa, how are you so good at this?” And you’re like, “Because I sucked for 10 years.”

David:
That’s it. And it’s disingenuous to portray yourself on social media or anywhere else as, “It’s easy, just do this. Just do these four steps and you, too, could have all of this amazing stuff that I have.”

Rob:
I always say this, I think real estate is not hard, but it is hard work.

David:
Yeah, that’s a good to put it.

Rob:
Conceptually, we understand the concepts here. Rehab a house, it appraises. You take the money out. That part isn’t hard, but what’s hard is actually doing it, the hard work. You have to actually put a lot of time and effort into it. So, before we end, I thought we could do our famous four. I don’t remember the questions. They’re not in front of me, but I got some good ones.

David:
All right.

Rob:
All right.

Speaker 3:
Famous four.

Rob:
This is the part of the episode where we ask our investors things about themselves. And question number one, favorite movie that’s not Interstellar?

David:
Favorite movie that’s not Interstellar, I would say is a… I can’t pick one, but I’d throw in the Batman Trilogy, the Matrix Trilogy, Inception or Gladiator.

Rob:
Fantastic. Question number two, favorite brand of shoes.

David:
Puma.

Rob:
All right. Question number three, what is your skincare routine?

David:
I don’t have a skincare routine. Tony Robinson has been telling me over and over and over that I would be much more successful in life if I would actually get one down. My whole body is basically the consistency of the weanest on the back of your elbow. And it’s something that probably does need to change now that I’m in the spotlight more, but I’ve yet to-

Rob:
I have not heard that terms of Friends Season 5. Last question here, where can people learn more about you if they want to follow you on the socials?

David:
Yeah, they should look up David Green 24 on whatever their favorite social media is. And you should check out the website, I have it. It talks a lot about the different things that I’ll be doing, where I’ll be speaking, what events I’ll be having, where you can join a webinar. I do YouTube live every Friday night where we bring people in. Sometimes, we have guests. Sometimes, we just take questions directly from people.
The book that I’m writing for BiggerPockets, you can’t buy it yet because it’s being written, but it’s going to be called Pillars or something like that. I really think that will change people’s lives. It details a lot of the stuff we talked about today, like my story and the stuff I learned at all these different phases of my life. We mostly talked about investing, but there’s whole phases of what I learned working in restaurants or working as a cop or when I went through trying my best at basketball and failing. And not having my career work out that applied to different areas of life.
And my philosophy is that building wealth is a three pillar system. There’s offense, there’s defense, and there investing. If you cannot save money, it doesn’t matter how much money you make, you’ll never be wealthy. You’ll just lose it. If you’re very good at saving money, but you cannot make money, you will be grinding your entire life and never being satisfied.
If you’re one of those people that’s like, “I live off of $12,000 a year, but I make my own soap and I wear the same socks every day and I wash them by hand,” you’re not getting the most out of yourself. And then if you’re good at making money, you’re good at saving money, you’ll die with the big savings account, but never have passive income, never have exponential growth, you have to build to invest the money.
And I’m passionate about encouraging people to deal with the hard things in their life that stop them from in saving money or stop them from making more money. You got to be good at all of it. And when you are real estate investing, it becomes much more natural.

Rob:
Well, I’m excited to read my second book. I’ve got it slated. I got it slated for-

David:
It’d be dedicated to you.

Rob:
Well, you can find me at Robuilt on YouTube, Robuilt on Instagram. And I’m throwing my first ever convention Host Con in Houston, Texas, January 8th through 10th. If you want to learn more about that, go to hostcon.com. I’m excited. I’m putting everything I have into this and it’s going to be pretty epic. So, find me on YouTube on Instagram and I’ll be talking about that.

David:
Maybe I’ll do one of those. I’ll call it the Greene Screen or something.

Rob:
That’s screen is Greene. I don’t know. I don’t know.

David:
We’ll have to think.

Rob:
Yeah, we’ll think about it. The Greene, man, I don’t know why are you’re doing this to me right now? You know I like to riff on this stuff. All right. Please, do it. Invite me.

David:
Yeah.

Rob:
I’ll get to your head.

David:
Yeah. And you can speak to mine and-

Rob:
Fantastic.

David:
You did such a good job interviewing me today. I have to, now.

Rob:
Awesome. Now, I want to do more of these. We need to fly out once a month to do these in-person ones, but okay. Well with that… oh, don’t forget to leave a five-star review and leave us a comment on YouTube. If you like this type of style interview where it’s just us bro-ing out, chatting about our real estate journeys and trying to teach us something and make it relatable and approachable, then let us know in the comments down below, in a five-star review on Apple Podcasts.

David:
Yeah. We’ll wrap this up. Thank you very much. You did a great job. This is David Greene for Rob, Barbara Walters, epi solo, signing off.

CNBC’s Diana Olick and Andy Walden, VP of enterprise research at Black Knight, join ‘The Exchange’ to discuss mortgage rates coming down, weak mortgage rate demand, and the impact the Fed decision could have on the housing market.

Whether you’re an aspiring entrepreneur or you’ve recently opened a business, you’re likely thinking about all the skills you’ll need to make your business thrive. While different types of businesses will require different skill sets of their owners, there are several skills that are universally useful across the small-business landscape.

To share a few of their top picks, 10 members of Young Entrepreneur Council sound off below. Consider their recommendations if you’re looking to improve your leadership skills and better manage the day-to-day operations of your current or future business.

1. The Ability To Sell

The cornerstone of sales is building relationships with your audience. You might have a winning product that solves a problem, but if you cannot communicate the value and build a relationship, you will not win business. Every conversation you have with your teams and with your clients should build stronger relationships. They are not always going to be pleasant, but that does not mean that they do not strengthen a relationship. – Matthew Capala, Alphametic

2. Marketing Skills

Marketing is the most important skill for small-business owners to have. It’s important because it allows you to reach your target audience and convert them into customers. You can always delegate product development, customer service and other tasks to employees, but it’s important for small-business owners to have a strong understanding of marketing so they can be involved in the decision-making process and make sure their company is headed in the right direction. – Syed Balkhi, WPBeginner

3. An Awareness Of The Customer Experience

Having an awareness of the customer experience is high on the list of useful skills for managing day-to-day operations. As you focus on the entire “experience” of your client’s journey, you are able to better understand how your employees also play their role with the client. This is extremely important to show how your clients feel when they interact with your company. Most people make decisions based on emotions, so if your clients feel good, supported and have trust in you and your team, then there’s a higher chance that your clients will be back to work with you over and over again. – Racquelle Pakutz, Zen Freight Solutions Inc.

4. The Ability To Manage Finances

One skill that all small-business owners should have is financial management. This includes understanding financial statements (such as a balance sheet, income statement and cash flow statement), creating and managing a budget and being able to make informed financial decisions for the business. Financial management helps business owners identify and address financial challenges early on. This is essential for projecting the long-term financial stability of the business. By understanding their financial position and being able to effectively manage their financial resources, small-business owners can better navigate the day-to-day operations of their business and set themselves up for success in the long run. – Michael Fellows, Solidity Beginner

5. The Ability To Delegate

The art of delegation is so important for small-business owners. When you have a small team, there can be a temptation to do too much yourself because everyone is working in multiple roles and you don’t want to overload them. But recognizing your team’s strengths and assigning tasks accordingly will make everyone’s lives easier. If the right people are tackling the right tasks, you can ensure everything is completed in a timely manner and no one is held up waiting for something because it got lost on your to-do list. – Diana Goodwin, MarketBox

6. The Ability To Read People And Situations

It’s easy to imagine what happens to a business when you hire the wrong people over and over again or when the team is constantly dealing with unnecessary drama. You can avoid this, though, if you learn basic psychology. It’s essential for running a successful organization and especially for managing day-to-day operations because it affects everything that you do—from hiring to solving problematic situations. If you can “read” people well, you can tell what motivates them, you can feel when someone is not living up to their potential and you can identify why. You also don’t have a problem initiating uncomfortable discussions. – Samuel Thimothy, OneIMS

7. Problem-Solving Skills

Every business owner should know how to solve problems. The type of problem doesn’t matter. Those who know how to solve a problem can use those skills in any situation, whether it’s an employee dispute, a distribution issue or a technical malfunction. Knowing how to solve a problem involves being creative and thinking outside the box. It can stretch your capabilities at times, but those who know how to do this will always be successful. – Baruch Labunski, Rank Secure

8. The Ability To Manage Time

One skill that all small-business owners should have is effective time management. This skill is useful because it allows business owners to prioritize tasks, focusing on the most important and urgent tasks. This can help them be more productive and efficient. Good time management can also help business owners reduce stress and avoid burnout, which can be common in the fast-paced world of entrepreneurship. By being organized and focusing on the most important tasks, business owners can ensure that they are making the most of their time and working toward their goals. – Renato Agrella, Acerca Consulting

9. The Ability To Systematize

In order to get any task off your plate as an owner, you need to be able to create a process, communicate the reason why it is done this way and then eliminate 80% of the decision making that goes into the task. We have a service where we review a client’s accounting file for opportunities to better use the software. In the past, only our most senior consultants were able to perform this task effectively. We have documented the processes so much—with detail on navigation and understanding the “why” of each step—that this is now something our interns learn how to do when they first join us. They don’t present to the client yet, of course, but they do all the leg work. This frees up time for our more senior consultants to provide solutions and get creative instead and paves the pathway for our juniors as well. – Marjorie Adams, Fourlane

10. The Ability To Listen

Successful small-business owners excel at listening to their customers, employees and investors. Strong leaders understand that despite their knowledge and experience, there are things they don’t know. Instead of walking around with a sense of superiority, true leaders listen to the people around them whenever they need to make a decision that will impact countless others. This skill is helpful because it allows you to take in other points of view and life experiences when you make key business decisions. – Chris Christoff, MonsterInsights

Ashley:
This is Real Estate Rookie Episode 257.

Tony :
Something else to think about, Lawrence, as you’re submitting some of these offers is to give the sellers different options. For example, we’re trying to buy a hotel over the summer and we gave them different options on the seller finance deal that we were putting together. One had a higher price point with slightly higher interest, but a lower down payment. Another option had a higher down payment, but then the other terms were a little bit more favorable for us. I think if you want to get to where you’re putting down no more than you said 15% or 7% based on what Pace said, offer that as another option. And maybe even if it’s a slightly higher purchase price, it still works out better for you because the down payment’s going to be smaller.

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’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today I want to shout out a very special person from the Rookie audience. This person goes by the username, The Handyman 317, and Handyman left us a five-star review on Apple Podcasts that says, “Thank you!” With the big exclamation mark. “Definitely one of my favorite weekly podcasts. I’m a contractor and I set a goal to start investing in 2023 for myself after listening to your podcast. Well, listening to your podcast weekly, I gained my confidence and already finished a flip and bought a duplex to hold on all in 2022. I appreciate the service you guys provide, and thank you so much for helping me reach my goals. So much free knowledge on this show.”
Handyman 317, kudos to you for listening and taking advice and taking action, man. That’s the biggest piece. So, if you guys haven’t yet left us an honest rating or review, please do. The more views we get, the more people we can help. The more people we can help, the more stories we get like Handyman 317. Ashley Kehr, what’s up? How are you?

Ashley:
Good. I got two closings today that I’m excited about. I’m selling a property.

Tony :
Busy day.

Ashley:
And then I’m actually using the proceeds to pay off another property.

Tony :
Isn’t that how it goes?

Ashley:
Yeah, I like to keep a couple free and clear, so just transferring some money over. And then I’m actually closing on a refinance for the A-frame property I remodeled.

Tony :
Let’s talk about that just really quickly. You got the refi, right? Refis have dried up tremendously, almost no one’s doing a refi right now. Can you share what’s the reason behind this refinance and why you have to do it right now?

Ashley:
Yeah, and actually the process has been so fast, I can’t believe it compared to trying to refinance the last two years-

Tony :
Last year, yeah.

Ashley:
… when lenders had to bend over lots of people wanting to refinance. But yeah, so I had purchased the property with hard money and my hard money isn’t due for, I think two more months, maybe. I rehabbed it, I used cash to actually rehab the property and now I want to pull my cash back out and we’re going to pay off the hard money lender today. We’re going to refinance with a small local bank. Then we’re just going to have our fixed trade. It’s going to be over 20 years amortized and fixed rate for five years.

Tony :
Yeah, that’s awesome.

Ashley:
And it’s at a 7.4% interest rate.

Tony :
That was my next question, which isn’t terrible, right?

Ashley:
No, no.

Tony :
I’ve seen definitely worse than that. Cool. I’m excited. A-frame’s almost done. That’s like the last step for everything, right?

Ashley:
It’s done. It’s done. Yeah.

Tony :
Yeah, that’s everything.

Ashley:
Yeah, it’s done. Yeah.

Tony :
Cool. Well, there you go. Well, we got a good show for you today. We got our mentees coming back on, so you guys get to hear a quick update from Brandon, Lawrence and Melanie and each one of them is kind of in a different phase and we dig into what each person is struggling with. Brandon, I think, and we talk about this a little bit, the biggest thing holding him back is just fear. And he kind of led into that by just saying he’s fearful of what could happen if he does keep moving forward with this. You get to hear us break that piece down. Lawrence was a man on a mission the last couple of weeks. He did a whole bunch of stuff, so we get to hear what Lawrence was up to you. But Lawrence was a little stuck on how to structure some of these offers that he’s putting out to folks, so we kind of walked through that. And then Melanie, she had a bit of a panic attack with her investing situation, so we break through-

Ashley:
She’s very relatable to me.

Tony :
Yeah, totally, right? And she talks through how she had a freakout moment and how she walked herself off the ledge and how she’s now moving forward with some confidence, and Ash and I give some advice on what we feel she should be doing as well. Each person kind of in a different situation, but hopefully each one of these stories helps our Rookie listeners know that there are other people going through the same things that they’re going through as well.

Ashley:
And if you guys haven’t already, please hype up our mentees in the Real Estate Rookie Facebook group because they’re out here sharing it all with you guys. And sometimes that’s hard to do, especially as a new investor, very unsure is admitting what you don’t know and how you’re feeling about investing. Make sure you guys are hying them up and give them tons of encouragement as we go along for the next 90 days. Brandon, welcome back to the Real Estate Rookie Podcast. How have you been?

Brandon:
Good. Good to be back while braving the cold up here.

Ashley:
Why don’t you tell us a little bit about what you’ve been up to since you were last on.

Brandon:
Since last time, I’ve definitely gotten more narrowed down on the buy box and analyzing properties. Went and walked through a lot more houses, just adding more consistency and just seeing what’s out there for the price points I’ve been looking and just getting more of a feel for what’s been out there, looking at everything that’s new to market.

Ashley:
Did you put together an offer on any of those properties you analyzed or looked at?

Brandon:
No written offers yet. Been working on one that I walked through and just wasn’t really interested at the price point and condition of the property. But they’ve actually been emailing back just wanting us to offer anything or whatever we’re thinking, because it sounds like it’s sitting still and put feedback’s been about the same as mine was.

Tony :
One call out Brandon. You said that not interested at the price point and the condition, but what that lets us understand is that there probably is a price point at that condition where that property makes sense for you. And I think that the challenge from Ashley and I is figure out what that price point is and regardless of what they’re asking, just submit the offer at that price point.
There was a property that I actually just got under contract less than 24 hours ago. I had initially submitted my offer and it was significantly below asking, and the buyers didn’t even counter, they just flat out said no. Then they came back to me last week and said, “Hey, Tony, will you meet us in the middle?” And I said, “No.” Then they came back to me less than 24 hours ago and said, “Okay, fine, we’ll accept your offer.”
So that’s kind of where we’re at in the cycle right now is that as the buyer, even if you’re asking prices significantly lower than what they’re asking for, and obviously this is going to vary by the market, but a lot of times if there’s not enough interest, especially if the condition of the property is not super turnkey, it gives you more leverage as the buyer. So I would say submit that offer, whatever price makes sense for you. Even if they say no today, there’s a chance that that property’s still on the market 14, 30, 45 days from now, now they’re going to come back to you and say, “Hey, Brandon, your offer looks a whole lot better now.”

Brandon:
Nailed it.

Ashley:
What are some other things that you think are holding you back from getting the next deal?

Brandon:
I guess biggest thing is just I haven’t been writing offers on stuff. I need to sit down and work backwards from what it needs and find that purchase price to offer on, even if it’s well off what they’re asking and not be worried about just ticking them off, I guess.

Tony :
Ashley, let me ask you a question, Ash. Have you ever submitted an offer that was so low that the seller said, “I don’t care what your next offer is, I don’t ever want to hear from you again?”

Ashley:
No, I’ve never had that bad. It was more of just no response, that you didn’t say, “My seller isn’t going to even acknowledge that offer.”

Tony :
But had you come back with a different offer, they probably would’ve acknowledged it, right?

Ashley:
Yeah. Oh yeah.

Tony :
Yeah. Maybe it’s happened somewhere, but I’ve never personally met an investor who said, “You know what, Tony, my first offer was so low and I offended the seller so much, they refused to listen to any other offer that I had after that first one.” I think a lot of new investors have this fear around pissing off the seller and them being offended and all these other things, but at the end of the day, if you give them a number that makes sense, they’re going to look at it. Don’t try and make that decision for the seller. I think the bigger thing for you, Brandon, is to do the numbers, figure out what works for you, and then put the onus on the seller to decide if they should be offended or not from there.

Ashley:
There’s so many times people make those lowball offers where they work, the seller accepts it and it’s like, oh my gosh, I didn’t expect that, but yay, they accepted my offer. You never know the reason for somebody selling and money may not be a reason at all, or maybe they don’t understand what the value of their house is or it’s just convenience to sell it to the first person that puts an offer in. Keep putting together offers and submitting them. And then if you’re putting in an inspection period, it’s giving you that second chance to go through the property and make sure your number’s correct too.

Tony :
Yeah, I think one last piece of advice, and this is, again, something that’s happened with me on a deal that we’re working on right now. We’re trying to buy some land to build our primary residence. We want land. Land is super limited where I live in California, super, super rare. And I’ve been talking with the agent who listed the land and same as you, he was like, “Oh, the seller doesn’t want to entertain that offer.” But I kind of got the feeling that the agent wasn’t even presenting my offer to the actual owner.
So what I did is I looked up the land, I traced owner’s contact information. I called them myself last week and said, “Hey, my name’s Tony. I’ve submitted a couple offers. Has your agent even shared my name with you?” The seller was like, “I don’t know. It doesn’t sound super familiar.” So what I’m gathering is that my offer was so low it didn’t quite fit with the agent’s needs, but I talked to the actual owner of the property and now he and I have a very open dialogue and he’s actually open to the offer that I presented. So, if you do feel that you’re getting a little bit of that, sometimes you might have to circumvent the agent to talk right to the owner.

Ashley:
And then, Brandon, when you’re looking at a property too, think about other ways that that property could generate income where maybe you can increase your offer a little bit. If it has a garage unit, can you charge an additional amount of rent for the garage? Maybe if there’s a huge parking lot, can you charge somebody to park their RV or their boat there over the winter? Things like that. Try and find different ways to increase the income or maybe if you’re looking at a property that’s going to have multiple residents in it is having a coin-operated washer and dryer in the basement or somewhere on the property, too, and make some income off of that too. Try and think of different ways to generate income off the property.

Brandon:
Okay.

Tony :
Brandon, one last question for you, man. When you think about submitting those offers, is it more so fear around what the seller’s response might be like? Is it that you’re analyzing a bunch of deals, but you’re just afraid to submit the offers because you don’t want to upset the seller? Or is it that you feel like you’re not analyzing enough deals to begin with? Which one of those issues do you think is a big one for you right now?

Brandon:
I do think it is out of fear of rejection, like you had said, or it getting accepted and then wondering what it didn’t account for type of thing. Or even having multiple offers that aren’t high probabilities and having both of those accepted.

Tony :
All right. Let’s break down both of those. Let’s break down both of those. Your first one was, what happens if they accept my offer, but there are things that it didn’t account for? Just walk through, what do you think you would actually do in that situation? Say that someone accepts one of your offers and now you’re in escrow, you’re during your due diligence period. What steps can you take to make sure that those unknowns get accounted for somehow?

Brandon:
I guess biggest things would be roofing inspectors and contractors to look over things and make sure the numbers I was estimating or planning for are at least close.

Ashley:
One thing you can do is put in a longer due diligence period, so a longer inspection period and ask for multiple times to have access to the property. Instead of having one inspector come in, if you want actual contractors to come in and bid it out, if you don’t think you’re going to be able to get them all right there at the property, same day, same time, then extend out in your contract, in your initial offer, put in a longer period of time and ask to have access as needed to the property, maybe with 24 hours notice if there’s tenants in place, or even the homeowner living there.
That way you can schedule out, okay, over the next two weeks, have the roofing guy coming this way to give me an estimate. I have these other contractors coming in to give me estimates on Thursday and go through a process like that. Then you’re going to get those hardball estimates. And just before you bring the contractors in, when you’re scheduling them, ask them, too, what their turnaround time is on an estimate to make sure that they’re going to get you the information back, too, before that due diligence period is up too. And you probably have a lot of contacts from your business too, from your work.

Brandon:
Yeah, like-

Ashley:
You probably run into a lot of other vendors.

Brandon:
Yeah, that’s numbers that I’m 100% sure, because I did them.

Ashley:
But even, too, do you run into other contractors on jobs or things like that or even your employer, he probably knows other people in different specialty skills, too, that he could connect you with.

Brandon:
Yeah, I’ve made decent friends in basically all the big trades.

Ashley:
That’s a huge advantage.

Brandon:
But not so much cabinets or a contractor overall.

Tony :
Yeah. And then, Brandon, the second thing you mentioned was what happens if you get two properties, two offers accepted? And it’s a reasonable concern to have because I think when you haven’t done your first deal, the idea of getting two at one time is like, oh my god, what am I going to do with that? But just say you were in that situation, what options do you think you’d have?

Brandon:
Trying to come up with the money a different way, see if seller financing is an option for them at all. Because the summer when I did a couple offers, but I would always wait to hear and then with how last summer was the other properties I was interested in were already gone before I heard back on the first one.

Tony :
So if you’re ever in a situation where you have two properties under contract or two offers accepted, first thing is that I would try and do whatever I can to close on both of those deals. I would try and look for a partner. Your idea of the creative finance is another great solution. But say for whatever reason you realize you can’t take both deals down, all you have to do is look at which one of those two deals you like more and then walk away from the other one. If you have a property that’s under contract or that you submitted an offer on a property and it comes back, as long as you’re not submitting your EMD and kind of kicking off the escrow and title process, you can still walk away from that deal. So, don’t feel like you’re automatically obligated to closing that deal. Most sellers, I think would understand like, “Hey, sorry, I had another offer that came in that was accepted.” And I think they would understand that is a legitimate reason to not move forward with that purchase. Don’t be too concerned about that piece.

Brandon:
Okay.

Ashley:
Tony, what do you think that Brandon’s next step should be? Do you think we should have him write some more offers, kind of get over that hurdle?

Tony :
Yeah, I want to see one lowball offer submitted by Brandon between today and the next time we speak.

Ashley:
Okay. And work in that inspection period, if that’s going to make you feel more comfortable. But I think that there’s some kind of fear holding you back and I mean, it’s completely legitimate like, what if I don’t run the numbers correctly or what if I don’t account for something? But that’s why you’re going to have your due diligence period to really break down everything and make sure that that’s the right number for you. And, of course, you can’t protect against everything, so make sure that you have whatever you’re offering on, it’s still going to leave you some reserves even after going in and doing some rehab if necessary too.

Brandon:
Okay.

Ashley:
Think you can handle that, Brandon?

Brandon:
Absolutely.

Ashley:
Okay. Well, thanks so much and we’ll see you in a couple weeks.

Brandon:
Yeah, appreciate it again.

Ashley:
Lawrence, welcome back to the show. Can you tell us what you’ve been up to the last couple weeks?

Lawrence:
Yeah, of course. I was able to do my homework, which consisted of watching those two amazing episodes with Pace Morby. I was able to get a good introduction to creative financing with subject two in seller financing. I’m more of leaning towards seller financing, because right now sellers still have a good amount of equity in their properties, especially in this area. Pace associated seller financing with gain, what does the seller want to gain since he or she may already have the equity in the property?
My biggest hurdle is not falling into analysis paralysis just because I do like to research different concepts. I have started to go onto the MLS listings for rentals and what I’ve started to do is that any rental that has been listed for over 30 days, I am trying to find the owners of those properties. I feel as though two things are happening in that situation. It’s either a landlord who is tired of being a landlord or they are not local to the area and they’ve handed over their property to a property management company that’s either not doing what they’re supposed to be doing or they may be overpricing a property.
I was playing Inspector Gadget and I was able to find one seller because there are a few right now that’s on market. It’s not a ton of aging rental properties on the market and I had to dig, because it was listed with a realty company and so I had to go to the county’s website and find the seller. Anyway, I got the seller’s phone number and email. I reached out to him and he said that he’s on vacation, so to try to get back to him in the middle of January. So I’m like, okay, well, at least I was able to contact him, and then he also lets me know that he’s on vacation and he has a property that’s listed for over 30 days. He may be inclined to selling the property because he’s not worrying about it cash flowing right then and there.
Another thing that I did was I reached out to a previous owner of a property that’s down the street from one of my rentals. He is about to rehab a property and he usually will either turn that rehab into a rental or he will sell it to a retail buyer. I reached out to him and say, “Hey, I’m interested in getting another property with doing seller financing. Would it be something you’re interested in doing?” He said that he would give back to me. So I’m like, okay, I’m tired of the, “I’ll get back to you right now,” that’s promising. I went back to the MLS.
I did find a new listing that hit the market that’s listed for seller financing. I contacted the realtor. However, I’m not too keen about the terms. Right now that particular property, they want 10% interest, 20% down payment, a minimum hold of three years, and a payment penalty that has not been decided. Because I normally buy single family homes, not owner occupied, I usually put down about 15% and then when you add in the closing cost, it kind of goes up to 20%. So I am going to revisit to see if I can maybe do an alternative offer. I’d rather not put 20% down on that particular property. If it still cash flows with the 10% interest, I don’t mind, and I don’t mind the three-year hold because I am into the long term.
But from my homework with Pace, he prefers not to put down more than 7% on properties that are seller finance. And one of his biggest things that he’s keen on would be to always cash flow. That has been what I’ve been up to. Again, I’m doing my research, but I want to continue to take action. My biggest next step, my biggest means would be to have a living document, a Google Document where I have a sheet for aging rentals that are over 30 days. There, I listed a sheet for properties that are on the MLS listed for sale for over 30 days. And I am just going to have to put the work in to contact those sellers and see what I can make happen.

Ashley:
Lawrence, you’ve been busy. This is great. The first thing I want to say is those terms on the seller financing, I mean, a bank’s terms right now are going to be better than that. You’ll give less than 10%.

Lawrence:
Exactly. And it just hit the market. And I mean, it is turnkey ready. What I understand from their property is that it was a flip that won’t sell right now. Because the very first thing that the realtor said was, “Hey, we have different terms for a retail buyer and an investor.” And so I was like, “Okay, well, what’s the terms for the investor?” And those were the terms, and I just was like, mhm.

Ashley:
I think maybe what they’re going after is probably somebody who has bad credit potentially and can’t go to get the bank financing. Because that’s actually my one business partner. When he bought his first house probably eight years ago, maybe 10 years ago, I don’t even know, he bought it from an investor who basically bought houses and seller financed them to people who had bad credit and would charge them… He paid a 10% interest rate and then when he built his credit back up, he went and refinanced out of that loan.

Lawrence:
Exactly. Now that’s why I probably will have another conversation. Right now I’ve worked hard where I’m not in that situation, I’m not going to mention my lender’s information because this is not sponsored, but I can easily be underwritten by almost any lender. All of my properties cash flow, I have a low debt to income ratio, I have great credit, so I want something that’s going to beat bank terms. I’m not going to put down more than 15% if I can go to a lender and do that with about a 8% loan. I definitely would have to get something very competitive if it’s going to be sellar financing.

Ashley:
Yeah, I think you even said it yourself is to go back and put in an offer with different terms. It’s not going to hurt anything, especially if they tried to sell it already, it hasn’t sold. I would put in lower than what the bank would be able to offer you. Even go with Pace’s advice and just do 7% down. I mean, they’re going to hold onto your offer. So if they don’t get anybody else, I mean, you may be their only option.

Tony :
But I think one of the reassuring things, Lawrence, is that you’ve already found a seller who is at least open to that idea. So there’s some proof of concept there that this path you’re going down could end up working for you. It’s just, okay, now how do we get the right terms? You said you’ve been looking at the rentals that have been aging. Have you looked at all at properties that were listed for sell, but that didn’t sell? So like on PropStream there’s like a failed listing filter that you can look at. Have you explored those at all?

Lawrence:
That’s my next list that I’m building, per se, that I’m going to be looking at. I started with the rentals first, but yes. So like I said, I’m going to have that living Google Drive Document or something of that nature where I have one sheet that lists all of the aging rentals and then another sheet that will list all of the aging properties for sale. And I do have another realtor that I’ve reached out to, and I’ve pretty much told that realtor if she’s able to bring me a seller finance deal that I would pay her commission on it.

Tony :
Because I think that bucket of owners, they might be even more open to the idea of seller financing because they just tried to sell the property and they potentially did it unsuccessfully, so they might have a little bit more motivation to go out and do that. Second question for you, Lawrence, are you looking just in the same market that you’ve been investing in or are you open to maybe more remote markets as well?

Lawrence:
Right now, I would say that my risk tolerance is more of where I’m local to, especially because I am a self-managing landlord, so my properties right now are within a mile of each other. That definitely cuts down on maintenance where I can have one local roofer and one local plumber to be able to get there and then me towards prospects and lease them out. As of right now, I want to do at least probably five to seven deals where it’s really local. This would be my fourth deal, hopefully, by the end of this mentorship program. Right now I’m wanting to stay local to my area, kind of dominate and monopolize this area.

Tony :
I love that approach. Yeah. I think maybe just looking at some of those fail listings through PropStream or you can go on Zillow or wherever and manually pull that, but that would probably open you up to a few more owners that might be open to seller financing.

Ashley:
There’s also the website landwatch.com. Have you heard of that, Lawrence? Pace uses it a lot too, and there is over 12,000 listings right now that already say that they’ll do seller financing on LandWatch.

Lawrence:
Wow. Awesome.

Ashley:
So, that’s a great resource starting point too.

Lawrence:
Great, thank you.

Ashley:
Okay, so what do you think is the next step for you?

Lawrence:
The next step would be, like I said, I will reach out to that realtor to see if they would be inclined to a different offer. And if I have to do a mailing campaign-

Ashley:
I think don’t even ask. I think just put it together.

Lawrence:
Just put it together.

Ashley:
Just put it together.

Lawrence:
Okay.

Ashley:
Because the agent can say, “Oh, no, I don’t think they’ll go for that.” But once you’re given the offer, the agent is ethically responsible to, even though Tony had told us a little situation where he didn’t think his offer is getting to the seller, but most agents have a moral responsibility to submit your offer to the seller. So, I think if you ask beforehand if they’re open for an offer, you’re asking the agent what they think and they’re giving the response, not all the time, but this way your offer is getting right in front of the sellers and they’re making the decision.

Lawrence:
Great. So I will submit an offer to them and then I build my list and, like I said, if have to do a… I like to try to find their phone number or email and call them, but if I have to do a mailer campaign, I will. And I will also follow up with those two other landlords who said that they possibly may be interested in selling one of their properties.

Ashley:
One thing just to remember, too, is that even if they say no or you get no response now, months down the road, they could come back to you. I sent mailers out a year ago and I just got a call in… So it was December, I think everybody got them December 23rd of 2021. And this past October, I got a phone call again from somebody who said he got the mailer in December, he was ready to sell now. It just goes to show that people will hold onto your mailers too.

Lawrence:
I definitely like that concept because I’m a huge advocate of networking. Just because it’s a, “not right now,” it doesn’t mean it’s going to be a never end because this area has been monopolized by just a handful of landlords. I’ve started to build a really good name where I’ve worked with two different sellers where I’ve put together off-market deals myself. And so now these local title companies and inspection people are like, “Lawrence, that kid knows what he’s doing. If he says he going to do it, it’s not a matter of if, but when.”

Tony :
I love that. And just something else to think about, Lawrence, as you’re submitting some of these offers, and this is something Ashley talks about a lot as well, is to give the sellers different options. For example, we’re trying to buy a hotel over the summer and we gave them different options on the seller finance deal that we were putting together. One had a higher price point with slightly higher interest, but a lower down payment. Another option had a higher down payment, but then the other terms were a little bit more favorable for us. I think if you want to get to where you’re putting down no more than you said 15% or 7% based on what Pace said, offer that as another option. And maybe even if it’s a slightly higher purchase price, it still works out better for you because the down payment’s going to be smaller. So just play around with different options. Don’t feel like you only have to give them one when you do submit those offers.

Lawrence:
Awesome. I greatly appreciate the feedback.

Ashley:
Well, Lawrence, thanks so much for coming back on with us. We always love having you on and just your energy and it motivates us to keep going and keeps us excited. So, we appreciate that.

Lawrence:
Thank you. I can’t stop. Won’t stop.

Tony :
There you go.

Ashley:
Yeah, awesome. We love to hear that. We’ll check back in with you in a couple weeks.

Lawrence:
Awesome.

Ashley:
Melanie, welcome back to the show. Thank you for coming on again. Can you let everybody know what you’ve been up to the last couple weeks?

Melanie:
Sure. Yeah, thanks so much for having me back. Good to see you guys. It’s definitely been an eventful couple of weeks I would say since we last chatted. I was really looking a lot at Florida and deep diving into just a very specific area and really had my heart set on that. But following our discussion, my homework was to look at some other areas, do some exploration of other locations, and then also to submit some offers. I would say that I jumped into looking at other locations pretty immediately. I thought just like, okay, what else am I somewhat familiar with? What do I know about, to Tony’s earlier recommendation, some of the tourism draws or some of the reasons people would come to an area?
And so I started looking in St. Louis and Kansas City because I felt like those might be areas that might be not the first location you would think of, but also had some potential. Pretty much right off the bat I could see that there were places in my price range, but I was getting a little bit more freaked out about occupancy, just seeing that almost 90% of the Airbnbs I was looking at had zero bookings for anywhere from two to three upwards of six months out. And so I was just kind of doing a little questioning of, okay, is this the market? Is this the particular area? Is it that the draw to these areas is just slower right now?
So I started to get a little bit of cold feet and I started to think, okay, I’m exploring a couple areas, I can definitely look into a few more, but am I really going the right route here right now with an STR? And randomly I had this opportunity pop up in Denver and it was like a multi-family that just had all of these shiny things about it that I was so excited about. I kind of went down that rabbit hole a little bit and I won’t get too sidetracked, but ultimately I wanted to refocus and recenter myself. And so I went back to looking at some other locations and on the forums actually I found a realtor that was talking about some unincorporated areas in Savannah and it just looked really appealing to me.
And so I started poking around a lot and found some things about Savannah I really liked and some beautiful properties and a really great price point. I’ve chased that a little bit more. I’m working with an agent, he’s sending me some listings. I got pre-approved for hopefully a 10% down, but 10, 15 or 20% down payment. Basically I feel really excited about Savannah. I feel like there’s a lot of opportunity. I started making a spreadsheet just with all of these locations and really starting to run analyses on all of these different properties that were popping up. I feel like there have been some viable options in Savannah and now my challenge is to make that offer, make that first offer, which was your recommendation, Ashley. My only hesitancy has been making sure I’m prude, making sure I have a lender, and just getting a little more comfortable with that analysis.
But in general, I had this full panic of, okay, I’m going in the wrong direction, and I kind of just slowed down and reevaluated a little bit and I feel like I’m back on track and have a good feeling about this particular area.

Ashley:
Melanie, that’s great. I’m glad that you have refocused yourself and you’ve even narrowed down a market now that you really want to focus on. I actually have two questions for Tony that were kind of brought up with what you were talking about. And I’m curious as to, Tony, what have you seen for lead times as far as bookings on properties? Because I know I’ve seen on Instagram people post that they’re still getting bookings, but they’re not booking three months out. They’re maybe booking three weeks out or things like that. So, Tony, I’m interested to hear that. Then also, Tony, what’s your take on the Savannah market? Do you know anything about it as a short-term rental?

Tony :
Yeah, two really good questions, Ash. Yes, booking lead times for us across the portfolio have been significantly lower than they were in 2021. This time last year in 2021, we got Christmas booked out by the end of September. This time, Christmas was booking out a few weeks ago. I think the habits of travelers have shifted between last year and this year. Across the board you are seeing more last-minute bookings. I don’t think I would be super concerned if I’m looking at a calendar for a market and I see that 30, 60 days out, there’s still a bunch of gaps in the calendar.
What I would look for is data to show, okay, how are those listings pacing over the last 365 days? What does their pricing look like over the next 365 days? And use that data to help me determine whether or not it’s a viable option. What does their occupancy look like over the last 30 days? Because looking back 30 days might give you a better understanding than if you look forward 30 days. Things to consider.
To answer your second question, Ashley, about Savannah, I actually don’t know anything about Savannah. The only market I’ve really looked at in Georgia was Blue Ridge, and we did that not even as a super deep dive. But, Melanie, it sounds like you found some things there that you feel will draw folks in and that the price points make sense for you. Is that what I’m hearing?

Melanie:
Yeah, that was a major factor, for sure.

Ashley:
Let’s go through some of those items. What are the things that you looked at in the market that you think are big draws that will bring people in?

Melanie:
I mean, obviously it’s by the coast. There’s a lot of people that are drawn to those islands like Tybee Island and a few others. There’s also an Air Force base. There’s a small college that’s, I guess small, it’s got 13,000 students, but well known in the area. I believe it’s a school of art and technology. I want to say the initials are S-C-A-D or something. SCAD or SCAT. And then also the historic district is a huge draw.
I will say that in looking at some of that data, there are properties that are still like 50% or 39% occupancy. I don’t think it’s necessarily 84 or 90% occupancy, which, of course, the higher the occupancy, the better. But they were still, at least the data I was looking at with Rabbu, they were still generating, for example, $3,300 in revenue on a $1,900 month mortgage or something. And I’m trying to be exceptionally conservative with my numbers and factor in property management because I will be out of state and that lower occupancy. I hope that answered your question.

Tony :
Yeah, it does. And I think that’s all good data to look at. I would also use a website like either PriceLabs or AirDNA. I think they give you a little bit more granular data than a Rabbu does. I haven’t spent much time on Rabbu, but I know AirDNA and PriceLabs are super catered towards the short-term rental industry and you get a ton of data when you look at those things. It sounds like you’re happy with that market. Have you looked into the policies of Savannah? Is it easy to get a short-term rental permit? Do you even have to get a permit? What does that whole process look like?

Melanie:
Yeah, so in Savannah proper, there’s a lot more restrictions, but in the unincorporated Chatham County, which is kind of just on the perimeter, it’s much easier. And a lot of the property management companies help you go through that process. They are tightening some restrictions, but there’s still a lot of opportunity. There’s still permits available.

Tony :
And I ask that question because the fact that there are tight restrictions, isn’t necessarily a bad thing. If anything, it almost protects the people that are willing to jump through those hoops and get those permits because not everyone’s going to be willing to do that. So if you are one of those hosts who have one of those harder to get permits, it almost helps because it keeps in, not a hard cap, but almost like a soft cap or an artificial cap on the supply of short-term rentals, which again, if you’re one of those that are operating it, it actually helps you. Have you submitted any offers yet in Savannah?

Melanie:
I haven’t, no. I’ve just been trying to analyze four to five properties over the last couple of days. I did explore some opportunities to do seller financing. It was kind of similar to Lawrence’s terms that he mentioned where the seller was offering a 7% interest rate and 20% down. I was kind of thinking I’d rather just get a loan from a bank. So, no, that’s definitely my next action item is to submit a couple of offers and I’m willing and ready to submit those lowball offers. I think I just wanted to make sure the analysis fit. I sent over a couple examples of my analysis to my agent who’s closed about 30 STRs this year, just to see like, these are my numbers. Do these look like your numbers? Should I be more conservative? Do you have any recommendations? I feel like I’m at that point where I’m ready to start making a couple of offers.

Ashley:
Melanie, you had put a question for us, too, in our group Slack channel about seller financing. Did you want to talk a little bit about that?

Melanie:
Yeah, thanks for mentioning that.

Ashley:
Yeah. One was about how the payments work. Okay, you got the deal under contract, it closed on it. Your attorney has put together an agreement and to kind of start from there is that your attorney will do your closing documents that you would usually have, but will also do a promissory note that goes along with the contract. And that’s where it’ll state that you owe the seller of the property X amount of dollars, and then the terms of the agreement, like what’s the interest rate, what’s the amortization schedule, what’s your monthly payment, things like that and how the repayment period works. What were some of the questions you had about that?

Melanie:
Yeah. I’ve never had a promissory note, and so I think I just was wondering what that actually looks like in practice. Do you have buyers who slowly stop paying? How is that managed and monitored? It seems so unofficial in some ways. And I just wondered… For my long-term rental, they just send me a check once a month. And so I assume it’s as simple as that. But I feel like without that formal entity of a bank or a lender, it just seems a little less easy to monitor. So kind of curious in your experiences, what that actually did look like month over month and if there were ever any issues with it.

Ashley:
I’ve done it both ways. I’ve done it where I was doing the seller financing and somebody was paying me, and then I’ve also paid somebody for seller financing. In both times it was a check sent out. I had it set up as autopay, so my check would go out on the first of the month to them. And then the same with the person that was paying me, they had it on autopay where it was just set up to go. Just like you would pay a mortgage payment, you’re just sending them a check, you’re maybe doing an ACH directly into their bank account. And that’s when I do seller financing offers. I do add that piece in there that’ll be direct deposited into their bank account on this date every single month. It’s just kind of hopefully something a little extra that they’ll appreciate to accept my offer.
But then say they don’t pay, and then that’s where it’s your responsibility to contact your attorney, most likely the one that drew up the promissory note. And that’s where you would go through the foreclosure process just as a bank would. The bank would use their attorney to go through that same formal process. The actual process of that depends on each state. Like New York State, you could pretty much pay for two years before they actually kick you out of your house for a foreclosure. Texas, I think it’s a way shorter time period where it’s so much easier to get people out. And that’s why a lot of investors do offer seller financing or do land leases and things like that because it’s so much easier to get people out, take the house back, and then go ahead and do seller financing again.

Melanie:
And have you ever had to go through that foreclosure process yourself?

Ashley:
No, I haven’t. I haven’t had to, which is a good thing.

Tony :
Yeah. Fingers crossed it stays that way.

Ashley:
Yeah. Any other questions about that, Melanie?

Melanie:
Actually, I guess, yes, one other thing. In a lot of seller financing deals, I feel like the biggest appeal is probably a lower down payment. And so when you see still a 20% down payment, if the interest rate is dramatically lower than what banks are lending at currently, then it’s green lights all the way. But I think I’m curious if there’s other things about a seller finance deal that I’m not considering that may get more appealing and more interesting.

Ashley:
One thing that I think of offhand is convenience. Just like having to go through a bank, it may be more of a, it’s a longer process. You have to put more paperwork in, you have to fill out more forms, all these things. So there’s the convenience method of it that doing seller financing, you really don’t have to do any of that. The formal application, things like that, doing seller financing. Another thing, too, is like you said, the down payment, but also the interest rate. If the person’s just going to have that money sitting in their bank account, well, instead of having the money from the sale sit in their bank account and make 1% interest off of it, instead they’re going to charge you 4% interest, which is still way better than the 7% interest you could get at the bank today is paying that 4% interest, but you’re both making out. In that example, you’re both making more than what you would if you went to the bank and they just put that money into their bank account. So, that’s another thing to consider too.
Then a big advantage for the seller is the tax advantages. The fact that instead of them taking a lump sum when they sell the property, now they’re taxable income is being spread out over the course of the loan. Instead of getting… Say, they sell property for $100,000, well, their tax bracket just increased because now they’re have a higher income based off of selling that investment property. Where they do seller financing, they’ve only made so much off of you in year one out of 20 years, the loan is amortized. It keeps them into that lower tax bracket and they’ll owe less taxes. So that’s a big advantage as to why a lot of people do the seller financing. One thing I always do is hint to ask sellers that they’re willing to do seller financing. They say no right away, I just say, “Oh, okay. I just didn’t know if your EPA had mentioned the tax benefits of it.” Then that kind of puts a little buzz in their ear.

Tony :
Yeah, and I think the other big thing, too, is that you can really create an offer that speaks to what’s important to that seller. For example, maybe the seller is just most concerned with getting the absolute highest purchase price, but maybe the property won’t appraise for the price that they’re looking for. But if you’re doing a seller financing position, they’re the ones that are on the hook for the property. So if they want to sell it for more than what it’s worth, that’s only working out in their favor. Whereas if you’re going with a traditional bank, if the seller wanted half a million bucks, but the property’s only worth 300,000, it’s not going to fly that way. So I think there’s more flexibility to listen to what is important to that seller and then give them an offer that really speaks to what’s motivating them.

Melanie:
Okay. The last thing I was going to say was it seems like if cash is the thing that the seller wants more than anything, that becomes like a seller financing deal killer because they want to cash out and walk away. And ultimately you’re only going to pay your down payment and then a payment over time with interest. That was kind of a learning with the multi-family I looked at this last couple weeks. But thank you so much for talking a little bit about that. That’s really helpful for me.

Ashley:
Yeah. And thank you so much for coming on again with us this week, and we look forward to talking to you again in a couple weeks.

Melanie:
Thank you.
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