April 2023

Crystalee Beck has built a million-dollar copywriting business from her home in the Salt Lake City area while raising four children ages one, four, seven and nine.

She is founder and CEO of Comma Copywriters, a copywriting agency that serves tech and real estate companies. She also runs the Mama Ladder International, a community for moms who want to start and grow businesses. She shares what she has learned about how to do it all on videos on a her YouTube channel, from which you can see one example below.

“I wouldn’t be a business owner without my babies as the motivation,” says Beck. “I wanted so much to be there for them, and said I’m going to figure out how to do both.”

Beck is part of an exciting trend: the rise of million-dollar, one-person businesses. In 2019, the U.S. Census Bureau counted 43,012 businesses with no employees except the owners that brought in $1 million to $2.49 million in revenue, up from 41,666 in 2018. Another 2,553 hit $2.5 to $4.99 million in revenue, and 388 made to $5 million in revenue and beyond. There’s no telling how many more of these businesses are likely to spring up, thanks to free and low-cost resources like cloud-based and artificial intelligence tools and robust freelance platforms for hiring talent.

She’s mastered lifestyle design to pull it off. Working 20-25 hours a week from Monday through Thursday, Beck relies on 47 freelancers in 20 states. She is expecting to hire her first payroll employee this year.

Beck began developing the skills that allowed her to create her successful business at her first jobs. Graduating from Brigham Young University in 2009, Baker got a job doing content development of in-flight training materials for flight attendants at SkyWest Airlines and became a flight attendant herself.

Wanting to get paid to write, she earned a master’s degree in communication at Weber State University. Then, after two years as a freelance features writer at Deseret Digital Media, she worked as a corporate communications specialist at a global agency and then as a social community manager for Market Star, an outsourced direct sales organization.

After getting laid off, she started Comma Copywriters in 2016. “I had a little bit of warning it was coming,” says Beck, who had been freelancing on the side. She was juggling being the main breadwinner with being the mother to a one-year-old, with her husband in graduate school.

“I practically skipped out the door,” she recalls. “I was so excited to have some freedom to do with my day what I wanted to do with it.”

She got serious about growing the business quickly. “I bought myself a business license in February 2016,” she recalls. “I wrote in my journal ‘This is going to be a million-dollar business.’ I had no idea how I was going to get there.”

One of her early projects was writing Joyce’s Boy, a book that captures the life of serial entrepreneur Alan Hall, who’d been the president of the agency where she worked.

Through her network, she won other clients. At first, Beck simply responded to what those clients requested. “I call those first couple of years my sandbox years,” she says. “I was playing the sandbox. I would just do what people were paying me to do.”

Soon Beck had more work than she could handle. Rather than try to do it all herself, she recruited a few freelancers.

Beck pulled in $100,000 in 2017, her first full calendar year in business. The business continued to grow, and by 2019 she rebranded it under the name Comma Copywriters.

One of Comma Copywriters’ selling points to clients has been that assignments are delivered on time or they’re “on the house.” Last year, Beck says, the company delivered more than 21,000 pieces of content, and 99.94% was on time.

She doesn’t worry about other agencies and freelance platforms clients may consider using “I don’t think about competition,” she says. “I think of them as options, rather than competition. We’re a supplement. It ends up being much more cost-effective for our clients to hire us than a full-time headcount writer internally.”

As the company has scaled up, Beck has organized the company into three groups of writers based on the types of clients they serve: B2C (business to consumer), B2B (business to business), and agencies. “Team leads” manage each group. She also has a team support manager and a client success manager.

When recruiting writers, Beck has found she does well by looking for people who match the company’s core values: Freedom, Accountability, Humility, Curiosity and Care. Many are women who appreciate the opportunity to be part of an organization that offers them steady work and professional development while they are managing household responsibilities. “I feel we really have the best of both worlds for our writers, who want the flexibility of being a freelancer and the support of a team,” says Beck.

To keep her freelance team motivated and aligned, Beck offers bonuses for on-time work, holds monthly professional development events and brings them together at a team retreat annually. After writers have been with the company for three years, Comma Copywriters gives them a $1,000 bonus to devote to ticking something off their bucket list. One woman invested in camping equipment. Another went to Disneyland.

Comma Copywriters leaves it up to writers how much work they want to take on. The team communicates about projects via Basecamp, a project management software. That’s allowed the company to keep things running smoothly, no matter what is going on. Last year, when the company broke $1 million for the first time, four out of seven members of its leadership team had new babies.

An important focus of the business is giving back, particularly to women. One way is through the Comma Cares program. For each client it works with, Comma Copywriters sponsors a girls’ education through a nonprofit partner, Kurandza.

Beck also started a sister business, The Mama Ladder International, a year after launching comma. It offers workshops and a retreat to help women start and grow businesses, in response to demand. “I had all of these women coming to me and asking how you start a business with little babies,” she says.

The Mama Ladder offers the HIGH FIVE Grant for Moms, which provides a $5,000 grant, along with several others, to mothers who want to grow their businesses but lack access to capital. This year, Lowe’s and Clean Simple Eats are sponsoring the grants for the first time.

Beck knows from her own experience that raising children and achieving significant business success are not mutually exclusive. “There’s nothing a motivated mother can’t do,” she says.

Ashley Kehr:
This is Real Estate Rookie, episode 282.

Tony Robinson:
What I tell people that are just starting out is give yourself 90 days. 90 days, analyze 100 deals, and if you can analyze 100 deals over 90 days, you’ll know without a shadow of a doubt whether or not that market is a good market or not. So there has to be a certain threshold that you hit, I think, before you rule a market out. And a lot of it just comes with grinding it out, analyzing the deals and doing the hard work to make it happen.

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

Tony Robinson:
And welcome to the Real Estate Rookie podcast, where every week, twice a week we’ll bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And man, we got a really good rookie reply today. I liked it because the questions today were a little spicier, a little different from our normal variety of questions for the reply episodes.

Ashley Kehr:
Yeah, and we go through three questions, but I feel like we went pretty deep into them really breaking things down. One of the things we talk about, buying properties with tenants in place, or how to get that property vacant if there are tenants in place when you do want to close on the property.

Tony Robinson:
Yeah. We also talk about REITs versus investing on your own. Ash and I share what we believe is the most passive way to invest in real estate investing, and one of the things that we both aspire to do.

Ashley Kehr:
And also how my side hustle is currently a loan shark. So if you have credit card debt contacting, and then we also touch on partnerships. And for some of you that maybe haven’t heard yet, Tony and I do let out a little secret of something that we’re working on when we do talk about partnerships, but we go through doing a first deal by yourself, doing a JV agreement, which is a joint venture agreement, or creating an LLC with a partner.

Tony Robinson:
Yeah, cool. So I just want to share a quick shout out to someone from the rookie audience, leaves a five-star review on Apple Podcast goes by the username VinceLR, and Vince says, “Inspiring and useful.” So it’s a little bit longer review, but it’s a good one. So Vince says, “Ashley and Tony do a great job bringing in unique content and people to learn from. They helped me build up the confidence to start my investing journey last year and are an inspiration. I’m in a position now with the things I’m learning from BiggerPockets to leave my nine to five and start building my own real estate investing business full-time. The content they provide was a big catalyst to make this possible and I’m so thankful.” And Vince finishes by saying, “Added bonus, Tony is also an inspiration for being ripped while doing what you love. Maybe one day I’ll have a six-pack like him.”
Vince, I appreciate that, man. I’m actually in my off season right now, so I’m far from being ripped, but I’m hoping one day you can be on stage with me, brother. That’d be a fun thing, Vince, too, together.

Ashley Kehr:
I mean, I was really loving that review, but then I felt personally victimized that my guns were not mentioned in the review.

Tony Robinson:
Well, Vince, I appreciate that, man. That’s good news.

Ashley Kehr:
Yeah, thank you, Vince. Let’s get into our Rookie Reply questions. Okay, Tony, I have the first Rookie Reply of today’s episode ready to go. And the first thing, so this question is from Tommy Burridge and he says, “Dumb question…” You guys should have learned from your teachers in elementary school, there’s no such thing as a dumb question unless you’ve already asked it several times and you did not listen to the answer. So that is my only exception. That is my only exception.

Tony Robinson:
What someone told me one time, Ashley, it’s like either you can not ask the question for the fear of feeling dumb or you can actually not ask the question and really be dumb.

Ashley Kehr:
Yeah, great way-

Tony Robinson:
So when I heard it that way, I was like, “Okay, that that’s fair.”

Ashley Kehr:
Okay. So Tommy’s question is, is investing in rental properties better off done alone or is it possible to JV, joint venture on something like this? Has anyone ever done this, and how did it work? So Tony, this is actually how you did your first deal, correct, was a joint venture with OMID?

Tony Robinson:
Yeah, so it was actually my second deal. So our first deal I did by myself, and then the second one, I did with a partner. And to answer the question, Tommy, it’s definitely not a dumb question like Ashley said, and yes, there were tons of people-

Ashley Kehr:
Okay. First of all, I did not say it was a dumb question, that was written in [inaudible 00:04:30]

Tony Robinson:
No. When I said like Ashley said, I meant it’s not a dumb question like how Ashley said, it’s not a dumb question. But anyway, the point Tommy is that, yeah, people partner in real estate all the time. You see partnerships on smaller deals, people buying single family homes, people partnering to flip houses, people partnering were one’s the private moneylender, one’s the person borrowing the money, and then you see partnerships on larger scales. Most of the apartment complexes or big commercial facilities that you see, it’s usually not one person that’s buying those, it’s an investor who’s raising funds from a bunch of different people effectively creating a partnership with those people to get access to all of that capital and then going out and buying the deal that way. So Tommy, you see partnerships in JVs across real estate in every way, shape, or form. So I think it definitely has the potential to work out positively if you do it the right way. There’s so much we can talk about, Ashley, but just what are your initial thoughts on Tommy’s question?

Ashley Kehr:
My first deal was with a partner. We didn’t do a joint venture agreement, we actually created an LLC where we are 50/50 partners on the deal. So you do have that option too if you are partnering to actually form an entity together. There are pros and cons to both. If you’re doing a JV agreement, you’re a lot less liability towards each other, you’re not completely committed to each other, you’re just tied together for this one deal. If you do do an LLC together, you are filing a joint tax return together, you are holding onto this business where you’re doing the accounting for it together, all these things, and you can run more deals through this. So I would say if you just want to do one deal with somebody, a joint venture is the way to go. If you want to keep buying deals with this person, you can still do the joint venture method every single time, but you’re actually going to build a business together, and LLC is also an option for you getting started.
So Tony and I often talk about pieces of the puzzle to get started in real estate and maybe you are missing something and that’s why you haven’t taken action yet. So maybe, Tommy, in your scenario, you have the money, you’ve been researching about real estate, but you just don’t have the time to actually go out and find a deal. So if that’s what’s holding you back, find somebody who can do that for you, who can go and find the deal and bring you that piece that you’re missing to actually start becoming a real estate investor. And this isn’t only just for somebody who’s trying to get their first deal, this continues on through your life of being a real estate agent as to like, “Okay, I want to do this.” For example, Tony is going after a campground in West Virginia and he is taking on private money partners for this purchase and you’ve done something similar but never to this extent.
So it was Tony as an experienced investor looking at this deal and saying, “Okay, I need to figure out how to partner with people to get this deal done.” So you’ll see this continuously as a huge advantage of leveraging other people and their resources. My partner right now is the first really hands-on partner that I’ve had. The other two were maybe hands-on for some deals, pass it for others or just completely passive in general. So I think look at what you want out of a partner, because that can make a big difference too. So if you just need somebody’s money and you can find the deal, you’ll do all the work, you don’t care, then make sure you’re going to find somebody who’s just going to let you keep that control and not say, “Oh, here’s the money, but I think I know best and I’m going to meddle in what you’re actually trying to do.” So there’s so many things to look at in that situation.

Tony Robinson:
And I just want to touch on for Tommy, and really for everyone that’s listening, the different things to consider when you’re structuring that partnership. First is that you should 1,000,000% get your partnership formalized in some kind of written document. Like Ashley said, it could be that you form an LLC together and that it’s your operating agreement that kind of establishes a lot of these things. Or if it’s a joint venture in the JV agreement, make sure you establish these things. But I’ll give a quick rundown of the things you should consider when you are creating a real estate partnership. So there’s two pieces to this. There’s the sweat equity, kind of the work portion, and then there’s the actual capital that goes into the deal.
So I guess I’ll talk about the capital first. So when you’re structuring a partnership, there’s the down payment, there are the closing cost, there are the mortgage that needs to be carried if there’s any rehab or if you’re maybe doing an Airbnb or set up in your furnishing costs. So there’s this money that needs to be used towards all of these different purposes, and you should identify who’s responsible for bringing what percentage of each one of those different buckets. You guys could say, “Hey, we’re just going to split everything 50/50 down the middle.” Or maybe one partner’s in charge of the down payment and the closing costs while the other partner is going to carry the debt, and then you split the rehab or furnishing whatever it is to get the property up and running. There’s so many different kind of scenarios there, but I think it’s super important to identify who’s responsible and at what percentage for each one of those different financial buckets in terms of how you pay each other back.
If one partner maybe is the full capital partner and the other partner is just bringing the sweat equity, what are the terms of how that other partner will get paid back? Is it, “Hey, they’re getting paid back just with the cash flow and we’re going to split the cash flow 50/50,” or is there some additional agreement that says, hey, if there’s $500 a month in cash flow, 50% of that’s going to go towards the capital partner until he or she gets repaid and then the remaining 50% will split, or maybe all of the cash flow goes to the partner that brought the capital until they get paid back. So there’s different ways you can think about that “capital recapture.”
And then on the equity side, there’s the sense of who’s doing what work. I’m going to use short-term rentals as an example because that’s where the majority of our portfolio is. For short-term rental, there’s so much that goes into it, there’s the initial setup, which could take several days to maybe a couple of weeks depending on the size of the property, where you’re out there building furniture, getting the property ready for the guest, and then whether it’s short-term or long-term, once you take that property live, you have to now deal with the folks that are coming into that property. It’s either going to be your guests on a short-term rental side or maybe tenants if it’s a long-term rental, and who’s going to manage that property on a long-term basis, actually being the person that’s interfacing with the guests or the tenant.
And there’s also the repairs and maintenance. Maybe you’re a handy person and you want to help the property save maybe a little bit of cost by doing the repairs and maintenance yourself. So all of these different kind of sweat equity pieces that go into maintaining that property, you all should identify who’s going to be doing what, and think about how you’re going to be compensated for that sweat equity. Here’s a mistake that a lot of new investors make, Tommy, is that they undervalue the sweat equity, they undervalue the sweat equity because if I’m the person that’s bringing the capital, my job is done once we close that property. All I’m doing is writing a check, maybe signing some loan docs and then my job is done.
But the person that’s going to be doing the sweat equity, their work persists for as long as you own that property. So you want to think about, how should I be fairly compensated for that work? So it could be, “Hey, my compensation is just going to be part of my equity, so I’m going to get X percentage of the cash flow and that’s going to cover my time that I put into managing this property.” Or maybe you do something like recharge a property management fee, which you’re doing the repairs and maintenance, you’re charging an hourly rate for the repairs and maintenance. So a lot of things to consider, Tommy, and this is just like the tip of the iceberg, but think through those questions and make sure you get it down in writing before you move forward with the partnership.

Ashley Kehr:
Yeah. I think to summarize all of those great points that you touched on, Tony, is to really think of now in your partnership what’s happening now, but also into the future, what are some things that can happen that you need to be prepared for. The second thing is roles and responsibilities as to who is doing what. But also if you’re saying, “You know what, neither of us are doing maintenance or the repairs, somebody else is going to do that,” somebody has to at least take ownership of hiring that maintenance person, overseeing that maintenance person, paying that maintenance person. And I think that’s oftentimes overlooked as, yeah, you’re going to outsource these things, but you have a bookkeeper doing of it, but all of a sudden she needs some information from you, who’s going to be the one to take the time to respond to her email? There’s all these little admin things and all this oversight that needs to be done even if you are outsourcing a lot of roles, getting financing done.
If you hire all these people on your team, the loan officer still may need your Social Security number, your tax return, that may be your property manager, your maintenance guide, they don’t even have that or you don’t have access to it. So definitely think about those things when going into building out your agreement too. And the last thing is the exit strategy. Maybe you need to pivot and you need to change from a long-term rental to a short-term rental or vice versa. What happens there? What happens if you sell the property? What happens if you refinance the property? Are you going to max out what you can get for the appraisal or are you just going to refinance to pay the current loan to maybe get a better rate?
But you have to have some kind of decision maker in there, especially if there’s something that comes up and you don’t agree on. So maybe one person wants to max out the loan to value based on this new appraisal and the other person doesn’t, what happens if you’re 50/50 partners or equal partners and there’s some decision that needs to be made? What is that kind of tiebreaker? And I’ve seen it where people have a designated third-party, maybe it’s their attorney or their accountant or somebody close that they trust, maybe even a mentor that comes in and actually looks at the facts of both sides and then makes the decision. Or it’s based on what, Tony, he handles all the maintenance, this is a maintenance decision as to whether we go and put a new roof on this property. He gets the final say in what we actually do in this situation. So there’s definitely a lot to think about. And good thing Tony and I will be releasing this summer our book on partnerships. So make sure you guys keep an eye out for that.

Tony Robinson:
Yeah. I guess just one personal update, because you mentioned it, Ashley. So we had that West Virginia campground that we’ve been working on and it was a partnership structure, but not equity. We were essentially raising debt from a pool of investors and we actually had to pull out of that deal, Ashley, on Friday.

Ashley Kehr:
Oh, wow.

Tony Robinson:
Yeah, and I think this could be instructor for all the rookies, so I’ll quickly share what happened.

Ashley Kehr:
Yeah, please do. I think it’s so beneficial

Tony Robinson:
Yeah. And it’s such a bummer because it’s like the second time this has happened to us, and I feel like every time we get close, something happens that gets us off track here, but when we initially put this property under contract, we needed to raise about $1.5 million or so, and we raised the funds, we had capital commitments from all of the lenders that were going to participate, but we did this as a traditional private money relationship. So each lender was going to have a promissory note and then a deed of trust that secured that note to the property. Now, we had already asked a syndication attorney months ago like, “Hey, if this is debt and it’s secured by real estate, is this a security and do we have to follow what securities laws and run this as a syndication?”
And he said, “No, you don’t because it’s a note secured by real estate.” So cool. So we go down the path, and eight weeks later, we start getting pushback from the closing attorney in West Virginia saying, “Hey, with a number of people that are lending on this deal, I feel like it’s going to be security.” And we said, “Look, we already cleared this with the security’s attorney, they said, no.” And he’s like, “Hey, I really think you should double check with them.” So we hopped in the call with our security’s attorney, we walk him through and he’s like, “Yeah, no guys, you’re fine. This is not a security, so move forward.” An hour later we get an email from our attorney saying, “Hey guys, I did a little bit more digging, and it actually does seem that this will qualify as a security even though it’s dead, even though it’s secured by real estate, it’s still going to be security.”
So now there’s the additional cost of it becoming a syndication, which you probably could have dealt with. But the bigger issue was that because we’d already talked about the deal publicly, and I’ve already mentioned on the podcast, now we’re at the point where we can only solicit that deal to accredited investors. And now the issue was that almost 80% of the people who had committed to participate in that deal were not accredited investors. So we essentially would’ve had to go out and re-raise another $1.2 million to try and close that deal. And we just didn’t feel that the timing was right or enough time to really get it closed in the window that we had committed to with the seller. So we had to pull out of that deal on Friday.

Ashley Kehr:
Well, I’m really sorry to hear that, especially since it was not receiving the right information that caused that. So I guess the follow-up question I have is, is there a certain amount of people that if you would’ve stayed under, would’ve triggered that or not triggered?

Tony Robinson:
There was no black and white number like, “Hey, if you’re under X,” but it’s just like, “Hey, once you get to, it seems like you might have too many cooks in the kitchen for this knot to be a security.” So there’s some lessons learned for us, and we specifically had wanted to keep it as a non-security so that we could market it to non-accredited investors. So just more lessons for us as we go about this for the third try.

Ashley Kehr:
I mean that’s what real estate is is lessons learned, getting to reach that point. And it shows, Tony, you are an expert in short-term rentals, the operations of them, buying in the markets that you’re in, Joshua Tree, the Smoky Mountains, you are an expert in that. But it just goes to show you, just because you are an expert in those things doesn’t make you an expert in everything, and you have to lean on other people like attorneys and accountants and even just different partners to try to figure out, “Okay, well, I want to scale and grow, this is the next thing I’m going to do.” And you’re not an expert anymore trying to step into how you set up the deal a new way to do that, or even if you were going to change and go into a syndication, you would still be a rookie syndicator, I guess.
And I just want everyone to remember that just because someone is experienced and an expert in one thing doesn’t make them experience in an expert in everything else, and the way that they do become experienced is because of educating themselves, leaning on others, doing the legwork to get to that point. So Tony, I’m really sorry to hear about that deal. It did sound really, really awesome and I was excited to follow the journey, but I know you’ll get another one.

Tony Robinson:
Yeah, and that’s the goal, we want to get that first commercial property under contract before the year is over. So dusted ourselves off and just to try and make things right with the seller. Our MD was still refundable, but we just let him keep it because we had tied that deal up for, I think, 45 days and we’re now getting into busy season and he wasn’t really doing what he was supposed to do with it. So just trying to make sure that we’re putting good karmic energy out into the universe, but fingers crossed, the next one will work out for us.

Ashley Kehr:
Yeah. And it’s just kind of that ethical thing and to keep that, if there was a better business bureau rating about you.

Tony Robinson:
Right. That it all says good things.

Ashley Kehr:
And also I think it kind of helps you sleep at night too. It’s knowing that you did what you could I guess when you had to, that kind of the deal.

Tony Robinson:
Yeah, and that’s what I told them. It’s like, at the end of the day, I feel like especially for me being a host on one of the most popular real estate podcasts out there, it’s like my reputation precedes me in a lot of places and I want to make sure that I’m protecting that more than anything.

Ashley Kehr:
Okay. Let’s go on to our next question. This one is from John Rodriguez. What’s the difference between REITs and regular real estate and investing?

Tony Robinson:
Ash, do you own any REITs?

Ashley Kehr:
No, I don’t. I never have. Yeah.

Tony Robinson:
Yeah. So John, think about when you’re a real estate investor, in a lot of situations you are purchasing the property and you own a share or you own that property in its entirety. So when Tony buys a property or Ashley buys a property, it’s our names or our LLCs names that are on title that are carrying the debt. We are the ones making the payments. If something goes wrong, it’s us talking to our property managers, to our maintenance crew. We own the property, we oversee the execution and the management of that asset, and then we collect our cash flow on a monthly basis or whenever we want to take those distributions. When you invest into a REIT, it’s almost the same thing as going on into E*TRADE or Robinhood and buying a stock. When I buy a stock in Apple or Amazon or Tesla or whatever company, I own a small ownership, but I have almost zero control over how that business is being run on a daily basis.
Instead, what I’m doing when I buy that share is I’m putting my faith in the leadership of that company and their ability to give me a return on my investment, either through dividends or through the stock price increasing, and then maybe I’m able to sell off some of my shares to realize that that gain. A REIT is essentially the same thing, you’re buying a share of a company that invests in real estate and you’re able to buy it and sell it just like you would a stock, but the downside is that, A, the returns are typically significantly lower than what you would get by doing it yourself, and B, the ability to control the asset isn’t there because instead you’re putting your faith in the leadership of whatever REIT you’re investing into.

Ashley Kehr:
Hey, Tony, I think that’s a great explanation and it really comes down to how passive do you want to be in your real estate investing. So the thing I love about real estate is there are so many different ways to actually do that. I mean, you can be completely hands-on making calls every single day to try to wholesale a deal, or you can invest in a syndication or invest into a REIT. So I have seen that a lot of large syndicators that some of them, their actual end goal, their exit strategy is to sell to one of these big REITs to just completely buy their whole portfolio. And then that’s kind of like their cash cow, they’re cashing out.

Tony Robinson:
Honestly, that’s part of my exit strategy as a real estate investor too, it’s like I want to build this massive portfolio of short-term rentals and the management layer on top of that and hopefully sell that portfolio off down the road to either a REIT or some kind of fund or someone. But actually, I just looked up the data, and this is from the Motley Fool, so hopefully this data is accurate, but it says over the last 20 years, the S&P 500 has had a total annual return of 9.5%, and REITs are at 12.7%, so it’s actually not bad. Now, I’d have to dig through this data, I would have to assume that that 12.7% doesn’t account for the fees that the REITs are taking. So REITs make money the same way that a lot of these companies in the stock market do, where they charge fees for managing the assets and there’s all kinds of other stuff. So you as the investor probably aren’t getting a 12.7% return, it’s probably something less than that once you account for the fees.

Ashley Kehr:
Yeah, because if you’re investing in an index fund like say Vanguard S&P 500 index fund, I think your fees are 0.05%, very, very minimal because there’s no management of it where if you have a fund where maybe Morgan Stanley or wherever, they have a guy that’s picking the stocks like, “Okay, in our fund, we have these five different stocks because we know they’re going to do great, invest in my fund.” Or if you look at your 401(k) and you see the different options, a lot of times with the financial provider, they’ll give you, if your target retire date is in 2040, 2045, it usually goes in five year increments, it’ll say, “We suggest you invest in this fund because all of the stocks that we’re picking for this fund will be doing good by then so you can cash out your retirement.” And it’s maybe low or a little bit higher risk now because it’s pushed farther away where if maybe your retirement date is in five, 10 years, they’re low risk stocks that they were putting into that fund.
But if you look at the fees, and you should get a disclosure every single year showing what the fees are for each of those funds that you could select, I mean, some of them are outrageous. I just did this the other day for Darrell, he was in a union at his last job and they have a couple pensions he was in, and I’m like, “Just so you know, this is how much you’re paying in fees a year.” So within an hour, I had already hacked into his account for it, and I changed it all to index funds. I’m like, “This is how much money I’m saving you.”

Tony Robinson:
And I think that’s the thing that a lot of people don’t realize when they invest into some of these well-known funds, the mutual funds, whatever it may be, is that the fund return might be X, but your return is the actual investor is going to be X minus whatever fees are there, and those fees can compound over time. Ash, are you doing anything, any type of passive? Well, you got your index funds, it’s like your passive investments, I guess, right?

Ashley Kehr:
Yeah, I have a Roth IRA, and then I still have a 401(k) from a W2 job, but they’re pretty much it. Yeah, it’s all index funds.

Tony Robinson:
The only socks I have are from the company that I’ve worked for before, and I’ve been like solo liquidating those over the last couple of years. And my goal is just to put pretty much all of it into our real estate portfolio. But I do want to get to a point where just almost my own hard moneylender, because I feel like that is the best kind of return that you can get on your investment because if I lend someone whatever, $500,000, I get maybe two points upfront. So I’m going to get, what’s two points on $5600,000? What is that $10,000 upfront? I’m going to get $10,000 upfront, which is already a great return. And then say I’d give that money for a year, say I charge them like 10%, that’s another $50,000 on top of that. That’s great. That’s a great return, but you got to have a big stockpile of cash to really make that a livable income. But I would love to get to the point where the majority of my income is just from lending out money privately.

Ashley Kehr:
I actually am a loan shark in a sense. My friend has some credit card debt and I paid off all of his credit cards, and he’s paying me lower interest than he would the credit card, but still a good interest rate so [inaudible 00:29:27].

Tony Robinson:
Who’s your fixer, who’s going to hit him up if he’s late on the payment?

Ashley Kehr:
Oh, that’s me.

Tony Robinson:
Oh, you’re doing it yourself.

Ashley Kehr:
I still got my crutches from when I tore my ACL, so I hobble over, you got the money and then take them all, crack to the back of the legs.

Tony Robinson:
What the audience doesn’t know is that your knee, your ACL tear wasn’t actually from a snowboarding incident, it was just Ashley was tied up, she owed somebody to some very bad people, and we’ve just been planted off as a snowboarding incident.

Ashley Kehr:
So then I looked at that scenario that happened mean, and I’m like, “I could do this.” And now I am the loan shark.

Tony Robinson:
Right. So that’s the real key to wolf guys, forget real estate investing, become a loan shark. There you go.

Ashley Kehr:
Okay, let’s go to our next question. This one is from Michael Marrero. After how long would you wait after not being able to close a deal to make the decision to try a different market? That is a good question.

Tony Robinson:
Yeah.

Ashley Kehr:
Tony, let’s start with you because I pretty much only invest in the same market, outside of Buffalo, New York, but you started in the Smoky Mountains and then you went to Joshua Tree. So maybe talk a little bit about that transition for you.

Tony Robinson:
Yeah. I guess before I even talk about myself, I think I just want to preface this question by saying we don’t know enough about Michael’s situation to really be able to answer this question with, I think, the right kind of detail that we would need to. Because, Michael, if you just started looking in that market two weeks ago and you’ve analyzed four deals, that is nowhere near long enough for you to confidently state that, “Hey, this market does not make sense.” What I tell people that are just starting out is give yourself 90 days. 90 days, analyze 100 deals, and if you can analyze 100 deals over 90 days, you’ll know without a shadow of a doubt whether or not that market is a good market or not. So there has to be a certain threshold that you hit, I think, before you rule a market out, and a lot of it just comes with granting it out, analyzing the deals and doing the hard work to make it happen.
But to answer your question, Ashley, we knew that we wanted to scale quickly, and we had already been analyzing a lot of deals in the Smoky Mountains where we first started with our short-term rental portfolio, and we weren’t finding enough that met our investment criteria in terms of cash on cash returns. So what we did is we just opened up the purview to say, “Okay, what other markets are similar to the Smoky Mountains where we can find good deals?” We landed on Joshua Tree and we just quickly scaled things up from there. So I think for us, it’s always, can we find deals that meet our return requirements? And are we being aggressive enough in our terms of acquisition? Are we being aggressive enough in how quickly we’re analyzing deals or we building relationships with the right people? And if we’re pulling all of those levers and we still can’t find the deal, then maybe we move on to another market.

Ashley Kehr:
I think a couple things to summarize there is thinking about if you can handle more. So like you said, you weren’t getting enough deals and you had the actual capacity to be closing on more deals, so that was a big decision as to why you were going to the other market. And then also finding the resources that you have too, so whether are you taking some of your resources? Maybe you’re staying in the same state, but going to a different market, are you going to be using the same real estate agent? Are you going to be using the same attorney? Are you going to maybe use a property management company that’s nationwide too and these are the other markets that they’re in? So you already know that you have that kind of team already in place. When actually looking at other markets, start with where other people are investing and then break it down from there.
First of all, just because other people are investing there, doesn’t mean that it is a good market for you. Their strategy, their reason for investing, what they look out of buying real estate, maybe it’s appreciation, but you’re looking for cash flow. Those things could be very different from what you want, so you need to verify information. But it’s a great way to start BiggerPockets.com. If you’re a pro-member, you get access to pro-exclusive articles, and this is where Dave Meyer from On the Market podcast actually breaks down and does analysis on different markets for you. He’ll pick cities, I don’t know if they’re random or how he picks them, but every once in a while he’ll just be like, “Let’s do an analysis of the market in St. Louis,” and he’ll do, “Here’s the price to rent ratio. Here’s what the job growth looks like.”
And you can also use these as starting point because you’re getting so much data. In my bootcamp, I have amazing, amazing students in the bootcamp. One person took the sheet that I create for the bootcamp with all the things you should be looking at when you’re doing a market analysis, and he put it into an AI chat. So I don’t know exactly which one he used, but he asked the AI to actually go and pull these data points for different cities, and it generated all the data, it gave the resources where it actually found the data, and now he’s just able to repeat that for every market that he wants to start investing into. I thought that just blew my mind, it was so cool to just see how I’ve wasted so much time looking at data when all I could been doing was that.

Tony Robinson:
Man, I love the application of AI, and honestly, we should have an episode where we just dive into how real estate investors should be leveraging all of the AI tools that are coming out to better systematize the processes in their own business. But yeah, I love that approach, Ashley. You mentioned something I don’t want the rookies to gloss over is leveraging your relationships to understand where other investors are being successful. That’s what took us to the Smoky Mountains originally. The deal in West Virginia that I just talked about, it was a relationship, another investor I knew in that market that took us there. When we were looking at that bed and breakfast in Western New York, it was a friend of mine who invested in the Finger Lakes that took us there. So we definitely lean on our relationships to help point us in the right direction. And then obviously we do our own due diligence afterwards to solidify that this market does make sense for us.

Ashley Kehr:
Okay. Let’s knock out one more question here, Tony. This one is from Melanie Schmidt. I’m looking to purchase our first investment property, hopefully a duplex or triplex. What are the pros or cons to obtaining a property that has tenants versus a vacant property? Thanks in advance for any advice. When you bought in your first property in Treeport, Freeport, whatever it is, I didn’t know for two years what city it was, but were there tenants in place or was it vacant?

Tony Robinson:
So all of our long-term rentals we had purchased, we bought four, they were all vacant when we purchased. And even now when we buy a lot of our rehabs, our flips, I still want to make sure that they’re all vacant when I purchase as well. And that’s a personal preference, but for me it was because pretty much every long-term rental that I bought or every rehab, we’re going to go in and we need to gut the whole thing in order to execute our business plan. So for us, having a tenant in place just didn’t make sense for what we were trying to do. Our first long-term rental, we wouldn’t have been able to command the rents that we wanted, had we left it at the pre rehabbed value. And the way that my debt was structured, I almost had to rehab that property to increase the ARV so I could get into it with no cash out-of-pocket. So I was almost forcing every situation to make sure it came vacant. But what about you, Ash? I know you’ve seen a mix of both.

Ashley Kehr:
Yeah, I’ve purchased properties with tenants in place, and honestly, the ones that I have purchased with tenants in place, I’m pretty sure all of those tenants are still there, they’re very long-term tenants.

Tony Robinson:
So the only tenants you’ve had to evict are the ones you chose yourself?

Ashley Kehr:
Yeah. Basically we’re a property management company. Yeah, I’ve never evicted an inherited tenant, I’m pretty sure. Yeah, there’s one person that’s been lived there when I bought it. She had lived there for 30 years. Well, that maybe five, six years now. But what we did in that scenario is she was paying very low rent. She was paying $300 for a $500 apartment, so we did a step-up. So every month we did a $25 increase until she got to that $500 amount. And the property, we bought it, there was six units in there, two needed to be updated, one was vacant that needed to be updated, but the four that had inherited tenants in them, they were all nice already redone and good condition. So we didn’t have to do that. But yeah, I think what you said about doing the rehab and what your strategy is, if you are purchasing with inherited tenants in place, make sure you know when their lease ends and what kind of notice you need to give them if you do plan on going and doing a rehab.
What I have seen some people do, especially in a duplex or a triplex situation, is they’ll go in and they will rehab one side of the property and they will give the tenant from the other side first dibs at that new unit and say, “We’re going to rehab this property, make it nice. Your rent is going to increase to this amount, but we’re going to let you guys have first dips.” Obviously if they take good care of their apartment, you don’t want to let someone into your new apartment that’s been trash. But then this gives these people a reason to move into this very nice new apartment, and then you can go ahead and rehab their unit now. And this kind of you don’t have to evict them, you don’t have to terminate their lease, it’s kind of a win-win for each person if they do agree to do that. So that’s one thing you can do.
But really looking at what your strategy is going to be for the property, if you should put tenants in or buy it with tenants in place or not. And you can always put that as kind of a contingency. I sold a property where there was tenants that I inherited in it, and then I ended up selling the property and they were still there, and the new people purchasing the property wanted it vacant. Well, this was last year I sold it, and just evictions are so backlogged that they were afraid that with their lease expiration, when I sent the notice that their lease renewed, what if they didn’t move out because it was after the closing date. And so we actually held money in escrow in case they did have to proceed with an eviction to get the tenants out. So that’s always something you could do too is ask for money to be held in escrow in case those tenants don’t move out. They ended up moving out and then I got my money back.

Tony Robinson:
Yeah, that’s a really creative way to solve that issue, and I actually took it from the other angle. One of the rehabs that we recently purchased, there was a tenant inside and we essentially just left escrow open until they were able to get the tenants out. So you can do it either way, you can close on it and then work with the other person to get them out, or for us, just because I didn’t want to deal with the headache, I was like, “Look, well, we still want to buy the property, just let us know when they’re out and then we’ll move forward afterwards.”

Ashley Kehr:
Okay. Well, thank you guys so much for joining us this week’s Rookie Reply. I’m Ashley at Wealth From Rentals and he’s Tony at Tony J Robinson and we will be back on Wednesday with a guest.

Ajay Rajadhyaksha, Barclays’ global chairman of research, joins ‘Closing Bell’ to discuss the slowdown in commercial real estate and the stock market’s reaction to the slowdown.

Do Migrant entrepreneurs do things differently? Well, there is plenty of evidence to suggest that companies led by founders who have crossed one or more borders may well outperform their native counterparts. To take just one example, a survey carried out in 2021 by the Open Political Economy Network found that eight out of Britain’s 23 unicorns were established by at least one entrepreneur from elsewhere in the world.

But is there something about the migrant experience that contributes to the creation of great companies? Back in late March, I spoke to Ramzi Rafih, founder of No Label Ventures, a VC fund established to invest in migrant-owned companies. In his view, the experience of making long and often difficult journeys tends to foster an entrepreneurial mindset and a will to succeed.

It was a compelling narrative but I was keen to hear more on the subject from the perspective of an entrepreneur. Is there an X factor and if so why?

So, earlier this week I got a chance to speak to Mesbah Sabur, co-founder of Circularise, a Netherlands business-to-business startup enabling supply chain traceability. Born in Kabul, Afghanistan, Sabur moved to Europe in the late 1990s. Although he has since taken the perhaps conventional route of going to university and then starting a business, he says his earlier migrant journey played an important role in shaping his approach to life and business.

Crossing Borders

In the early days at least, finding a new home in the Netherlands wasn’t easy. “It was a long journey,” he recalls. “In times of war, you can’t just cross borders and there were some dramatic scenes as we crossed between countries.”

Once in The Netherlands, the family faced a five-year wait in a migrant center while the powers that be decided on whether or not to grant asylum. “That sort of thing lives with you,” he says.

From that point on, Sabur’s life took a more conventional course. He completed his school years and went on to study at university. But there was a sense that he was journeying without a map.

“One of the things you find is that there is no one to tell you what you should be doing,” he says. So while the parents of other students were aware of the career paths post-university and might, for example, advise their children to study hard and then join a big consultancy, Sabur’s parents were outside that loop.

But in a way that was liberating. Nobody gave me advice. I had a blank sheet. I started a business in my second week at university.” That felt like an unusual choice. While peers through themselves into extra-curricular activities, Sabur and partner Jordi de Vos developed software.

Positive Contribution

Sabur was also aware that he didn’t quite fit in. “As a migrant, you will never be a local,” he says. “The next best thing is to earn your place because you won’t be accepted by default. And you better make a positive contribution to society.”

Arguably, Circularise – also co-founded with Jordi de Vos – represents that positive contribution not simply because it is a business -and thus creates jobs – but also because it is part of a movement towards greater environmental sustainability. The software allows companies to track the materials and component parts that come through the supply chain and end up inside products. This creates a transparency that makes it easier to recycle and reuse materials.

Sabur and de Vos began by identifying a problem that didn’t have a solution – at least not one that they were in possession of – and began to research the topic. The commercialisation of the solution itself began in 2016, with the help of funding from the European Union’s Horizon program. In the intervening years the company continued to draw on EU support while building its own revenue streams. In 2022 it secured €11 million in Series A funding.

International Focus

A familiar journey, perhaps. But Sabur says he had a slightly different perspective from at least some of his peers. “There are companies working in similar spaces to us that focus on local markets first,” he says. “We never looked at the Netherlands as our market. We went international from day one.“

That raises a question. Circularise offers a business-to-business, enterprise solution. Finding the ears of corporate buyers is notoriously difficult even in a domestic market. So how do you get a foot in the door?

“You have to have vision. Even billion dollar corporations need to be led by the hand when they look at sustainability. I spent many years understanding the problem and that has helped enormously.” However, he acknowledges that while some potential customers are relatively easy to approach, others are not. “In some years, it has taken years to find out who to speak to,” he says.

The market is changing. Sustainability has risen up the corporate agenda, driven by regulatory change, customer demand and concern about reputational damage. That has made things easier.

You could argue that the experience of Sabur simply echoes the journeys of other b2b companies. So is there really a migration factor. Every migrant story is going to be different, but perhaps it is the background ethos rather than the day-top-day approach to running a company that characterizes migrant owned (or part owned business). That knowledge that “you have to earn your place.”

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined today by Jamil Damji and James Dainard. How are you guys doing?

Jamil:
Amazing. How are you?

Dave:
I’m great because this show is going to be completely self-serving and an abusive power on my behalf, because I want to learn something about real estate from you guys. I invited you here so I can learn, but then we’ll record it and so all of our listeners can enjoy and learn as well.

Jamil:
Awesome.

James:
I’m excited because I love talking about deals. It’s a deal junkie day. We get to look at properties and cut them up.

Dave:
Exactly. If you all don’t know, I have been investing for 12, 13 years, but I really just invest in long term deals. I’ve never wholesale a house, I’ve never flipped a house, but I want to. Part of hosting this show, which is great, is that I get to talk to these very interesting people, but you also, or at least I, get extreme FOMO every time I talk to you guys or some of these other investors because I want and get to hear about all these cool new strategies. These aren’t exactly new, but all these great strategies that are working for you all. I want to partake.
I’ve been thinking about flipping my first house with a partner, because I live in Amsterdam so I’m not going to be actively doing it, but I really have some fear about it and I’d love to learn how to comp better, particularly because we’re in this very weird market that is correcting and now it’s a little bit hotter as of when we’re recording this in early April, but it’s very confusing to me. I’m hoping that you guys can teach me a little bit about comping, particularly in this type of market.

Jamil:
Well, Dave, it just so happens that comping is one of the dear passions that I have. It’s interesting, people have so many fun hobbies. They fly fish. For instance, James Dainard likes to yacht.

James:
Yes.

Jamil:
I find a zen-like meditative release by comping houses.

Dave:
That I believe. I definitely know you have a genuine passion for this. James, is the same true for you? Do you love this?

James:
I’m with him. I do love this. I’m a true deal junkie, looking at deals all day, but I get the opposite effect. I don’t get zen. It’s drinking 10 Rockstars. When I find that deal, my adrenaline goes through the roof. It’s not zen, it’s the opposite.

Dave:
Well, have you drank 10 Rockstars right before you comped that deal?

James:
It depends on the time of day. In the morning, I won’t be that deep in, no, but usually I do try to look for my deals and comp things first thing in the morning and the end of night. 7:00 in the morning, 10:00 PM at night, open the day, shut down the day. I guess it is a little zen because it puts me to bed.

Dave:
There you go.

James:
I feel like I’m not missing anything if I do that last little check.

Dave:
Jamil, what is it that you love about comping so much?

Jamil:
Well, I think the thing that is the most attractive to me with comping is that it’s like math. If you follow the formula and if you plug in all the right variables and put the puzzle together right, you can come up with a very specific answer. Even though comping can be looked at as an art form, as well as very scientific, the beautiful thing is, is that creatively people can approach it from different ways, but we very, very often come to the same answer.

Dave:
That approach. I’ve always respected it, but I think what’s happened over the last few years has proven that this is a real skill that investors really need to learn. Because from my perspective, I have some training and experience with machine learning and writing algorithms and it’s really interesting to see that. Although a couple years ago, I would’ve assumed that machines would’ve been able to do this and do this better than humans. What’s happened with iBuyers like Opendoor and Zillow has proven that that’s not true and that there is still a skill and knowledge that you as an investor can learn and need to learn to do this really well. I am very excited to learn a little bit about this from you guys.

Jamil:
Amazing.

Dave:
All right. We are going to take a quick break, and then we’re going to come back and James and Jamil are going to teach me how to comp. All right. What we’re going to do is James and Jamil both have different expertise and specialties. Each of them are going to share with us their comping philosophy, and we’re going to start with Jamil. Jamil, can you just tell everyone, if you’re not familiar, what comping is?

Jamil:
Yeah, absolutely. Comping, basically it’s short for comparing, right? We’re comparing two houses to get a determination of the value of one. In order for us to understand how much something could be worth once value is put into it, so like an investment is made to beautify it or to bring it up to a current retail standard, you need to have some pretty common characteristics to be able to say, “This house and this house compare.” The way I like to think about it is you want to make sure that if you are growing apples, for instance, that the apples that you’re growing are the same apples grown from the same orchard in the same tree, in the same soil, so that it’s all very, very, very alike.
That is how you can say, “This home could be worth this much because these factors all line up.” Now, here’s the thing, it’s rare for everything to line up. It doesn’t happen that often. Now, again, builders lost creativity… From early 1900s to the mid 1900s, like 1950, 1960, there was so much variety in homes. You would have a Victorian next to a Colonial next to a Tudor. All these builders had all of these beautiful architectural designs that would make neighborhoods feel so different. As building became more commercialized, you would find these master plan communities would have five houses.

Dave:
Yeah, they would just reverse the layout. It would be very confusing to walk into two of them.

Jamil:
It makes it easier for us to compare houses as we’ve gotten farther and farther away from the creative process. But because things don’t necessarily always line up, we have to make adjustments. We have to be able to say, “Okay, if this house has an extra bathroom, or if it’s missing a bedroom, what would the adjustment in value be?” What I did, Dave, is I sat down with a hundred appraisers across the nation, because as you may or may not be aware, KeyGlee, my wholesale company, we do business across the nation.
I need to be able to value homes across the United States and do it pretty accurately so that I don’t make mistakes and I’m not purchasing homes and overpaying for homes, or that I’m also not undervaluing homes and not offering enough. I need to be able to see what is the maximum amount I can pay for this house in this condition so that I can make good business decisions. I can also then help the folks that are a part of my coaching or my franchisees make good business decisions. In interviewing these 100 appraisers, I found some very common rules, and these are rules that almost every appraiser follows.
Now, if you’re watching this on YouTube, you can probably find the document in the description, or if you’re listening to this on the podcast, just check the show notes and there’ll be instructions on where you can get this document, but I’d like to show you how this looks.

Dave:
Jamil, while you’re pulling this up, can you just tell us why you need to be so good at this as both a wholesaler and a flipper? What is the importance of being good at comping?

Jamil:
Well, great, great question, Dave. The reason why you have to be good at comping is because as real estate investors, we are trying to determine how much something could be worth, if there’s an actual opportunity here. And if we are looking to find an opportunity, we need to be able to know what is it worth before a risk is taken or before money is invested. As a business person, which if you’re a real estate investor, you are a business person, as a business person, it makes sense for you to have a good understanding of how much things are worth.

Dave:
If I’m going to go flip a house, there’s a few variables. I need to understand what the purchase price is, what the rehab costs are, and then the third one, which is how much I can resell the property for eventually, which is where comping comes in, because you can get a very good idea of what you’re going to buy something for. Eventually you’ll know exactly what that is.
As you become more experienced in flipping, which I am not, I assume you get better at estimating rehab costs. This is just seems like a crucial skill for both wholesalers and flippers and really any type of investor that’s doing any value add. Even if you’re going to do value add and hold onto something and rent it out, you still want to be good at this.

Jamil:
Absolutely, yes. From the standpoint of a wholesaler, why you would want to know how to comp is wholesalers are selling potential. We’re looking at a property and saying, “This is the potential of this. If you did this renovation or if you spent money here and fixed this here, the house could be worth this much. That’s why I’m owed or that’s why I believe that you should pay me five or $10,000 to give you this opportunity to flip because I’m showing you what the potential that exists in this property is.”
If you’re a flipper, you need to know, if I buy this house for this much money and I spend 50 or $60,000 renovating the house, will I actually be able to sell it for this value and make money, or am I going to just break even and lose money? If you’re a buy and hold investor, if you are buying a home and then renovating it and then hoping to refinance it and pull your cash out, you need to know what it’s going to appraise at. That’s why these appraisal rules are so important. Regardless of whether you’re a wholesaler, a fix and flipper, or a buy and hold person, it’s important for you to understand how to underwrite and determine value.

Dave:
Beautiful. I love it. You have some appraisal rules that you use basically for comping across the country, is that right?

Jamil:
Correct. The appraisal rules, again, like I said, have been derived from interviewing 100 appraisers across the nation, and these were the commonalities that I found. Now, before we move any further, I do want to say, for 2023, we are wanting to use comps that are no older than six months. Right now, appraisers, in fact, they would prefer to use a comp that is no older than 90 days, but they will go as old as six months, but no older than that because we’re all aware the market has shifted and you can’t use comps that are older than six months because the direction of the market has changed.

Dave:
Can you just give us some context? In normal times, how old of a comp would you use?

Jamil:
Well, before the market turned, appraisers would have gone back as far as 12 months because the market was going in one direction. Here’s the thing, if there was a comp that they found that was 11 months old, because the market was still going in the same direction, meaning things were worth more than they were 11 months ago, you could use that comp from 11 months ago because the house was only worth more than what that number was giving us.
An appraiser, if there weren’t a lot of sales available or a lot of sales activity available, instead of leaving a subdivision, which we’ll talk about here shortly, instead of leaving a subdivision, appraisers would time travel. They would actually go back. You can see this right here. It was better to time travel than leave the subdivision, whereas now it’s actually better to leave the subdivision than time travel.

Dave:
That’s interesting. In a normal time, let’s say in 2021, if an appraiser goes out and creates a comp and they find a great comp from nine months ago, with how quickly the market was growing, were they adjusting it, like saying, “Okay, we know the market generally went up five to 10%?” Really if there’s no good ones in the area, are they generally just older and not taking into account the last six, nine, 12 months of data?

Jamil:
Yeah, they’re not going to just give you appreciation without evidence. The reason for that, Dave, is because the job of the appraiser is to protect the lender.

Dave:
They’re being conservative.

Jamil:
Unless there’s actual evidence to prove that value exists, they’re not going to just extrapolate it for you and give you an additional five or 7% of value on your house. Because again, the way that it’s looking, they want to protect the asset, they want to protect the loan, they want to make sure that their number is accurate, and they’d prefer their assessment to be more conservative than accurate. Now, looking at these appraisal rules, again, we always want to try to stay within the same subdivision.
That’s something that appraisers will typically do. I’ve seen many would-be wholesalers or fix and flippers make errors where they will ignore a comp within the subdivision, so a viable comp within the subdivision, and they’ll actually leave the subdivision to tell a better story of value.
Actually, wholesalers are very, very, very guilty of this because they’re trying to share or trying to paint a picture of what a property’s potential is and they will just ignore, they’ll ignore a house in the same subdivision behind our subject house or a couple doors down and opt to use a sale from a completely different neighborhood just to try and prove that this house if having an investment made to it could be worth $100,000 more than what it should be. Generally speaking, you don’t want to leave the subdivision.

Dave:
Because otherwise, you can comp something that’s maybe as the crow flies a 10th of a mile, right?

Jamil:
Yes.

Dave:
It looks like it’s close, but it’s in a different subdivision and might have different quality of homes or just a totally different character or whatever it is.

Jamil:
Exactly. Have you ever been in a neighborhood, and this is very, very common in these major metros in the United States, but you ever been in a area where you walk for two minutes and the neighborhood just completely changes?

Dave:
Yeah, of course.

Jamil:
A few streets over it, we’re talking about night and day difference.

Dave:
Totally, yeah.

Jamil:
This is the reason why, right? You don’t want to be looking at properties outside of your subdivision if there’s comps that exist there, because things can change one block over. It’s funny, here in Phoenix, Arizona, we have these historic districts. You can literally be looking at a house in a historic district and one street over, it’s not in a historic district, you’re outside of the historic district, and the values drop by $100,000 or more. It’s really important to pay attention to these things. Again, you want to try to stay within the same subdivision. Another rule that appraisers will use is they won’t use or compare properties that are more than plus or minus 200 square feet apart in size.
Here’s the reason why. As a house gets larger, its dollar per square foot value starts to decline. Smaller houses have a higher dollar per square foot value. What many wholesalers who are just getting started accidentally do is they’ll see a renovated comp, say it’s 1,000 square foot house, and let’s just say the subject house they’re looking at is 3,000 square feet. It’s the largest house in the neighborhood. They’ll mistakenly take the dollar per square foot of that 1,000 square foot house and they’ll apply that dollar per square foot to a 3,000 square foot house.
Now they’ve got this crazy number they think this house is worth because they used an incorrect dollar per square foot extrapolation. You can only use the dollar per square foot extrapolation plus or minus 200 square feet.

Dave:
That makes sense to me. If it was a big house, let’s say it was 4,000 square feet versus 4,400, does the same principle still apply?

Jamil:
Yeah, I think that that rule starts to get a little bit less constrictive as you get larger in home. It would make sense to me that you could use a 4,400 square foot comp and a 4,000 square foot house. That makes sense. That 10% does feel right. However, it’s still less accurate. If you can find… Again, the more you break these rules, it doesn’t mean you’re wrong. It just means that your value is becoming less and less and less accurate.

James:
Price per square foot’s like a good value check, but I wouldn’t ever use it to put the value on. Typically, you can see where the clusters are in those segments. 3,500 to 4,000 is going to be around this range, 2,500 to 3,000. You go in ranges of 10 to 20%, and then you can narrow that price per square foot down a little bit more.

Jamil:
Exactly. The next thing that you want to do is you’re always wanting to make sure that you want to compare properties that are of the same type. Let’s just say for instance, you’ve got a single story ranch, and your comps are mainly two-story houses. They’re not the same, right You want to compare single story ranches to single story ranches. You want to compare two-story houses to two-story houses. You want to compare Colonials to Colonials, Tudors to Tudors. You want to make sure that your property type is the same. Again, another example here in Phoenix, Arizona, the pitch of the roof can even qualify as a reason for value discrepancy.
For instance, single story houses here in Phoenix, if they have a pitched roof, are worth roughly 10% more than flat roof homes. You want to compare houses that are of the same property type. Now, again, guys, the way to know if you’ve left a subdivision or not, I just follow this rule. If I’ve crossed any major roads, there’s a chance I’ve left the subdivision. That’s it. I can keep myself pretty honest and I can keep myself pretty accurate by making sure that I’m not crossing any major roads. Now, if you’re using any comping tool, typically major roads are different colors.
You can just see, oh, the thickness of this line or the color of this line is different from all the other street lines or street colors, so this must be a major road. Whatever comping tool you’re using, just try to get an understanding of what the legend is or what the different colors or the different widths of the line stand for. And then the next thing that you want to pay attention to is the construction technology or what I call build generation. For the most part, appraisers will only compare homes that are within plus or minus 10 years of construction of each other.
And that’s because the technology of building has changed and it changes so rapidly. Pretty much every 10 years, the construction technology is completely different than it was 10 years prior. Now, where this rule doesn’t really apply is in the late 1800s to the early 1900s. There wasn’t great strides in building technology made between 1870 and 1930. We tend to find appraisers use comps fairly liberally in those late 1800s and early 1900s. But once you get past like 1930, they typically don’t like to compare homes that are more than 10 years apart in build construction year.

Dave:
That makes sense. That makes a lot of sense.

Jamil:
Now, again, as I’d mentioned earlier, you’re not going to have the same house all the time. Let’s just say, for instance, your subject house is a two bed, two bath, and the comp that you’re looking at is a three bed, two bath. You need to be able to accommodate for that bedroom’s value. Or let’s just say your subject is a three bed, one bath and the comps you find are three bed, two baths. You need to be able to accommodate for what that bathroom’s value is. These are general values that appraisers are using for bedrooms, bathrooms, pools, and garages.
For a bedroom, that value can be worth anywhere from 10 to $25,000, depending on the price point of the house. A bathroom is worth plus or minus $10,000. A pool, this value is the one that actually really irritates me the most. An appraiser will only give you plus or minus $10,000 in value for a pool here in Arizona. I’ve built many pools and I’ve never built a pool for $10,000. They cost upwards of 30 to $50,000 to install, yet an appraiser will only give you $10,000 in value for it here.

Dave:
I heard once that pools bring down the value of houses in some neighborhoods. I’m sure in Arizona that’s not true, but I grew up in the Northeast and people never built pools because they apparently brought down the value of homes.

Jamil:
Depending on where you live and the maintenance required, they can absolutely be a hindrance.

James:
And that’s true. That was true. In a Pacific Northwest, you got a pool, that’s a negative, higher insurance, dangerous. But ever since the pandemic, that changed. It’s all of a sudden pools got you a premium in Washington.

Dave:
You use them like two weeks a year in Washington.

James:
And not only that, there’s not very many pool companies here, so you’re paying two to three times more than you’ll pay in Arizona for a pool. I got a couple quotes and I was like, no, not doing it. I’m filling this thing in.

Jamil:
A garage is worth plus or minus $10,000 and a carport worth plus or minus $5,000. Now again, this last adjustment is something that we want to take into consideration and it differs based on price point. I’ve seen many new wholesalers, new fix and flippers make this error. Guys, pay attention to this. If you are siding, backing, or fronting traffic, commercial or multifamily, you have to make an adjustment in value. Let’s just say, for instance, you’re in the price point under 500,000. If you are siding or backing traffic, commercial or multifamily, you want to adjust down $10,000. If you are fronting traffic or commercial, you want to adjust down about $20,000.
But then when you get into more luxury price points over 500K, if you are siding traffic or commercial, will give you a 10% hit. Instead of 10,000, it’s 10%. If you’re backing traffic, multifamily or commercial, it’s 15%. If you’re fronting, it’s 20%. I actually just recently, we accidentally committed to and took down a house that was not only on a major road, but also fronted some commercial. The comp that we had used to determine value was one street behind us and the difference in value was over a $100,000. When it all shook out and we were actually able to sell the property, we had missed the mark by about a 100K.
It was right on the money at 20% for a value adjustment because of the traffic and the commercial that was there. Now, the last little bit that I want to say and that’s usually just for any additional dwelling units or basements, typically what I’ve seen, and James is going to have a different assessment of this, but typically what I’ve seen is appraisers will typically only give you 50% of value for basements or ancillary dwelling units depending on the level of finish. But again, that’s regional, and so that value may or may not be different in different markets.
It’s something that you definitely want to check into with fix and flippers or appraisers in your local area to see how much value they’ll give you for a basement renovation and for any ancillary dwelling units.

James:
Again, that’s a huge point that Jamil just pointed out, and it is regional, so you got to look into it. But when you have a basement, if you have 1,000 square feet up and 1,000 square feet down, they’re only going to count that square footage for value purposes at 50%. You’re looking at a 1,500 square foot house rather than 2,000, unless you have full egress going out of the property. In Washington, if you have a full egress, you dig down the basement, you put sliders in and you can egress out, they’ll give you 100% value.

Dave:
Like a walkout.

James:
A walkout basement. Yup.

Dave:
What about a DADU?

James:
DADU, they give you 100% value for the square footage in Washington, and then they’ll look at it… They do it two different ways. A lot of times they do it on a rental approach if you’re keeping it in… Well, it depends on the lender that you’re putting together, but they’re going to use it based on either rental approach if you’re keeping it as a rental. But in Washington, we can condo them off and give them their own parcels, and so they’ll give us full straight value. They were extremely difficult to comp two years ago because there wasn’t very many. Now there’s a lot more.
What they used to do is actually take small single family houses on small lots and then town home comps and they would blend them together to get the value prior to having the data points. Now, luckily, we have a lot more data points. It’s easier to put values on them.

Dave:
I was curious, because for everyone listening, DADU stands for detached accessory dwelling unit, basically a little second unit, call it a mother-in-law suite, something like that, that’s not attached to the primary home. In Washington, as I understand, James, they have “upzoned” a lot of the single family plots so that you can add these things. They’re talking about doing the same thing in Colorado right now. I was curious because that seems pretty important for comping if you were going to add those types of things, what kind of value you get for it.

James:
Oh, yeah. Extremely valuable to understand that.

Jamil:
In Arizona, the DADUs are still only getting 50% of value. Unfortunately, I think and it just has to do with inventory and we’re not as constricted as the Pacific Northwest or places like Los Angeles where that DADU has a major selling point, here in Phoenix, Arizona, they’re still only giving you 50% of value for them.

James:
Phoenix is a lot bigger city, so the density is not as… Seattle is tight, so they’re all over the density.

Dave:
All right, so are those your rules, Jamil?

Jamil:
These are the appraisal rules. I would highly suggest that anybody who is really planning on becoming a full-time real estate investor, you learn these rules and you commit them to memory. The more you comp, the more you look at properties and try to determine how much stuff is worth, the better you will be at it. Getting good at comping doesn’t just happen naturally. You have to practice at it. I would suggest putting in as many reps as possible so that you get really good at understanding value.
For myself, David, I became the most important person in my company because I am the best comper there. That’s it. I’m the one that they go to to make sure that we’re not making a mistake in the commitment. I’m the one they go to to ask how much is something worth. Because of that, I’m just always going to be the most popular guy.

Dave:
You’re a popular guy for many other reasons beyond that, but that’s a good skill to have.

Jamil:
Thank you.

Dave:
All right, well, Jamil, thank you so much for sharing this. Again, anyone who wants to check out these tips, Jamil has very generously made that available to everyone. You can find those in the show notes or on biggerpockets.com. All right, let’s go to James. From what I understand, we were talking offline, James, you have a slightly different approach, because whereas Jamil is comping things on a national basis and has to be really good at this without intimate market knowledge, Jamil, I assume that that makes sense.

Jamil:
Very broad, yeah.

Dave:
But James, as you always talk about in the show, you really concentrate on one market. How does comping change with your style of investing?

James:
What Jamil is doing and what he just talked about is so important, because I’ve been investing in other deals in other states too with other operators. Having those general principles for a nationwide wholesaling or when you’re doing more tract style homes, that will really help you get through your deals quickly. Having those tools are really important. For us, we have the same general rules, but we’re a metro flipping company and we work inside infill areas, very tight density spaces, which have a lot of concentration of population in a small area. What that means is there’s a lot more variance in a small area.
When you’re looking in Phoenix, Arizona, it’s a bigger short plat. You might go into other subdivisions that are a lot bigger. Whereas in Seattle, we have to say sometimes street by street. When you’re dealing with an expensive market, the as is comparables are irrelevant to us. It’s all about what is the potential of the property and the value add that we can uncover to make this deal more profitable.

Dave:
Can you just say more about that? What is the difference there with as is comps, and what is your approach? Does that just mean you’re not restoring the house in its existing format and you’re thinking more creatively about totally renovating, adding new features, adding new bedrooms, adding new units? Is that what you mean?

James:
Well, it’s more what am I paying for the property? If I’m looking at a property right now and I can pay let’s say 500,000 for it, if I go on the MLS and I find like for like comparables, which maybe the home doesn’t have a finished basement and need some repair, what’s the as is value like? What would that house sell on market in today’s number for the condition that it’s in? When you’re in more tract home areas, the variance is going to be a lot different because the tract homes are typically built a little bit better. They’re newer, like Jamil was talking about. They have the same floor plans. There’s not going to be as a big of a variance on the as is for the remodel.
It’ll be more standardized. But in metro areas where you’re typically finishing more space, adding more living space and adding more value, the swing in the comps are very dramatic. A 2,000 square foot house that’s only half finished could sell for half of what a finished house would at that point. If I’m looking at more broad areas, I’m still always referencing the as is. But if I’m in my core metro, I’m really just looking at what the buildout plan is, what’s my total maximum build-in square footage, and then how do I get there with a systematic construction plan, not just grabbing comps and then putting the house back together.
A lot of the value curated in the comps is based on what you’re going to do to the property and how much heavy lifting you have to do.

Dave:
All right, so tell us how you do it.

James:
In metro areas, when you have a lot of density, there’s not very much inventory a lot of times. And then the other thing about these core metro areas like San Francisco, Seattle, Austin, they’re expensive and there’s a lot of money down there. A lot of times just buying a like for like renovation, when you’re buying a three bedroom, two bathhouse and selling it for a three bedroom, two bath house, the margin is not going to be there because the buy price will just be too high. For us in Seattle, we’re always taking and we’re looking at how do we increase the value. How we do that is the first thing that…
My general rules for comping a property is I need to be on the search for how do I increase this and find that magical formula and plan that’s going to get the highest and best use. We’re always focusing on highest and best use, which is going to turn in that value add. But when we’re looking for these things, the first step we always do is pull the tax record, because the tax record of the property is going to give us the general specs to what we can build out in there. That’s going to give us the finished square footage, the unfinished square footage, what the current bedroom and bathroom counts are, what the buildable out plan could be to where we can add those in.
If I’m looking at a house that’s 1,000 square feet upstairs, two bedroom, one bath and I have 1,000 square feet in the basement, I’m not really worried about the two bedroom, one bath because I have 2,000 square feet that I can work in and I can build whatever I want in there. I can at least probably get a four-bed, three bath with the right construction plan. I always pull the tax record because I want to know what the shell of the property is, what’s my buildable square footage that I can work inside.
And then the next thing I want to do is look at the other core aspects, which are going to be year built, because that’s going to tell me what kind of construction I need to do on that project, how rough it’s going to be, what kind of upgrades I’m going to need to do the duration of time. When we’re comping, we’re also thinking about the value plan that we’re putting in as well. If I have a home built in 1920, I know that that property is going to require a lot more seismic upgrades because the wood is old, the framing was different, which could add three to six months on my plan as well. The core comping is also telling me how to underwrite the deal all the way through.
It’s not just for the value. But as we pull the tax record, the core things I’m looking at is buildable square footage, year built and the era. I’m looking for the style code of house. Is it a daylight basement? Is it a basement house? Is it a two-story? Is it a rambler? And then the other thing that we’re really focusing on is what is the lot size and what is the zoning behind that? Because there’s a lot of hidden value inside your land. That’s where we have done very well flipping is not just looking at like for like remodels and going, “Oh, I can build this here and this is what my margin is.” It’s where is the hidden value.
We spent a lot of time looking at the lot, what the topography of the lot is, and then what is the zoning in that specific city, what do they allow for, whether we can build additional units. Can we subdivide it off? Or maybe the lot is just good in a metro area and it’s a little bit oversized, which in metro, if you have an oversized lot, you’re going to get a huge premium, especially with the pandemic and people wanting to have a staycation. Those things make a big difference while I’m going through my tax record. Always pull the tax record. Then we go right to the street view because I need to know, like what Jamil was talking about, is you can stay in subdivisions on these bigger cities.
With metro cities, street by street can vary dramatically, where I could be one street over and the value could be 20% more and then I could go another street over and that could be an additional 10% more. Those make big, big variances on the street view. I also want to see what my neighbors are. Because during that time, if I’m going to sell a house, but I have maybe crummy neighbors, that’s going to affect my resale in an expensive market by five to 10% sometimes, because people are okay spending the money on a property, but they want to live in it and they want to be able to go. The street view tells me my neighbors.
It tells me what is my street condition. Does it have sidewalks or not? That could be a five to 10% bump just on livability feel. Those are things you have to check out for as you’re comping because that’s going to make a huge difference on how livable it is. The other reason we’re checking for sidewalks is because that tells me utilities are there. That’s going to tell me what I can do with that lot as I’m looking at… If I’m looking for hidden value, but I have no utilities right there, it could be too expensive to bring in that extra unit in the back.
These little things can tell you a lot. Just by going on Google Street, I can see there’s going to be a 10 to 20% value swing just by looking at that. We go tax record, we look at the street, and then we start digging into our comps, which is going, okay, this is what we have, this is what we can build out. And then we pull three sets of comps every time. We’re going to pull on the unfinished space. We’re going to pull comps for the property with just the finished space that we’re not adding the space into the basement. Then we’re going to go highest and best use, which is looking at the total maximum square footage of the property and what can we fit inside there.
And then that’s going to give us the second value. And then the third value we’re looking for is where is the hidden gold on the property. If we have a 5,000 square foot lot with an alley in the back, which the Street View is going to tell me and it’s flat, in Seattle because of density, I can maybe add an additional dwelling unit there, which can dramatically change by numbers.
Every property we look at, we look at three different sets of comps, highest and best use with development, highest and best use with total maximum square footage, and then highest and best use for a simple renovation where you can get in and out of the project, not move as many things around, and click the deal out faster. Because sometimes building out the most expensive best product is the worst plan because of the permitting and the time.

Dave:
Awesome advice. Thank you so much. James is going to share a deal with us, and we’re going to walk through one of the recent ones, but it struck me while you were talking, James, and comparing it to Jamil that these two different approaches to comping make a lot of sense relative to your business model. Jamil, I assume that you hear James’ approach and you’re like, “That’s a great way to do this, but that’s his job because he’s the flipper.”
Whereas you’re the wholesaler and you’re trying to figure out just the basics of how much it could get, because it’s not really practical for you to know what a flipper might want to do in terms of renovating or adding, doing gut rehabs or just doing a cosmetic rehab. Is that right, or is this just personal preference here?

Jamil:
Well, I think we absolutely do do what James is talking about in certain pockets in our business as wholesalers. However, it is a lot fewer of those types of deals where we’re actually chasing a deep value add opportunity. We are more in the volume business of selling like for like. Hey, here’s a 2,000 square foot, three bed, two bath. Here’s a 3,000 square foot three bed, two bath. This is the ugly house. This is the cute house. Cute house is worth 500K. Buy the ugly for 350.

Dave:
Right. But then if the flipper does want to do the deep renovation, then they can. You’ve shown them that there’s value just doing the simple thing. If they choose to do the more deep dive into this like what James is doing, then that’s up to them.

Jamil:
Yeah. Again, it’s pocket specific, city specific. If the neighborhood calls for it, for instance, where I live here in Phoenix, in Arcadia, we have value adds happen all the time. You’re always looking at lot size, exactly what James talked about. In Seattle, you actually can go very close to 100% lot coverage. Here in Phoenix, 42% is max. You can only cover 42% of what a lot size is. We’re still doing this similar thing. The number of instances that we will get that deep into it is 5% of the time.

Dave:
All right, cool. Well, James, are you ready to share with us the deal you got?

James:
Yeah. We actually just closed on this. Randomly, when I did my first underwriting, I didn’t like the deal at all, because I flew through it really quick and I was like, well, it’s a lot of work for not that much money.

Dave:
How’d you find the deal, by the way?

James:
How we found the deal was actually a seller, he’s a builder in Washington, and we’ve boughten 18 homes from him over the years because we make it so easy. From an investor standpoint, when you’re doing B2B with other investors, it’s an easier transaction. He understands the math. We have our math. We make it very easy on him. He is a very established investor. But because we’re easy and we can be aggressive and his skillset isn’t doing renovations, so he doesn’t want to do all the value add, so I can do it for a lot cheaper than him. A lot of times he just called me up and we just did another deal.

Dave:
Nice. Awesome. All right. You didn’t like it at first though?

James:
I didn’t like it at first because I went through my surface underwriting really quickly, and the reason being is because the location it was in, it was on a oversized lot. He called me up and he says, “Hey, we have this house. It’s been a rental property of ours for 35 years.” It was a two bedroom, one bath house, 760 square feet on the main floor, and then there was 760 square feet in the basement that was totally unfinished. I’m looking at that property and I’m going, “Okay, well, I have a tight footprint house. Not the best thing for resale.” Those are things I’m always looking at when I’m going through a deal is not just what is the square footage, where is the square footage.
Because if you have a 2,000 square foot house with an unfinished basement that’s 300 square feet, that’s actually going to be a lot more livable than a 2,000 square foot house with 1,000 up and 1,000 down. At first when I looked at this, I’m like, well, I got roughly a 1,580 square foot house, but it’s not going to live really well. It’s going to be tight, two main floors, small bedroom, small bathrooms. That’s not great for marketability. That was the first way I looked at it. I’m like, that’s going to be kind of tight. It was in, I would say, a B style neighborhood of Seattle, not the prime part, but it’s in a path of progress where market values have done well.
But that’s also the markets that compressed a lot over the last six months. I wasn’t itching to be in this exact location because it was a weaker pool. At first I was like, well, I can buy this house. He wanted to just get a number out of me. The first things we did is we looked at the square footage, 740 up, 740 down. I knew what I could work with. And then I also knew that I had a daylight basement house because I had egress out, but then part of the square footage is not going to be above grade. Then what we did is once we looked at those comparables, I pulled two sets of comps.
The first one was for a 740 square foot house with an unfinished basement that was completely renovated, still new roofs, new windows, new plumbing, new wiring, and an establishing value at that point.

Dave:
Did you say 740 square feet?

James:
It’s a tight one, yeah.

Dave:
Oh, okay.

James:
It’s roomy.

Jamil:
I think the right word is cozy.

James:
Cozy, yes. Very cozy.

Dave:
Very cozy.

James:
When we pulled up those comparables, I’m looking at it two ways. I’m going, okay, well, the reason I like looking at it this way is because it’s fast. I can have that house renovated in six months, back to market. I’m selling that. I can put out my money, get it back in six months. It’s a good velocity. The issue I was having was was those comparables were only about $620,000 at the time. I knew he was wanting to be around 500. That is not going to pencil at all for us. Also, that was going to require me to back my numbers down and be at an offer price of around more of 390 to 400 to him, which I did not feel was a good value to the seller.
I knew that wasn’t an option because it wouldn’t work for the seller. So then we went to the next set of comps, which was gutting the house all the way down the studs because the layouts were a little awkward in the property, and we had to take it all the way down the studs and optimize it into a three bedroom, two and a half bath house. We were going to do a formal en suite upstairs with a walk-in bathroom closet, because all the comparables that we were seeing had the bigger bedrooms. Well, let me take a step back. As we pulled the comparables, we were looking at four bedrooms, two and a half bath houses, but ones with formal en suites and then ones without en suites.
The ones with en suites were selling for 10 to 15% more than the ones without. For us, as remodelers, we already know we’re going to take the whole thing down the studs anyways, so it doesn’t make a difference and cost that much whether we’re doing that or not. We threw away the non-en suite properties because we’re still doing the same amount of work to get a higher comp.

Dave:
Is that just something you know being in your area that en suite bathrooms is something you should be considering, or out of all the dozens of variables between houses that you can consider, how did you identify that en suites were the difference maker there?

James:
Well, there’s always your major selling features. When we’re looking at comps, we’re going through picture by picture on each house and we’re reading the descriptions. Because if you just do it quickly, a four bed, three bath house won’t comp for the same as a four bed, three bath house. It needs to have those amenities. We’re always checking for kitchens, en suites, because those are two big selling features. And then we’re also checking for layouts of bedrooms and baths. Where is the locational? If you’re a one bedroom upstairs and two in the basement or let’s say three in the basement, that’s a worst resale product.
Families don’t want to have their kids downstairs. We’re checking locations of spaces as well, because those are big differences. Not every 2,000 square foot house is the same. We’re checking all those finite details. Because as we’re doing our construction plan, it makes a big variance in the cost too if we’re having to move all the bedrooms, all the bathrooms. We’re looking for the highest highest and best use at that time.

Dave:
That’s awesome. Where did you come out with the final value there that you could get out of this property?

James:
After we looked at it, by adding the two bedrooms and a bath and a half and creating the en suite, the value of that property was going to be 699, or no, 725 at the time. By doing the extra scope of work, it was increasing the value by over $100,000. The cost of that renovation is only going to cost me about 50,000 more to do that plan. I’m getting 100% upside. But the thing I also have to look at when I’m looking at comps is how much time is that going to be because there’s a cost to that debt.
My true cost may be 50 grand to increase the value at 100,000, but I also had to account for the $20,000 I was going to incur in debt cost and whole cost. That tells us what the highest and best use is with these technical plants. At the end of the day, we’re still getting a 30% margin increase by using the debt and the construction to increase the value.

Dave:
Jamil, would you do anything differently?

Jamil:
No, I think that it’s really interesting to hear the really creative ways to increase and add value. One of the harder things for me to have ever fought for with respect to an appraisal is how much layout affects value and what James is talking about with respect to where the bedrooms are located. He’s 100% right. Of course, when you’re talking about a family, families don’t want their children to be on a different floor than where the parents are. That’s a very real thing, right?

Dave:
Yeah. I have a buddy who turned out like a beep up and we always make fun of him because he’s the basement kid. All his siblings lived upstairs and they were all fine. His parents stuck him in the basement. It’s been downhill ever since.

Jamil:
I mean, look, I was a basement kid too.

Dave:
Look at you! All right, you proved it wrong.

Jamil:
Well, I mean, if you were looking at me in my 20s, you’d be like, “That guy sure is turning into a basement kid.”

James:
Everyone can get out of the basement at some point.

Dave:
You’re a basement to top floor success story.

Jamil:
It’s interesting, because I agree, there is an intangible value to these nuances, these different things. I’ve just yet to see how that affects homes or how that has affected an appraisal in a deal that I’ve been involved in. I don’t know what is the value for a better layout and how much can you give that property?
What James is doing is he’s looking picture by picture and seeing, okay, well, if you have the en suite, it’s worth 20% more. I mean, over here, because we’re so cookie cutter over here, it’s just completely different. I love the artistic, I love the very intricate ways that you can… I would say that the way that James is comping houses is artistic. The way that we comp it is very formulaic.

James:
The one thing you can do as an investor is use your broker as the sounding board, because an appraiser’s not going to consider that as much a lot of times. They’re not going to consider the bed or bath counts as much, or livability and flow. That’s what your broker’s for. They’re going to tell you, is this property more marketable? If it has a better perfected floor plan, typically you’re going to get five, 10% more. That can make a big difference when you’re selling a million dollar house. Use the whole team when you’re looking at comping properties because it can make a huge impact. But this deal got even better though when we dug into it.

Dave:
What?

James:
Oh, it got way better. This is what pushed me over the edge because it was about looking at that highest and best use. Once I’ve figured out I was in his range, we dug down in more. Because when we’re looking at those numbers, we ended up buying this property for 435,000. We’re putting $135,000 in the construction, and then we’re going to sell it for 699 to 725 when we establish our comparables. The margin on that after you turn it and you take nine months and the hard money costs, it actually ends up being like 60, $70,000 in profit, which this is a lot of work for that much money. That’s where I was having the hesitation.
Going back to that, Metro cities, you can take a very average deal that might not be worth the effort and maximize it, because the next thing I looked at was the size of lot. The size of lot was a 6,800 square foot lot, which is big for Seattle. Typically, they’re four to 5,000. It was zoned single family. If you just look at that very surface level, you’re going, “You can’t build anything more there because it’s SF 5000, so one house per 5,000. You’re short.” But with the density increase, they’re allowing you to air condo off cottages. And then in that cottage or the DADU, we can then build a unit in the back, condo it off and sell it as a separate property.
But there’s a couple things you have to watch out for when you’re comping these. When you put a structure in the back of the property, my property that was worth 725 is now going to go down in value. My lot size is shrinking. It’s more congested. We have to adjust that down. The things that you have to consider on those values is where is your parking. Sometimes you are losing parking by doing this. Parking in Seattle can be a difference of $100,000 if you have a parking spot because of the amount of density. And then there’s a little bit more crime right now. You have to adjust that. We’re planning in the DADU.
And then based on that DADU, we had to come up with two new comps. One is how much is that property value coming down. And so then we started looking for comparables with properties with backyard cottages as well. We were only focusing on that, which brought our value down from 725 to 675, because we were still going to have parking and we were still going to have a yard. If we wouldn’t have had a yard or parking, it would’ve actually been 599. Really digging in those core attributes. The next thing we had to do was, what DADU do we build in the back? Do you build a two bedroom, two bath with no garage?
Can you get a one car garage in? Can you get a two car? Because a DADU in the back when we pull comps, if it had no parking, no yard was worth 599. If it had a one car garage in a small yard, it was worth 800.

Dave:
What?

James:
The swings are that big.

Dave:
What?

James:
Same square footages, same designed houses, but the livability factor, because they didn’t feel like they’re in a backyard condo, they feel like they’re in a house.

Dave:
In that single family home.

James:
Then I had to revisit the site and go, what can I fit here? And then from there, we figured out we could get a two car garage on this property, a two bedroom, two and a half bath, 1,000 square DADU with a yard, that’s worth 800 grand. My combined value just went from 725 on the high to over… We’re looking at the DADU’s worth more than the house in the back.

Dave:
I mean, it is a DADU technically, but you’re just building a second house.

James:
But it’s permitted and condoed off as a DADU. That’s important. Because if we were subdividing, it would take six months to nine months longer than doing the DADU. On that cost, that’s $100,000 in hold cost at that point. When we’re pulling comps, it’s not just about finding like for like, that’s important, but it’s the scenario. How are we moving it up and down?
What is that magical, highest, and best equation that might be the most amount of work, or maybe it’s due to the least amount of work and get your velocity of money going? Get in and out, turn it. Because at one point, I was really thinking about just doing a two bed, one bath, turning it because my cash on cash return was actually higher than the bigger project.

Dave:
I love this because a lot of times, especially in recent years when deals have been difficult to come by, we say on BiggerPockets and lots of other real estate educators say that you can’t always find deals, you have to make them. I think this is a perfect example of making a deal. Obviously not everyone can do this type of construction, but it just proves that thinking creatively and finding the best possible use of your property can make something great out of what at first pass appears like it’s not going to be profitable at all.

James:
Yeah, and that’s where the talent of comping is so important. I heard for two years, you can’t find deals. There’s no deals. Our favorite deals and the most amount of properties I buy are ones that are sitting right on market publicly advertised for sale that have been on market for six months. People just were looking at it one way. My passion is looking at a deal that everyone says is a bad deal and cutting it up four to five ways and finding that magical equation to where it goes from a dud to a home run.
That’s why if you’re in those core metro areas, the properties are expensive, the values you can get the upside, but you have to put that perfective plan together, that’s by understanding values and then going, okay, what can I do to maximize this deal, but not overcomplicate the plan?

Dave:
I love it. That’s a perfect way to get out of here. Thank you both so much. I’m going to try and flip a house hopefully with you guys. Let’s do it together. I think it would be super fun. We’ll make some content out of it, but I learned a lot. One quick question for you guys. I know we have two seconds. Can you tell me really quickly, how do you adjust this if you’re in a market that’s correcting? Are you taking these comps and then adjusting them down in the comping process, or are you padding your construction budget or your margins? How do you adjust to make sure that you’re not comping against a market that will have changed in six to nine months?

Jamil:
For me, if I’m using comps that are 90 days old or newer, I feel pretty confident that we’ve adjusted for market condition. Yes. Here’s other thought. I’m seeing the market actually improve, so I don’t feel like we’re going to be worth less by the time I come to market on my renovation from this point as long as I’m using comps that are 90 days older or new. And then I’m also looking at pendings, where are actives and pendings sitting, because that’s going to tell me the direction of where things are going as well.

James:
Yeah, Jamil nailed it. Recent comps or we use comps with similar interest rates. We’re going, okay, what is the rate at? Let’s look at what the market was doing at that time. And then pendings. Pendings are key because that is the most up to date. And then communicating and talking to those brokers because they’re also telling you how many bodies are coming through that house. If they’re pending at full price, but they had six people come through in the weekend, I’m going to feel good that that market’s going to hold. If they were on for 45 days and they had one offer with very little showings, I might bring the value down a little bit. It’s about velocity of people as well.

Dave:
All right. Well, we got to get out of here. But thank you guys so much. This was a lot of fun. We went way over because I was learning a lot, and I hope everyone listening learned a lot. Thank you, Jamil and James, and thank you all for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Caitlin Bennett. Produced by Caitlin Bennett. Editing by Joel Esparza and OnyxMedia. 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.

Sun Tzu’s The Art of War is a renowned ancient Chinese military treatise that has been studied and applied for centuries. Although originally written for warfare, the principles outlined in the text can be applied to various fields, including business and startups.

Ancient wisdom shouldn’t be discarded quickly even in modern circumstances. The principles of the world haven’t changed much despite the ever-changing makeup of our time.

Here are five quotes from the ancient text that can inspire and guide modern startup founders:

1. “Every battle is won before it is fought.”

This quote from Chapter 6 emphasizes the importance of preparation and planning in achieving success.

Before launching a startup, founders must conduct thorough market research and analysis to identify opportunities, competition, and potential challenges. This preparation is essential in developing an effective strategy and positioning the startup for success. Startups must also have a clear mission, vision, and goals to guide their efforts and keep them on track.

2. “If you know the enemy and know yourself, you need not fear the result of a hundred battles.”

To be successful as a founder you must have a deep understanding of the strengths, weaknesses, opportunities, and threats to your project. You must also understand your competition, including their strengths, weaknesses, and strategy.

While this is obvious, it is much easier said than done. Having a surface level understanding of either could be fatal, as the devil is in the details. This is why the best way to acquire deep knowledge of your project and its environent in the early startup stages is to run validation tests.

3. “All warfare is based on deception.”

Chapter 1 highlights the importance of deception in warfare. While deception is not the right term for startups (since they are not in an adversarial situation with most of their stakeholders), creativity and originality are crucial for success.

Successful startups use storytelling to create an emotional connection with their audience and differentiate themselves from their competition.

4. “Opportunities multiply as they are seized.”

Chapter 5 stresses the importance of opportunism.

This is likely even more important in the startup field – innovative projects must be agile and quick to respond to changes in the market, including emerging trends, shifts in consumer behavior, and competitor moves. This requires a culture of innovation and experimentation, where failures are viewed as learning opportunities and pivots are embraced as necessary.

5. “In war, the way is to avoid what is strong and to strike at what is weak.”

As a startup, you can’t take on established corporations head-on. Instead, you need to differentiate yourself and provide more value for customers in areas where corporations struggle ot do so. Usually those are market new dynamic market niches that require rappid innovation and agility – qualities that large corporations lack.

Every great empire that has come before the United States has eventually fallen. Some have fallen at least somewhat gracefully, like Great Britain. Others, like ancient Rome, well, not so much. 

As I write these words, more and more ink has been spilled regarding the looming threat to the American-led world order. Words such as “de-dollarization” and a “multipolar world” are thrown out often, perhaps simultaneously or even interchangeably.

And indeed, “de-dollarization” is happening, albeit at nowhere near the speed some doomsayers describe. And we are likely already in a “multipolar world” where the United States is no longer the sole superpower. Instead, a new cold war—this time between the United States and China—seems to have dawned as East and West once again bifurcate and globalization slows down and begins to reverse.

Not surprisingly, what plays out over the next few years will have a significant impact on investors. But first, let us strip away the hyperbole and describe what exactly is happening.

A Crash Course on the History of Reserve Currencies

Before the Great Depression, the United States and most other countries had a gold-backed currency. In other words, citizens could have their dollars redeemed in gold bullion. This remained true until Franklin D. Roosevelt severed that link during the Great Depression. 

While most currencies had been convertible to gold, this was rarely done. And during most of the 19th century and the first half of the 20th century, Britain’s pound sterling was the reserve currency of the world. It was World War II that changed this, as Britain put itself into such enormous debt to pay for the war (peaking at 270% of GDP) that the position of the pound was severely eroded. 

So much so, in fact, that when Britain, along with France and Israel, invaded Egypt during the Suez Crisis of 1956, the United States effectively vetoed the action by pressuring the International Monetary Fund to deny Britain financial assistance. Without such assistance, Britain, which once held the reserve currency of the world, would have to humiliatingly devalue its own currency. Britain decided to withdraw from Egypt (and eventually devalued its currency in 1967, anyways).

While the Suez Crisis symbolized the changing of the guard, the shift from pounds to dollars was all but codified with the Bretton Woods Agreement of 1944. This agreement opened a “gold window,” allowing nations (but not individuals) to convert dollars to gold at a fixed rate of $35 an ounce. At the time, most of the world was devastated, and the United States controlled a whopping two-thirds of the world’s gold supply. Bretton Woods all but made it official that the dollar was now supreme. 

However, such power usually leads to excess. And American exceptionalism, in this case, just meant exceptional excess. The United States very soon found its gold supplies being squeezed as the “guns and butter” of the 1960s (the Vietnam War and Great Society programs) were costing a fortune. To pay for both, the United States printed a lot of money, causing the currency to depreciate. Remember, though, the Bretton Woods system had a fixed exchange rate for gold. As dollars lost their value, gold was still priced at $35/ounce, and a run on America’s gold reserves began.

Thus, in 1971, Nixon closed the gold window, and dollars were no longer convertible to gold.

Now, the dollar was the reserve currency of the world, yet it was backed by nothing but the “full faith and credit of the U.S. government.” At the time, this left something to be desired, especially given all the money the U.S. had printed to help pay for so many guns and so much butter. The United States began to suffer from stagflation with low growth and inflation rates consistently north of 10%. 

A large part of the reason for such inflation was that there were too many dollars chasing too few goods. To alleviate this pressure, the Nixon Administration made a deal with Saudi Arabia in 1974, which brought about what is now referred to as the petrodollar.

Under this and subsequent agreements, Saudi Arabia and all OPEC members would sell oil exclusively in dollars. Then, as Investopedia notes, “subsequent deals deployed Saudi oil export proceeds to pay for U.S. aid and development projects in Saudi Arabia and to finance U.S. weapons sales to the kingdom.”

The petrodollar both increased the demand for dollars and also created an important reason for other countries to store them. And so, they did. In 1975, a full 84.6% of currencies held in reserve were dollars. After oscillating for a while, it settled in at 71.1% in 2000. Then, well, things started to unravel, albeit slowly.

Things Fall Apart?

After Russia invaded Ukraine in February 2022, Russia quickly became the most sanctioned country in the world, surpassing Iran for that dubious title by a factor of three. Unfortunately, though, the sanctions didn’t work, and the Russian ruble hit its strongest level since 2015.

Perhaps this was a sign of America’s eroding economic position in the world. Since then, a smorgasbord of countries have abandoned the dollar for trade in whole or in part. Not surprisingly, Iran and Russia abandoned the dollar. But in addition, India has signed an oil deal with Russia that forgoes the dollar, as has Brazil with China. France is doing the same, bringing de-dollarization right into the heart of NATO. And so is Saudi Arabia, the progenitor of the petrodollar.

So, needless to say, the petrodollar’s preeminence is being tested. Now, it’s important to note that this is not de-dollarization per se. The dollar reserve standard regards the currencies world governments hold, not the currencies they trade in. Still, the latter moving away from the dollar bodes poorly for the dollar to remain the world’s hegemon.

And that is what is happening, although at a very slow and steady rate. Over the first 23 years of this century, we have seen a notable decline in the dollar’s reserve currency status, falling from 71% to under 60%.

Here’s a chart from the Federal Reserve that shows how foreign exchange reserves have changed since 2000. The dollar has been slowly but steadily losing its share of foreign reserves: pic.twitter.com/1CRpMWJCPu

— Genevieve Roch-Decter, CFA (@GRDecter) March 29, 2023

At the same time, the United States is flirting with the same things that brought down the pound sterling and the Gold Window: too much debt. 

The U.S. trade deficit has been negative for decades and sits at negative $948.1 billion in 2022, up over 10% from 2021. And the federal budget deficit is even worse, at $1.1 trillion during just the first half of fiscal year 2023—up 63% from 2021. 

Bipartisan Policy Center

And there is no Covid nor lockdowns to explain this away.

Should We Panic?

Fiscal implosions rarely look like real-life implosions. After all, the United States bounced back from the Great Depression and Great Recession at least relatively quickly. A country’s collapse is usually due to war or revolution. Think of the Goths with Rome, the Bolsheviks in Russia, the Americans, British, and Russians with Germany, etc.

Fiscal unraveling may hollow out and leave nations vulnerable to such destruction, but it rarely destroys a country by itself. And there doesn’t appear to be anyone likely to threaten the United States militarily. We should also remember that Britain did not collapse after the pound sterling fell to second behind the dollar. 

At this point, the only possible contender to the dollar is the Chinese yuan. There’s no way the dollar will fall to third, and it has a long way to go just to fall to second. 

Despite many doomsayers, cooler heads on both the right and left have cautioned against delusions of the opposite of grandeur. They note that “the Chinese yuan has no adopters outside of China” and “Middle East oil-producing nations have other reasons to stick to the dollar. A crucial one is that most of their currencies are pegged to the greenback, requiring a constant influx of dollars to support the arrangement.”

Furthermore, despite fiscal recklessness spanning multiple administrations by both Republicans and Democrats, the United States still has the largest economy in the world. The GDP of the United States is $20.49 trillion, 50% larger than China’s and just a few trillion smaller than the next eight countries combined.

And it should also be pointed out, as Robb Nunn succinctly did, there are other reasons the U.S. dollar isn’t going the way of the Dodo. One is that it’s backed by the world’s most powerful military.

It’s that the US dollar also comes with the underwriting of the most powerful military on Earth. Assured by alliances with 8 of the top military powers on Earth with it. The Euro-Dollar system is where capital reserves are held etc etc

— Rob Nunn (@robfnunn) March 30, 2023

What Does This Likely Mean for the United States and Investors?

What we’re seeing is unlikely to be a calamity but is instead the slow but steady deterioration of the dollar as the sole reserve currency of the world. The future is likely that “multipolar” world with the dollar being held as the plurality of the world’s reserves but no longer the dominant position it had for so long.

What this means is that there will be more dollars returning to U.S. shores that were once occupied in some foreign country’s reserve accounts. Not a tsunami of dollars returning, but a noteworthy amount in a relatively steady stream.

At the same time, global trade and integration is slowing and likely to reduce as countries retrench with more nationalist policies and the world again divides between East and West. While this has its benefits, low costs are not among them.

Furthermore, the baby boomer generation is retiring, taking a disproportionate percentage of the labor pool out of the workforce. And this is a global phenomenon. The United States isn’t even close to the worst when it comes to upside-down demographic pyramids.

These new retirees are and will be switching from savings mode to spending mode. As geopolitical strategist Peter Zeihan notes,

“In the world of 1990 through 2020… all the richest and most upwardly mobile countries of the world were in the capital-rich stage of the aging process more or less at the same time. Throughout that three-decade period there have been a lot of countries with a lot of late-forty-through-early-sixty-somethings, the age group that generates the most capital… Collectively, their savings has pushed the supply of capital up while pushing the cost of capital down…” 

But once those Baby Boomers start retiring (as they already are), the math switches,

“Not only is there nothing new to be invested, but what investments they do have tend to be reapportioned from high-earning stocks, corporate bonds, and foreign assets to investments that are inflation-proof, stock market crash-proof, and currency crash-proof.” (The End of the World is Just the Beginning, pg. 200-202)

In short, the eroding of dollar hegemony, the fiscal deficits, the pivot away from globalization, and the reduction in savings from retiring baby boomers is all going to be putting significant upward pressure on interest rates.

Inflation in the United States has cooled significantly since the highs of 2022. But long term, the “good ole days” of interest rates in the 3s and 4s are likely a thing of the past. There’s simply too much upward pressure on prices and interest rates.

Already, there has been talk of moving the Fed’s inflation goalpost of 2% up to 3 or 4%. While Fed chairman Jerome Powell has rejected such ideas so far, it will likely become inevitable in the relatively near future.

Given the long-term trends, it would make me hesitant to refinance old mortgages in the 3s and 4s, even if rates drop back into the 5s. (Unless, of course, you have a really good place to put the money you refinance out.) Fixed rates are also better than adjustable, at least once rates come back down from their current high.

While no one has a crystal ball, rates appear to be coming down in the short term, but all signs point toward persistently higher interest rates in the long term.

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