April 2023

Equal employment and affirmative action laws enacted during the tumultuous 1960s are the roots of today’s diversity, equity and inclusion initiatives. Six decades and a global pandemic later, companies have come a long way from initial attempts to diversify their workforce. What began as simply “diversity” has become significantly more complex.

The pandemic changed the values of workers and the workplace itself forever. Employees are attracted to companies whose DEI efforts are more than skin deep. Social unrest surrounding racial injustice, civil liberties and the increasing perils of climate change have left workers asking their employers to make commitments to these types of issues as well.

It can sound like a lot of internal and external distractions corporate leaders would rather avoid than deal with. Many would prefer to concentrate only on producing a great product or service, gobbling up market share and enjoying increasing profits.

Although DEI is changing, it isn’t going away. Leaders need to focus on their DEI strategies now more than ever. Here are a few reasons why.

Kindness Counts

Corporate America is full of brands that embrace kindness. Think Bombas, TOMS Shoes and, well, KIND. The practice of companies donating a product to those in need for every one sold is a notable kindness to the broader world. But charity, as they say, begins at home. What are companies doing to cultivate kindness among their own?

Some brands are evolving beyond simply trying to educate their employees about the value of understanding, appreciating and welcoming diversity. They are also incorporating kindness into their respective DEI strategies. Taking the time to truly see and hear individuals who are different from you not only helps everyone flourish, it also develops leadership capability, creates a growth mindset and drives performance.

This is Marissa Andrada’s philosophy. As Chipotle’s former Chief Diversity, Inclusion & People Officer, her mission was to co-create with leaders and team members an environment where each employee, at every level of the organization, can thrive and do their best work. This inclusive, equitable culture affected the business transformation and profitable growth for the company. As a DEI thought leader and in-demand speaker, Andrada refers to herself as a “Culture Master & Kindness Catalyst”. As such, she is passionate about helping companies create purpose-driven, high-performance cultures that are exponentially more meaningful than mere purveyors of products and services and successful at achieving business results.

The idea that the whole is greater than the sum of its parts is an ancient one. To be whole, though, every part—that is, every person—needs support and the opportunity to excel. Wholeness means no one does things at the expense of someone else, but for the greater good.

DEI Has Become Too Big to Fail

Large banks aren’t the only institutions deemed to be “too big to fail.” Company DEI policies also demand a bailout when they falter. The DEI concept has become too important to employees to risk failure.

The growth of DEI efforts has given rise to industry practitioners. But this development hasn’t yet resulted in any standardization of practices, measurements and analytics. Instead, every organization is finding its own way through something launched with the best of intentions but often at risk of collapsing under its own weight.

Most companies set diversity goals because they are easily measurable. But diversity goals alone do not make a DEI program. Determining what’s causing disparities and establishing targets for addressing the causes is more important.

Effective DEI programs must reflect a cultural shift, not merely a change in the number of underrepresented employees hired. Sound, thoughtful efforts don’t alienate anyone. Instead, they work toward drawing everyone together as DEI grows organically and takes on a larger-than-life role of its own.

The Generational Shift Is Here

The shift in the generations constituting the workforce has arrived. Millennials have essentially become the full moon, with Generation Z rising rapidly. The generational shift is calling for changes in everything from technology to benefits to a company’s environmental, social, and governmental (ESG) policies.

This shift also demands real change in DEI efforts, driven by Gen Z’s inherent racial and ethnic diversity. Some 80% of Gen Z place a priority on DEI, and more than half of them want to see more diversity in leadership. At issue here is the fact that those approving DEI policies are much older and much less diverse than the predominant sectors of the workforce.

Company leadership would be wise to get out of the way of emerging generations who not only value diversity, but represent it. By letting them take the lead in developing DEI efforts, you’re both creating culture-altering results and growing your future leaders.

Boomers and Gen Xers in corporate leadership are sometimes flummoxed by diversity issues such as gender identity and by a workplace culture altered by shifting values and technology. Yet to the younger generations, particularly Gen Z, it’s life as they have always known it. Companies are going to have to catch up with them or lose them forever.

Non-Believers Need Not Apply

Companies that aren’t truly invested in making their workplace one where diversity, acceptance, respect and value apply to every employee will fail at DEI. At this point in the growth of the DEI industry, there are opportunities to find out why programs fail and what elements make them successful.

If you aren’t an ardent believer in DEI’s contribution to your company’s success, you’re well behind the curve. DEI policies that are little more than lip service may be good enough for older workers, but not for the emerging workforce. In a world where the ability to pivot has become the key to success, not making this one is no longer an option.

David:
This is the BiggerPockets Podcast show 753. Starting a company is a great way to go from a full W-2 worker with no flexibility into the passive income ideal of owning real estate and living off of their rents. Very few people can make the jump from one all the way over to the other. So instead, what I recommend is that they make a little pit stop in between called owning a business. This is becoming a 1099 employee, an entrepreneur, and you get a lot of write-offs when you get into that world.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with a Seeing Greene episode. This is your first time joining us today, you’re in for a treat. On these shows we take questions directly from our audience. Yes, that means you, and we answer them on the show. And in today’s show, I brought help from three friends. This is a tax-oriented show where we are going to share tax strategies, share specific stories regarding taxes that different BiggerPockets members encountered, and we’re going to have tax experts give them advice of what they could do to save that money.
Today’s show, we get into a lot of topics, but some of the ones that stood out the most were when a partnership makes sense and when it doesn’t make sense and what to do when you run out of money to invest, when you don’t need to do a 1031 to shelter gains, and what specific questions you should ask your CPA to find out if they are the real deal or a pretender when it comes to real estate investing. This is all really good stuff that’s going to save everybody a lot of money, so thank you for being here. I think you’re going to love it.
Before we get to our first question, today’s quick dip is when you save in taxes, it’s like getting a race. Today’s guest CPAs have all been on the show, some of them a number of times, and I encourage you to look in the show notes for another tax episode featuring one of these three fine folks and really see if there is a way you could implement this information into your investing this year. Remember the old phrase, “A penny saved is a penny earned.” It’s actually better than a penny earned because you’re taxed on money that you make. You’re not taxed on money that you save. And if you end up loving this show and you want to submit your question to have me answer it, simply go to biggerpockets.com/david where you can submit a video or a written question that we just may feature on this show. All right, let’s get to the first question.

Matt:
Today’s question comes from Cody in Arizona. A quick recap of the question. “I recently purchased my first investment property and it is out of state near family. My brother is a realtor and my dad is going to be my handyman/management guy.” Perfect setup. So question one, “Since I am looking to purchase more properties eventually, is creating an LLC now a smart idea?” And if I create the LLC, should it be located in the state where I live or where the investment property is located?”
First I got to tell you that I would confirm this with an attorney just to make sure that all of your facts and circumstances are considered here. Now, from my experience, it’s going to be best to set up the LLC where the rental property is. That is what’s going to give you the most protection.
Next would be just to remember that setting up an LLC is not for the tax benefits. You’re not going to get any other tax benefit for having an LLC or the rental property in the LLC. What you are going to get is an additional expense for the cost of setting up that LLC. So just remember that when setting these up.
Number two is, “How can I find real estate investment friendly CPAs that are willing to work with me now and that also understand my future goals? As I stated, my husband and I are employed full-time and are only experienced in W-2 income prior to this rental property.”
First I would say look to the BP community for CPAs and accountants. There’s a ton in here that I see answering questions that are awesome that I’ve seen on podcasts and things like that. Next would honestly be Googling them and just finding one that is obviously versed in the business of real estate and that when you talk with them and interview them, give them a snippet of your scenario and ask them if they have clients that are in your similar situation. That is what I recommend. That’s what we do with new potential clients that we talk to. We make sure that we can help them in what they need. You don’t want a CPA or an accountant that’s just going to say yes to you, but that they have no experience and they’re really going to use you as the guinea pig to learn on. So definitely be transparent when you’re interviewing them and asking them questions if they can help you. So that would be my best advice there. I’ll pass it back to David.

David:
All right, Matt, thank you for that advice and I thought that was fantastic. Remember everybody, not every CPA is the same. Not every realtor is the same. Not every contractor is the same. Just because they say they do that does not mean the job is done. You really want to dig in deep and see how much experience they have with the type of work that you want. One of the most common questions I get is, “How do I find a CPA that understands tax strategy?” It amazes me how so few CPAs do understand tax strategy, but that’s just the thing. Just like so few realtors understand how to run numbers on an investment property or what that even means. So ask those questions when you’re talking to somebody, “What type of tax strategies would you recommend?” And if they don’t have anything to say, that’s not the one for you. All right, our next video clip comes from Sean in Cleveland.

Amanda:
All right, this question comes from Sean Unn from Cleveland, Ohio. Sean’s question is, “I’m looking for CPA who I can bounce ideas off of and can offer me suggestions, especially since I have properties located in different states. How should I approach finding the right one and what are the key questions to ask them in an introductory call?”
That is such a great question, Sean. I love it and you’re exactly right. When you’re looking for CPA to work with, you’re not just looking for someone to file your tax returns, but you’re really looking for someone who can help you plan proactively and like you said, give you ideas, suggestions, and best practices both within tax and just financially as an investor. So don’t ask generic questions like, “Do you work with real estate investors?” Because nine times out of 10 they’re going to say yes. So what you want to do instead is to ask more powerful questions. Common examples might be, “What are your successful clients in real estate doing to save on taxes?” So this way you get them to showcase what types of strategies they’re working with and also who they feel are strategic or are some of the bigger investor clients that they work with.
Also, you can ask them more pointed questions like, “What are your thoughts about 1031 exchange or what do you think about cost segregation study?” I think asking more open-ended questions like that will really allow them to go as in-depth as they can and really be able to demonstrate how well-versed they are in real estate. Especially since you have real estate in a lot of different states, one important question you want to ask is to see whether they’re comfortable or have experience in working with multi-state tax filing and/or tax planning. All right, back over to you, David.

David:
All right, Amanda. Well, you just made me look smart because on our last question I told people very similar advice to what you just gave, not knowing that your advice would be this on this question. A hundred percent, don’t give generic questions like, “What do you think about real estate?” That lets people have an open out. You really want to nail them down. If you say, “Tell me what you understand about cost segregation.” Or, “What service do you use to run your cost segregation studies? If you get a dot, dot, dot or a, um, or some fancy way of dancing around it, that means they don’t understand cost segregation, and so that’s not a person that you as a real estate investor would want to be using.
You might say, “What do you think about the bonus appreciation step down over the next five years? What strategies have you come up with to make up for that?” If they don’t have an answer or they haven’t been thinking about it, not the person for you. I think this is fantastic advice for a lot of things; for contractors, for real estate agents, even for mortgage brokers. Ask your mortgage broker, “What loans do you have that are exclusive to investors or what would you recommend I do to get loans once I get 10 properties?” If they don’t have an answer, then they’re probably just running a cookie-cutter operations. They know how to do the very simple thing that’s right in front of them, but they don’t think outside the box, which means they’re not a good fit for you. Great contribution, Amanda, thank you very much for your time.

Tom:
So this question comes from Jim in Norfolk, Virginia, and Jim asks, “If I get a private lender to lend me money for investing in rental real estate, how does the IRS see that? I’ve got investors, they want to invest with me, they want the tax benefits, but they don’t want to do anything.”
So you really have two choices. One, they can be a straight lender. In that case, they just report interest income, so they’re not going to get any of the tax benefits. You are going to get all of the tax benefits and you’re just going to send them a 1099 showing interest income. Now, if you want them to have interest income… I mean, if you want them to actually get tax benefits, excuse me, then what you want to do is you want to form a limited liability company or a limited partnership, and the title of the property will be in that limited partnership, with limited liability company, and you’ll share the profits basically with these investors and they will get their share of the tax losses from depreciation or any other tax benefits. So back to you, David.

David:
All right there, Tommy. Thank you for that and again, very good advice. Now, this is powerful because knowing this can change the way that you market yourself to raising money. If you’re telling people, hey, lend me money in real estate because you’re going to get tax advantages, you do have to structure a certain way. There needs to be shared ownership of some type. Whether that’s a share of the LLC, a share of the property itself, they can get a piece of whatever the depreciation will be. But if you’re like me and you typically only borrow money as debt and you don’t do equity, well, your investors aren’t going to get any of that depreciation because I’m going to be taking it all. Now, this is very powerful for you as the investor to keep in mind. If you make a big income and part of the reason that you’re investing in real estate is for the tax benefits, you’re not going to want to tell people about the tax benefits of real estate because they would go buy their own instead of letting you borrow the money.
If you don’t have big income and you don’t need to shelter any income, well then hey, talk about the tax benefits of investing with real estate and structure your loans in a way that that person can get a piece of them also. I thought this was really good, and it also highlights the fact that there’s more than one way we make money in real estate. Cashflow is one of the ways we make money in real estate, but there’s many ways and tax savings is a big one. Thanks for that, Tom.

Amanda:
Okay, today’s question comes from Shree from San Jose. Shree’s question is, “I have a handful of rentals across several states currently held in my family trust. What do you suggest for asset protection? I have over a million dollars in umbrella insurers, different CPA suggest different things. I’m want to keep things simple for tax return. And also separately, my wife is a real estate agent. What kind of entity should she use if she may have losses in the first few years?”
Okay, so two completely different questions. Let’s tackle the first one first. Disclaimer, I am not an attorney, so I’m only able to answer this question from the tax perspective. All right. My limited understanding in terms of liability protection is that trust, if you’re talking about a revocable living trust, that really doesn’t provide any asset protection. Now, from a tax perspective, revocable living trusts do not file separate tax returns, which means that the rentals are reported directly on your personal returns. So that will kind of help you achieve that simplicity goal that you’re looking for, but again, my understanding is the living trust don’t give you any asset protection. So if you’re looking for asset protection, you’re looking at a true legal entity, whether it’s an LLC, a partnership or maybe some kind of a Delaware statutory trust that does provide asset protection.
Now, which one of those will be best for you and your scenario? That’s a good question for your attorney to work with you on. Now, this is going to be a joint effort with you, your attorney, and your CPA. The reason being your CPA is going to be able to help you do a cost benefit analysis, meaning what is going to cost for you to have these different entities, whether it’s holding company, series LLC, or a DST. Right? What’s it going to cost for you to have those, to form it, to maintain it every year, and what is going to be the added liability protection for you? And then really weighing it out to see if it makes sense. I know you’re in California. California has very, very high LLC fees. So if you have seven rentals, you likely don’t want them in seven different LLCs because that could get really costly real quick, but working concurrently with your tax and your legal team could really help you find that optimal point where you’re getting the protection but also at a cost that makes sense for you. All right, back over to you, David.

David:
All right, and the second part of Shree’s question comes to me. “My portfolio is limited so that I cannot obtain conventional loans anymore. I also have limited down payments now, but I hate partnerships. What do you suggest to overcome the mindset and do partnerships to buy more properties either to buy and hold or fix and flip?”
All right, I’m going to give you some advice that’s different than most people in this space, so just take it with a grain of salt because not everybody would agree with me. I feel it’s conventional wisdom that when you run out of money or you can’t get loans, the answer is to go find a partner. And then you don’t need to have money and you don’t need to have loans because the partner’s going to provide it and this information gets given as if it’s all just that simple like, “Oh, just go find a partner.” It’s kind of like if someone says, “Hey, I don’t have any other tax strategies to save money and I have a lot of taxes.” And someone says, “Oh, just go get married. When you get married, you get a lot of tax write-offs.” That’s a terrible reason to get married. And if you marry the wrong person, the pain of a bad marriage will far outweigh whatever tax savings that you might have got. Is it true? Yes, you do get savings through getting married in taxes. But is it practical? Is it wise? No.
Oftentimes the practical application of advice that you are given is much different than the hypothetical way that it’s explained. This is one of those situations. I don’t think you should go get a partner just because you’re out of money. Now, if you are going to do it, I would say to do it with fix and flips. And the reason is that I like to see partnerships not be for the long term, as short of a period as possible, especially when you’re first starting to partner with someone you don’t know them. In the same way that I would never tell someone to go marry somebody after the first date, I wouldn’t want to be a partner on a long-term project with someone that I don’t know super well just because I was told to partner. Now, if we go on a couple dates, we do a couple fix and flips, we start to get to know each other, we start to like how we work together, yes, a long-term partnership can start to make sense, but you got to give yourself time and repetition before you get to that point.
My advice is different. When you run out of money, the goal needs to be to make more money. It’s often easy to just say, “Oh, I need help with something. I’ll go find someone else that can provide it for me.” And if you have the right people, that does work. But sometimes that can be the carrot that incentivizes you to save more of your money, to live beneath your lifestyle, to go take more challenges in life so that you can make more money, to ask for that raise at work, to start a business to earn more money. Real estate is a wonderful way to build wealth, but it is not the only way to build wealth. In fact, my personal opinion is that real estate works best when it is a piece and a bigger puzzle of which entrepreneurship is also present. Real estate works great as a tax savings, but you have to be making money in order to have something to shelter your income, especially if you’re doing it in a 1099 endeavor like entrepreneurship.
So Shree, can you start a business? Can you work more hours? Can you find a way to be more efficient with the hours you’re working so you can make more money? Do you have equity in some of your previous deals that you could pull out to reinvest? How can you move forward without relying on a partner that you don’t know? I don’t know that your mindset is wrong that you hate partnerships. You might have really good reason to not like them, so I’m not going to tell you to get over that mindset. I would need to know more about why you have it. I am going to say if you’re going to partner, do it on short-term deals like flips, and if you don’t want to partner, then let’s ask different questions. How can I make more money? How can I save more money? How can I get more capital to invest so I don’t have to have a partnership? Submit us another question with some ideas you have. I’d love to help you out with that.
Also, Shree, I see that you are in San Jose, California, just a hop skip and a jump from me. I’m recording this over in Brentwood, so hopefully we run into each other soon. Would love to meet you.

Tom:
This next question is from Dale Vance Jr. in Los Angeles, California, and he says, “If I 1031 a property to buy a condo where I’m going to live, how long do I have to keep it a rental before I can make it a personal residence? Will there be tax consequences, say after two years? Thank you.”
Dale, I actually think two years is a really good timeframe to be renting it. You do need to show that your intent of buying the new property was to rent it. You can’t pre-establish…. Don’t write a two-year lease. I’d write a regular one-year lease. You can renew it. You want to make sure you at least straddle two tax years, but two full years is probably a good rule of thumb. I think that’s a really good idea. And then remember, after that, as long as you actually live in it for two out of five years, then anything other than the depreciation you’ve taken should be tax-free up to that 250,000, 500,000 exclusion for single versus married individuals. So you actually can have your cake and eat it too. Thanks Dale. Back to you, David.

David:
Thank you, Tom. That was a great answer to a tough question. Oftentimes, we as human beings want to turn subjective matters into objective ones because our brain finds comfort in knowing exact answers, and this was a question just like that. How long do I have to wait before I can take a business property that I bought through at 1031, or an investment property I should say, and turn it into a primary residence? And there is not an objective answer to that. I don’t believe the tax code specifies a period of time you have to wait. It would come down to a judge’s subjective interpretation of what your intent was, and Tom, I thought you gave a great answer that two years would be a healthy period of time.
Just remember everybody, sometimes there’s not an answer like that. Similar to when you’re buying a house as a primary residence and then you decide that you want to rent it out. There’s not a period of time that you have to live in it before you do that. It’s often said you have to live in it for a year. That’s because when you buy the property, you’re intending to occupy it as a primary residence and you’re not allowed to buy another primary residence until you wait a year getting a conventional loan, of course. That’s where the year thing comes from. It doesn’t come from the tax code saying that you have to live in it for a year. Many people have bought a primary residence and had a life change, a sick parent, they got a new job and they had to relocate. Some other life event happened and they couldn’t live in that house. Well, they can’t force you to live there and say you’re not allowed to rent it out. What you get in trouble is if the bank can prove during a foreclosure that you intended to rent it out and you never intended to live there.
So thank you Tom for that advice and making us all a little bit smarter.
All right, I hope you’re enjoying the advice for my colleagues here. We’ve blazed through five already and we have more to come. I just want to remind you to like, comment and subscribe to our YouTube channel here. Specifically comment, I want to know what you think about these shows. Now, I always like to get feedback about the length of the show, the topics, my light color, and guess what? You all responded, which is awesome. These comments come from episode 741 from Mountain Surf. “I love how you admit this is a difficult market. I turn off 80 to 90% of YouTubers because they’re trying to put an optimistic bullish spin on this market.” Oh, bullish like positive, not like bullish like a substitute for a bad word. That’s funny. I read that differently.
“To me, it means they are not adapting to the situation because they are not fully acknowledging it. We don’t know when or if the fed is going to pivot. Your concepts are also not basic. It’s so relieving not to listen to the same stuff other people say. At the end of every YouTube I watch, I asked myself, ‘What do I know that I didn’t know before?’ I’m finding more and more of YouTubes end up being nothing burgers. Yours are thankfully advanced enough that I gain insight. Don’t simplify, stay advanced.”
Wow, Mountain Surf, that might be my favorite comment that I’ve read for somebody. You put a lot of effort into, well, not only complimenting me, but saying why you like the show, and that’s a very valuable thing you can give other people. It’s one thing to say I’m a big fan or I love what you do. It’s another to tell somebody why you like it. That gives someone like me a direction to know how to make the shows better, what’s working, what people are enjoying and why they’re liking it. I really appreciate that comment. This is awesome. And it is something that I put a lot of effort into trying to do. I could come in here and tell you guys that everything is easy. That wouldn’t make any sense. I could also come out here and say, “It’s hard, so nobody should invest in real estate. Go buy a bunch of NFTs.” That wouldn’t be honest either. This is the most challenging market that I’ve ever seen in my real estate investing career.
Now, I’m not Sam Zell. I haven’t been doing this for that long, but I’ve been doing it for a minute and this is incredibly challenging and the reason is that there is significant inflation, especially related to assets, which is the best safe place to put money to protect it from inflation at the same time that they keep raising rates, which is lowering affordability. So it’s not affordable to buy a house which eliminates cash flow for investors a lot of the time, but you still got to put your money somewhere because it’s losing value. It’s like there’s no safe place to run and there’s nowhere to hide, and that’s what makes this so hard, which is why we’re making more of an effort to produce more shows and share more information.
I also appreciate you saying that you liked it. I’m not giving you basic information here. I try really hard to avoid just giving something basic, and I always give my explanation for where my advice came from so that if you don’t agree with it or you don’t want to follow it, at least you understood the perspective I was coming from so you can decide if it’s right for you or not.
Here’s the last thing I’m going to say. If you’re getting your information from YouTubers, TikTokers, people that are telling you how great real estate is and they’re selling you on a dream, not on reality, it’s usually because they want your money. Podcasts like this are free for you, so you don’t have to worry about me telling you something just because I want your money. Now, I do sell houses and I do have a mortgage company, which I use when I’m buying my own property. So I do provide services to people, but I’m not sitting here telling you guys that you need to all go buy houses so that I can sell it to you. In fact, very few of you have actually bought a house with me. I’m telling you the truth and it’s free and you can trust it.
All that I would ask in return is that you would go and give us a five-star review wherever you listen to your podcast, whether that’s Apple Podcast, Spotify, Stitcher. It helps so much for us to get reviews. I would really appreciate if you guys would do that. We want to stay the top real estate investing podcast in the world so we can continue to bring you these shows for free.
All right, our next comment comes from Army Faser. “I love the show and don’t give a darn about the background color. This is because I always forget to change the light. Thanks for the reminder about focusing on the long term. My insurance costs are steadily rising in south Louisiana, but we are still above water. At the moment, it does have me wondering if I should sell and buy outside of Hurricane Alley. PS. Don’t worry about the length of the show. If it’s good info, it is worth the time.”
Well, thank you for that Army Faser. I appreciate that you’re liking the show and you’re not worried about the time. So we will continue to make them and if you do decide to invest outside of Hurricane Valley, check out biggerpockets.com/longdistancebook to learn how to put systems together to buy real estate in other places.
And our last comment comes from Aberet Art. “I might be wrong, but it feels like it’s too late to get started at this point and only the people who got going in the golden age have the advantage over everyone else.”
Whoo, that’s a deep one man, and I see where you’re coming from. I’m not going to sit here and tell you that that’s not the case. Now, I will say that it is more difficult to do this than before, but it’s not too late. Adversity is the fuel of greatness. I will also tell you that the people that bought five years ago, 10 years ago, 15 years ago, 20 years ago, here’s the truth, they all thought it was too late also. They all thought prices had already come up too high, it was too expensive, they were waiting for a market where houses less. Anyone who’s honest will tell you the same thing.
I’ve yet to meet a person who bought a house and said, “Man, that was a great deal.” They always thought they bought high. And at the times when we were buying low, we didn’t know it was the bottom. We thought it was going to crash more. There’s no person at the time they’re buying that knows if it’s at the right time or not. But every person when they look back says, “I’m really glad I bought real estate. I wish I had bought more real estate.” And I had to tell myself this all the time because I struggle with the exact same feelings as you. It’s especially hard when you go buy a bunch of real estate and the market dips a little bit like it has, and it went from I bought it, to it went up, and then it came down a little bit. I forget that it went up before it came down. I only think about the fact that it came down and I feel really bad in a lot of ways. So keep in mind that you’re not the only person feeling that. Everybody feels it. When you’re buying for the long term, those worries go away.
Now on episode seven 741’s YouTube page, there are a ton of great comments, specifically two really good threads where people made comments and it started a conversation going back and forth. Piece of advice number one, beware at BiggerPockets we get spam and there’s a WhatsApp account that will frequently pretend to be BiggerPockets. That’s not them, so don’t message them, but there are a lot of people who are making real comments. So if you want to avoid the spam and you want to make sure that your comments get acknowledged, because sometimes people stop paying attention to YouTube comments. After you leave the comments, just head over to the BiggerPockets forum and start the conversation over there where you can be free of spam as they’re moderated. And you don’t have to worry about asking something that nobody sees because the BiggerPockets forums are monitored more than the YouTube comments. But keep leaving them comments, folks. I love it. All right, let’s take another video question.

Amanda:
All right, this question comes from Mary Hopkins from Florida, and the question is, “I have a friend who’ll be selling two of her farms and have a significant amount of tax. We were discussing the 1031 exchange issue, but I was not sure the options within it. Can she invest in the REIT or syndication and still receive the tax benefits?”
All right, so great question Mark. When you sell farmland, you can actually do a 1031 exchange directly. So if your friend is interested in buying more real estate after she sells a farmland, then I think that would be the most straightforward way to save on taxes. So again, sell the farmland 1031 exchange the proceeds or the sales price into other types of real estate. Now, if she wanted to do a 1031 exchange, unfortunately REITs are not eligible as replacement properties. They’re typically set up as corporations, and so when you 1031 exchange, it has to be the asset itself and not a corporation that owns a piece of property.
Now, with respect to syndication types of real estate, it may be possible what she’ll want to do is to contact the various syndication investments that she’s interested in and ask them if they are set up to take 1031 exchange money. Some of them are set up that way, many of them are not. So she’ll just want to find that out from the company that she’s interested in investing with.
Now, last but not least, even if she was not able to do a 1031 exchange or the syndication that she wants to invest in is not accepting 1031 exchange, she can always use what we call a lazy 1031 exchange. And that simply means buying other real estate, whether it’s directly on real estate or real estate in a syndication. To the extent that those real estate can strategically create tax losses, those losses should be able to offset the taxes on the sale of her farmland. So a lot of different options there. Now, back over to you, David.

David:
Amanda, that was a great answer. In fact, you’re bringing up something that I just realized was a bit of a secret in our industry that you mentioned that never gets talked about, but I remember having a conversation with a CPA that brought it up and my mind kind of like… It took me a couple times to wrap my head around what they were saying.
The 1031 is the way that you shelter the gains from something that you sold. But what you described is, I think you called it the lazy 1031 or the sneaky, something along that lines. It’s buying enough real estate that the bonus appreciation would show losses that would also shelter the gain that you made. So you don’t always have to do the exchange and play that game with those rules. So it is very conceivable if you have enough depreciation because you bought enough real estate that instead of doing a 1031, you just sell the property, buy new ones, take your capital gains, and then have those offset by the depreciation that you took on the new real estate and you don’t need to do a 1031. Great advice. It doesn’t get talked about very often, and it will save a lot of people headaches if they get into it. Brought to you by us at BiggerPockets all for free. All right, let’s get to our next question.

Matt:
Today’s question comes from JD in Sacramento. A quick recap of the question, “How is it that there are so many tax benefits for real estate but they don’t count if you have a W-2 job, and why does no one ever talk about that?”
The first reason is because rental real estate is considered passive by the IRS versus money that you earn as a W-2 employee or a business owner is considered non-passive. And we have to look at those two things as buckets of income. Now, it’s very difficult without jumping through all of these hoops to offset those against each other. So meaning if you make 100,000 at your W-2 and you lose 50,000 with your real estate, you ideally would want to net those to where you only pay tax on 50. But again, you can’t if you’re simply a W-2 job, not in the nature of real estate and you don’t pass those rules. Rules being a real estate professional and materially participating in your rental properties.
Now, I do want to mention that you can be a W-2 employee and still utilize these loopholes and tax tricks, but you will need to own at least 5% of that business for it to count towards being a real estate professional.
And the last thing is you can be a W-2 employee within let’s say your own S corporation, so you’re basically self-employed, but again, that business would just have to be in the nature of real estate. So let’s say that you’re a realtor and you operate as an S corporation, you likely or should be getting a W-2 from that position that you play within your own company. And again, since you would qualify as a real estate professional, and let’s say that you do materially participate in your properties, that very well could give you tax savings right there. But really just remember that there’s two buckets. There’s passive and non-passive and rental real estate is technically considered passive, and money that you earn at a W-2 role is considered non-passive. So at the end of the day, you’re going to need to pass these tests in order to net those against each other and really maximize your tax situation. Now, I’ll pass it back to David.

David:
Thank you, Matt. Great job answering a tough question. This is misleading because when you hear certain phrases like depreciation, that sounds like the value of an asset going down, it’d be the opposite of appreciation, but that’s not what it means. It means the asset deteriorating over time. When you hear phrases like passive income, that is misleading. You think, “Oh, I just buy something and it gives me money like a stock.” Real estate is considered passive income in the tax code, but in practical application, it’s rarely ever that passive.
Many of the tax benefits that come in the tax code come from non W-2 work, and there’s many reasons why, but here’s the way that I like to think about it. When you have a W-2 job like most of us do, you’re taking a lot of the risk out of the way you’re earning money, your employer is taking the risk. So if one of my businesses loses money, I don’t pass that loss off to the employees. They just didn’t make money or maybe they made less money than they used to, but they don’t lose money. Employees don’t take risk. They have a floor, a sturdy foundation that they stand on where they get a check regardless of how good the business does until the business runs out of money and they lose their job. But that floor comes with a price and that’s a ceiling. It is much harder to get higher to make more, to do better for yourself when you’re standing on that floor. And this is where a lot of people get upset, is they only look at the fact that they have a ceiling on themselves and they don’t recognize the fact they also get a floor. When you take a step out of that cage, which sometimes feels like a nice safe floor, keeping you safe, and you get into the entrepreneurial world, you get a lot of tax benefits, but you also take on a lot of risk.
Starting a company is a great way to go from a full W-2 worker with no flexibility into the passive income ideal of owning real estate and living off of their rents. Very few people can make the jump from one all the way over to the other. So instead, what I recommend is that they make a little pit stop in between called owning a business. This is becoming a 1099 employee, an entrepreneur, and you get a lot of write-offs when you get into that world. Now, I’m not a CPA, that’s why we brought a bunch of them onto the show, but you can often write off dinners that you would already be having if you have them for a business purpose. You can write off vehicles that you would need to be driving anyways if you’re using them for your business.
Think about me as a realtor. I’m driving all over the place When I was showing houses or going to listing appointments, I had to have a car, I had to have an iPad in order to give my presentations. Now, the IRS doesn’t say, you’re not allowed to use that iPad unless you’re giving a presentation. I could also use it for other things. A lot of people take advantage of write-offs when they run a business that they can’t when they’re a W-2 worker because they use it for the business, and that’s something that you could just think about. If you’re having a hard time finding tax write-offs, starting a business and owning real estate are the two best ways to do it, and if you combine them together, you get even more.

Tom:
So our next question comes from Sonya in Massachusetts and Sonya asks, “My husband and I recently got divorced and we own a duplex. I would like to reinvest my share the proceeds, but I still have to give him half of the proceeds which is about $100,000. How do I do this tax effectively?”
The very first thing I would tell you, Sonya, is you need to make sure that he’s going to recognize your ex-husband half of the gain. So when you sell the property, make sure that he’s actually on the sale, which I presume he would, and you need to make sure he picks up half of the gain. So you would actually file a partnership return and give him a K-1 showing half the gain unless your divorce decree says otherwise. Then you can take your money and you can reinvest it. You could do a 1031 exchange if you really wanted to, but I think you’re probably better off just taking bonus depreciation. Just make sure that you buy your new property and place it in service, meaning it’s ready to be rented by the end of December. And then you get 80% bonus depreciation on the land improvements and the contents of the building, like the carpeting and the ceiling fans, the window coverings, et cetera. Typically, that’s about 20 to 22% of the cost of the property as long as you get a good cost segregation done.
So that would be my recommendation. I would probably not mess around with a 1031 exchange. I would rather probably see you do the bonus depreciation, but be sure to sit down with your CPA, your tax advisor, make sure your tax advisor understands what they’re doing and that they can run the numbers for you. David, it’s all yours.

David:
All right, thank you for that, Tom. Again, we see that a 1031 exchange is not always necessary if you have enough depreciation available to you. Now, here’s something else to think about. As much as we complain about how tough the market is and how it’s too hard, which frankly… Side note, I think that comes from being oversold on the fact real estate’s supposed to be easy and the market has been easier than normal for the last eight years due to really low rates and rampant inflation. Even though we complain about it, there are still some massive benefits to owning real estate and depreciation is one of them.
When you combine cost segregation studies with bonus depreciation, people have been able to buy large amounts of real estate and shelter all of their income. I’m talking a hundred percent of their income for several years in a row because of benefits given to us in the tax code that incentivize real estate ownership. That is not normal. That is not something that everybody gets. It’s not something that other countries allow, and as Tom just mentioned, it’s going to start stepping down and this year it’ll be 80%, then 60%, then 40% and so on. This is a big perk that we’ve had for a long time and for people that didn’t jump in and take advantage of it because they were waiting for a crash, I feel bad sometimes. This is a great point that you’re making there, Tom, about ways people can save money and make money in real estate that are not purely cash flow. And I’m just giving everyone a heads-up. It’s not going to be around forever. Unless Congress approves this to be extended or gives us another run of it, it could go away and you won’t hear us talking about depreciation in the same way when it comes to sheltering your business income or your active income like we have been able to in the past.
And the second part to Sonya’s question reads, “Massachusetts multi-home prices are so high with the high rates I’m not expecting to be able to afford much. I have a few questions. Can I buy a home without putting down 20%? And how do I find investment properties, single or multifamily in other states that I can afford and run while living in Massachusetts? Actually, I’m not opposed to moving and renting out my single-family home, but if I understand the capital gains laws, I have to buy an investment property with the money from the sale of a duplex. I hope this question gives enough details. I’m at a loss and a bit overwhelmed by my situation.”
All right, thank you, Sonya. I could tell from the way that this was written that you are feeling overwhelmed and there’s a million things going through your head. So the first thing that I would recommend is that you step up your education when it comes to real estate investing. Get in the BiggerPockets forums, follow me @DavidGreene24, follow other BiggerPockets authors. Especially people that have written books for BiggerPockets usually have a higher knowledge base than just the casual member. I need you to get in the world a little bit deeper and sort out the chaos that’s jumbled in your mind that I can tell is coming out here. I definitely sense that you’re overwhelmed.
You brought up a couple different things like you’re not opposed to moving and renting out a single-family home, but then you switch to there’s going to be capital gains if you sell a duplex. The first part of your question here talks about how you can get around putting down 20% on an investment property in another state that you can afford and run while living in Massachusetts. Well, there’s not a lot of options when it comes to that. One would be buying from a seller directly and taking over their note and negotiating directly with that person what the down payment’s going to be. Sometimes you could get no down payment. We have to call that creative financing. The problem with that is if you’re stuck right now, you probably don’t have a ton of people lining up to talk with you about selling their property directly to you not on market. Those always sound easier to do than what they are when you go try to apply it.
So if you have an opportunity like that for creative financing, that’s one way to get around it. Another would be the NACA program. You can Google that, N-A-C-A, and visit their website and see what options that they have available for low-income people. On episode 590, we actually interviewed somebody who got into how he has used this to scale his portfolio at a specific area. I’m not an expert in that. I don’t do a ton of it, so I can’t tell you on this show, but that is a place that I would point you towards.
And then the other option could be finding a partner, if you find another person that can lend the money to go in on the deal. But again, I’m going to give you similar advice to what I told somebody else. If you’re having a hard time finding the 20% to put down, either house hack, which no one likes to do because it’s uncomfortable, but that’s why I recommend doing it because you’re showing that you value your future over your present comfort because you can house-hunt for three and a half percent down or 5% down and then move out of that property in a year and buy another one, and now you got to a rental property. Or figure out a way to make more money, which will force us to improve in other parts of our life. I’m writing a book right now for BiggerPockets called Pillars of Wealth that talks about how real estate investing is a third of the way you build wealth, but the other two thirds are offense and defense, making money and saving money, and those are just as important.
Thank you very much for your question. And by the way, episode 590 was with Andre Haynes about the NACA program.
All right, we have time for one more question. This one comes from Ola in Atlanta.

Matt:
“At what point would you pull out equity of a free and clear property, especially in this market and where we are headed?”
My personal opinion is I’m a fan of honestly never selling. So in this case, even if you want to refi and take cash out, I would look into getting a home equity line of credit or a HELOC, as they call it, because then the cash is accessible to you and not yet accruing interest. Versus if you do a refinance right, you’re now walked into an additional… Or not additional, but a new 15-year or 30-year note, and you obviously will have a monthly payment obligation there. So I’m a fan of if you need quick access to cash, consider that HELOC for that just because again, you don’t really accrue anything until you use it.
The next question is, is there a rule of thumb on how long to hold cash flowing assets? I’d say this is all personal preference here. You obviously want to run the numbers and see do you have a better potential opportunity for this equity, let’s say, that you have in these properties? And if not, maybe leave them there.
And then the last question here was looking to refinance some, but then are just considering an overall sale, but then thinking about the tax implications, what are the thoughts here? So overall, again, I’m a fan of never selling, and if you do need to sell, I would look at a 1031 exchange. I can see here that the concern is if you sell it, yes, you will come into let’s say a windfall of cash, but now you’re looking at a tax liability potentially. If you tax plan, there may be some tax advantages here that if you have passive losses built up, you may not have to pay as much tax as you think you would here, but overall, if you will be stuck with a tax bill, I would consider a 1031 exchange overselling here. So those are my thoughts there, and I’ll pass it back to David.

David:
I love it, Matt. The idea of never selling. This is something that bears repeating because I forget people aren’t aware of it, but when you refinance a property, you do not pay taxes on the refinance. Now you gain a bunch of money, but you’re also taking on a lot of debt. It is not a capital event. You’re not actually making money. You’re just exchanging money in the bank for a note that you have to repay with interest. So of course, you’re not going to be taxed on that, but people don’t realize it. You can buy a house, put it on a 15-year note, pay it off, refinance it, all that money comes tax-free to you, and then use the money from your tenants and the increased rents to pay off the new note. Again, this is why I love real estate because it’s something I buy with the majority of somebody else’s money, and then I get a third person, the tenant to give me the money that I borrowed to buy the property and very little of it is my money. It’s just the time that I have to spend operating it. Then you get all the other benefits of real estate and it is awesome.
So thank you for that advice and everybody please remember that you don’t have to sell property in order to get money out of it. You can put an equity amount of credit, you can cash out refinance.
Regarding the question of how long as a rule of thumb to hold cash flowing assets for, the way that I look at that problem is I ask myself when the property stops running efficiently. So I don’t sell properties very often. I’ve sold a handful over my entire career, and it’s usually when that property’s either in a location that I don’t like, some life event that was unexpected occurred and I had to sell it, or more commonly, the rents have not kept up with the growth of the assets in that area. So I talk about that in the BRRRR book, this example of how I sold one property and turned it into 10 using the BRRRR method, but the reason I chose to sell that property was that the value of it had gone up, but the rents had not kept pace at that point. The cash flow didn’t justify holding it, so that’s the one that I sold. If a property keeps cash flowing, there’s no reason to sell it unless you have another opportunity. You’re better off to refinance it and keep the property and buy more with the money from the refi.
Tom, where can people find out more about you?

Tom:
You can find more about myself and WealthAbility at wealthability.com, and you can also find me on social media.

David:
And Amanda, where can people find out more about you?

Amanda:
Hi, I am Amanda Hahn, CPA, a tax strategist and real estate investor, and you can follow me on Instagram, Amanda Hahn CPA, for daily tax and financial tips.

David:
Matt, where can people find out more about you?

Matt:
Hey, thanks, David. You can find me on Instagram with the handle @mattbontrager, or at our website, truebookscpa.com.

David:
All right, thank you all for your contributions to Seeing Greene today. I appreciate you guys taking the burden off my shoulders to talk about taxes because I’m not a CPA, and frankly, it’s not my favorite thing to talk about. It’s kind of like vegetables. You have to eat it, but you don’t have to like it.
All right, everybody. That is our show for today. Thank you for all of your contributions. Thank you for listening to us. If you want to follow me specifically, you could do so at davidgreene24.com, or you could follow me on all the social medias @DavidGreene24. And guess what? I finally got Meta to give me that blue check, so now you don’t have to worry about being taken advantage of by fraudulent David Greenes. Send me a DM and let me know what you thought of the show and go to my website, check out what I got going on.
Also, if you didn’t know, BiggerPockets has an entire website with more resources than I can tell you right now, we are more than just a podcast or a YouTube channel. There’s tons of stuff. So head over to biggerpockets.com next time you’re bored and look at all of the free resources that we have for you there.
Lastly, if you have time, watch another video, and if you don’t, make sure you tune in a couple days for the next episode that we are going to be releasing. We also have tons of other content on YouTube that you could check out in the meantime. Love you guys. Appreciate that you spent some time with me. I will see you on the next one.

The global market for “superfoods” is worth around $162 billion and is set to grow by an average of 5.5 per cent between now and 2028, according to figures published by IMARC.

But if superfoods are helping us to take care of our minds, bodies and tastebuds, should we also be asking whether their production is having a positive impact on the environment, particularly if the products in question are being grown and harvested in parts of the world considered important in terms of bio-diversity.

That was a question I was keen to explore with Albana Rama, founder and CEO of The Rainforest Company. Her venture – which is shipping Acai berry puree packs to stores in Europe – has just raised €36 million in VC finance. As Rabana sees it, a commitment to protecting the Rainforest environment is key to the company’s mission. So how does that work in practice?

A New Contender

Sometimes it seems that every day brings a new supefood. The Acai berry is one of the latest contenders. Harvested from a palm of the same name in Central and South America, it is apparently jam-packed with antioxidants. According to its proponents it can have a beneficial effect on heart health and the immune system. Over the course of the last few years, these berries have probably made it to a health store or supermarket near you. There are a number of suppliers in the marketplace.

And if the activity of VCs is anything to go by, it’s market with potential. In the context of food startups, the €36 million raised by The Rainforest Company last December represented a signficant sum. Not only was it one of the largest funding rounds in the European foodtech sector it was also the biggest raise by a female founder. The fundraising round – led by family office Kaltroco – also came at a time when investment in foodtech as a whole had slipped from $54 billion in 2021 to $28 billion in 2022, according to Forward Fooding.

So what was the attraction?

An ESG Agenda

Well, revenues clearly played a big part. Since launching in 2016, The Rainforest Company has increased sales rapidly. Its puree packs are currently sold through 12,000 points of sale across Europe and following a move into the U.K. market, there is potential for further growth. The company has generated revenues of 38.5 million Swiss francs since 2018. Between 2021 and 2022, they grew by 200 per cent. Rama says earnings of 80 million Swiss francs in 2033 are expected this year.

But underlying that is an ambition to have a positive impact. The Rainforest Company’s avowed aim is to pursue an ESG policy that outstrips anyone else in the market. So why is going the extra environmental mile so important?

Inspired By The Forest

Rama was born in Kosovo but moved to Switzerland with her parents. Her early working life was in the finance industry where she had roles with GE Capital and Ekman AG. “I had a great career in finance but I began to get disillusioned. It didn’t give me the fulfillment I thought it would,” she says.

The turning point came when she visited the South American Rainforest. “I went on a three-week survival course to get out of my comfort zone.”

Despite the beauty of the Rainforest, it was almost impossible not to be aware of the problems it faced in the form of deforestation to make way for the cattle and Palm Oil industries.

So, in setting up The Rainforest Company, Rama set out to provide a means for local people to make a living that didn’t involve the degradation of the environment.

“I saw that we could make profit from plants that were growing wild in the Forest,” she says. “And by offering a decent price, we could incentivise farmers to work for us.”

Scaling The Supply Chain

So how do you build a genuinely sustainable business while avoiding accusations of greenwash? Rame says the supply chain was key.

“Setting it up was the longest part of the process,” she says. “We had to talk directly to the farmers. We see them as partners and we aim to include the whole community,” she says. There are currently around 200,000 growers.

But it wasn’t simply a question of finding people to cultivate and harvest the berries. A processing facility was also required, along with a port close enough to the Rainforest.

The second challenge was to actually find a market for a product which had not gained the traction it enjoys today.

The company held a launch event at a vegan restaurant and invited journalists while also enlisting the help of influencers. Retailers were also invited. The company began to get its products into stores in Switzerland. Today, the U.K. market is a priority, with its products available through supermarket group, Waitrose, delivery service Ocado and the Whole Foods chain.

Business Impact

But is the business really helping the Rainforest in any measurable way? Rama points to a policy of fair pricing to ensure that farmers are not (and do not feel) exploited. And in terms of the farmers themselves and the local partners providing logistics and processing, the company carries out due diligence to ensure its own ESG policies are adhered to. There is a particular focus on biodiversity and climate.

Locking In Carbon

The company’s impact report claims to have stored 6.3 million metric tons of CO2 through preserving the Rainforest. Moving forward the goal is to remove 13.7 million metric tons of the gas by 2024.

But does this policy make a difference to customers? Rama says the company is targeting a mass audience across generations. Within that mix, some consumers will doubtless be influenced by the ethical stance of the company but others will be much more focused on the taste and reputed health benefits of the berry. But proveable positive impact is part of the mix. Customers, Rama says, are interested not only in health and the taste of the berry but also sustainability.

And that’s part of a bigger picture. If VCs were attracted by rapid sales growth and – as investor Futury put it – “internationalization and product expansion” – Rama aims to show the commercial goals can sit alongside forest preservation.

Ashley:
This is Real Estate Rookie episode 278.

Tony:
You should also look at the numbers and use that to help you kind of make a determination because, say that we look over the next year, over the next 12 months, and say that you’re trying to get 1,000 bucks for your place right now, but because you tried to get a $1,000, your place sits vacant for the next two months. Right? Over the course of that year, you have two months that are empty, so you’re going to make $1,000 over 10 months, which is $10,000. Say that you dropped the price from 1,000 to 950, and you rent it out this month, now you have a full 12 months. You’re actually going to make more. You’ll make $11,400 at 950 if it’s rinsed out for the entire year.

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

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey.
And I want to start today’s episode by shouting out someone by the username of RSGreen2. They left us a five-star review on Apple Podcast that says, “I tell everyone and anyone I can to listen to this podcast, especially when people ask me about where they can start. Tony and Ashley have great energy, and they keep things very tangible for listeners. Keep up the great work, Ashley, and keep laughing. Don’t let anyone tell you different. Life is too short.”
And, so, RSGreen, we appreciate you. And Ash, I got to say, I love your laugh as well. Don’t listen to the haters. Keep doing your thing. Keep living your life.

Ashley:
Well, thank you so much because it is physically impossible to stop laughing, so, here to stay. So, Tony, what’s new with you?

Tony:
We got this campground that we’re working on in West Virginia, so I’m super excited about that. And, honestly, by the time this episodes airs, I think we should hopefully have closed on it by now. But it was a deal that came to me actually on Instagram. One of my Instagram followers reached out to me. And most deals that get sent to me on Instagram are not all that good, but this one actually ended up checking out, so we’re super excited for it.
Right now, it’s got a single-family house plus a little … There’s a church on the grounds, and there’s a few RV pads, but we’re going to build out some really cool dome campsites there. So, we’re excited. It’ll be our first true commercial project and hopefully the first of many. So, just trying to do our due diligence right now and get the money lined up and take this thing down.
So, we had a failed attempt last year at our first commercial deal, so I’m hoping this one … hoping we actually make this one happen.

Ashley:
Yeah, I’m so excited for you. I got your newsletter that talked about the property the other day, and Daryl and I were reading through it. It looks so exciting and such a great opportunity.

Tony:
Yeah.

Ashley:
Okay, well, this week, we have, I think, five questions we actually go through today, five or six. And we talk about financing, getting bank financing, the differences between doing an adjustable-rate mortgage, a conventional mortgage, a second-home mortgage, lots of different things we talk about, and what are the pros and cons and what may be the best route for you, depending on your situation.
And then we go into estimating a rehab and some of the ways you can do that as a rookie investor.

Tony:
Yeah, we also talk about analyzing deals, and we talk about FSBOs and how to kind of negotiate with sellers, without your agent being present. And we also talk about renting your property out and how to not get screwed when you’re searching for tenants and make sure you’re getting the place filled. So, lots of good conversation for today.

Ashley:
We will also tell you what a FSBO is, for those of you that don’t know. So, listen for that, the [inaudible 00:03:33]-

Tony:
That don’t know.

Ashley:
Okay, so our first question today is from Ernesto, and this is in the Real Estate Rookie Facebook group. Guys, don’t forget, if you want to ask questions that we may answer on the show, you can go ahead and join the Real Estate Rookie Facebook group. Ask a question in there. Most likely, you are going to get a whole bunch of people, rookie investors and experienced investors, to answer your question before we get to it.
But to Ernesto’s question today is, “Is it possible to get a new mortgage in an LLC with 20 to 25% down? Also, what are the documents and requirements needed?”
And the answer to that is, yes, you can. That is actually typically what a commercial lender is looking for, is that 20 to 25% down. Sometimes, they may require 30% down or more. So, since this is going to be in an LLC, you are going to have to go to the commercial side of lending.
I have found one small, local bank that did allow you to get a loan on the residential side in an LLC but, most of the time, you’re going to have to go to a commercial lender, and you can do the 20 to 25% down. There are lots of different options for the commercial lending. For example, how long you’re going to amortize the loan. That will also affect your interest rate. If you’re going to do an ARM, an adjustable-rate mortgage, lots of different options on the commercial lending side.
I have not seen, on the commercial lending side, where they will let you put less than 20% down. I have seen on the residential side, where a small bank that’s going to hold the loan in-house will allow that, just because you’re buying below market value. But banks are really flexible, especially the small, local banks, where maybe that does happen where you can put less than 20% down.
Tony, have you ever seen that, where a commercial lender will put less than 20% down?

Tony:
No. Yeah, most of our debt, honestly, isn’t carried by our LLC. And the debt we do have in our LLC is from private money lenders. We’re usually going 0% down on those ones.
But I think my question to Ernesto would be, “What is your motivation, Ernesto, for getting the LLC and going after commercial debt?”
I think there’s a common misconception that you need an LLC to buy investment property or to get all the tax benefits to come along with being a real estate investor. And that’s not true. You can still claim all the deductions, even if the property’s in your personal name and even if the debt is in your personal name.
The LLC really comes if you’re worried about liability, right? Asset protection. And even still, there are ways to protect yourself from a liability perspective, without even creating the LLC.
So, I think that would be my first question, Ernesto. Because, a lot of times, you can get better debt if you’re able to get that debt in your own name.
Now, obviously, if you do go that route, a lot of times, banks are going to want to make sure you have the DTI to cover that. So, maybe if you’re going after commercial property, where they’re kind of looking at your … Gosh, why can’t I think of the name of the statement? Your personal financial statement, and they’re looking at the NOI of the property, that could be one reason.
But Ernesto, if you have the debt-to-income ratio, you have the credit scores to go out and get that debt by yourself, I might even say, it might be more beneficial to get something in your personal name.

Ashley:
And then, the second part of that question, was the documents required, and Tony touched on one of them, providing your personal financial statement, which lists your assets minus your liabilities.
So, if you own a primary residence, that would be your asset. If you have cash savings, that’d be an asset. Your liabilities would be the mortgage that’s on your primary residence, or if you have a car loan, things like that.
The next thing that you may need to supply, and these are especially if you’re going to be a personal guarantor on the loan. So, even though your LLC is getting the loan, the bank may require you, or ask of you, to be a personal guarantor, where you are signing, saying that if the LLC defaults on the loan, you are now personally liable to pay that loan. You do get a better interest rate if you do sign for that, and you may get better terms if you are a personal guarantor.
So, they may want two years of your personal tax return, if applicable, two years of your LLC tax return if it’s been open for two years, a profit and loss of the property you’re purchasing, also the rent roll of the property that you are purchasing. And then, they’ll probably run your credit too, as a personal guarantor.
They also will most likely require any partner that has more than … or has 20% or more ownership in the property too, to supply all of these things as well, such as their tax return, and to also be a personal guarantor.
I’ve never seen it, where, if somebody owns less than 20%, they require them to sign on the loan or to provide their information, but that could also possibly happen.
Okay, so let’s move on to our next question. This question is from Denise Biddinger, and this is also from the Real Estate Rookie Facebook group. “What’s the best way to structure a first-time partnership? Should we look for someone to split the cost of a mortgage, and each get a loan for the applicable half? Is that even an option? So, here’s some background on it. It’s a buy-and-hold. The property is listed at 265,000, the down payment only 20%, which is around 50,000, which, hopefully, would be funded by a partner. What other factors should I be considering? Thank you.”
So, this is something Tony and I talk about a lot. There is no right way to structure your first partnership. That is completely negotiable. You just want to make sure that it’s legal and that it’s all in writing.
So, I think Tony will be able to talk to this better on this one because, Tony, you do partner with people who bring the capital to deals and how you do your joint venture agreements.
For myself, personally, my first partnership, we did a 50-50 ownership. My partner brought the capital, but he also was the lien holder on the property. He held the mortgage, so the money we used to purchase the property, we were paying him back that money over a 15-year amortization, at 5.5% interest.
So, he was getting a monthly payment every month of principle and interest. He was also 50% owner of the property, so any equity by mortgage paid on, he was getting that advantage. He was also any appreciation into the property that was building equity. So, when we eventually sold, he got 50% of the profit. He also was getting 50% of the cash flow through the lifetime of that property that we had it.
So, Tony, do you want to go ahead and touch on the joint venture side of doing a partnership for your first deal?

Tony:
Yeah, so there’s a couple things you should look at, Denise. So, the first thing you said is, “Should we look for someone to split the cost of a mortgage, and then each get a loan for the applicable half?”
I’ve actually never seen that happen before, where you have two different partners, and each of them gets their own mortgage for their part of the property. Usually, if you’re going to do it that route, both of you would just be applying for the same mortgage.
But here’s the thing. I think, if you’re in a partnership, typically, you want the smallest amount of people on the mortgage as possible, because if one person can qualify for that loan by themselves, then it allows the next person in that partnership to get the subsequent loan. But if both of you are in that loan, now both of your DTIs are impacted. So, usually, you want the smallest number of people possible on the mortgages as you can.
But anyway, to kind of answer your question about how to structure it, there’s a few things to look at, Denise. You can look at mortgage. So, who’s going to carry the mortgage? The down payments of the capital, who’s going to bring that capital? And then, on the actual ownership of the property, you look at equity. How are we going to split ownership of this property? And then you look at profits. How will we split the actual profits of this property?
And you can tie in other things like, “Hey, is someone going to get a management fee for doing the day-to-day management of the property?” Or if someone does maintenance on the property, do you get an hourly fee for the maintenance piece? But I think those are the different levers you want to look at.
And it sounds like Denise, you’re looking for someone to bring the down payment, but it also seems like, if I’m reading this the right way, that you feel you have the ability to get approved for the loan. So, one easy way to do it would be to say, “Okay, look. I’m going to carry the mortgage. You’re going to bring the down payment capital.”
And you have to make sure that that money gets seasoned or that your lender’s okay with that person gifting that money to you. But say, you carry the mortgage. That person brings the down payment. And then you guys can say, “Hey, we’re going to split the profits down the middle 50/50. We’re going to split equity down the middle of 50/50.”
Or your partner could say, “Hey, since I brought the 50K, I want to make sure that whenever we sell the property, I get my 50K back first, and then we split whatever’s left over.”
So, there are a million different ways to kind of skin the cat here, Denise, but I think those are the things you want to look at, is your mortgage, your down payment, your equity, and your profits.

Ashley:
Okay, our next question is from Trevor Manning. He says, “Hi, Rookies. I’m going to start analyzing deals. I was wondering if there is a rough rule of thumb for estimating rehab costs, like an estimate per square foot, moderate, heavy rehab. It doesn’t have to be super accurate. I just want to get my hands dirty with practicing my analyzing. Have a great weekend.”
Okay, so this is such a hard thing, as a rookie starting out, is estimating the rehab. And even still, I struggle with it, as to there’s so many variables that come into play to get the perfect budget, the perfect estimate.
When I first started out doing full, heavy rehabs, I took on a partner who knew how to do construction, and that’s how I learned to do my estimates.
The first thing I would do is to look into the book Estimating Rehab Costs by J. Scott. It’s available on the BiggerPockets bookstore. And it’s not going to be able to tell you, “Okay, in your market, in your area, a painter is going to charge you $2.50 per square foot,” but it’s going to lay out everything. You should be getting quotes for, everything you should be estimating that you might be missing.
Another way to kind of look at it is, and this is very time-consuming, but once you do it one time, you can constantly reuse it for other properties, is build out your own kind of template, so you can at least get a very good idea of what the material cost will be.
So, you’re looking at a property. You’re looking at the listing online, or maybe you go to do an actual showing. Take tons of photos and videos of the property. Then, sit down and go, room by room.
Okay, so I always use the bathroom as an example. You’re looking at the bathroom. You want to rip the bathroom out and redo it. Okay. For the shower, maybe you know want to put in tile. You want to tile the whole shower. Okay, will they make a Schluter tile system. Okay? You can go and look at the price at Lowe’s, Home Depot, or whatever hardware store you use. Pull up the cost of that. You are going to link that to your spreadsheet.
Then, you are going to find a YouTube video that talks about what it takes to build out a tile shower. And you are going to say, “Okay, I need the grout. I need the tile. I need the thinset. I’ll need these other things. I’ll need the faucet. I’ll need the handle. I’ll need whatever else is in that video.” Make a list and build out that kind of worksheet, that template, and then go online to the hardware store and pull those things.
Okay, so a toilet, you’re going to need a wax seal to go with the toilet. You can google all this on YouTube. Put those things in there. Even if you don’t use that exact same toilet that you linked, it’s still going to give you a pretty good estimate of what your budget is going to need to be.
If you don’t know what toilet to pick, go ahead and pick one on the higher end, and if you end up getting one that’s cheaper, and it’s going to work just as well, then great. You just saved yourself 25, $30 right there. So, always overestimate. Go for the higher-priced item. You don’t want to blow your budget way out of the water by picking $10 per-square-foot tile if you’re just doing a rental property, where you could get away with $2 or $3 per-square-foot tile. It’s time-consuming, but I think that is a great way to kind of get an understanding of what materials cost.
And then, for as far as labor, call around and ask contractors, “What do you charge to install a toilet?” Ask other investors. James Dainard, we had him on. I’m sure Tony already has his episode numbers teed up, as to what episode that was. But he did this heavy, deep dive. And he has a template, where he knows that his painter charges X amount per square foot. So, when he’s estimating a rehab, he already knows, “Okay, this is a 2100 square-foot property. I’m going to times that by the $2.50 cents my painter, and that’s how much I should be charged for … That’s my estimate for the painting on the property.”
And the same for installing tile and all these different things, or even drywall. So, calling and kind of getting an idea. Of course, no contractor’s going to be able to tell you over the phone, “This is how much it would cost just for this,” but just an idea or a range can really help you kind of figure out.
And then, for kitchens too, call kitchen cabinet places that do the design and ask if they can give you a low-end model or low-end cabinetry, what the price point runs on that. If it’s 500 square-foot kitchen, things like that.
This is going to be time-consuming, but going around and visiting those different places, making the phone calls, looking things up online, it’s going to be worth it, if you really do want to have a more accurate estimate. And if that’s the one thing that’s holding you back from getting started, then it’s definitely worth the time doing this kind of research.

Tony:
Yeah, it’s a great breakdown, Ash. And, of course, I’ve got James’s episode teed up, so that was Episode 165 for Part One, and I think Part Two is 167, if I’m not mistaken, or 166, one of those ones.
So, Trevor, in addition to everything that Ashley said, I’ll just kind of share what my journey was when I was first starting out and what I did to try and estimate my rehab costs. And once I found my subject property, a property that I was looking at purchasing, I looked for other comps in that area that had recently sold, and I identified the comps that I liked, the ones that I was trying to emulate.
And I did two things, really. First, I went out, and I found another contractor and said, “Hey, here’s what I’m looking to turn this house into. Here’s what I’m looking to transform it into. Can you give me an example of projects you’ve recently done that looked like this?”
And this contractor said, “Yeah, here’s one or two properties that I did, that are similar to what you’re trying to do.”
And I said, “Okay, what was the cost for that property?”
And he told me, “Hey, it was, whatever, $70,000 to do that rehab.”
And then, that kind of gave me a ballpark, if I want to do a level of rehab, it’s going to cost me around 60 to $70,000 to do that.
And the other thing I did was I gave him photos of what the property looks like today, the current state of that property, and I showed him those comps that I was looking at, and said, “Hey, to get a property like this, to look like this, what do you think it would cost me?”
And he said, “Okay, it’s going to cost you around this much.”
So, now, I’ve got these concrete numbers of what he charged his previous clients to do these rehabs, and I’ve now got this ballpark of what he’s going to charge me to take this property that I’m looking at and turn it into something new. And with those, it gave me a pretty decent ballpark on what I would be spending to kind of get the level of rehab that I was looking for.
So, I think, Trevor, talking to other investors in your market and asking them what they’re spending on a price per-square-foot is super important. And then, also, just going to the folks that are going to be doing the work and getting their opinion.
It is incredibly difficult, Trevor, for me or Ashley to say, “Hey, use this price per-square-foot in your market,” because it’s what Ashley spends in Buffalo is going to be very different than what I spend in Southern California, and it’s going to be very different than what you spend in whatever city or state you’re in. So, you do have to kind of get localized information to make your best guess.

Ashley:
Yeah, the last thing I would add on to that too is, even when you’re just in Lowe’s, if you keep an eye out, they usually have signs saying like, “We will install your flooring. We’ll install your bathtub.” Find out what their pricing is on that. And a lot of times, they actually do provide free quotes too, where they will send someone out. But sometimes, they will say, “We have a special going on. Our rate is usually $5 per square foot to install flooring, the luxury vinyl plank, but for this week only, we’re doing it for X amount.”
But you can at least see how their pricing kind of varies, and you can use that, too as kind of a starting point as to what the prices are.

Tony:
Ash, I’m just curious, have you ever not used LVP in your properties? Have you ever done, I don’t know, tile, actual tile, in your properties or, I don’t know, what’s the old linoleum type, or do you always go LVP?

Ashley:
Recently, always LVP. I’ve done tile showers and tile in bathrooms. I don’t think ever tile in a kitchen before for a rental property, but I’ve definitely done the tile shower, the tile in the bathroom floor, and then luxury vinyl plank throughout. I, actually, in one unit right now, that I just did a big turnover, and when we ripped up the carpets from when I bought it, we were going to put the LVP down, but it actually had hardwood floors. And it was cheaper to refinish the hardwoods, than it was to rip the carpet out or to put LVP into that unit.
And then, the A-Frame, the short-term rental, we did do tile in that bathroom and the shower too, but that was the rest was all LVP in there. Yeah.
And then, in the apartment complexes that I asset-manage for, we do linoleum in the kitchen, in the bathroom, but we’re slowly changing that into LVP, as people move out and just keeping it consistent the whole way through.

Tony:
Yeah, same for us. We tile all of our bathrooms, the bathroom floors, the shower floor, the shower walls, we always tile those. We have patios in most of our backyards. We will tile the outside with some nice tile as well. And then, everything else is a really nice LVP also. I’m just curious because one of my friends, this is in primary residence, and instead of doing LVP, he just tiled the entire inside of his house. And it almost looked like LVP, but it was tile. And he told me that they were thinking about doing LVP, but it ended up being cheaper to do that tile. So, I was just curious if you ever tried anything like that before.

Ashley:
Yeah, actually, in this property that I’m in right now, I wish … There’s the whole stacking. You can kind of see it, the whole pallet of flooring right there, and it’s LVP, but I wish that I would’ve done tile in this one throughout.
My aunt and uncle did that. They actually ripped up all of their hardwoods in their house and put tile that looks like wood on it, just because of the durability. Their dogs were scratching up the hardwoods.
My house that I built, we did tile in the kitchen and the bathrooms and the laundry room, but the rest … in the mudroom, but then the rest is all the hardwoods. I hate it so much. The first couple years living in that house, I would cringe every time a toy dropped onto the floor or whatever. Now, there’s dings and scratches and everything throughout it, but it’s also LVP, I think, is a lot easier to keep clean too, but also a lot more durable than the hardwoods too. So, I just don’t care for hardwoods anymore.

Tony:
Yeah.

Ashley:
Okay. So, our next question is from Jordan Alexander, and it is, “Would you go with a conventional second home mortgage at 10% down, with long-term fixed, or start an in-house portfolio relationship with a lender at 15% down, 5% interest, and a 20-year amortization?”
Okay, so, my opinion on that is, what is your why, first of all? Are you going for cash flow? Are you going for appreciation? Are you going to build this huge portfolio, where you think that doing this one loan differently with the lender is going to give you years of great business with them?
I think run the numbers and what’s going to give you the better cash flow. If you can get both of those, look at five years down the road, where you’re getting the better return on those things.
Doing the in-house portfolio loan, if you work with that lender to do the portfolio loan, or you work with them to do the second home mortgage, you’re still going to be establishing a relationship by working with that loan officer, no matter what type of loan product you are doing.
So, in my opinion, I would recommend doing the 10% down and getting that 30-year fixed mortgage on that, with a lower interest rate. The 5% interest for the second one that you mentioned with the 20-year amortization and putting a little bit more down, maybe that is a lower interest rate right now. I’m not sure when this post was done or what it would be for the second home mortgage, but 5% interest doesn’t sound that bad for me now.
I’m doing … helping my business partner. He’s doing a loan right now on a primary residence. And when I was filling out some of his paperwork, it was 5.125% that he was getting, but it’s a 7/1 ARM, so it’s only fixed for seven years, and then he’ll go and refinance it, depending when … what rates are, or probably just pay it off.
But Tony, what do you think about that? And also, Tony, I have another question for you too, are you … And I heard this. This was a rumor that was swirling around, and I keep forgetting to ask you if it’s true, are banks getting more strict on lending the second home mortgage, that the 10% down is going away?

Tony:
Yeah, it’s a great call-out, Ash. What I was going to mention is, as I talked about Jordan’s question here, is that banks aren’t necessarily getting away from the second home mortgage, but they are becoming more expensive. So, they’re still 10% down, but a lot of banks are now adding additional points, on top of the 10% down payment, that almost makes it less desirable for people.
So, we haven’t closed on a 10% down second home loan in a while, and we’ve been going with 15% down investor loans because, when we add up the total cost of the debt, it’s actually been cheaper to go with a 15% down loan with no points, versus a 10% down with all the added points and fees.
So, I think I would answer Jordan’s question in a very similar way, Ashley, where it’s like, “Jordan, you got to look at the total cost of the debt and understand, between the second home mortgage and that portfolio loan, which one’s going to allow you to achieve better returns and better cash flow long-term?”
Like Ash said, I mean, 5%, if that’s today’s rates, that’s pretty good. So, I might be interested in doing that. You didn’t mention what the term was for that, so I don’t know if that’s a three-year term, a five-year term, but 5% does seem pretty solid. But yeah, I would definitely just run the numbers and try and figure out which one makes the most sense.
So, just before we close this one out, I just want to talk about what points are and how it adds to your closing costs. So, one point is essentially 1% of your mortgage amount. So, if I had $100 of mortgage, one point would be 1%, which is $1.
So, as you add these additional points, it really can start to add up, especially if you’re buying a house for 300,000, 400,000, 500,000, $800,000, one point can make a pretty big difference in what your down payment cost is.
So, you want to make sure that you understand, not just the down payment percentage, but also the additional points and fees that are being added onto that, because when you close on that property, it’s the down payment, plus all the closing costs, which includes those fees and points.

Ashley:
I’ve seen banks doing a lot of options for people, is that they’ll offer, if you pay points, you get an interest rate buydown. So, say, for example, your interest rate is 6%, if you pay one point, they’ll knock it down to 5.8% or something like that.
So, what you have to do in those scenarios, is you have to look at, “Okay, how much more money am I going to have to put down?” So, one point, say it’s a $300,000 property, that’s $3,000 added to your closing cost, but let’s look at over how much interest are you saving by having that interest rate knocked down a little bit and is it worth it?
Also, look at your monthly payment too. How much extra cash flow will you actually have and how long until you can get that $3,000 back, that you put up, up front? Or is it worth it taking higher interest rate and not having to put more money into the deal upfront too?
So, just a couple things to think about, as lenders are trying to get creative to attract people when those interest rates are higher by offering those point paydowns. So, just make sure you’re understanding if it really is a better option for you or not. And I’ve seen it up to three points, where you can pay 3%, to get your interest rate knocked down a little bit.

Tony:
Yeah, just really quick, Ash, before we go to the next one. I know we’ve talked about NACA before. And I recently had a guest on that used NACA as well. And NACA’s like a loan program, that helps people buy properties. And they’re really good at allowing you to buy down your interest rate as well. And when interest rates were super low, I know some people that were getting NACA loans below 1%, which is crazy to think about. That’s literally almost free money.
So, yeah, if you are able to buydown your rates, it can be beneficial in the right environment.

Ashley:
Okay, our next question is from Preston Wallace. “Listed my first rental about two weeks ago. I have had a few people reach out about applying, but never complete the process. I am using a property manager, as I have moved a little over an hour away. At what point do you all consider reducing the ask on the monthly rent? I did a fair amount of research in the area and even priced rent about $50 lower than a few comparables in the neighborhood that rents it out in January. I can afford to pay the mortgage without the rent, but at the same time, I don’t want to have it vacant for much longer.”
So, the first thing I would look at is to the property management company or your property manager. What are the things that they are doing to market your property? If you search your property, or you search, say, the properties in Buffalo. Apartments for rent, Buffalo, New York. Two-bedroom apartment in Buffalo, New York, or whatever the city is that your property is in.
Where do you see the listing? Is it in multiple places? Is it being blasted out to 10 different places? Is there a sign in the front of the yard? So, that’s the first piece I would look at, is the actual marketing of the unit.
And then, I would take your property manager’s advice. They’re the expert, supposed to be the expert, in that market, and get their opinion as to, “Okay, this is listed, what I thought was below $50 before comparables in the area. In your experience, what do you think is the difference between my unit and these other units?” So, maybe these other units have a washer and dryer, and yours doesn’t. And that’s actually becoming more of a big deal than it isn’t. And then, see if there’s an opportunity, for whatever you are missing, to add that into it.
So, maybe these other properties allow pets, and you don’t allow pets. Okay, maybe do reconsider and allow a pet and charge a pet fee upon move-in? Things like that.
So, that’s what I would kind of do some research, before you actually go in and decrease the rent any further than what you have.

Tony:
Yeah, I think the only other thing I’d ask that, Preston, is that you should also look at the numbers and use that to help you kind of make a determination because, say that we look over the next year, over the next 12 months, and say that you’re trying to get a 1,000 bucks for your place right now, but because you tried to get $1,000, your place sits vacant for the next two months. Right? Over the course of that year, you have two months that are empty. So, you’re going to make $1,000 over 10 months, which is $10,000. Say that you dropped the price from 1,000 to 950, and you rent it out this month, now you have a full 12 months, you’re actually going to make more. You’ll make $11,400 at 950 if it’s rented out for the entire year.
And, so, I didn’t even include the fact that you have to pay the mortgage yourself for those two months of the property sitting vacant. So, sometimes, you can make more money by reducing your rent. So, I think just take that into consideration as well, where sometimes real estate investors get so fixated on the monthly amount, they don’t realize the impact that it’s having on vacancy, which is the biggest expense for us, as real estate investors.

Ashley:
And the last thing to add onto that, that’s great advice, Tony, the one thing to be careful with that is don’t … You want to fill that unit. Don’t just take on the first person that applies for your unit and risk getting a bad tenant in. The one time it is good to wait and have that little bit longer vacancy is waiting for a good tenant, and not just settling because you want to get it rented super quick. And then, the people end up trashing the house, and you saw all the red flags, but you just wanted to get it rented. So, that would be my one cautionary tale.
Okay, our last question today on Rookie Reply is from Samuel Hall. “A FSBO, which is For Sale By Owner, has agreed to move forward with my offer. However, they want me to provide comps, comparables, to them. How would you handle this?”
Well, I think this is a great situation for you to control, Samuel. They want you to provide the comps, instead of them going out and finding their own comps. So, I think you can definitely use this to your advantage. So, go onto the MLS, Zillow, realtor.com or whatever, and I would look at comparable properties that have sold in that area, not what things are listed at, because just because they’re listed at something, does not mean they’re actually going to sell for that.
I would also go to propstream.com. They have a free seven-day trial, so just use it for the seven days, and you can cancel it or you can keep it if you love it. But you’ll also be able to pull comparables from there too, by putting in the address, and there’s a little button you push to look at comps in the area.
So, you’re going to compare bedroom count, bathroom count, but also square footage, and then finishes of the property. If you find a property that’s $400,000, but it fits every check box, but it has all these high-end finishes, where yours is still designed in the ’60s, that’s not going to be a good comparable, or you’re going to have to adjust your comparable by showing this house has an extra $100,000 of upgrades in it that this person’s house doesn’t have.
The place that I would be cautious about that is this person probably has this sentimental value to their property, so try not to bash their property by saying, “Oh, these comparables are way better than yours. That’s why I am looking at something different.”
So, even look at, see if you can find a property that is worse than theirs, or level as there’s, and it sold for actually what you are going to pay for it. But I think you do have an advantage by picking and choosing what comps you use, to make your offer look more favorable.

Tony:
Yeah, I think the only thing I’d add to that is, also include, Samuel, and I’m making an assumption here that there’s some work to be done, but I would also include what you predict your rehab budget to be. So, you can go to the seller and say, “Look, I’m buying this property from you for X, but I also need to invest another 10, 20, 50, $100,000 to make this property even livable for the next person. So, I’m taking on all of the work that you don’t want to do.”
And the last thing you can tell the seller is like, “Look, Mr. And Mrs. Seller, I’m going to buy the property completely as is. You literally don’t have to lift a finger. If you want to just leave all the trash here, leave the trash air. If you want to do … Don’t touch anything, I’ll take care of everything. But just know I also have to put a little bit of work into it myself.”
We’ve used that tactic a couple times with some off-market deals we’ve purchased, and it’s been helpful to say, “Look, we get that you have the sentimental value, but for us, it also is a business for us as well, and here’s what we’re going to have to spend to make this worthwhile.”
So, I found that to be helpful when you’re negotiating with folks also.

Ashley:
Yeah, that’s really good advice. So, the more information you can provide as to … that’s going to be to your benefit, the better.
Well, thank you, guys, so much for joining us for this week’s Rookie Reply. If you guys are watching this on YouTube, make sure you are subscribed to the channel, and you like this video for us, and leave a comment below, as to what question and answer you found the most valuable this week. And don’t forget to leave us a review if you are listening on your favorite podcast platform.
Thank you, guys so much. I’m Ashley @wealthfromrentals, and he is Tony @tonyjrobinson, and we’ll be back on Wednesday with a guest.
(singing)

In an excellent article on early-stage venture capital (VC), former VC Andy Rachleff notes that the top 20 VCs, i.e., about 2%, earn about 95% of VC profits. Is this true? Why? What are the implications?

Here is why few VCs earn most of VC profits:

· Home runs are key to VC returns because VCs fail on about 80% of their investments. Only about 19 are successes and one is a home run, and these profitable ventures have to pay for the failures and offer a return. VC portfolios that do not have home runs will not be in the Top 20 (Designing Successful Venture Capital Funds for Area Development: Bridging the Hierarchy & Equity Gaps Dileep Rao, Applied Research in Economic Development, 2006. Volume 3. Number 2).

· Due to the high level of losses in its fund, Y-Combinator (a noted Silicon Valley incubator) is said to have earned a mediocre return in its fund that included an investment in Google.

· Noted VC Marc Andreessen of Netscape and Andreessen Horowitz notes that about 15 ventures are said to account for ~97% of VC returns. VCs who fund these ventures are likely to be in the Top 20.

So, whether it is 20 VCs or 40, and 15 home runs or 30, the reality is that there are very few home runs, and VCs need to invest in these few VC home runs if they want to be in the Top 20.

Here is how the Top 20 VCs invest in potential home runs and earn most of the returns:

· They hunt where the home runs roam. VCs do not start home runs. Unicorn-entrepreneurs do. And unicorn-entrepreneurs have mainly been in Silicon Valley. That is why VCs have mainly succeeded in Silicon Valley.

· Importantly, the Top 20 VCs invest at the best stage of the venture for VCs. VCs need to see evidence of potential, i.e., Aha, to earn high returns and reduce risk. Rachleff notes that the Top 20 VCs finance after the Value Model (Strategy Aha) and before the Growth Model (Leadership Aha) for better value and reasonable risk. After Strategy Aha, venture leadership is the key goal. This is one key reason the Top 20 VCs often replace the entrepreneur, like Pierre Omidyar (eBay) was with a professional CEO, in order to grow faster and increase the chances of leading the emerging industry. Risk-averse VCs (an oxymoron) invest after Leadership Aha. But by then the venture’s potential is evident for all VCs to see and the high interest from VCs to invest puts entrepreneurs in control. Entrepreneurs such as Jan Koum (WhatsApp) and Mark Zuckerberg were able to select their VCs and dictate the terms. The high demand also increases valuations and reduces annual returns.

Implications for VC-Based Ecosystems Outside Silicon Valley

· The belief that there is a VC shortage because so many “deserving” entrepreneurs are rejected, and the assumption that everyone can succeed as a VC just by starting a fund, has led to the launch of many targeted VC funds. Few seem to be asking the right question: if there was such a shortage, why do so few VCs succeed and so many VC-funded ventures fail? To earn high returns outside Silicon Valley, VC-Based Ecosystems need to develop Unicorn-Entrepreneurs to start potential unicorns.

· Without home runs that can go public, VCs cannot earn the huge returns that public valuations offer during euphoric times. This means that VCs outside Silicon Valley have to mainly exit via strategic sales, but few of these strategic sales give home-run returns.

· Areas outside Silicon Valley that are starting VC funds should instead focus on developing Unicorn-Entrepreneur-Based Ecosystems if they want sustained success.

Implications for Entrepreneurs and Entrepreneurial Ecosystems outside Silicon Valley:

· Entrepreneurial ecosystems (EE) outside Silicon Valley need more Unicorn-Entrepreneurs who have the skills to start and launch home runs without VC. They can learn from the 94% of Unicorn-Entrepreneurs who avoided or delayed VC.

· Areas that use VC to develop high-growth ventures have another problem. For their ventures that are successes, but not home runs, the most likely exit is going to be via strategic sales where the venture is sold to a corporate buyer who may move the venture and its potential growth elsewhere. The area does not gain.

Implications for Sustainable Development

· Any constraints that are added to the development of ventures reduces the range of investment options. This means that VCs that fund “sustainable development” have a smaller universe to fund, with a lower probability of home runs. This also means that sustainable developers need to reduce risk and increase potential by developing Unicorn-Entrepreneurs who can grow more with less. .

MY TAKE: Few VCs outside Silicon Valley do well because they try to build unicorns using venture ecosystems, which is a frontal assault on Silicon Valley. They would do better by building the entrepreneurial ecosystem and launch a guerilla attack.

Wealthfront BlogDemystifying Venture Capital Economics, Part 1 | Wealthfront
NytimesVenture Capital Firms, Once Discreet, Learn the Promotional Game (Published 2012)
TechCrunchWhy Angel Investors Don’t Make Money … And Advice For People Who Are Going To Become Angels Anyway
MORE FROM FORBESFlips, Flops And Unicorns: Where Will You Fit In The VC Portfolio?By Dileep Rao
Wealthfront BlogDemystifying Venture Capital Economics, Part 1 | Wealthfront

Dave:
What’s going on, everyone? Welcome to On The Market. I am your host, Dave Meyer, here with James Dainard today. James, how’s it going, man?

James:
It’s good, man. I’m excited to talk about dirt. It’s actually one of my favorite business models is sourcing building lots.

Dave:
Is it something you’ve been doing a long time?

James:
Yeah. Well, we’ve been doing it for about 10 years, but then we really started sourcing a lot of dirt a couple years ago, or I’d say three years ago because we were working with so many fix and flip clients, it’s the same general process. But honestly, as a wholesaler broker it’s a little bit easier because when you’re selling dirt versus a fix and flip house, a lot of times they’re just a professional company buying it. And so it’s a lot more of a smooth transaction rather than the learning curve of fix and flip.

Dave:
Yeah. It seems like an interesting time to get into this business, which is why for everyone listening we’re bringing on a guest, Dan Apke, who is going to teach us and inform us about a pretty interesting strategy I had not really heard much about prior, which is basically land flipping. And we wanted to do it because, James, you’ve said a lot on the show recently that land prices are going down a lot and obviously that presents risk. But it also could present opportunity if land prices are falling so dramatically. I’m curious to hear if you and Dan think that it’s a good investment or there’s going to be some attractive price points in the near future.

James:
Yeah. There’s a great opportunity for people right now buying that kind, at least in our metro area. Dirt has fallen 30, 40%. And so what it’s allowed us to do is actually buy some rental… Rather than just buying land cheap, we’re actually buying rental property with zoning upside to where that property can be worth a lot of money down the road.
And so I know in our market there’s a substantial opportunity. Anytime you can buy it 30%, 40% cheaper in a nine month period, that’s usually a good idea. I’ll be curious to see how it’s going in the rural market because I know the more expensive product has came down more, but that cheap investments, they have a lot of velocity right now. They’re still moving. People still want to buy real estate, but they want to buy the cheap stuff.

Dave:
All right. Well let’s bring on Dan, because I think that you make a great point. We’re going to bring on Dan, who’s going to teach us all about a very interesting business model for buying land that maybe many of our listeners will want to consider. But I think even if you don’t, learning just about… We’re going to talk a lot about an area of the country and a part of the country that we don’t talk about a lot in the show, which is rural America. And Dan has some really interesting insights into what’s going on with real estate in general in rural America. So you’re definitely going to want to stick around and check this one out. But first we’re going to take a quick break.
Dan Apke, welcome to On the Market. Thanks so much for being here.

Daniel:
Thanks for having me, Dave.

Dave:
Well, why don’t we get started by just having you introduce yourself and telling our audience a little bit about your involvement with real estate investing.

Daniel:
Absolutely. Originally, I got started in e-commerce. I had an e-commerce electric bike company. I was trying so many different businesses. I had drop shipping businesses, I had Amazon FBA businesses. And along the route, I bought my first round of property about five years ago. It was a commercial salon. That was my first introduction to real estate as a whole. So it was a salon on the bottom, apartment on top. I bought it for $82,000. That was my introduction to real estate. That’s when I fell in love. And ever since then I continued to buy real estate along the way. I was involved in all these different businesses, like I said, 10, 12 different businesses. And I just saw lack of sustainability in a lot of these kind of get rich quick schemes, a lot of different things that will not be around in 20 years.
And I sold my electric bike company to an investor out in California. And during the process of that, one of my mentors kind of showed me buying undermarket land and I dove full force into that with my brother. He is my 50/50 business partner. We looked into the business model. I loved the sustainability of it. I loved how just wasn’t competitive like a lot of the other real estate industries I was seeing at the time, just lack of competition, sustainability. We dove full force into land investing, started buying anywhere between 20 to 50 properties in our first few months of getting into that. And ever since then, it’s been history. We’ve been hiring transaction coordinators, salespeople for our team. We dove into land investing, really full force. I love the sustainability, I love the lack of competition in the space and just something that’s going to be around for a long, long time.

Dave:
That’s great. Congratulations on your early success, or all of your success. I do want to get into the land, that’s obviously why you’re here. But given all the side hustles you’ve done, what was the worst one you did? I’m very curious.

Daniel:
I had a ghost-writing business. So I was publishing books in the romance sector.

James:
Whoa.

Dave:
I’m so glad I asked the question.

Daniel:
I don’t read a lot of books in general, for the most part. I’ve always had trouble struggling reading in general, just from lack of attention. And then I started writing romance books using an author and publishing those on Amazon. It was actually good money, just I hated it. I hated the business model.

Dave:
You got out right before ChatGPT too, I’m sure you’re writing all the romance novels now.

James:
Yep. So Daniel, how’s your dating life, if you’re a romance novelist?

Daniel:
I put a lot of emphasis on the editing. I never even got around to really reading one of the books to be honest.

Dave:
All right. Well let’s get into the real estate side of things. So you said someone introduced you to the concept of land investing. Is that right?

Daniel:
Exactly. His name was Mike Brusca. He was doing e-commerce with me, my mentor in the e-commerce and drop shipping space. And he had a lot of success and he saw this business model. The key, what he was doing, I think at the time he was buying properties under market value and then reselling them I think on notes or seller financing and things. And I saw the objective of buying properties under market value. And we switched up the business model a little bit, but that was the name of the game at the time and he introduced me to that.

James:
And Daniel, because land acquisition is a huge market and there’s all different type of land that you can source, whether it’s track home spot lots or affordable lots nationwide. What segment are you in, and then why did you go to that segment of the market? Because there’s so many different businesses inside land acquisition and disposition. Which ones did you guys focus on immediately? Because getting going on 20 to 30 deals in your first couple months, that’s a lot of moving. You’re moving a lot of land, or dirt at that point. What made you focus on the specific area and what do you guys target?

Daniel:
So we were targeting at the time anything from two to 50 acres that were really laid back with zoning. We want someone to be able to put a mobile home on it. Very, very little restrictions. We didn’t like HOA properties just because they were more difficult to sell a lot of times if we didn’t know the market and have a buyer’s list and things like that. So we were going across mainly the south. At first we were in Tennessee and Georgia. Those were two main markets and we’re really outside of those, the Nashville areas, Memphis areas and Atlanta. And we’d go one to three counties away from those areas and target anything really between two to 50 acres with very little restrictions because the lower restrictions, without knowing a ton about the market when just entering the lower the restrictions, the safer it is. And that’s kind of how we scale to that number. We just got nice pieces of land, we get drone shots on all of our land. We get really nice pieces of land with very little restrictions and they sell pretty well.

James:
Okay. So you guys focus on path of progress areas. Is that naturally what you’re looking for, those core? Because that’s where you can get big hits is that path of progress, metro areas are expanding out. Is that why you guys focus on the fringe with low regulations, but is it also just because the growth is naturally as the market gets better, it expands out? Is that been kind of the reasons you started with outside Nashville or major metro cities?

Daniel:
So for us it’s about finding that balance. We don’t necessarily want to be in the hottest markets in the United States, but we also don’t want to be in the slowest markets. We like to find that balance. That’s why we take those hotter areas, the path of progress, take the Nashvilles of the world, that Atlantas of the world and bounce a few counties out. That’s kind of the name of the game. We want to make sure, yes, we can sell it on the backend, but at the same time we don’t want them being overwhelmed with other people’s offers, extremely competitive. So we try to find that middle ground in this business model.

Dave:
Speaking of business model, that’s actually the question I wanted to ask you, Daniel. Can you just give us a basic rundown of what the business model is for buying land?

Daniel:
Absolutely. So the first thing we do, like we were just talking about, we actually need to select a county. We go by countywide. We’re not in zip codes or anything. We usually select a county outside of an area. We’re talking about one to three counties outside of a city of our choice. And let’s say example is Atlanta, we’re going around Atlanta market. We choose five to 10 different counties to analyze. And then we’re actually analyzing what we do. We analyze, okay, what’s the days on market? What’s the population density? We don’t want overly populated areas. It doesn’t work well for this rural vacant land business model. So we also want to see another major thing to look at is what properties are for sale on the market now. Are we going to be competing against 25 other five acre properties on the market? So we want to look at the competition.
But then we also want to look at the sold data. Make sure the for sale to sold data ratio is okay to make sure, okay, we’re going to buy this five acre lot, we got to put it up and we got to be able to sell it. So we start diving into things, how long did this five acre lot take to sell? How long was it on the market? How long was it pending and actually going through on the sale?
But then what we actually do, talking about the business model specifically what we do, we’re pricing all of our offers. So we’re sending blind offers, that’s how we acquire. And we typically send blind offers to purchase their land in cash for about 35 to 45% of market value on average. And there’s a lot that goes into that. But that’s what we’re doing in bulk, right? We’re pulling a lot of data. So say Macon County, Georgia, we want all the records from two to 50 acres we discussed before. That spits out 5,000 records. Now let’s go into the county and figure out how to price it, look at the competition, and then really just bulk price that 5,000, send them direct mail.

Dave:
But how are you making money off it? Who are you selling them to? How are you reselling them?

Daniel:
Yeah. So we’re buying these in our own names. We have a group of investors in our land community, and they actually will put up the upfront capital to buy the deal. So we’re buying them in our name and then we’re putting it on the market. If it’s an area we do a lot of work in, like around Atlanta, Georgia, we have really, really good land realtors we work with that know us and work with us very closely, we’ll give it to them. We’ll just hand it over to them, they’ll put it on the market, do the showings, handle all the leads for us. If we’re in an area we can’t, like we’re talking rural America. Where’s majority of our land? It’s in rural America. And sometimes there’s just not a lot of land agents out there. And then you take the small amount that there are and there’s not a lot of good ones as well.
So if we can’t find a good realtor, what we do, we will put it on the MLS using a flat rate broker and we’ll put it on a website called land.com. It’ll get to Lands of America, landwatch.com, all those. And then last is Facebook marketplace. We actually sell a ton of land on Facebook Marketplace and that’s kind of our strategy. So we always get on the MLS, so it’s on the Realtor and Zillows of the world, and we’ll always get on the land.com and Facebook Marketplace. Those are our three key areas to sell. So we’re selling to the mass public. We personally don’t really utilize buyer’s list because we’re not doing the whole infill thing. We’re selling the end users who are putting a cabin on it, putting a house on it, whatever, just hunting on it. And that’s kind of our business model. When we get more into in infill lots, that’s when we utilize our business or our buyer’s list and all of that.

James:
And Daniel, what kind of feasibility, as you’re buying land, because you’re buying in all different types of areas and counties. So before even if you’re targeting 35%, you want to make sure that you’re buying something that’s sellable. What kind of feasibility do you guys run on these properties before you close on them? Because if there’s setbacks or anything like that, it can kill a deal really easy. Or if the topos out of whack, which is the topography, if there’s a lot of hillside. What do you guys do prior, to find that deal?

Daniel:
So for every five purchase agreements, so that’s what we’re sending out, we’re sending out purchase agreements in the mail, blind offers. So for every five we get back, we usually buy one of them just because like you’re saying, the feasibility. We call it underwriting the deal. We’re looking at the wetlands, the slope, the typography. We get drone out to every single lot before we buy it to check everything. We look at the pricing, make sure… Sometimes we’ll weigh overprice mail by accident. It just happens. We’re sending out such a large volume of mail, some pieces we’re just overpricing. Sometimes we got to go back and negotiate down.
There’s a lot of things that come up. But in general, yes, slope, wetlands, floodplain, and then we look at attributes, things like that. Then we get a drone guy to walk out there. We have a set of things that we send the drone where he actually goes and walks the property, gets ground photos of it, aerial photos of it, walks the property, give us a report, and then gives us the pictures. And then if we’re using a realtor as well, we’ll send them their prior to purchasing it as well. So those are our steps. We have a very heavy underwriting process before we actually wire the money.

Dave:
So you’re going out and buying these, you said like 30 to 40% of market value, is that right?

Daniel:
On average, 35 to 45%.

Dave:
Wow. That’s amazing. And then how long are you holding these on average and what kind of holding costs do you have?

Daniel:
Yeah. So on average, we get it under contract on average in about three weeks. And then one of the bottlenecks we run into is just land loans. It’s hard for people to get land loans in rural America, and that’s where it’s either okay, they have to have cash or they have to have some sort of banking relationship. And that’s kind of the holdup is on the loan a lot of times. So usually, on average, we get it under contract within three to four weeks, and then it’s usually an average of five to six weeks to close after that.

James:
What kind of debt? Because land loans are very tricky, especially in the last nine months, they’ve tightened up quite a bit. There was a lot of raw lot loans going out. I know we were sourcing a lot of dirt where people would buy well before permits, right? Because typically builders, like in infill lots, which is a little bit of a different business model, they want to close with permits because they can get better debt on it and have less liquidity in the deal. You’re targeting lots that are a lot more affordable, so you can kind of move, flip, it’s a different sale. You’re going after that discounted lot where the cash outlay is not as heavy. What kind of loans do you guys usually get? Because as the market tightens and the rates go up, lenders want more and more down. Have you had to change recently? And what kind of debt do you guys usually try to get and what’s the average rate on those?

Daniel:
The average rate, and there’s specific banks, especially in Georgia, there’s a company called, I think it’s Finance Land Georgia or something like that. And they work with a lot of our buyers in that state. Really state by state. There’s a lot of local banks who will finance land. Their average rate is probably around 10%. A year ago, probably 60 to 70% of our sales were cash, cash closes. But obviously things are changing, debt’s getting more expensive, money’s getting tighter.
So we’re starting to really have to look in that direction. How are we going to move land quicker without having the debt side such an issue? So we’re starting to look at things like seller financing, offering our own financing as well and then just selling the note. The good thing about selling seller financing is you can get things under contract really, really fast generally for land in these desirable areas. But the bad thing is on the back end we got to maintain it, it’s more work, or we have to sell it off for 75% of the total unpaid balance. So you take a hit on profit. I’d rather personally drop the price enough to be able to get someone with cash or a loan. That’s kind of our business model right now.

Dave:
So in recent months, Dan, have you seen the time it takes for you to resell properties tick up?

Daniel:
Yes, yes. Used to be, we used to put 50% of our properties used to sell same day or day after almost.

Dave:
Whoa.

Daniel:
Now it’s starting to, okay, it sits and some we’re seeing more price drops for sure. It’s definitely here for sure. Things are slowing down.

James:
Yeah, I know in our local market, we’ve seen… We sell a lot of spot lots. We were talking about this before we hopped on, where we’re focused on core metro areas. A lot more expensive dirt that we’re usually trying to plan and permit out the site prior to even closing on it because the cost of the dirt. Our average lot where we are is going to be seven to $900,000 just to buy the lot.
And what we’ve seen is that because of the debt, local banks and lenders are being very aggressive on land acquisition, or give permitted site to where they were asking for… We did a town home site where the bank financed us 90% of the deal. It was 10% down with the buildout in there. But that’s drastically changed over the last nine months. These banks, especially the local banks, as some are starting to have issues, their regulations in underwriting has really stepped up to where now, they’re not really doing raw land or they want to be at a 50% LTV on it. And so we’ve seen the demand for dirt. Dirt pricing has fallen 40% in our market in a nine-month period, just because access to debt. The resale values have only compressed like five to 10%, but the cost of the dirt has fallen dramatically. Are you seeing that in these raw lands too, in these outskirts areas or because it’s so cheap you haven’t seen as much movement on it?

Daniel:
Yeah, we haven’t seen movement in the price you’ve seen in that area. That makes sense, especially with building getting tighter and tighter and debt getting tighter and tighter. Out in our markets, we haven’t seen price drops like you’ve seen, but what we are seeing is more and more buyers backing out of the deal because they can’t get loans. So they’re getting pre-qualified or whatever a month or two ago they come to us, they put the offer in. We have to be really, really picky on the front end, kind of analyzing the offers because what happens is people are underqualified saying they’re getting a loan and then like you said, these loans, their underwriting process is changing significantly. So yeah, we’re seeing that as well, just not on the pricing side.

Dave:
Dan, you said that one of the things that attracted you to land investing is that there is relatively little competition. Why do you think that is? The way you’re describing it, it sounds like a very interesting profitable business. Why do you think there’s not more interest from other real estate investors?

Daniel:
It’s picking up for sure. You’re starting to see there’s certain areas we target where the landowner will get three or four different offers. Most of the time it’s not that way. But I think it’s just a newer emerging business, model to be honest. It is picking up the competitions rising, but it’s still greatly lower than going to wholesale property in Austin, Texas or something like that. So I think it’s just a newer business model that people are starting to understand and see. So what we’re seeing now, there’s a lot of wholesalers coming to try to wholesale land as well and they’re starting with the infill lots and then they’re coming to us and seeing our business model as well. And they’re starting to come to more rural land and get outside the infill lots as well. So I think the wholesalers are starting with the infill lots, they’re coming in and now they’re starting to expand out. It is a really, really fast-growing niche right now, the land investing model, especially in the rural America aspect.

Dave:
And if someone listening to this is interested in getting into this model, what type of investor or what skills do you think are needed to get into land investing to be successful?

Daniel:
The biggest obstacle that we see is mail. We’re sending direct blind offers. That’s what’s worked best for us. We do text, we cold call, we have services for that as well, and we’ve emailed. We’ve tried all that. It’s good to get people on the phone, but blind offers filters out all the BS. They call you and they actually want to sell their land.
So the biggest obstacle with that, blind offers, is the upfront capital. It’s like 62 cents to send a piece of letter. So the biggest thing is people coming in that are kind of fearless, they understand we’re going to reach people through blind offers. So that takes upfront capital and you have to believe in the business model to do so. The people that succeed are people who come in and they’re more fearless, they’re ready to go, they’re ready to send mail, they’re ready to acquire properties. And the biggest scale I see payoff in this business model is great salespeople, right? Because they get on the phones, they’re not scared to talk, they’re very confident. They negotiate down, they negotiate with these sellers because a lot of the sellers that we send a letter to call us, they want more money or they want to make sure they can trust us to sell us their land. So they just want a conversation. So the people that come in with good sales experience, I think, do the best.

James:
So you kind of referenced that a lot of wholesalers, and I’ve been seeing this too, wholesalers was kind of a big deal. Wholesaling dirt was a big model for the last 24 months and actually guys were getting paid really well because builders were being so aggressive. I’ve never seen builders buying like this in infill. They were paying 50% of value, which typically they’re 25 to 30%, 35 to 40% with a permanent hand. But they were just breaking all their rules at the time. And then as it’s gotten trickier, I think I’ve seen the migration, like you’ve said, from these wholesalers sourcing infill because it’s a lot more complex on those lots to go into these more affordable markets. And just all investments right now, people are chasing that, affordable deals. If you have a really good fix and flip property that’s more expensive, people are still wary of it because it’s expensive, the debt costs more, you got to have more capital outlay, but then the cheap fix and foot deals are still flying off the shelf.
Are you worried that that space could get a little bit more crowded since wholesalers are having a lot hard time moving dirt in these infill areas? I know for us we had to switch our model from us tying it up, doing the analytics to going, “Hey builder, where do you want to be at?” And we work it backwards at that point because it’s just to lock the deal in because of the different variances that come in with infill lots like the city, the jurisdiction, the permitting. Do you think that your space could get more crowded with the complexity that’s happened in these more expensive markets?

Daniel:
Yeah, it’s going to. They come in and they see the simplicity of it and the profit potential. They come in and they see the… Yeah, it’s a matter of time before it gets more and more competitive. It’s going to happen. It’s much, much more simple of a business model, flipping rural dirt, rural vacant dirt without any restrictions on it than what you’re seeing in those more metro areas with the very expensive lots. So naturally, it’s going to get more crowded. That being said, the business model will change over time just like business models do. In five years, we might not be able to buy a piece of dirt for 35 or 45 grand and resell it for 100, 110 grand. In three weeks, it might not be that way.
But we might have to change the business model. Right now we’re doing a lot of different projects, improvements, repurposing, rezoning, things like that. It’s not that complicated too. You can take a 50 acre lot, split it five times down the middle and sell five 10 acre lots and get 310, 350%. So I think naturally as it gets more competitive, which it will just because the simplicity and the profit potential in the business model, naturally the business model will change a little bit and that’s where these different niches are going to get more and more important and specializing in these different markets are going to get more and more important.

Dave:
Can you explain some of the specializations in the market? You’re talking about sub-dividing land. Are you selling those to a developers, to farmers? Who’s buying these?

Daniel:
So we’re not selling to developers typically, and we’re talking minor subdivisions. Splitting something up five times for a 50 acre lot, it’s extremely easy to do. We’re not talking about putting roads and sewage and plumbing and all that stuff in it. We’re talking about just minor subdivisions and our future buyer typically someone who just wants five acres outside of a city or they’re sick of living in a city or they live in the area, they just want to move and have land and have space. I, personally, that was one of the biggest obstacles I had to overcome is understanding there’s actually a demand in rural America for these rural lots. But there is, there’s so many people out there looking for five acres, 10 acres, 20 acres.

James:
And with these people looking in high demand and what we were just talking about, kind of lack of access to capital are you guys looking… I know for us sourcing dirt, we’re always looking. Anytime we’re working on any type of investment, it’s how do we maximize it? And for us, we’re actually starting to take these lots in and entitling them ourselves because we can then sell these lots for typically 30% more than we’re selling them for, raw.
As you scale your business, you’ve had a lot of success, you’re moving a lot of different dirt. Are you guys looking at getting into any other types of things, like entitling your property? And entitlement, just for everybody, is when you grab the piece of raw land, you permit out the site. Permits are ready to issue, which then a builder can get better financing on. Are you guys going to be doing any of that just to kind of expand the business model, or is it you focusing on the dirty cheap lots? You’re obviously buying them at great spreads. You’re getting 100% return on your investment, on each lot, but what’s next on the scaling as far as sourcing dirt and selling it?

Daniel:
Yeah, we are looking into doing that. We haven’t done much of it so far, to answer your question. But for us, our target this year is let’s do more expensive lots, more six figures, some seven figure lots that we’re buying. And with those lots, you have a lot of different opportunity to repurpose them and rezone them or subdivide them like we’re saying. So what we’re looking to do, we’re just looking for bigger, more expensive lots. So far this year we’ve already bought probably five to 10 different six figure lots, which is big in this space. We weren’t doing that a year ago.
We were buying 20, 30, 40, $50,000 lots. This year so far we have a lot of different six figure lots we’re buying. And a lot of the times, they’re that much more expensive because one, the area, but two, a lot of times we’re just buying bigger. Tomorrow we’re closing on Sumter County, South Carolina, we’re closing on a 75 acre lot for I think around 70, 80 grand. So we’re really looking for more expensive properties. It’s still cheap compared to the Seattle market, what you’re seeing, 700 grand for a lot. But for us, we’re trying to scale our numbers up and we’re doing that by doing more projects and buying in more desirable areas.

James:
And so you guys are going to be developing those out and that kind of blows my mind. You’re saying, “Oh, we can make these subdivisions in a quick amount of time.” For us, it takes 12 months to get a permit for a single family house, nine to 12 months in Seattle. Town homes are like 12 to 18 months. So when I hear buying a raw lot and doing a subdivision, I’m naturally like, “Ugh, this is such a long deal.” What is the timeframe for that? You can take 70 acres, let’s say you want to split it up into four parcels, what does that look like and how long does that take? Because the debt cost can erode a deal very quickly. What’s the timelines on that?

Daniel:
Typically, you’re on the surveyor. You’re just waiting on the survey and then you just need to file. That’s why we’re focused on low restriction areas because of that. We don’t want to have to get all the permits and do all that work, like you’re saying, and wait 12 months. We’re waiting on the surveyor at the time. So right now, six to 10 weeks to get a survey done and then you need to file and do all that. So usually, within eight to 12 weeks, we can have a full survey done. A lot of times quicker than that. It’s just really depends, the area and the surveyor’s availability.

James:
And then how long does it take for those cities to issue those lots? Because that’s where we get jammed up. We’ll have our surveyor out to a site in five days, but then it goes into this abyss of waiting in the city. Do these counties just really approve it that quickly?

Daniel:
Yeah. Typically, no, there’s not much hold time on that. Within a couple weeks, we should have that all ready to go.

Dave:
Are you jealous, James?

James:
I am extremely jealous because the timing and the waiting is what kills you on these deals.

Daniel:
Absolutely.

James:
We have a town home site that we’re doing, and we got a good price on it, but it’s so expensive. We paid 4.7 million for this site in Bellevue, Washington. We’ve been waiting on permits for three and a half years.

Daniel:
No.

James:
And granted, if it had permits, the site would’ve been worth 8 million because it’s in a prime, prime location. But it’s like when you get to that two, three year mark, you’re like, what is going on?

Daniel:
That blows my mind because I’m not used to the… And that’s part of the reason our business models outside of cities. The people that come looking for this business model are the people who want quick cash flow, quick way out of their nine to five. And you’re not going to do that by repurposing and rezoning. You can buy these. That’s why we’re so focused at first on buying the 40,000, selling them for 80,000 because it was a quick way out of our jobs, quick way to get good cash flow and all of that. We’re not used to the city ordinance like that, waiting on city.

James:
There’s a lot of politics that go on there. And so it just goes slower and honestly, I think I need to get into your land business because I think every year that goes by with a permit, it knocks a year off your life too, because cause you’re just so frustrated. I was at the city yesterday like, how do we get this moving forward? And it’s been even worse lately because with the labor market issues, these cities are having problems hiring people too.

Daniel:
I’m sure.

James:
So it’s like they’re understaffed, it’s taking forever and it can become very detrimental to your deal. If you think it’s going to be a year and a half permit and you’re putting 50% down, it turns into three, your cash on cash return just drops dramatically over the life of that deal. And so I’m extremely jealous right now of your timelines.

Dave:
Dan, thank you so much for joining us. We really appreciate you teaching us a little bit here. Is there anything else you think our audience should know about land investing before we get out of here?

Daniel:
Like I said, it’s really for the people who are stuck in their jobs and want a quick way out, or just want a way out. It’s a cash flow heavy. Rental properties, you’re in it for a long term investment. You’re not going to get out of your job first year, generally. For me, land flipping was that income. It was that way of doing that, getting out of my nine to five job. And I think that’s who it’s for, for the people looking for a nice, steady, really, really lucrative way out of their nine to five job, looking for that freedom. And that’s kind of what we preach.
Now, from this podcast, it might sound a lot easier than it is. For every 2,000 mailers we send out, we get one deal back. So that’s about 12 to $1,400 cost to acquire one property. Given our average profit on a deal is about 20 to $23,000. But that’s the biggest hurdle, Dave, is people who come in and they’re scared to spend money. But how do we get in front of these landowners? We have to send them mail. We have to target them through marketing aspects like mail and texting and that’s where the biggest hurdle, is people fearing to put out that money for that.

Dave:
Well, thank you so much, Dan. If people want to learn more about you or your business, where should they do that?

Daniel:
You can learn more about the land investing business model on my website, landinvestingonline.com, or I’m very active on Instagram. It’s @DanielApke. DM me, I’m happy to help with any questions you guys have.

Dave:
All right. Thanks, Dan, so much for being here. We appreciate it.

Daniel:
Thanks for having me.

James:
Thanks, Dan.

Dave:
James, what’d you think?

James:
Man, I think I’m working too hard fighting with these cities. And I have experienced that before. I remember we actually did a big site where we were working with the builder. We were doing a big 1031 exchange for one of our clients and we bought five raw lots that had permits the builder was going to build out for multi-family, and it was a great cash flow deal. And I remember walking out with the builder and I’m talking about the planning and we really wanted to change two units. And the guy’s like, “Well, we can get that change done.” I’m like, “Is that going to be nine months out?” He’s like, “No, no, no, just give me one day.” He goes over to the city, walks in this more rural area, they approve the plans right there on the spot. He comes back, he goes, “No problem.” And I was like, I am working in the wrong markets. We have big spreads in our markets, but there’s big headaches to come with it.

Dave:
Yeah, no one’s buying two or 3 million flips in these rural markets. You’d have to cut out that

James:
Business. No, but I do love the model because it’s very scalable as a wholesaler or investor because it’s really a numbers game. There’s so much raw lots in middle America. You’re just targeting, you’re going out, you know what your spread is, you know what your target is. And then people are, like you said, there’s less competitions, so you can just name your term. And if the guy’s ready to sell at that time, he’s really going to entertain that offer.

Dave:
Yeah, I guess the part that gives me some hangup is the demand side. I know Dan was saying people just want raw land. But I’m curious in an economic downturn if people are still going to be buying raw land at the same price and with the same fervor. If you’re buying it 30 or 40 cents on the dollar, it’s probably not that risky, but I would just be curious how this unfolds over the next couple of years.

James:
Yeah, I think it would be good to have a backup plan for each site if I was doing that model, like okay, I’m buying this thing raw, I know what my spread is. But as financing and all these small banks are having a little bit more issues, I think the lending requirements are going to tighten up even harder.

Dave:
Especially on stuff like this.

James:
Yeah, so if you’re selling $100,000 lot, people are going to have to come up with 50 grand, and that might be a lot for that specific area. And if it was me, I’d put a backup plan with maybe you’re just putting a mobile home on the property, septic, well, mobile home, and at least have that in your back pocket. Because even if the lots are 30 to 40 grand, but you buy 10 of them, that’s 300 grand you got a service and cheap can get risky really fast as well.

Dave:
Yeah, I would just be worried about getting stuck holding the bag for longer than I want to. When you buy land in Seattle, is it mostly for your own development or are you flipping it also?

James:
We do both. Because builders, like in infill, we stick to what we know and we build based on what our resources are. So your typical builders in your metro areas are going to be your town home, density guys, which that’s what we buy. And then you have your single family, the one for ones building a brand new house. And then now with all the upzoning and the density chasing, there’s, we call them a three pack where people can build a single family, an ADU and a DADU, all on the same site. And so if it hits our buy box, we buy it because that’s what we’re good at building. But if it doesn’t, we work with other builders. But the reason I like the metro is we’re not buying based on speculation, we’re buying based on performance.
So we know what our bill costs are. When we’re targeting land, we’re acquiring it for this. We know we have to build. Our average bill cost is 325 in Seattle. We can build this product for this and this is what it will sell for. So I think it’s a little bit more of a package. And we know that that will always trade. In addition to if we build that out, let’s say the market comes down, we at least can rent it out, we’re not sitting on a raw lot. Because the problems with raw lots is they don’t pay you money and your income goes down. And so that’s why it can be a little bit riskier to just land bank. I always say land banking’s for rich guys. They don’t care about the return.

Dave:
It smells like speculation to me. I know if you know what you’re doing, there’s more to it than that. But isn’t that what land banking is, just speculating that someone’s going to pay more for it in the future? There’s no real fundamentals behind it, is there?

James:
It’s 100% speculation. And I think as the market gets harder to get financing, you’re going to want the biggest spread. I may buy a piece of raw land just to sit on it, but I’m going to want to pay 15, 20 cents on the dollar because I like income coming in and I like to know what my disposition is.

Dave:
Yeah, exactly. Yeah, that’s why I think it is a little bit, that’s probably why there’s less competition because with wholesaling, like you said, yeah, there’s competition, but you know what the dispo is, so there’s a lot less risk for you than there is in this model.

James:
Yeah, it’s when we’re buying land, it’s a buildable plan in the next 12 months, no matter what. And when we’re sourcing to other builders, they’re businesses, so they have to keep their engine going. And pricing just comes down to what the market conditions is. And so in metro areas, the land kind of follows the market more. What’s the availability of capital? How are things selling? What’s bill cost? Speculation is you’re just buying it cheap and you’ll sell it in the future at some point for more.

Dave:
All right, cool. Well, this was fun. I learned a lot, and I think honestly, this kind of model is not what I invest in personally, but I think it’s really interesting for people who are trying to earn more of that transactional type income, like flipping or wholesaling. This is a really interesting option with less competition than probably either traditional like house flipping or wholesaling has. So yeah, check out, learn more from Dan or it sounds like there’s some information on the Bigger Pockets forums about this as well. So if you’re interested in learning more, you should check out those resources. James, thanks a lot for being here, man. We appreciate your time.

James:
Always.

Dave:
All right, well, thank you all for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett. Editing by Joel Esparza and OnyxMedia. Researched by Pooja Jindal, and a big thanks to the entire Bigger Pockets team. The content on the show on the market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

An engineer, social entrepreneur, and Baltimore native, Brittany Young is on a mission to show young people how brilliant they are, so that they can be their own geniuses and problem solvers. Via B-360, the Baltimore organization she started in 2017, Young is solving for two seemingly disparate challenges: the lack of meaningful STEM education and the stigmatization of Black youth culture in Baltimore, as embodied in the culture of motorsports (dirt bikes). Ashoka’s Angelou Ezeilo sat down with Young to learn about B-360’s work to unleash young people’s brilliance, create safe spaces for learning and belonging, and build the nation’s first dirt bike campus, now with $3 million in new funding.

Angelou Ezeilo: Brittany, you and B-360, the organization you founded and lead, focus on motorsports for a few connected reasons. One is education and job skills. Tell us more.

Brittany Young: Right. Bike riders, young and old, learn mechanical engineering just by repairing their bikes. This is true! And I’m saying this as an engineer myself. It’s better than reading a textbook. So not only is dirt bike riding embedded in Black Baltimore culture, it’s teaching skills that can literally pay the bills.

Ezeilo: But dirt bike riding is criminalized in Baltimore, right?

Young: Yes, but the reason people ride dirt bikes in traffic is that there are no dedicated spaces for it. For basketball, you go to a rec center. For swimming, there’s a pool. But for people who ride dirt bikes in Baltimore, there’s only the streets. So that’s why we’re excited to build the nation’s first dirt bike educational campus in the heart of the city — for which our first federal investment is in, a $3 million grant just announced with support from our Senator Van Hollen and Senator Cardin.

Ezeilo: Great news, congratulations! The announcement also recognizes B-360 as Baltimore’s only diversion prison program. What is the link there?

Young: Well, in the early days of B-360, we saw that a lot of our students were getting charges for dirt bike possession. So I was calling judges, talking to lawyers, putting together paperwork. Then in 2020, our Baltimore City state’s attorney’s office reached out to us. They wanted to take a new approach to dirt bike-related offenses. Out of that came the B-360 diversion program. So now when people get arrested for any nonviolent offense, they can opt into our programming, for a minimum of 20 hours. Once they complete the training, we submit a letter to that judge, and charges are dropped. The young people can also become employed with B-360 to build transferable skills.

Ezeilo: You’ve said that some 122,000 STEM jobs exist in Baltimore that don’t require a four-year degree. How do you connect Black students with these jobs, and what barriers are you finding?

Young: If you tell a student, “Hey, read this physics book,” they’re going to ask, “Why should I care?” But if you say, “Hey, you pop a wheelie going down the street at this angle, and you have to figure out how long it takes to get down there and at what time,” that’s actually a distance equation — which is physics. And you’re now talking about Newton’s second law. Now, we also need the dynamic in educational institutions and workplaces to be culturally competent because access isn’t the only barrier. For example, I grew up knowing I wanted to go into STEM. I went to the number four high school for STEM in the country and had great grades. But when I got into the industry, people had never met a Black girl from Baltimore who worked in chemical engineering. The culture in a lot of STEM institutions is white male-led, or white-led, period. You can be ready for STEM, but STEM isn’t always ready for you. And so we want to get more Black people to not only go into STEM but to stay there. That’s when the virtuous cycle truly starts.

Ezeilo: You draw young people in through dirt biking. But are they now starting to see that there are so many other jobs that are unlocked through your program as a vehicle?

Young: Yes. Lots of our very first students are now pursuing entrepreneurship and contributing their own ideas. Daron wants to open up his own auto body mechanic shop to make his own dirt bikes and then to go into business. Treasurer is a girl who just turned 16. She wants to be a traveling psychiatric nurse. A STEM career is cool, don’t get me wrong. But we want to make sure young people have cognitive reasoning skills so that no matter what they become, be it a chef, or an entrepreneur, or an astronaut, they are well-equipped. And then when we look at the data, 100% came for dirt bikes, and more than 90% leave wanting to go into STEM careers because of our programming. Not to mention the 43 point increases on their standardized tests.

Ezeilo: When you started helping young people access STEM careers, were they aware that these possibilities existed?

Young: You know, as a teacher some years ago, I remember asking my fifth graders, “What do you want to do?” And no one had ever asked them what they ever wanted to do in life. That’s heart-breaking. But when you look at the links between professional stunt riding and Black street riders, you see that this industry would not exist without us. Just look at the Bessie Stringfield Award. The American Motorcyclist Association gives out this award, which is named after a Black woman and the matriarch of stunt riding. If you ever watched “Lovecraft Country” and saw that woman riding the Harley, that’s Bessie Stringfield. She’s the reason Harley Davidson is popular today. She rode through the Jim Crow South to spread the radical vision of a Black woman on a motorcycle. Yet in the history of this award, I was the first Black person, in 2021, to have ever won it! Point being, we need to elevate new role models.

Ezeilo: Brittany, you’re not a dirt bike rider yourself, right? So how are you involving people close to this problem to be part of the solution?

Young: I had a whole conversation too with local dirt bike riders to get consent, to get buy-in. And from that group, we also got riders who signed on with us to be a part of programming as educators. These riders are really idolized by the young people.

Ezeilo: When you look at the statistics, Baltimore is around 68% African American. Yet most of the wealth is held by white residents. And then the unemployment rate for young Black men is 37%, compared to 10% for young white men.

Young: Yes, this is all true. And it’s also true that negative framing is unfortunately part of the problem. When people think about Baltimore, they could also think of Billie Holiday, all these great people that come from the city, or the fact that we’re the number five tech city in the country. And then there’s also a lot of Black wealth in Baltimore, too. The importance of an organization like B-360 is that we can start to shift that narrative and lead with what’s working, the bright spots that show a new way forward, something to aspire to.

Ezeilo: Your idea lands with impact for education, talent, jobs, criminal justice. When did you know that this idea was working?

Young: Ha! It was the fact that our program kept growing. With my older students, I knew we were doing it right, when they kept coming back. One of the riders we have now, Derek, has been riding his whole life. He knows how to put together a dirt bike by hand. And what I like about Derek is that he’s motivated and ready for more. He says, “Let’s get more people involved.” And he’s barely 20 years old, so his potential is enormous. But it was also seeing the change in how students spoke about themselves. Of course, they had never done dremeling or soldering or worked with CNC machines, so that was a transformation. But hearing them say, “We love Baltimore. We know that we’re smart.” That was the most important shift.

Ezeilo: Last question: How does it feel to be recognized — by Ashoka and in your TED talk with some 1.5 million views to date — as a leading changemaker?

Young: To me, a changemaker is just a fancy word for a survivor. Black people in America have always had to be innovative, we’ve always been people that have to go against the system, even though it is assumed that the system is never wrong. The power in the work we do is igniting and exploding the genius of our community. And what B-360 has been showing is just how smart these students already were and will continue to be.

Brittany Young and Angelou Ezeilo are both Ashoka Fellows. This interview was edited for length and clarity by Ashoka.