September 2023

Ashley:
This is Real Estate Rookie episode 325.

Sam:
I pictured my retirement, working till I was 60 something, and living off my retirement. And I realized very quickly that that wouldn’t be the case. And so, I kind of had a moment of panic and I realized, “You know what? I think real estate will be a great way to supplement whatever I’m putting aside.” Turnkey provider, pretty much the easiest way to explain is that they flip properties to investors. So, pretty much, they’ll buy a property under market value, they’ll put work into it, and they’ll sell it to an investor who’s looking for a property that pretty much needs no work. It might need a little bit, and you can ask them to do things that come in the inspection. And they usually come with property management included as well.

Ashley:
My name is Ashley Kehr and I’m here with my co-host, Tony J. 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 we’ve got a great episode today. We’ve got Samuel Dolciné on the podcast, and Sam actually runs a podcast of his own called the Black Real Estate Dialogue. And as soon as he came on, I could tell that he had a little bit of experience behind the mic because he was just so smooth and he delivered his story so well. And I was like, “Man, this guy’s got a great story.” All right. So, you guys are going to love this conversation with Sam. He’s going to talk about red flags to look out for in potential tenants and how he almost got scammed by someone who wanted to rent his property. You’ll also get to hear Sam talk about red flags in a property, and you’ll hear why he pulled out of two potential deals that he already had under contract.

Ashley:
We start this podcast a little bit differently, talking about Sam’s idea of retirement. So, he actually went and pulled up his portfolio online for his 401(k) and played with the little tools and buttons they have on there to see what he would actually have at retirement. And to say it was not exactly what he wanted might be an understatement. But then, he makes one phone call, and this one phone call gets him his down payment on his first investment property. And one other thing I want to mention about Sam is this whole episode is you are going to learn all of the ways that he analyzed a market and did it so efficiently, and saved himself so much time during that process too.

Tony:
So, before we kick it over to Sam, I just got to give a shout-out to our amazing Rookie audience. And guys, Ash and I mean this from the bottom of our hearts, the Rookie Podcast would be absolutely nothing without our listeners, and we’re so incredibly grateful and thankful for you guys when you take time out of your busy schedules to leave those reviews on Apple Podcasts, wherever it is you’re listening. So, I want to give a shout-out today by someone of the username JRschmitt2012. And JR says, “The best information out there. Thank you for providing so much useful information. I haven’t made the first purchase yet, but I’m in the middle of moving to a new market and I don’t think I would be as confident as I am without this podcast. Keep it coming, guys.”
So, if you are a Rookie listener, if you’re a dedicated Rookie listener, or even a new one, and you found some value in our podcast episodes, please do take just a few minutes out of your day and leave that review. Because the more reviews we get, the more folks we can inspire to start their investing journey as well.

Ashley:
And for today’s social media shadow, it goes to Drew Breneman, D-R-E-W B-R-E-N-E-M-A-N. You can find him on Instagram at his name. And he does a great job of showcasing different real estate strategies and methods. He also has a podcast called the Breneman Blueprint. So, go give him a follow and check out his page.
I love that we do these social media shout-outs now, and it’s not to get the person followers, but it is for you to build your own network of like-minded investors. Being able to learn from them and also watch them grow. You will not believe that the motivation and inspiration and everything that you will learn just from filling your social media feed with actual real estate investors, especially Rookies, and being able to connect with them. Trust me, as entertaining as memes are, this will be way more beneficial to you. Okay, now let’s get into our show and we are going to bring Sam on.
Sam, welcome to the show. Thank you so much for joining us today.

Sam:
It’s an honor, it’s a pleasure to have this opportunity and I’m excited to get into my story, and I really appreciate you two hosting me today.

Ashley:
I want to start this podcast off a little bit different today. And the first question I want to throw at you is, what did you picture for yourself for retirement?

Sam:
Yeah, so initially, I pictured my retirement working till I was 60 something and living off my retirement, my 401(k) primarily. At the time, I didn’t have any visions of owning real estate or using rental income. I just assumed that my putting away however much percentage at work would do the job. And I realized very quickly that that wouldn’t be the case. But initially, that’s what I thought.

Ashley:
So, are you on track now to get that type of retirement? Is what you pictured actually happening to you right now?

Sam:
What I pictured at that time? Absolutely not. I came to a realization at work, at my desk, that what I was saving, projecting out my raises and things of that nature, it wouldn’t last me that long based on the lifestyle that I envisioned living with my family in retirement. And so, I kind of had a moment of panic and I realized, “You know what? I think real estate will be a great way to supplement whatever I’m putting aside from my job or whatever it is I’m doing.” And honestly, I’m glad that I came to that realization because life is a lot more different now than it was five years ago when I came to that realization.

Ashley:
Can you expand on that a little bit more of what that realization was for you, that moment in time?

Sam:
Yeah, so I was at my desk at work, and for whatever reason I decided to go check my retirement account. And they have these calculators where you can project out, all right, if I put away, let’s say 5% and these are the raises I make over the next 30 years, how much will I have? And then, the second step was how much do you want to live off of? So, I put the number in and in less than 10 years the money would’ve been gone. So, I’m like, “You know what? I have to figure something out.” So, I started reading different things. And I’m like, “You know what? Maybe real estate is the way to go.” So, I live in LA, been here about seven years. And I tried to get pre-qualified and I spoke to a mortgage guy and he’s like, “Hey, you might be able to get a condo somewhere, but you can’t get anything right now.”
And so I’m like, “All right, I don’t make enough money. What’s the next thing?” And so, I started looking online, are there other ways people are investing in real estate? And I came across some information about people investing out of state. And I’m like, “Wait a minute. I didn’t know you could invest out of state. I thought you had to live near where your properties are.” And my point of reference was the landlord where we lived at growing up, his house was right next to the building that we lived in, so I figured that’s just what it was. And so I spent about 12 months just learning everything I possibly could. BiggerPockets was very integral in that. Just learning everything I could about investing out of state. And 12 months later, I purchased my first out-of-state property. So, that moment of panic turned into research, and then that research turned into my first out-of-state property 12 months later.

Ashley:
I have to say, what a great moment of panic to create that realization. 12 months down the road, you have your first property.

Tony:
Yeah, I think a lot of new investors, they get stuck in that analysis paralysis, where they never really get to a point where they do pull the trigger. And 12 months turns to 18 months, turns to 24 months, turns to 36 months, turns to decades. So, Sam, this is a question that I always like to ask people because I think it’s super insightful for the listeners, but you have this realization sitting at your desk, realizing the money’s only going to last you a decade. You go on this journey of self-education. At what point did you realize that you were ready to actually take action? Do you remember that moment where it was like, “Okay, this is the moment where I’m actually going to submit that first offer,” or, “This is the moment where I’m signing that first purchase agreement”? How did you know that you were ready to move forward?

Sam:
Love that question. So, the first thing I did when I realized, “All right, I’m going to invest out of state,” the first thing I did was I put my student loans into forbearance, and I was paying hundreds of dollars. So, that helped me save about 6K. And so fast-forward, I’m researching, I’m trying to find markets, and I got introduced to some folks in Dayton, Ohio. And so, I went out for a visit, looked at the market, did market research, they sent me some reports. And I’m like, “All right, I need to speed up this timeline.” So, I get the bright idea to call my retirement plan. I’m like, “Hey, how can I get access to some of this money?” They’re like, “Well, you have a couple options. You can withdraw however much and pay the big tax penalty, or you can borrow up to 50% of the balance.”
And I’m like, “Wait a minute. If I combine what I’ve been saving from not paying student loans, plus what I can borrow from my retirement plan, I’ll have enough for a down payment and I can get into this Dayton market much quicker.” And so, I did that the same summer that I went on that visit because I’m like, “I got to get into the game.” And so, once I had the money, I knew I was ready. And then a couple of months later, a property came on the market that fit my criteria and I just went for it. So, I think, for me, once I had the money, I’m like, “All right, I need to make this thing happen.” But all the while, I was preparing and then that moment came during the summer where I’m like, “Okay, I can add to what I’ve been saving already. Let’s do it.”

Ashley:
Sam, when you decided on this during your analysis, why did you pick Dayton, Ohio?

Sam:
Yeah, so it’s funny. So, I had a Google Doc with just a bunch of markets, most of them in the Midwest or some parts of the South. And I was listening to a podcast and they were like, “If you want to buy turnkey properties, reach out to us. We can introduce you to some folks.” I’m like, “Okay, let me just do this.” So, they introduced me via email to folks from Memphis and then from Dayton, Ohio. The only reference point I had of Dayton, Ohio was sometimes the NCAA tournament basketball was played there, but I didn’t know anything about the city. I didn’t know anyone there. And so, the folks from Memphis didn’t reply, the folks from Dayton did. They sent me information on the market, so just about infrastructure improvements, how much they’re investing in downtown, the percentage of renters, which was 60% renters, 40% owners at the time.
And I took that information, I did my own research just on the market and things that they’re doing to improve the city. And I also noticed that it was situated geographically in a very interesting place. So, Dayton is in between Columbus and Cincinnati. So, Columbus to I think the north and then Cincinnati to the south. And so for me, I’m like, “You know what? There’s enough information here where I think this could be a good splash. Plus it’s not popular.”
When I was on the BiggerPockets forums, there weren’t that many people talking about Dayton, even though a lot of my research was confirming that this is a good market to invest in. And so, once I went out there to visit, I got to see some properties, got to see the city and see all the things I was reading about. I’m like, “You know what? I think this is a good opportunity to make a splash.” I didn’t want to overthink it too much. I’m like, “You know what? I have the connections here. Let’s just make it happen here.” So, those are some of the reasons that I chose Dayton, and it’s paid off very well. It’s a great market and I definitely intend to invest there more.

Ashley:
What a great resource of information of getting the market data presented to you from the turnkey company that has saved you so much analysis right there. And then, you’re just going and verifying the data instead of starting from scratch. So, I think that’s a super useful tool is to someone, especially if you’re using turnkey, is to ask them for the market instead of saying, “Okay, I’m going to analyze these five markets. Do my deep dive. Okay, I’ve picked this one. Now, I’m going to go to the turnkey company and talk to them about the actual property itself. I already know I want that property.” You did an amazing thing and you went and wanted market data from a couple of them, and one got back to you and the data was great, but what a great resource and very efficient.

Tony:
Sam, actually, if you don’t mind, can you define what a turnkey provider is? What does that even mean, turnkey?

Sam:
Yeah. So, a turnkey provider, pretty much the easiest way to explain is that they flip properties to investors. So, pretty much they will buy a property under market value, they’ll put work into it and they’ll sell it to an investor who’s looking for a property that pretty much needs no work. It might need a little bit, and you can ask them to do things that come in the inspection. And they usually come with property management included as well. And so, for my first deal, I’m like, “You know what? Obviously, the downside is that you pay at the market pretty much. However,” I’m like, “this will get me into the game. This will help me to build up my confidence. And then, perhaps on my next deal I can take on a little more work and things of that nature.”
So, for me, it was a good way to get into the game. I, by nature, am very risk averse, which is funny because I’m investing from thousands of miles away. But I’m like, “I need to get into the game. This seems like a relatively safe way to get into the game, just start making some money, build my confidence up, and then I’ll go from there.” So, I’m glad I went that route. I did learn thereafter that I could find turnkey properties on the MLS. But based on what I knew at that time, it made sense. And if I didn’t do that, we probably wouldn’t be sitting here today.

Tony:
Sam, let me ask a follow-up question. First, I appreciate you breaking down the pros and cons of the turnkey approach, because for some people that maybe don’t have the time, desire, or ability to find distressed assets, rehab them, get them placed with a tenant and do all that work, turnkeys do solve a need for a lot of those people. And I’ve met some investors who all they do is turnkey. They’ve got very busy day jobs, they got maybe a high salary, they’ve got a big shovel to dig with in terms of the income they have coming in. So, for them, it’s easy to take that money, dump it into a turnkey property, not have to think about it. But I would love just to get the 30,000 foot view. Like say that Tony and Ashley wanted to invest with the same company or a similar turnkey provider. What’s the step-by-step process? Do I just subscribe to an email list? Is there a Facebook group where they’re posting all their stuff? What does this look like to buy from a turnkey provider?

Sam:
Yeah, so typically, what’ll happen is you’ll reach out to them, share that you’re interested, and they’ll get you on an email list of different properties. They’ll do some back-of-the-envelope math for the cashflow and things of that nature. So, they will get you on an email list. A lot of times they give you the option of coming out and seeing properties in various stages of rehab, which is what I did. So, I got to see some stuff that was fully gutted and some stuff that was halfway done, some stuff that was done, just to get a good sense of their work. And typically, let’s say you find a property that you’re interested in, the price is the price.
So, one of the cons is that there’s not any negotiation, like the price is the price because, of course, they have to make their profit. However, you can get your inspection and have them fix things that need to be fixed. But typically, that’ll be it. And if you decide to go with their property management, what I did was I went with their property management because I wouldn’t have to pay a lease up fee. And for those who don’t know what that is, pretty much a percentage of the first month’s rent is what you typically would pay to a property management company or to a leasing agent.
So, I’m like, “You know what? Let me do that with them. I’ll try it and if they’re not that great, I’ll get rid of them,” which I eventually did, but at the time it made sense. So, that’s typically how the process will work. And then, they’ll just hand you over to their property management and you’ll get the statements of monthly, and they’ll place tenants and things of that nature. When I purchased mine, there was a tenant there in less than a month, so I think it closed on the 15th and a tenant moved in within two weeks. So, they did the tenant placement and things of that nature as well. That tenant was great. She stayed maybe a year or two years, maybe about two years. But that’s typically how it works, high level.

Tony:
Just a quick timeline perspective, from the moment that you said, “Hey, I’m interested,” until you actually closed on that property and owned it, what was the timeframe there?

Sam:
About 30 days. So, it was quick. It was quick. So, I did buy the property-

Tony:
30 days? Holy crap.

Sam:
Yeah, it was super quick. So, I had the financing, the lender I was going to go with and everything ready. The inspection took place. The repairs that I wanted them to do took place. They turned it around pretty quickly. So, we closed in about in about 30 days, which is crazy. So, I went from 30 days before not having any property, finding a property, closing, signing all the stuff. And 30 days later, I was a landlord. So, it was pretty crazy.

Ashley:
Do you think part of the reason you were able to do that so fast was because you felt more comfortable since you visited Dayton? Can you kind of give us your opinion on… First of all, what was the cost to actually go there? Did you fly there? Did you drive there? Did you have to stay overnight and going there? And was it worth it to go and actually be on the ground and visit the area and see their properties? Or do you think that you could have done just as great of a job of picking a property and having it being sight unseen?

Sam:
Love that question. So, I found a lot of value in going out there, and it’s not the easiest place to get to. I had to get a connecting flight, I think in Chicago, and then the next flight down to Dayton from LA. But for me, it was important to visit, because again, you got to think about it. I didn’t know anybody, investing long distance. I was taking a big chance. I didn’t know anybody who was doing that. And so, to me, it was great because I got to almost put my hands on it or check the city out for myself, drive around and see what’s happening around the city. And the person from the company, she drove me all around. I got to check out the city, go to different places. And to your point, as you mentioned earlier, verify a lot of my research.
So, I verified a lot of what they sent me online, but then to see it in person, for me personally, it was great. It was great. And so, I definitely think I could have done it sight unseen. I know a lot of people do. I mean, I haven’t seen the last place I purchased yet. But for me for the first time, it was super important to go out there and see it myself. And I felt good. I felt good after I went there. I’m like, “You know what? I know 100% that this is where I want to be, this is what I want to do.”

Tony:
Sam, if I can ask, you mentioned that the turnkey, even though there were some cons to it, there were some pros as well. Getting that first base hit, building your confidence to be able to do this on your own. So, let me ask, even though you didn’t necessarily find the distressed property, manage the rehab, place the tenant yourself, I’m assuming that you probably still picked up some things along the way that kind of prepared you for that next deal. What were some of those initial lessons you learned on that turnkey property that you feel kind of prepped you for the next one?

Sam:
Yes. So, I think the first thing is to have more confidence. Because I eventually visited that particular property about 14 months later. I was like, “You know what? Let me just come back. Let me see how it’s going. Let me put my eyes on the house, see what it’s like.” And the management company was really acting like I was a nuisance. I was trying to get access to the property. And eventually, my boots on the ground, who I also met on BiggerPockets, she went with me to the house and we just checked in on the tenant. Just like, “Hey, we just want to make sure everything is cool.” And I had been debating letting go of the property manager and self-managing, and that was really confirmation that I should just try it, and if it doesn’t work out, I’ll just find another management company.
So, that’s one thing I learned, just to follow my instincts because my instinct was to move on. But after that visit, I think I sent them a 30-day notice and we parted ways. So, that’s the first thing. And then, the second thing I would say I learned is that I could find turnkey properties on the MLS. So, the next deal, I’m sure we’ll get to that, I found a realtor and we went that way. So, again, I went based on what I knew at that time, and I always tell people, know enough to get to the finish line. You don’t need to know everything. Make your decisions based on what you know.
And so, if I could do it again with what I know now, and obviously hindsight is always 20/20, I would just go with the realtor and you have more negotiating power that way, and there’s just more flexibility in what you can do and pricing and things of that nature. So, I would say those. And then, the last thing I would say is that just to get started, for me it was important to start, even if I made 300 bucks a month, at least I started and I can figure out how to get better deals over time, how to improve things over time, which is what I did. So, I would say those are the things that I learned.

Tony:
Sam, you said something, “Know enough just to get to the finish line.” And I like that saying, and I might even tweak it just a little bit to say, know enough just to take your next step because I think that’s where a lot of Rookies get stuck is that they sometimes do want to see every step straight to the finish line, but you oftentimes don’t really know what you don’t know. And as long as you have the confidence to put that one foot forward, then the next foot forward, that’s how you start to make progress. And it seems, Sam, that that’s kind how you navigated this situation.

Sam:
100%. That’s exactly what I did.

Tony:
So, I want to touch a little bit because you said that you got rid of the turnkey property management, and are you still currently self-managing that property?

Sam:
Yes. Yes.

Tony:
Okay. So, let’s talk about that because you’re in California, Ohio is thousands of miles away. So, how were you remotely managing this property given that you’ve never done it before? What were the steps you had to take to kind of cheat yourself with tools, automations? Just tell us the whole experience of self-managing from multiple states away.

Sam:
Absolutely. So, the first thing I had to do was find a platform to receive the rental payments. So, how the property management works is they just send you the money via ACH, so it’s in your bank account every month. And so, I switched the tenant over to apartments.com, and sent her an email letting her know, “Hey, I’ll actually be managing the property now.” And at that point, I had put her on a six-month lease. She had asked to be on a six-month lease, and that ended early, but I’m sure we’ll get to that. And so, from the logistics standpoint, that was pretty much all I had to do, and just make sure the payments were redirected and the management company sent me her security deposit and what I had in reserve. So, from that perspective, it was pretty seamless, and it was all pretty simple until she left. So, it wasn’t that much I had to do as far as switching her over.

Ashley:
As far as the maintenance request, I’m hoping that since it was turnkey, there wasn’t a ton of maintenance. But did you have almost like a Rolodex of vendors or handyman that maybe the other turnkey providers have used, or how did you handle maintenance requests?

Sam:
I’m glad you asked. I actually did not have a Rolodex. And shortly after I took over, there was an issue with the furnace. And so, I get a text or an email on Sunday night saying, “Hey…” And this is the winter, the middle of the winter in the Midwest. So, she’s like, “Hey, the heat is out and I’m just freaking out.” I’m like, “Oh, my gosh.” So, I start googling just like, “Who can fix a heater?” And I just start calling around, calling around. I finally found somebody to go out to the property on that night and figure the situation out. As a matter of fact, I think they had to come in the morning, so she didn’t have heat that night, but they came the next morning and fixed everything. And so, I did not have a Rolodex of anything at that time. I was really starting from zero. But thankfully, that was the only incident that took place while that particular tenant was there, and she probably stayed another five months after that.

Tony:
Ash, I want to get your insights on this piece too, because when you manage your properties yourself, at least when you first start, you oftentimes don’t have a Rolodex of HVAC, of plumbers, of electricians, of general handyman to do all these things. And you do have to scramble like you did, Sam, like, “Let me just open up Yelp and find as many as I can and see who works.” And that’s been our process too. We self-manage all of our short-term rentals. And I remember the first time we had a big maintenance issue in Joshua Tree that our handyman couldn’t fix. We had to source… I think it was an HVAC issue, similarly. And we had to call a bunch of different people. And the first one that we found, they were able to get it, but we didn’t really like working with them. And then, the next time we had an HVAC issue, we found someone else.
But as these issues kind of continue to pop up in your business, you do start to build your own Rolodex. And now, we’ve got a list of all of our preferred vendors. So, now anytime something happens in our business, our VAs have a list of just who to call, who to text, who to email, et cetera. So, it does kind of build over time. But Ash, I guess I’m just curious for you on the property management side, was it similar for you as you kind of build things out or how did you manage the whole vendor piece?

Ashley:
Even today there’s different towns where a contractor will say like, “Oh, I don’t go that far,” or something like that. And then, you do have to find somebody else to fill that special skillset. Right now, my biggest tool is referrals from other investors or even just other contractors, just anybody that would use a maintenance person. My mom is actually great on Facebook. She’s in all the neighborhood Facebook groups and she’ll just send me a screenshot and be like, “Oh, this person recommended this person in this town to build their deck,” or whatever it may be. But we have the same thing. We use monday.com, and we keep just a list of people.
Anytime that my one business partner, Daryl, he sees a truck, a van, anybody driving or we’ll go and get coffee and they have the big tack board with business cards, he will take pictures of that and then he will put it into our list of different vendors. A lot of these we’ve never even used, but we have them there in case we need to. And yes, it is cold calling them. Those types of people we don’t have any referral for, but at least sometimes it gives us a starting point as to who to contact. But I think another great way, if you don’t know anybody that’s investing is going into the BiggerPockets forums, going on to the neighborhood Facebook groups and ask in there, “I’m looking for a plumber in the area. Does anyone have a recommendation?” And you will get a ton of people just listing, listing, listing. One thing I would watch for is make sure it’s not only the wife of the plumber that’s making the recommendation, that it’s actually somebody that used their services.

Tony:
Yeah. Well, I guess let’s lead into this next piece because you hinted at it a little bit, Sam, but I’m curious, what was really the journey of that tenant turnover? So, after that first tenant leaves, what does that look like? What do you do next?

Sam:
To be honest, that was the toughest experience that I’ve had, and I’ll explain why. So, pretty much what happened was the tenant ran into some financial issues and she asked if she could end her lease early. And I’m like, “You know what? Cool, she’s paid on time, fine. Just make sure the place is clean.” And I didn’t charge her a fee or anything. 30 days later she left. And so my boots on the ground, who I mentioned before, her name is Courtney, shout out to Courtney. I met her on BiggerPockets and she’s like my aunt in the Midwest, she’s great. And so, she did the checkout process with the tenant, just made sure the place was in good condition, got the keys and everything. And she said, “Sam, there is a smell here. It smells like the dogs have been doing their business inside.”
And at the time, there was carpet. And in the lease, the tenant was supposed to shampoo and wash the carpet, which they did, but there was a stench. And so, I was talking to an investor friend of mine, he’s like, “The first thing you want to do, rip that carpet up, get some vinyl plank flooring.” I’m like, “Okay, fine.” And of course, I had to paint the place. And I found somebody on Facebook inside of one of the Dayton investor groups who is a handy woman, she sent me some pictures of her work. She says she can paint. I’m like, “Cool, you can paint.” And so, the first mistake I made was, like I said, I have boots on the ground. She’s an investor there. She’s awesome. I didn’t leverage her enough.
So, the handy woman, she was sending me pictures of different rooms painted and things of that nature. And at the very end when she said the job was complete, I had the boots on the ground go there and she’s like, “Hey, Sam. She missed this wall. She missed this room.” And what I should have done is had her going throughout the week. She could simply have gone on her way back from work to verify all the information that was being shared with me. And the next thing was the flooring. So, I had to rip the carpet up. And I was talking to her, she’s like, “Oh, I could do this too.” And I’m like, “All right, cool. Let’s do it.” So, we had an agreement on what I would pay her. I bought the materials, I paid her for the labor once the job was done. That took forever because I was not utilizing my boots on the ground. And it seems so obvious, but for whatever reason, I just wasn’t doing it.
I don’t know if it was pride, or maybe being too timid, or whatever the case is. And eventually, she got that done and a couple other things, but the process took over a month. And quite honestly, it should have just taken a few weeks. And so, that period of time while there was a vacancy was very difficult and stressful because I wasn’t managing the person doing the work properly and wasn’t using my resources I had to get the job done quicker. So, eventually, we got it done and rent in the area went up like 50%, so that was great. But I fumbled big time just with how I managed that particular contractor.

Ashley:
Did you say the rent went up by 50%?

Sam:
Yes. If I calculated correctly. Let’s test my theory. So, the previous tenant was paying $900 plus $50 pet rent. And the next family that moved in, they were paying $1,395, including pet rent, $1,445. So, they’re paying $1,445. I think that’s 50%. You can check me on that.

Ashley:
Yeah, it’s close enough for me. Yeah, that’s quite a big… That’s awesome. Yeah.

Sam:
Yeah. So, that was crazy. So, that was the light at the end of the tunnel.

Ashley:
Right.

Tony:
It’s actually 52% just to be exact. So, you can [inaudible 00:31:23].

Ashley:
Of course Tony had to do the math. And Tony is so smart, he did that in his head just so you know.

Tony:
Yeah, all in my head.

Sam:
You got a genius on our hands.

Ashley:
I know. So, let’s talk about that portion of it, as to changing that rent. Now, did you go in and did you list the apartment for this after pulling comparables in the area, what other things were listing for? Did you rely on your boots on the ground? What was that process of deciding what to list the unit for?

Sam:
You know what’s funny? I had listed it before everything was complete for like $1,200, and then I took it down after a week. And I’m like, “You know what? Let me actually make sure this person finishes everything and everything is good to go. It’s cleaned out and everything.” And I looked on the market. So, what I typically do is either look on Zillow or Redfin, look at homes for rent in the zip code that are three bed, one and a half or two bath. And then, I also go to Rentometer to verify everything. I saw a property, similar square footage, in the area that was like $1,395. I’m like, “Wait a minute, this has to be a joke.” And so, I looked and I’m like, “No, this is actually a real listing.” So, I’m like, “You know what? Let me try and see what I can get at this price.”
And so, I put the price up at $1,395. And the way that I learned to do it… I used to do just individual appointments, which is a huge waste of time. So, what I do now, and what I eventually did was just open houses. “This is the day. This is the time. Come see the property.” That’s it. And so, I’m like, “You know what? Let me see if I can get this much rent.” And so, it was up on the market for maybe three or four weeks and I found the right people, after almost being scammed, and they were down to pay it. And so, I just tested the theory and that’s typically what I do.
I try to go a little bit higher and see what type of results I get. And if I don’t get a lot of traction, I drop the rent a little bit and just see what the inquiries look like. But yeah, I just put it up there and I’m like, “Let’s test it for a few weeks and see if people will bite.” And so, I’ve had the same family in there since 2021, and I’m actually sending them a new lease this year. They’re going to stay there. And they’ve been great tenants.

Ashley:
Sam, you can’t use the word scam and not educate us on how we can not get scammed learning from you.

Sam:
Yeah, I’m happy to share. So, I use apartments.com for the management and also to receive applications. So, whether the leads come from Facebook, which is where most of them come from, they are directed to apartments.com to submit their application. And so, there was this one particular applicant, and I’m looking through the documentation and the IDs and the W2 or W9s, they’re not matching. The names are all different, but they’re all claiming to be one person. And so, I kind of followed up on it, and it was just like a weird vibe. I was trying to verify it and the person was kind of pestering me like, “Hey, I really want to rent this place,” and this, that, and the third. But I’m like, “The information is not matching.” There was a split second there where I almost kind of took the next step. I’m like, “Wait a minute, something’s not right. You know what? No, I can’t move forward with these folks.”
And it’s important to, especially if you’re doing your own tenant placement, just to verify all the information. Even if you got to Google and look online. I go through everything with a fine-tooth comb just to make sure everything I’m looking at is correct. And so, basically the person tried to… I don’t know if they were putting up family members’ information or whatever the case is, but the documentation was not lining up and they were really persistent with me about their desire to rent the property, which was another red flag. So, I’m glad that at that decision point, I’m glad I decided to go in a different direction. But yeah, I mean some people will just try to do that.

Ashley:
Tony, I think we need to do an episode, maybe a Rookie Reply on tenant red flags instead of dating red flags-

Tony:
Or just tenent screening in general, right?

Ashley:
… go through tenant applicant red flags. Yeah. So, Sam, I think maybe this was probably the same in your situation, but a lot of times it’s better to have a longer vacancy than to rush and take a tenant just to fill the unit. So, anyone who’s going through that process right now, really think about that. And it’s better to wait for the right tenant than just to get somebody in there, where you do have that back of mind like, “Oh, I’m kind of taking a risk here. They really don’t meet what I want, but I want to get somebody in there.” And it’s not always the case. It’s not always somebody awful.
I rented in a unit once to somebody who I was iffy about. They just barely met the screening criteria. And they lived there for two years. And when they moved out, the woman cried to me and said, “Thank you so much for taking a chance on us. We just bought our own house for the first time ever,” it was her and her two kids, “and we’re moving there.” So, that’s not always the case, but I think it would be good if we did an episode on red flags. Because there’s a lot of times I’ve looked back and been like, “Man, those red flags were there, but I didn’t see it.”

Tony:
And honestly, the message, Ashley, of patience, I think translates to a lot of different parts of being a real estate investor. Sometimes we get so focused on the money right now that we start to maybe make poor choices. Like I rushed and hired a contractor because my usual guy was like, “Hey, Tony, I can start it in four weeks.” And I was like, “I need someone to start today.” And I ended up having to pay two contractors because the first guy didn’t finish the job the right way. So, there’s a lot of instances. People who maybe pulled the trigger too soon on a deal because like, “Hey, I want a deal today.” Not realizing that a better deal might be right around the corner. So, I think that idea of just patience as a real estate investor is probably something we don’t talk about enough.
But with that, Sam, I want to transition to deal number two, because we got through some of the trials and triumphs of your first deal. But how did that first deal then prepare you for the second deal, and what did that one kind of look like?

Sam:
Yeah, absolutely. So, I actually took a couple of years and sat out, just sat on the sidelines. And in the fall of 2022, my wife was like, “Hey, when are you going to get more properties?” I’m like, “Oh, all right. Well, I guess I should.” And at the time, of course, interest rates were going up. And I consider myself kind of a contrarian thinker, so I’m sure you guys know, people are on the sidelines right now. So, for me, I’m like, “This is the best time to get in. If I can find a deal that will pencil and cashflow regardless of the interest rate, we should buy something.” And so, I started my search. In September 2022, I found an investor-friendly realtor inside of a Facebook group, and I just started looking at deals.

Tony:
Is that also in Dayton, Sam?

Sam:
Also in Dayton. Yep, also in Dayton. And so, I was looking for about six months. I was under contract twice, backed out of those deals, and I finally closed on that next property in February of 2023. But yeah, I bought that next property and the interest rate is about 7% almost, but the cashflow is great. I think it rents for $1,370, the mortgage is $690, so the spread is pretty solid on it. And again, I decided to get in because everybody was going the other direction. So, for me, it’s perhaps less competition and perhaps sellers will be willing to do more and negotiate more. And so, it was a great opportunity and got that rented a couple months after. Had to do a little bit of work on it. But yeah, it is going well. It’s going well so far. And happy to dive a bit deeper into any part of the deal too.

Tony:
Yeah, first I’ll say 7% today, honestly, isn’t all that bad. I mean, I’ve got a short-term rental we just refinanced at like 8.7%, which pains me to say. So, I’d be happy to get 7. But just really quickly, you mentioned that you pulled out of two deals before you closed on this one. Can you just run down, what were the things you saw during that due diligence, or both of those due diligence periods, that made you want to pull out?

Sam:
Absolutely. Absolutely. So, it’s funny, the two deals that didn’t work out actually inspired me to create a pretty expansive walkthrough checklist for things that I missed while walking through my realtor. I usually get on FaceTime and I don’t care if it takes an hour. I have her go through every single thing on the list. But the reason I backed out of those properties is because structural issues, they both had structural issues. So, as my inspector… And I’ve worked with the same inspector since 2019. He’s actually helped me avoid multiple bad properties. And I was actually referred to him through BiggerPockets forum. But he called me on one of them. He’s like, “Hey, Sam, I’ll stop the inspection right now. Just pay me for my time. Do not buy this house.” He’s like, “As I’m going up the stairs, it’s leaning. There’s all type of structural issues in this property. This is not safe for somebody to live in.” And so, that was one of the properties. The other property-

Tony:
Wait, I just want to clarify. You said that the inspector called you and said that?

Sam:
Yeah, he called me. He said, “Hey, Sam, I’m going through this.” He’s like, “Just pay me for my time. I do not recommend buying this house because the structural issues in here are ridiculous.”

Tony:
I’ve never had that happen. Ashley, have you ever had an inspector call you and say, “Don’t buy this”?

Ashley:
No, they usually don’t give their opinion or they tread around it.

Tony:
Yeah, it must’ve been bad for an inspector to say, “Don’t buy this.” That’s crazy.

Sam:
Yeah, I mean, I respect him because of that. Because I mean, hey, if he did the whole inspection, he gets all his money, but I think I paid him a couple hundred bucks. I don’t even think I paid him 50% of what the full cost would’ve been. But he’s like, “Hey, Sam, I know you’re out of state. I don’t want you to get taken advantage of. This is not a good deal.” And on the other property that we backed out of, it also had structural issues, and the inspector recommended that they have a structural engineer go out and verify the findings, what he found. And so, they had someone do that. And I sent the inspector their assessment, and the structural engineer was pretty much like, “It’s fine.”
And I called the inspector, I shared it with him. He was pissed. He’s like, “I can’t understand how somebody who’s licensed could make such an assessment because of X, Y, and Z. It’s very clear that this is a structurally-compromised home.” And he just felt like they were trying to just pass off the problem to somebody else. And so, I ended up backing out of that particular deal too. I mean, there were other things, but the main thing was the structural issues. And I’m like, “I’m not going to buy a property where I have to do all these things because of the structure and something that probably will end up being a money pit.” And in fact, on one of the deals, the seller discounted it by like 20, 25,000 after the inspection, which told me pretty much everything I needed to know. They’re willing to cut the price to pass on such a big problem to somebody else. And so, those two deals didn’t work out, but it led me to the final one, which did work out, thankfully.

Ashley:
And Sam, to clarify, this was an inspection from a third-party service that you hired to do this during your due diligence period. This wasn’t part of your bank financing or funding that they required you to do an inspection at all?

Sam:
Good question. Yeah. So, this was an independent third party, so I’ve used the same guy for four years, but on one of the properties… I’m glad you mentioned the bank financing. The bank let me know like, “Hey, we’re not going to finance this property with this structural issue.” And so, that’s what helped me get out of at least one of those deals, if not both. Just saying, “Hey, the bank is not going to finance this. I’m not moving forward unless you guys fix it,” and they didn’t want to fix it.

Ashley:
Let’s walk through that real quick. So, you must have notified the bank that there was the structural issue because or else they wouldn’t have known anything about your third-party independent inspection, correct?

Sam:
Exactly. Exactly. And I also was trying to find ways to get out.

Ashley:
Yeah, that’s a great strategy. Because in your contract, you must have had a contingency saying that if you did not get bank financing, that you could walk out of the deal.

Sam:
Exactly.

Ashley:
Yeah. And that’s why it’s so great to have these protections in place, and also finding ways to kind of get those protections to work for you. But yeah, that was a great strategy.

Tony:
Can we just expand on that really quick, the contingency piece? And for folks that maybe aren’t super familiar with that. So, when you sign a purchase agreement for real estate, typically there are multiple contingencies found inside of that purchase agreement. It’s going to vary from transaction to transaction. But some of the basic ones that you’ll find are, there’s typically a due diligence period and where you, as the buyer, have your opportunity to do your inspections, to walk the property, to gather additional information that you couldn’t before you submitted your offer. And if you find something that you feel is important, you can then either renegotiate with the seller or you have the ability to walk away if you guys can’t come to an agreement.
So, that’s a big one that folks use. You have your appraisal contingency. So, if the property doesn’t appraise for what you have to under contract for, again, you can try and renegotiate. And if you guys can come to an agreement, then there’s an opportunity to step away as well. Then, you have your financing contingency as well where you can say, “Hey, if I can’t get a bank to give me money to buy this thing, then I have the option to walk away.” Which is why the, quote, unquote, cash buyers oftentimes are able to submit lower offers because there’s more certainty with a deal that’s cash, because it doesn’t have the appraisal contingency or the financing contingency that some of these debt-based offers do. So, I just wanted to clarify that because we were throwing around the word contingency, but just to break it down for folks.

Ashley:
Tony, I just made a note to make that an Instagram Reel. I’ll make sure to tag you because that was [inaudible 00:45:25]. I was like, “That’d be a great Instagram Reel idea.”

Tony:
We get at least one of those per episode.

Ashley:
Yeah. Well, Sam, I’m going to take us to our Rookie request line. And anyone can submit a question to us at biggerpockets.com/reply. And you can enter your question or you can send a DM to Tony or I, or leave it in the Real Estate Rookie Facebook group. So, today’s question is from Molly Alred. “This is a question for out-of-state investors. What tools or methods did you use to determine where to invest? We live in a ridiculously expensive area and would like to invest out of state, in an area without such a high barrier of entry. My husband and I are both from Michigan, but I don’t want to necessarily limit my search only to Michigan. We live in Colorado and are currently house hacking our primary residence.” Well, that’s exciting. Congratulations on the house hack. So, Sam, what would be your advice, or what are some of the tools or methods that you have used to determine where to invest out of state?

Sam:
Absolutely. So, the first thing is narrow down your region. So, I would say look in the Midwest and look in the South just to get started. And the next thing you want to do is what are the major cities? So if you’re looking at Michigan or Ohio, what are the major cities? And then, what are also the cities that are in between? So, what’s outside of Columbus? What’s outside of Cincinnati? Because you may not necessarily be able to afford inside the main city, but a lot of times they’re like, I don’t know if you call them maybe tertiary markets or secondary markets within a particular region, that can give you some more options. So, the third thing you want to do is when you find a couple cities you’re interested in or cities outside of the major cities you’re interested in, what is happening in that market? Is the city investing in itself? Are there employers coming there? Are they improving the infrastructure? Are they putting things in, like bike lanes? Are they putting in new parks or redoing the parks?
And any city that’s investing in itself will always have a website about it or have… They’ll always want to publicize that. So, for example, in Dayton, I think the website is downtowndayton.com or.org. They show every single thing that they’re doing, all the investments that are being made. So, that’s the next thing that you want to do. Then of course, you want to see what are the prices of the homes? If you want to buy a multi-unit or if you want to buy a single family, what are the prices of the homes? Are those within your budget? And then, what are the rents? What is the cashflow that you can get? What’s the estimated cashflow that you can get based on the type of property you want to buy? And so, once you have that information, and if it looks good enough to you, then you want to build your team. You want to get an agent, or a wholesaler, or go direct to seller yourself, and then go from there. But as far as finding the city, those are the four or five things I would say that’ll help you get a good start.

Ashley:
I just Googled it and it is downtowndayton.org too. But yeah, just at a quick glance there’s, “Here’s a blueprint of what we’re doing to our city,” and things like that. Yeah.

Tony:
Sam, what a great breakdown of how to choose a city to invest in. I think just one thing I’d add to that is that typically when people invest in real estate, they’re balancing three different motivations. You have cashflow, you have tax benefits, and you have appreciation. And people will rank those three motivations differently depending on your unique situation. If your big focus is cashflow, then yeah, maybe going to the Midwest is a good play for you. If you want appreciation and tax benefit, then maybe some of the more expensive markets make more sense for you. So, I think before you can even try and whittle down of the 19,000 cities in the United States, which one is the right choice for me? It’s really getting clarity on what are my motivations, what are my goals as a real estate investor? And then, from there, you can start to make some more informed decisions.
And I love listening to people that are smarter than me when it comes to data and economics. And like Dave Meyer, he runs the On The Market podcast, employee of BiggerPockets, wrote the book Real Estate by the Numbers, incredibly smart guy. And there’s tons of blog posts that he’s written on the BiggerPockets blog about different markets that investors should be looking into. He’s done YouTube videos about markets. There’s a lot of content out there about where should you look, that people who are smart, Dave Meyer, have already looked into you to give you a leg up. So, loved your answer, Sam, just wanted to add that for folks as well.

Sam:
Love that.

Tony:
All right. Well, let’s finish things off here with our Rookie Exam, Sam. So, you’ve killed this interview so far, but I’m sure you’ll crash it with the exam well. So, these are the three most important questions you’ll ever be asked in your life. So, Sam, are you ready for the Rookie Exam?

Sam:
I was born ready. Let’s do it.

Tony:
There you go. All right, man. Number one, what’s one actionable thing Rookies should do after listening to your episode?

Sam:
So, if you want to invest out of state, start looking for a market. Tony and I gave a couple tips. Start looking for a market as soon as you finish this episode.

Ashley:
I think that is a great piece of advice. And Sam gave you guys every possible way to actually take action on doing that. Okay. Next, what is one tool, software, app, or system in your business that you use?

Sam:
Apartments.com. It’s free. It’s pretty simple to use. Tenants pay their rent that way, and there’s no checks or anything like that, and it’s pretty seamless. So, that’s one tool that I use that I really like.

Tony:
Gotcha. And then, last question for you, Sam, where do you plan on being in five years?

Sam:
That’s a great question. So, in five years, I definitely want to have picked up a couple more properties. I love real estate. It’s a wonderful thing. And I also realized that I don’t necessarily want 20, 30 doors. I want the fewest number of doors with the highest amount of cashflow, so that’s my goal. And so hopefully, in five years I’m closer and have a handful more properties in my portfolio.

Ashley:
So, Sam, what are you most excited for in retirement? Now, that you have your blueprint to achieve it, because we started the episode out with what you thought retirement was going to be for you, and now that that’s changed and you’re kind of on a different path, what are you excited about most?

Sam:
Yeah, I’m excited to just relax and hang out with my family. Hopefully, my wife and I have some children, and maybe even some grandchildren by then. But I would say I want to use real estate to buy time. I think that’s the most important thing. That’s the most important thing we have. You can’t make more time. So, hopefully, my wife and I can retire earlier through real estate and other ventures. And I’m just looking forward to just enjoying life, doing what we want to do, traveling where we want to travel and living where we want to live. And I think it’s possible through real estate, especially if you look further down the line. I mean, rent’s only going to go up. We’ll pay down debt even more. So, that’s what I’m looking forward to.

Tony:
Awesome, Sam. Well, hey brother, we’re excited to see you go on that journey, man. And hopefully, we’ll get you back here on the Rookie Podcast When you’ve reached that retirement milestone and you can give us the update. But I want to finish things out by shouting out this week’s Rookie Rockstar. And this is actually a name you might remember from episode 297 of the Real Estate Rookie podcast, but it’s Olivia Tati. And Olivia says, “Just went live almost two weeks ago on our first out-of-state long distance real estate investment property, which we used private money to fund.” So, they had someone else fund this entire deal for them. “My best friend and I DIY renovated this property ourselves.” She said, “Two little ladies changing toilets, vanities, electrical receptacles. We had no clue what we were doing, but thankful to the BiggerPockets and Real Estate Rookie community, and the podcast for lighting this fire in us.” So, again, if you guys want to hear Olivia’s full podcast episode, head back to Rookie 297.

Ashley:
Well, Sam, thank you so much for joining us today. Can you let everyone know where they can reach out to you and find out some more information about you?

Sam:
Absolutely. It was a pleasure to be on the platform. Like I said, BiggerPockets was really integral in me getting started and building out my network, and boots on the ground and all those things. So, I just want to say thank you for the opportunity. And if anyone wants to keep up with me, you can find me on Instagram @blackrealestatedialogue. Send me a DM after you listen to this. Let me know what you think and would love to connect. And if I can answer any questions, would love to do that. And happy to come back at any point if I could be of service. So, really appreciate this opportunity, and thank you two for a great interview.

Ashley:
Thank you for listening to this week’s Rookie Podcast. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson on Instagram, and we will be back on Saturday with a Rookie Reply.

Speaker 4:
(singing)

A judge on Tuesday ruled that Donald Trump and his company are liable for fraud by misstating the true values of multiple real estate properties for years and thus grossly overstating the former president’s net worth by billions of dollars.

Judge Arthur Engoron in his bombshell decision also canceled the New York business certificates of Trump, the Trump Organization, and the other defendants, including two of his sons, in a lawsuit by the state Attorney General’s Office.

The judge said he would appoint an independent receiver to manage the dissolution of the corporate entities whose business certificates he canceled.

It is not clear whether Engoron’s decision means the Trump Organization and related entities will have to completely cease doing business in New York, or whether the companies can be legally reconstituted later.

A spokeswoman for Attorney General Letitia James declined to comment on that question.

But Trump’s lawyer Chris Kise, who called the decision “outrageous,” said it “seeks to nationalize one of the most successful corporate empires in the United States and seize control of private property all while acknowledging there is zero evidence of any default, breach, late payment or any complaint of harm.”

“While the full impact of the decision remains unclear, what is clear is that President Trump and his family will seek all available appellate remedies to rectify this miscarriage of justice,” Kise said.

Engoron’s ruling, which also dismissed Trump’s request to dismiss the case, did not settle six other claims in dispute in the case whose defendants included him, the company and his sons Donald Trump Jr. and Eric Trump, as well as former Trump Organization Chief Financial Officer Allen Weisselberg, company executive Jeff McConney.

Those issues remaining claims will be addressed at a nonjury trial due to begin Monday.

James is seeking $250 million in damages in the case and wants Trump and his two adult sons barred from doing business in the state.

Engoron, in granting partial summary judgment to James on the fraud claim, found that Trump made false and misleading valuations for multiple real estate assets in statements to insurers and banks for years as he sought more favorable terms on insurance coverage and loans.

Because of those misstatements, Trump also inflated his true net worth in annual financial statements by billions of dollars, according to the decision.

“In defendants’ world: rent regulated apartments are worth the same as unregulated apartments; restricted land is worth the same as unrestricted land; restrictions can evaporate into thin air; a disclaimer by one party casting responsibility on another party exonerates the other party’s lies,” Engoron wrote.

“That is a fantasy world, not the real world.”

Engoron also ordered sanctions of $7,500 for five attorneys who represented the Trump defendants for making frivolous and previously rejected arguments in court filings. Kise is among those fined by the judge.

“Today, a judge ruled in our favor and found that Donald Trump and the Trump Organization engaged in years of financial fraud,” James wrote in a post on the X social media site.

“We look forward to presenting the rest of our case at trial,” James added.

Trump, the front-runner for the 2024 Republican presidential nomination, separately faces a total of 91 felony charges in four criminal cases. Two of those cases relate to efforts to reverse his re-election defeat in 2020. Another case involves his retention of classified government documents at his Mar-a-Lago club in Florida, a property that is mentioned in Engoron’s ruling Tuesday.

In the fourth criminal case, Trump is charged with falsifying business records related to a 2016 hush money payment to porn star Stormy Daniels.

He has pleaded not guilty to all of the charges.

Engoron in his ruling wrote that James’ office in its civil fraud suit “has prevailed on liability on its first cause of action … as against all defendants.”

The judge added that if liability for fraud is established under New York law, that statute allows the attorney general to obtain an order enjoining defendants from continuing to do business or “any fraudulent or illegal acts.”

Even after Engoron appointed an independent financial monitor for the Trump Organization last year, “defendants have continued to disseminate false and misleading information while conducting business,” the judge wrote.

“This ongoing flouting of this Court’s prior order, combined with the persistent nature of the false [statements of financial condition] year after year, have demonstrated the necessity of canceling the [defendants’ business] certificates … as the statute provides,” the judge wrote.

Engoron’s 35-page ruling details how Trump fraudulently valued his Mar-a-Lago club in Palm Beach, once by more than 2,000%, Trump Park Avenue and 40 Wall Street in New York City, his Seven Springs property in Westchester County, New York, and his golf course in Aberdeen, Scotland.

“Time and time again, the Court is not comparing one appraisal to another; it is comparing an independent professional appraisal to a pie-in-the-sky dream of concocted potential,” Engoron wrote.

After noting that Trump submitted statements falsely claiming that the Trump Tower apartment in which he resided for decades was nearly three times its actual size, and was worth a whopping $327 million, the judge wrote, “a discrepancy of this order of magnitude, by a real estate developer sizing up his own living space of decades, can only be considered fraud.”

“The documents here clearly contain fraudulent valuations that defendants used in business,” Engoron wrote.

“Defendants respond that: the documents do not say what they say; that there is no such thing as ‘objective’ value; and that, essentially, the Court should not believe its own lying eyes,” the judge noted.

Kise, the Trump attorney, said Engoron’s “outrageous decision is completely disconnected from the facts and governing law.’

“The Court ignored fully the Appellate Division mandate and basic legal, accounting and business principles,” Kise said. “Without even conducting a trial, the Court substituted its own judgment for that of nationally recognized experts from the NYU Stern School of Business and beyond.  More importantly, the Court disregarded the viewpoint of those actually involved in the loan transactions who testified there was nothing misleading, there was no fraud, and the transactions were all highly profitable.”

Another Trump attorney, Alina Habba, in a statement said, “It’s important to remember that the Trump Organization is an American success story and the fact that a judge without trial would say there is no question of fact and issue a decision like this in summary judgement is concerning.”

Habba who was among the attorneys sanctioned by Engoron.

Trump responded to Engoron’s ruling by reposting a statement on social media attacking James and the judge, while doubling down on his claims of having a much higher net worth than what was displayed on the financial statements at the center of the fraud case.

“It is very unfair, and I call for help from the highest Courts in New York State, or the Federal System, to intercede,” Trump wrote in a post on his Truth Social site.

In a tweet Tuesday, Eric Trump, who runs the Trump Organization with Donald Trump Jr., wrote, “In an attempt to destroy my father and kick him out of New York, a Judge just ruled that Mar-a-Lago, in Palm Beach Florida, is only worth approximate ‘$18 Million dollars’ “

“Mar-a-Lago is speculated to be worth [well] over a billion dollars making it arguably the most valuable residential property in the country. It is all so corrupt and coordinated,” Eric wrote.

Sweetgreen’s unlikely plan for domination includes potato chips, robots, and (maybe) airport food courts. Co-founder Nicolas Jammet talks the company’s roots over breakfast for a new Forbes column, Cereal Entrepreneur

It sounds like the set-up to a joke. But Sweetgreen? The inescapable salad chain? It was started by three dudes who met at Georgetown: Nicolas Jammet, Jonathan Neman and Nathaniel Ru. That was sixteen years ago and in some ways it’s been a charmed ride: Sweetgreen, which now has more than 200 locations nationwide, went public in late 2021 at arguably the height of the market. And while the stock price has since cooled (as has the market in general), that influx of cash allowed the company’s founders to invest further in technology, acquiring a company called Spyce that automates production; in May, Sweetgreeen launched its first Infinite Kitchen concept in Naperville, Illinois, where a robot assembles your salad.

That’s just a pilot program but an essential question remains for Sweetgreeen as it levels up: How do you scale a business built on small, local farms? Is this a tech company or a salad company? And how does a business that caters to a lunchtime office crowd weather our new work-from-home hybrid schedules? Here, Jammet sits down with Forbes for a new interview series called “Cereal Entrepreneur,” hosted by Method and Olly co-founder Eric Ryan and journalist Mickey Rapkin. Over a bowl of cereal, Jammet reveals how Sweetgreen nearly went bust in year one, what really went on in the “war room” in the early days of the pandemic, and why dinner might be the key to profitability.

MICKEY RAPKIN: Let’s start back in college when you were probably eating a lot of cereal. You launched Sweetgreen as an undergraduate. How bad was the cafeteria at Georgetown that three guys decided to start a salad company?

NICOLAS JAMMET: The cafeteria didn’t really taste very good—or feel very good. There was the cult sandwich spot we all loved eating at but you can’t eat there all the time. Between the three of us, we decided there was this opportunity to rethink convenient fast food. Today, we wouldn’t even drive by that first space [we rented].

ERIC RYAN: What was wrong with that first location?

JAMMET: It was a 500-square foot shack with no running water, no plumbing, no electricity, no sewage. And we said, “Perfect, we’ll open a restaurant here.” (laughing) We’d taken this entrepreneurship class at Georgetown, we wrote a business plan, we raised $300,000 dollars from family, friends, old bosses, anyone that would talk to us. We were told by a lot of people—even by some of our professors—“Don’t get into that business.”

RYAN: Sometimes being naïve is good for a first-time entrepreneur. Outsiders are the ones that typically disrupt industries because they can see opportunity for change that experts can’t.

RAPKIN: Have you run into any of those professors since?

JAMMET: Funny enough, in our early days, we used to live on the Amtrak between D.C., Philly, and New York. We ran into one. My co-founder Jonathan was like, “Hey, I don’t know if you remember me, but I started Sweetgreen and you told me not to.” We ended up having a great conversation with him and had a laugh about it.

Growing Pains

RYAN: Tell us about an early hiccup. With any new start up I like to say you’re not trying to win but learn how to win.

JAMMET: That first winter—a few months after opening—we almost went full belly up. We were running out of cash because we had this tiny restaurant that didn’t have any indoor seating, and that served salads and frozen yogurt in the depths of winter near a campus where students went home. It forced us to really think about how to evolve the offering, the experience and how to think about the next [location].

RAPKIN: Your parents were in the hospitality industry. Was this always going to be your path?

JAMMET: My mom grew up in Switzerland and my dad in France. Going back generations on my dad’s side, everyone was in hospitality, hotels or restaurants. My dad came to the U.S. and had the restaurant La Caravelle. I grew up in that world and grew up with a lot of these chefs that honestly were some of the first believers in us. Daniel Boulud was one of our first investors, Joe Bastianich, Danny Meyer, all these folks that I grew up with. This was right at the beginning of that fast-casual boom. But growing up in that world, we all saw the blood, sweat and tears—late nights, weekends, no line between work and life. There’s a sense of ownership and risk.

RAPKIN: How close are you with Daniel Boulud? Was he in the kitchen making you snacks after school?

JAMMET: (laughs) We would spend holidays eating at his restaurant or with his family. I really respect him. He’s one of these individuals that comes from this very old-school world obviously, but he is so curious around what is new and what is next. He’s actually the one that introduced us to Spyce—

RAPKIN: The company behind the Infinite Kitchen.

JAMMET: He invested in it and was like, “You have to meet these guys.” Five years later we acquired them.

Enter the Robots

RAPKIN: Let’s talk about the Infinite Kitchen. You opened your first pilot restaurant in Chicago earlier this year. Customers order at a kiosk and essentially a robot assembles the salad. Can ChatGPT make a salad? Are you replacing workers?

JAMMET: Great questions. When we think about the future, we see automation and robotics playing an important role. Working in restaurants can be physically hard. When you go into Sweetgreen at peak rush, you’re interacting with the team member but they’re also trying to be fast and accurate and friendly. This new experience removes a lot of that intensity and repetitive motion.

RYAN: I love how you continue to be entrepreneurial as you scale with a progress-not-perfection mindset. How did experimenting with this technology impact the footprint of the restaurant? Does it allow you to be more efficient?

JAMMET: It will give us flexibility with different footprints. But the beauty of the experience is re-deploying our team members to be more focused on hospitality and on prepping fresh vegetables. It’s only been two or three months now. We’re excited to keep learning from it.

RYAN: Talk to us about the pandemic. Take us inside the room with the three founders when you realize people aren’t coming back to the office right away. Was it sheer panic?

JAMMET: When COVID hit, I don’t think we imagined it being this multi-year challenge. But we’d raised a lot of capital and we had invested heavily in our tech and digital infrastructure. We had just launched delivery on our app two months before which was really fortunate. We had also shifted so much more of our real estate and growth strategy towards suburbs and residential communities.

RAPKIN: OK. But were there wild, late night text chains? With links to article about offices never re-opening? There must have been some fear.

JAMMET: A lot of fear around the unknown and around what the world was going to look like. A lot of war rooms with the three of us and just our whole exec team. But we had a strong balance sheet. We’re grateful that we didn’t have to go into survival mode. Which was great because it allowed us to really focus on, OK, How do we emerge from this as a stronger company?

RAPKIN: I’ve gotta ask you about the loyalty program. Sweetpass+ sounds like a streaming service. Like it comes with 12 hours of Mrs. Maisel.

JAMMET: (laughs) That sounds like a good perk, actually. It was a lot of big brainstorms on the names. Instead of reinventing the wheel, it’s easier to just stay as straightforward and direct as possible. But it really gets back to this idea of routines and incentivizing folks to think about their daily rituals.

RAPKIN: Can you be profitable without getting people to come to Sweetgreen for dinner?

JAMMET: I think we’ve focused a lot on our offerings and the broader experience. Today our menu looks almost nothing like what it looked like 16 years ago. There are obviously salads. But we continue to make our menu heartier and add new entrees, new proteins, to continue to broaden the menu and attract the non-salad eaters. At that point the offering would be pretty relevant at dinner.

Going Public

RYAN: We always hear about the downside of going public. But have there been some surprises for you? What do you personally love about driving a publicly-traded company?

JAMMET: Listen, there’s positives and negatives to any experience. I would say it gave us a big microphone. And I would say we were really happy with the timing when it went public.

RAPKIN: You and your co-founders have become celebrities in a way. When each of you bought a house, The Dirt reported on the details. Is that strange?

JAMMET: To your point, everything we do now is public and there’s scrutiny and there’s a microscope on it. We’re very conscious about that with everything we do or say publicly. And so it is definitely a different mindset. But I would say even before going public, we kind of had this rule internally: “Don’t believe your best press and don’t believe your worst press.”

RAPKIN: Coming back to cereal, what gets you out of bed every day?

JAMMET: What keeps me going is knowing that even though we’re 16 years in and we have 215 restaurants, it’s still tiny in the context and scope of what it could be. And what we want to build. I mean, there are thousands of Chipotles, tens of thousands of McDonald’s. And if we really do want to help redefine fast food it’s going to be like a 100-year journey.

RAPKIN: OK. But this comes back to the initial question. How do you scale a business built on small farms? Because Chipotle doesn’t care who makes their beef.

JAMMET: I will say Chipotle—in the context of all the scaled fast food players—does a great job in general.

RAPKIN: Fine. But how does Sweetgreen get from 215 stores to 1,000 stores and still care about the farmers? I know how important your partners are to you.

JAMMET: What gets me excited is thinking about how we use our scale for advantage. As we now level up, we’re able to work with some of the largest growers in the country and we can say to them, “Hey, we want to transition this land to organic.” That’s how you can create real change in the industry. There are some things that we do at this scale that will not work at 1,000 restaurants. And that’s OK. As our supply chain grows and scales, there’s going to be new growers and new farmers and partners that we work with that we’re also really proud of. Just because they’re large it doesn’t mean they’re bad. We will always be 100% transparent on how we’re sourcing it and where we’re sourcing it from.

RAPKIN: You just introduced potato chips. Can we talk about this?

JAMMET: It’s our first savory collab—with Siete Chips. It’s our Green Goddess Ranch Dressing made into a chip. It’s the first time we’re selling potato chips at Sweetgreen. But sourced really thoughtfully and made with avocado oil.

RAPKIN: What has the world come to? Chips at Sweetgreen!

JAMMET: People love chips done our way.

RYAN: When do we see Sweetgreen at the airport?

JAMMET: I wish yesterday. It’s something we’d like to do and we’re learning more about. Operating in an airport is a very different and complex environment. There’s usually licensees, most people don’t operate their own restaurants. But it’s definitely something we hope to do.

RAPKIN: So, is Sweetgreen a tech company or is it a salad company?

JAMMET: First and foremost we’re a food company. And we love to leverage technology to rethink the whole experience and rethink our business model. At the end of the day, if a product is not craveable—and the desire isn’t there for the product—then nothing else matters.

The conversation has been edited and condensed for clarity.

David:
This is the BiggerPockets Podcast, show 823.

Mitchell:
So cost segregation is the wheels to the ground strategy of how real estate investors create tons of bonus depreciation year one and lower their tax bill by a ton. So that, just like I said, rather than paying taxes, real estate investors can continue compounding and continue that big snowball of buying real estate.

David:
What’s going on everyone? It’s David Greene, your host of the BiggerPockets Podcast, the biggest, the best, and the baddest real estate podcast in the world. Joined by my co-host today, Rob Abasolo. Rob, what’s going on, bro?

Rob:
It’s going well, man. It is a Wednesday, but it basically is Friday because I am flying to San Diego tomorrow for the next couple of days, so I’m really excited.

David:
What are you going to be doing there?

Rob:
Well, it is my best friend’s 40th birthday party, and I wasn’t going to go, and my wife was like, “Hey, you need to go. It’s his 40th birthday party.” And I was like, “Really?” And she was like, “Yes.” And so I booked some flights with points and I’m going to go surprise him. He doesn’t even know.

David:
So not only is Rob working out every day, eating clean and has moved on from wearing Haynes pocket tees all the time, he also has made a friend who would be happy to see him in San Diego. Let us know in the comments on YouTube, how proud you are of Rob, and please congratulate him on this. And I would like to congratulate all of you who are about to listen to this show because this is fire. If you’re someone who doesn’t like taxes, which I’m assuming all of you are, you’re going to get a lot out of today’s show because we are going to get into ways that you can legally save in taxes that you may not have known about, with specific steps that anybody can take if this is something they want to do. Rob, what is the most valuable insight that people will take away listening from this show?

Rob:
Today we are going to talk about how to leverage tax strategy to compound your wealth over the course of your life. All right. But you have to listen closely and you have to understand that there’s a lot to this stuff, and we don’t expect you to be a perfect expert by the end of this episode, but bookmark it and really pay close attention because I think it can have a huge significant impact over the course of your real estate career.

David:
That’s great. My advice would be listen to this show until you can explain it to somebody else who doesn’t understand taxes or real estate. That’s the best way of knowing that you have a firm grasp on how you too can save in taxes. Now, before we bring in our guest, Mitchell Baldridge, I’ve got a quick tip just for you. Stop thinking about solving tomorrow’s problems and start thinking in terms of decades. Real estate in general and tax deferment in specific is not utilized very well as a short-term strategy. When you’re using 1031s, when you’re using bonus acceleration strategies to cost segregation studies, you’re not avoiding taxes, you’re often deferring them. And if you defer taxes the wrong way and end up in a situation where you’re not making money and that tax bill hits you when you’re not ready for it, it can hurt.
At the same time, if you’re trying to build and accelerate your portfolio, this can be a massive, massive beneficial accelerator for you. So come up with an overall strategy, a plan for where you want to be 10, 20, 30 years from now, and ask yourself which of these strategies would work for you to get you there faster. Rob, anything you want to add before we bring in Mitchell?

Rob:
Just listen to the end because we really do talk about a lot of those key watch-outs. There’s a lot of good and not necessarily bad, but I think caveats that really is important to soak in. So really, anytime David says anything, listen particularly closely because, man, you really broke it down so well today.

David:
Well, thanks for that, man. I appreciate the compliment. I try to break it down every chance I get. I hope you break it down in San Diego and let’s let Mitchell Baldridge break it down for us now. Mitchell Baldridge, welcome to the BiggerPockets Podcast. So to kick things off, tell me a little about yourself.

Mitchell:
Hey, thanks for having me. Yeah, my name’s Mitchell Baldridge. I’m a CPA and a certified financial planner in Houston, Texas. I run my own CPA firm. We primarily work with small business owners and real estate syndicators. And then in addition to that, I have a bookkeeping tax service called betterbookkeeping.com, and then I’m a partner in RE Cost Seg and STR Cost Seg.

Rob:
Well, awesome, man. Well thanks for coming on. For anyone who might be ready to tune out because we’re going to talk about taxes, let me just set the table about what we’re going to be talking about because personally I feel that taxes are a lot sexier than most people believe, because in my mind, if you are paying taxes, you are not keeping that money in your pocket, thus you are making less every single year. I’ve had multiple six figure tax bills and this one strategy is how I’ve been able to lower my bill through the power of real estate tax knowledge. And Mitchell here is my partner over at strcostseg.com, wanted to bring them in to really set the stage for what I think is the most powerful wealth building strategy in real estate.

Mitchell:
Yeah, totally. You do not compound by paying taxes to Uncle Sam.

David:
And that magical tax strategy we’re going to get into today is called cost segregation. For those that already knew where we were going, well done. Mitchell, why is it important for investors to know about cost segregation?

Mitchell:
Sure. So cost segregation is the wheels to the ground strategy of how real estate investors create tons of bonus depreciation year one and lower their tax bill by a ton. So that, just like I said, rather than paying taxes, real estate investors can continue compounding and continue that big snowball of buying real estate.

David:
Rob, tell us about why you believe cost seg can be even more powerful than cashflow itself, as heretical as that may sound.

Rob:
Definitely. Well, I think most investors getting into the game, we tend to focus on cashflow because we want to make money today. Now granted of course that’s overgeneralizing, that’s not everybody, but for those people that are really set on their cashflow, I think it’s really important to look at the overall ROI of your investment, not just the cash on cash return. Because when you look at all of the different components from cashflow to appreciation to debt pay down, and then you start adding in the tax deductions that you can get, your ROI on any property can really begin to skyrocket. I’ll tell you about a quick deal, and granted this is a bigger deal. This isn’t something that everyone at home is going to be working through. But I’m actually working through a $2.4 million property right now. The cashflow on it is going to be on the lower side for that specific property.
It’s going to, I think, cashflow between 30 to $40,000 a year, which again, it’s not a bad amount of cashflow, but relative to that property, I typically look for a little bit more. However, once we start using some of these tax deductions that we’re going to talk about today, this specific property will actually help lower my tax bill by about 250 to $300,000. And again, we’re going to get into another deal later on in today’s episode that’s a much smaller deal, much more tactical for a lot of the people out there, but big or small, it can work for anybody.

David:
All right, so now we know why it’s valuable, but how does it work? Mitchell, can you lay the foundation for us in simple terms so our listeners can understand what cost segregation is and how it can be used?

Mitchell:
Sure. So in very simple terms, cost segregation is the mechanism, it’s an engineering report where you blow your building up into almost like, picture one of those blueprint component piece diagrams. Well, you take a real estate investment, whether it be a short-term rental or a huge industrial property and you blow it into all of its component pieces. You take the land as a piece, you take the roof as another piece, you take the foundation as a different piece and windows and special air handling systems, and you attach a tax life to every component of your building. The reason you do this is because there are these different tax lives for different assets.
So the roof and the foundation and the walls and the framing of a building would have either a 27 and a half or 39 year tax life, whether it’s a residential property or whether it’s a commercial asset. But a lot of these components of the building will have much shorter tax lives, would have five, seven, or 15 year lives, like landscaping or vinyl flooring or certain cabinetry or certain mechanical systems could have a much shorter life. So what this engineering report, this cost segregation study does is takes the building and puts it into different tax life categories so that you can hand that to your CPA and you can save money year one.

David:
All right, Mitchell, so you’ve described how cost segregation works, but let’s back it up a little bit and talk about how overall depreciation works. How about if I give you my understanding of it and that as a professional, you could correct me if I miss anything? Sound good?

Mitchell:
Sounds great.

David:
So if you were a small business owner, which we are as real estate investors, our real estate portfolio is our business. And let’s say you owned a restaurant and you bought a dishwasher for that business and you spent $20,000 on this industrial grade dishwasher, that would be a write-off for the business. So even though the business may be made $100,000 in the year, you had to spend 20,000 of that dollars on the dishwasher. So you’d be able to write off $20,000 against the 100,000 you made. But the government usually won’t let you write off the full amount in the first year because then if you had a construction company and you bought a whole bunch of trucks for that business and the amount of vehicles you bought was more than the actual profit that was made, you’d never have to pay taxes and you just keep accumulating assets.
So instead what they do is they let you write off a percentage of that dishwasher every year and they figure out how many years that dishwasher will last, say it has a useful life of 10 years. And they’ll say, “You can write off one 10th of that dishwasher every year,” that way you can’t take the full deduction in the first year because then you wouldn’t probably pay many taxes at all. If you bought new equipment constantly, you could avoid or significantly reduce your taxes. That same principle, which is called depreciation, applies to real estate investing. So the building that we’re buying is actually falling apart over time. The siding is wearing out, the air conditioning unit, the mechanical systems, all the things you mentioned wear out.
And as a general rule, the IRS has said, “Hey, we say that a house has a useful life of 27 and a half years for a residential dwelling. We will let you write off one 27.5th of that every single year against the income that you make.” So if the property makes eight grand in cashflow, but that appreciation on it is $6,000, you’re only taxed on $2,000, which is significantly better than if you earn money at W2, you have no way to shelter it. My understanding of cost segregation is that rather than extending it over the full useful life of the property, which is 27 and a half years for residential real estate, you can accelerate that and take chunks of it in the very beginning.
Those cabinets aren’t going to make it the full 27 and a half years. The air conditioning, the boiler, some of the other components of the flooring planks you said, they’re probably not going to make it the whole time. So they’ll let you take a bigger chunk, which is those pieces in the beginning, which gives you a bigger write off for that year’s income. How did I do?

Rob:
I think that was pretty good.

Mitchell:
The idea of sure, I own a business and I buy a stapler, I can write off the stapler year one. But I buy, to your point, this commercial grade dishwasher or this house, they’re going, “Whoa, whoa, whoa. This is not an expense. This is a capital asset and the way that you’re going to recover that cost over time is through depreciation.” And there’s different methods and there’s a lot of different rules around that, a few of which we’ll get into right now.

David:
Now I think it’s important to mention, and I know we’re about to get into it, we tend, as investors, to think when I buy a $500,000 property that I invested $100,000, that’s 20% down. That’s how our brain sees it. I invested 100,000, because that’s what I took out of my bank account and gave to the seller and then the bank gave the other 80% of it. But you actually bought a $500,000 asset. You were on the hook to pay back the full 400 grand that you borrowed. It was not free. It feels free because we pay it back with the money that came from the tenant. But indeed, in fact, you bought the full $500,000, which means you are able to write off, I should say, you are able to use a basis of $500,000 minus whatever the land was with your depreciation.
And it’s important that people recognize you’re not taking the 100 grand that you invested and making that your basis, you’re getting the full $500,000, which means when you incorporate leverage into real estate, it makes it even easier to save in taxes. Can you break down, Mitchell, how that works?

Mitchell:
The simplest example outside of real estate would be I can walk into a car dealership on the last day of the year with $1,000 and put that down on the table and walk out with $100,000 Chevy Tahoe. And so I’ll also, to your point, David, walk out with a $99,000 loan that yeah, they will insist I pay that back. And then we’ll talk more about bonus depreciation, but using bonus depreciation, I can write off, or section 179, I can write off that whole car the year I buy it. So wow, I just walked into a car dealer with $1,000 and walked out with a car and with $100,000 write off. That’s amazing. Well, that happens in real estate the same way, where, to your point, a 20% down payment on a house, that seems like a pretty large down payment for a home, that’s actually pretty high leverage. If you go look at an industrial warehouse or if you go look at a self storage deal, they’re going to want you to generally put down an awful lot more than 20%.
But with this home, they’re great targets for depreciation in the sense that in your example, I’m going to take $100,000, I’m going to buy a $500,000 house, and then of that 500, I’m going to separate the land from the improvements and then I’m going to take the improvements, both the site improvements, the building improvements and cost segregate, meaning break all those improvements into their tax lives, shorter lives and longer lives. And then I’m going to use bonus depreciation to accelerate all the short life property and take a huge deduction year one. It’s super convenient because the year that the capital goes out of my bank account happens to also be the year that I get a huge deduction.

Rob:
Yeah, there’s a few things to unpack there. I mean, the high leverage benefits of real estate are pretty nuts, because just like you talked about, you can be very high leverage in real estate, whereas you can’t necessarily go and take $100,000 and say, “Hey, I’m going to buy $500,000 of Tesla stock.” There really aren’t ways to do that, not easily that I know of anyways. Whereas you could go to a bank and get that same exact leverage on real estate because it’s an appreciating asset and banks are willing to do that. And you sort of define the idea of depreciation, so I think we get that over the course of time, whether it’s 27 and a half years or 39 years for commercial property, you get a small line item deduction. You talked about cost segregation, how we’re able to, I guess, break down those components and see what could be deducted faster. But the one thing that we haven’t really jumped into specifically is bonus depreciation. So what is the difference between bonus depreciation and depreciation in general?

Mitchell:
Bonus depreciation has been around a long time in various forms. And bonus depreciation really means for the shorter life property, these five, seven and 15 year items like machinery and fixtures and land improvements, that bonus depreciation allows you to accelerate all the depreciation or a chunk of the depreciation to the very first year you placed the property in service. In 2017 in a budget reconciliation, they passed the Tax Cuts Jobs Act that unlocked this huge bonus opportunity. One, it took bonus back to 100%, meaning any five, seven or 15 year property, that was real property that you placed in service in that year could be 100% bonus depreciated. And the other thing, the Tax Cut Jobs Act unlocked is that you could apply bonus to used property. Previously cost segregation and bonus depreciation was super valuable for ground up development. It could only be put on new cars, new property, new equipment. Well Tax Cuts Jobs Act allowed you to go take an apartment that was a value add from the 1970s and buy it new to you and start to cost segregate and bonus it and bring all that depreciation forward.

David:
So if I understand you correctly, before, you could only write off the useful life of some of these things like the air conditioning, the roof when they were brand new, when it was first built. And they adjusted the tax code to say, “Hey, even though when you bought it, that roof was 20 years old, we’re still going to let you write it off as if it was brand new over the useful life of that roof.”

Mitchell:
Well, the roof’s a longer life asset, but yes. So another thing about bonus depreciation as opposed to 179 and the huge unlock, is that bonus depreciation will allow you to offset your income below zero, so you can generate net operating losses in real estate. So Rob, back to your point of this Arizona house that’s going to generate 40 to $60,000 of net cashflow every year. The first year, you’re going to lose a quarter of a million dollars. So you’re going to be left with cashflow of $40,000, but a net loss of $200,000 out of that property. So that’s where this all really comes together. Sort of back to that Chevy Tahoe example of I put $1,000 down and I buy this car and I just generate $100,000 loss day one.

Rob:
Well, and let’s just clarify, when you say “loss,” quote, unquote, for everyone listening at home, we’re talking about a paper loss, which is effectively the concept of you are actually profiting in your cashflow, but that doesn’t mean that on your tax return, it doesn’t look like you lost money because of all the advanced, or I guess the bonus depreciation or the depreciation that you took. Is that kind of an accurate representation of what a paper loss is?

Mitchell:
Yeah. So if you want to go way, way nerdy, it’s a deferred tax liability. So you are basically creating a loss today ahead of schedule and you’re just pushing taxes into the future. So yeah, I used to work at a big corporate tax firm doing tax provisions for public companies. This would show up on your balance sheet, a deferred tax liability out there. So I basically took five years from now’s tax deduction and pulled it into this year. And we’ll talk more about recapture later and we’ll talk about there’s no free luncheon in the tax code. What goes up must come down. But yes, like I was talking about earlier, it’s a nice thing to have that the year that the equity goes out the door and that the bank debt comes online, is also the year that you get to generate this massive deduction so that you’re not paying taxes the same year that you’re buying property, hopefully.

David:
Right. And it is important to notice that we call this a paper loss. So you are writing off … they assign a dollar value to the loss of the materials in the home because at some point you’re going to have to replace them, but that doesn’t mean that you actually lost money on the deal. And when you’re applying for financing, they’re not going to hold the depreciation against you. So if the property made $50,000 in a year and the depreciation was 40,000, you’re only taxed on 10. But when you go to apply for a loan, they will let you use the full $50,000 as income in most cases. I think a lot of people get confused as well, if I take a loss on depreciation, it’s going to affect my ability to borrow money, it’s going to affect my debt to income ratios. But for most lenders, that’s not the case. Correct, Mitchell?

Mitchell:
Yeah, that’s a great call out. Any good banker will allow you or will go to their underwriting and allow you to add back either all or a part of that depreciation to get back to-

Rob:
And so in theory, using this strategy of both bonus depreciation and how cost segregation studies can help you do this, is it, in theory, possible to take such a big loss on your real estate holdings, that it actually crosses over to other types of income, like your W2 income and makes it look like you lost money there, effectively lowering your tax bill in that moment, is that something that people can do as well?

Mitchell:
So yeah, we’re getting into now how do I utilize these losses? And this is definitely worth calling out here, that real estate income or rental income by its nature is considered passive income and your W2 income by its nature is considered active and you cannot offset active income with passive losses unless you’re a real estate professional. So we can get way into real estate professional status if you’d like.

David:
Yeah, let’s get into that. So is this something everyone listening can do? Can they just all start taking depreciation against not only off of their real estate deals, but also off of the money that they’re earning in other endeavors?

Mitchell:
So you may have to jump through some hoops out there. So real estate professional status is a bright line status recognized by the IRS that allows you to offset ordinary income, ordinary active income with these passive losses out there. But to become a real estate pro, you have to work 750 hours and more than half your working time in your own real estate business out there. So you have to be acquiring, or developing, or redeveloping, or rehabbing, or brokering, or managing real estate for a business that you own more than 5% of. So you can’t even be a W2 employee for a management firm or a W2 employee for a brokerage house. You have to be in the real estate business and you have to be working more than half your time and really working in real estate to be a real estate pro. So it’s a big hurdle to jump over.

Rob:
Yeah. So it’d be really hard to be just a full-time W2 worker and a real estate pro because full-time W2 workers work roughly 2,000 hours a year. And so if you want to be a professional, real estate professional and a W2 worker, you basically have to work over 4,000 hours a year, right?

Mitchell:
Yeah. If you’re a dentist, it’s going to be hard to be a full-time dentist and be a real estate pro. So being a real estate pro is fantastic because not only is the real estate that you buy and bonus depreciate able to offset your business income, but then you’re also able to go be a limited partner in deals and kind of aggregate all your real estate activity and create actual passive losses that will offset your … if you’re a property manager or a broker, I mean, it’s just a fantastic way to be able to kind of passively go mute your income with real estate and not have to get fully into buying and owning and operating real estate on your own. But if you cannot or will not become a real estate professional, there are a couple of ways that you can still get the benefits of real estate losses, but you got to jump through a couple of hoops.

Rob:
One of the main ways, one of the biggest hula-hoops you can jump through is you can just marry a real estate professional. I mean, I know that’s not all that easy, but in theory, once you’re actually married to someone, let’s say you marry a broker or a real estate agent, their status, does it sort of transfer over to you? How does that work?

Mitchell:
Yeah, we keep joking about starting up this dating app where we take real estate pros and then we take high income W2 folks and we just match them together. And so yeah, if you are married to a real estate pro, their status is automatically imbued onto you. So a lot of doctors, lawyers, folks like that always talk about, “Oh, just marry a pro or have your stay at home spouse become a real estate pro.”

David:
Do you hear that, ladies? If you’re making a ton of money and you need some tax shelter, I’m your guy.

Rob:
That’s right, because David Greene is both on the real estate agent side and brokerage. So it’s kind of like you become a double real estate pro.

David:
More value. Maybe I can be the face for this dating app when it actually comes out, Mitchell. Rob, is that how you got your wife? You just basically was like, “Listen, I’m a full-time real estate professional, very rare. You don’t want to miss this opportunity, it might not come again.”

Rob:
And she was like, “Yes, continue talking to me about taxes, please.” And I was like, “My girl, right here.”

Mitchell:
So then, yes, you can marry a real estate pro, which could be great or could be very difficult, depending … So there’s a couple of other routes you can take as well, which are really to take that real estate passive income and make it active. Oh, one way to do that is I’m a CPA, I own the CPA firm, I could go buy a building that I operate out of, and that would not be a passive rental activity, that would be an asset that my business owns, similar to the servers or the copier or any other asset we own, that we operate out of. And so that active loss of the real estate that I purchased could offset the business income of any of my active businesses.

David:
You are able to use depreciation from real estate you buy to shelter income that isn’t directly related to that specific asset. So your loan commissions, your realtor commissions, I would imagine a construction worker, might be some of the money they make from doing construction projects, consulting, property management fees, all of that. You can shelter that income with the same depreciation, otherwise it just stacks up. And if you don’t use a depreciation, you save it and next year you could use it if the property made more money then. So that works for the people like me that make our living writing books and teaching people how to be real estate investors and running brokerages. But what about the high income earner that isn’t able to completely go full-time real estate professional, but still wants to take advantage of what we’re talking about?

Mitchell:
So yeah, aside from being able to buy your own building or buy property for your business, which by the time you’ve bought the building and bought the warehouse and bought the other building, you can only buy so many buildings for your business. You can also create another type of business, a short-term rental business, the STR loophole. So the IRS looks at a short-term rental, not as rental real estate or real rental property, but looks at it as a hotel that you operate, that you happen to own the real estate of, that looks an awful lot like a rent house, but it’s considered to be a whole different thing. And so if you run a short-term rental, which means seven nights or less, you have the opportunity, or seven nights or less on average, you have the opportunity to take all the depreciation related to that trader business and offset other active income.

Rob:
And so one of the big requirements for this short-term rental loophole, which is applicable to really probably a very large majority of our audience that own short-term rentals, is the idea of material participation. And so that basically means, in a very simple way, if you’re self-managing your property, you are likely materially participating so long … I mean, I think there’s seven ways to do this, correct me if I’m wrong, but one of the main ones that probably applies to most people is if you are working on this property a minimum of like 100 hours every single year, which is I think two hours every single week, and working on the property more than anyone else, then that would be considered material participation, right?

Mitchell:
That’s right. So where the real estate pro designation is 750 hours and more than half your time, material participation is kind of an or test. So if you work 500 hours in that business, you materially participate. If you work 100 hours and more than everybody else in the business, meaning you spend more time in that business than any other single person, you’re a material participant. Or if you’re just the only operator of that business, you’re materially participating. So if you have a ADU behind your house that you’re the only person who really works in it, but it takes you 20 hours a year, that you’re materially participating.

Rob:
So that would be like if it’s on your property, but you clean it, you’re the maintenance person, the landscaper, you’re the one that’s really owning everything about that, okay, then you actually don’t have to fulfill, yeah, you don’t have to fulfill the 100-hour requirement in that.

Mitchell:
That’s right.

Rob:
Wow, that’s crazy.

Mitchell:
So yeah, the material participation guidelines are a little bit looser. If you want to go full nerd, there’s publication 925, which is about passive activity rules, that if you really want to go to sleep, you can read that whole thing tonight.

Rob:
The tax sleep talk, as we call it. Well, so if you materially participate in a short-term rental, I mean, again, I think a lot of people do without even knowing it, this is sort of where it all comes to a head from a bonus depreciation, cost segregation standpoint because it’s at that moment that you’re able to take your losses and apply it to your W2. Or am I missing something?

Mitchell:
That’s right. So yeah, if I work for some big tech company making a million bucks a year and either me or my spouse runs a short-term rental and materially participates, we’re able to aggregate those two income sources, the high earning W2, and the huge loss from the paper loss that we’ve generated, put them together and pay way less tax and defer it to a later time.

Rob:
Dang. So is there a limit? Any amount of money that you make at your W2, you can just wipe out?

Mitchell:
So along with all of these great rules that the Tax Cuts Jobs Act gave us, they also created one limitation, the excess business loss rules that came into effect last year. So a single person can deduct about $300,000 from their W2 and a married couple can deduct about $600,000. So if you are a hedge fund trader with a $5 million W2, you can’t just go start buying a ton of car washes and wipe out your entire income, you’re going to be limited to that 300 or 600,000 out there.

Rob:
And then what about on the real estate side? Is there a cap on how many losses you can take with real estate?

Mitchell:
Excess business loss rules apply to any type of business loss against a W2. So if you’re running a gelato shop or if you’re running a real estate business, or if you’re running an STR business, you can only lose 300 or 600, if you’re married, against the meta $1 million W2 for the software engineer.

Rob:
I’m saying in your real estate holdings, you can only take $600,000 of losses on that? Because I thought you could take infinite losses.

Mitchell:
The most you can take against a W2 is 600,000, but David Greene’s brokerage business that makes $20 million a year at least, he can offset that as much as he wants by buying as many stadiums or amphitheaters or whatever he wants to go do. Does that make sense?

Rob:
Yeah, yeah, totally.

David:
So in essence, the government is sort of rewarding those who make their living through real estate if they invest their money back into real estate. So if you’re making loan commissions, you’re flipping houses and making profits there, you’re trading capital gains, but you didn’t necessarily execute a 1031 exchange, you have a loan company, you’re doing things that employ people, generate revenue for the government. Maybe all your employees are paying taxes on their stuff, but if you take that money and you go invest it into more real estate, which creates more jobs and more economic opportunity, your reward is you don’t get or you don’t have to pay taxes. You just have to be aware it’s not all sunshine and rainbows, it’s not free money. You are highly susceptible to fluctuations in the economy when you make your money as a real estate broker or a full-time real estate professional. Interest rates going up, economic recessions, people get decimated at those times.
So even though it looks like, oh, this is great, I’ll never pay taxes again, well, maybe you don’t pay taxes because you lost money for four years in a row. 2010 wiped out a lot of people that were in the real estate space. So I think it’s important to highlight, it’s not like this cheat code where, oh, all I have to do is go make money in real estate. It’s very hard to do that. It’s very competitive. There’s no ceiling, but there’s no floor. I hear people talk about it like, “Oh, that’s all I’ll do. I’ll just quit my job and go be a real estate agent.” And five years later they’re begging their boss to take them back into their W2 job because it was really hard. I see you smiling, Mitchell. Have you seen some of this before?

Mitchell:
We were all going to quit our jobs in 2021 and trade crypto. Market cycles have a way of doing that. And I mean, also I talked about this as the idea of I’m going to cost segregate and bonus depreciate my property is going to create a deferred tax liability. Well, that’s called a liability for a reason. Remember we did this 20% down, 80% loan rent house. Well, I’m adding more leverage to my real estate deal by frontloading all the depreciation. It’s just another form of leverage. You owe the IRS money in the future. It’s not showing up on your balance sheet or your personal financial statement if you’re not doing great gap accounting. But if you were doing great gap accounting, it would show up right there as a liability of a future tax you owe.

Rob:
Okay. So Mitchell, you walked us through the basic concepts of cost segregation. Next, we’ll get into an example that lets us see how this actually works in action and maybe we can hit some pitfalls of cost segregation too here at the end. But I actually just want to go through a case study of a property that I just closed on and kind of walk people through really, I think, a very realistic property for anyone at home. Is that cool?

Mitchell:
That’s great.

Rob:
Okay, awesome. Well, this property, the purchase price, and we’re rounding up a little bit to keep the math simple, but the purchase price was around $300,000 and the land value of this property was about $111,000. And the reason that’s important is because like you said earlier, the land value, you can’t really depreciate land. You can only depreciate the improvement on the land, which is typically the house. And so we’re depreciating things like the actual house itself, the concrete, the patios and everything like that.

Mitchell:
That’s right. Yeah. I think this had a lot of decking and improvements outside that were all 15 year bonusable property.

David:
And so we looked at this one, and to your point, you paid about 300,000 for it, the land is 111, you can’t depreciate that, so you’re left with 189,000 out there. And we were able to find about $60,000 of just first year depreciation between the bonus and what would’ve been the 27 and a half year property anyway. We took things like trim finish, carpet, luxury vinyl plank, shelving, disposals, microwaves, and then like I told you, a lot of this outside landscaping and land improvement stuff.

Rob:
So let’s really break this down for people at home so that they understand. So you said I was able to depreciate about $60,000. So the way you would calculate any tax deferment on that end is are you just multiplying that $60,000 by your tax bracket?

Mitchell:
Yeah, so your tax rate becomes a limiting factor. There’s really five limiting factors. There is the land value as opposed to the improvement value of what you pay for. There is the amount of the short life property we find inside of the deal. There’s the leverage that you put on the property, like we talked about before. Then there is, to your point, Rob, are you in the 37% tax bracket or are you in the 10% tax bracket? Because if you’re in the 10, you may not want to do this, especially if you’re going to have a high tax year in the future. And then the last is that where are we at in the point of the bonus depreciation, are we in the 80, 60, 40, 20 or zero out there?

Rob:
Yeah. So on this particular property though, once we calculated it for my situation, it lowered my tax bill by $21,000, which is significant because the depreciation on this was 56,000, which is pretty close to the down payment of this property.

Mitchell:
So yeah, you pay 20% down and you were able to in effect, net of the land, net of everything, net of the 80% 2023 depreciation bonus what you put down on the property. What that does in effect is turn your down payment into a 401 K contribution or an IRA contribution, where you just get to deduct your down payment and then defer that tax to a later date in time.

Rob:
Yeah. So that right there just shows not really that crazy of a property for anyone to go out and get. And crazy tax deferment strategy there makes it to where the ROI on that particular property now skyrockets. So Mitchell, are there any other cool things that listeners should know about cost segs?

Mitchell:
Yeah, so again, like you just mentioned, this is the most kind of advanced tax strategy for regular people, where you can borrow against an appreciating asset and write off taxes like this. Some opportunities for people are if you have put a property in service from late 2017 to today and not executed this strategy yet, it’s not too late, all’s not lost. You can either catch up depreciation by filing a change in accounting method with your next tax return, or you may potentially be able to amend a prior tax return. You can optimize that with your accountant on what you should do. But you’re able to go back to the moment that they put Tax Credit Jobs Act into place and catch up the depreciation by getting a cost segregation study today.

Rob:
And then if you take a big loss, what happens, let’s say you take more of a loss than the actual profit that you make, do you just lose that the year that you take it?

Mitchell:
Yeah. Well, the way that tax brackets work, you never want to post a zero, especially if you’re a perennial high income person. But let’s say you do. Let’s say you just generate a net operating loss because you put a big property into service one year, you can carry that net loss forward and it’s not a problem.

David:
What that means is that if you don’t use all of your depreciation, if you have $100,000 of depreciation, but there’s only $80,000 of money that could be taxed, you don’t lose the $20,000, it carries over into the next year and you could theoretically use it then and then every year in perpetuity. Is that accurate?

Mitchell:
Yeah. It just carries forward until you use it.

David:
So it’s not that if you don’t use it, you lose it. You keep it.

Mitchell:
That’s right.

David:
If you don’t need it, you keep it. I’m trying to make that rhyme. Try to find the alternative to if you don’t use it, you lose it. So let’s get into some of the caveats here because I personally believe that oftentimes when people are taught information like this, it is done from the perspective of it’s free. Like, you’ll never pay taxes again if you do a 1031 exchange. It’s not really that way. There are caveats, there are pitfalls, there is a price you pay to take advantage of these and that doesn’t mean don’t do it, it means be aware of what that would be. So let’s talk a little bit about the fact that you’re not evading taxes, you’re not skipping taxes. It may be that you’re deferring taxes or lowering a tax bill. Or how about the fact that when you take your depreciation up front, like we’re talking about, you don’t get to take it later down the road. Can you explain a little bit about what’s actually happening here from a practical standpoint?

Mitchell:
Yeah, so to your point, depreciation is real, recapture is real. Your building is going to fall apart over time, and this is just an acceleration of all the depreciation allowance that the government is giving you for 40 years to year one, or a big chunk of it. So you can’t do that without giving up something on the other end. And so yeah, it does sound rosy, but you shouldn’t do this if you can’t utilize the losses because you’re not a pro or it’s not an STR or it’s not a business property. You shouldn’t do this if you’re in a low tax year already and you don’t have a lot of taxes to defer. You shouldn’t do this if you’re going to sell the property in the next couple of years.

David:
Can you explain why?

Mitchell:
Well, so there’s something called recapture out there. So the same way that we get to deduct all this short life personal property year one, when we go sell it, we’re going to suffer what’s called recapture. So that 30 year old fridge that we bonus depreciated, well, when it’s 34 years old and we go to sell it, they’re going to reevaluate it using the same methodology. And any depreciation that we took that wouldn’t have happened in its own course, we’re going to pay back as recapture. So we’re just going to pay it at our ordinary tax rate. So to your point, this is just Newton’s law of tax, what goes up must come down, but what this strategy gives you is a lot of outs. You already mentioned 1031, shoot, if you’re working in an opportunity zones and you get that step up in basis year 10, this effectively becomes a tax credit because you’re not going to suffer recapture year 10, you’re just going to get this tax jubilee. So you should definitely do this if you’re in an opportunity zone.

David:
But like Rob’s example, he put $60,000 down, he saved 60,000 in taxes buying it. If he sold it next year, he would have to pay back that 60,000 in savings. Is that right?

Mitchell:
That’s right. And there’s some little planning nip tuck you can do around the edges on that, but directionally that’s a correct statement.

David:
Got to pay the piper. Also, we mentioned, for a long time you used to be able to deduct 100% of what came up in the cost segregation study. This year it’s 80%. Next year it’ll be 60. So as time goes by, it becomes increasingly less efficient to use this strategy unless it’s renewed in the tax code. So it’s another thing to be aware of. It’s not necessarily a strategy you could use forever. Do you have something to add there?

Mitchell:
Yeah, there’s a whole thing about, a few rules that have come out of Tax Cuts Jobs Act not exactly related to this, that are being talked about in Congress. And some of the proposals are to continue to extend 100% bonus as partners in STR cost seg. Both Rob and I pray that they will extend it forever. But as it goes down, it loses its efficacy because ultimately this is, to your point, a deferral of taxes. So you’re getting the time value of the use of your money and you’re getting to borrow this money from the government interest free. And really what you save year one or what you save in the first few years divided by what you pay for this study, is your initial payback. And so you want to be cognizant of what you’re getting to do this.

David:
And we’re not talking about 1031s, but they are also a tax deferring strategy similar to the depreciation. And that is a thing that gets thrown around a lot as well. Well, just 1031, you don’t have to pay taxes. It’s not that you don’t have to pay them, it’s that you are deferring them. You are kicking the proverbial can down the road.

Mitchell:
And that trade off of everyone’s favorite buyer is the guy on the 1031 up leg who just has no leverage or who has no ability to walk away because they’re tied to this strategy because they-

David:
You don’t hear very many awesome stories that come out of, I just did a 1031 and I’m stoked about the deal I got, and it was awesome. It’s like, you are now committed to this thing whether you want to be there or not, or it’s the 11th hour and you find something because it’s better than owing the taxes, or at least we tell ourselves. And I wanted to highlight, it’s important to notice if you’re going to use strategies like these, more than likely you will never be able to stop buying more real estate. This is not a de-leverage strategy. I often say it goes one way. The analogy that Rob likes is I say, you’ve got the wolf by the ears, so he can’t bite you, you’re not going to pay taxes, but you can’t ever let go.
You’re sort of stuck in the stalemate with your own portfolio because if you ever sell the property and don’t want to reinvest, you’re going to have a gain on that whole amount that you’ve had maybe from two, three, four 1031s over time. Would you like to comment on that?

Rob:
I have a comment. You have a wolf by the ears and you got to keep feeding it little biscuits every so often, so it’s not trying to get out of your grip and attack you

Mitchell:
As you build this mountain of leverage, it’s the idea of you’re trying to move a refrigerator and you have a dolly, and when that goes against you and it just falls on top of you, it becomes a big problem. So leverage can go both ways, definitely. I mean, the problem that people face when they use cost seg, and they have this experience of paying no taxes, is that it feels really, really good and you just want to do it over and over and over again.

David:
Which is what we’re wanting to highlight. If you love real estate and this is what you’re going to do for the rest of your life, it’s amazing. If this is a phase you’re going through, you wanted to work really hard for 10 years and stop doing it, there will come a point where you’re going to have to pay. A lot of people don’t realize that as you buy a million dollar property and then you sell it, you have a $300,000 gain, you reinvest the money, you buy a property for 1.5 million, a couple of years later you buy a $2 million property, you do this and it becomes $8 million of a portfolio or a property, however it works. If you want to try to get money out of that deal, outside of a cash-out refinance, you are going to pay those taxes. They’re going to hit you hard.
And if you want to do the cash-out refinance, which will help you avoid it, you still have to be making enough income to be able to get that loan. So if you’ve bought this property, you’re living off the income, you’ve lived the BiggerPockets dream, you’re living off your cash flow, and now you want to refi that thing, you can’t get a loan on it because your debt to income ratio is all out of whack. There’s a lot of things that can go wrong if the pH balance isn’t just right.

Mitchell:
Yeah. And further, as you keep cash-out refinancing, you can get to the point where, to your point, you sell your entire portfolio, you pay back all the debt, and then you have this big deferred tax liability that comes due and it can just swallow up all your profits or swallow up all your profits and then some, which is just a nightmare. So yeah, be careful, folks. We are in the deep end of tax planning and tax strategy. Do not take tax advice off of a podcast. Contact your CPA, contact a professional, do the real work of planning this out because you have to think in terms of decades around this. It’s not a one and done thing.

David:
But you should be listening to the BiggerPockets Podcast because we will shoot straight with you and we will tell you it is not a magic pill or a magic bean that’s just going to grow a perfect bean stock. It will accelerate your growth, but with that growth comes a higher tax burden that at some point is going to work. So Rob and I have said before, buy until you die is the way you avoid the taxes. You just keep upgrading, deferring taxes. Yeah, this is the rhyming episode right now. Parapa the Rappa.

Rob:
We workshopped it for 10 minutes before this, but it is good. Really quick, before we exit out of here, speaking of exit strategies, when is it worth it to do a cost segregation study on a property? Is there a certain price point or sweet spot for this?

Mitchell:
With STR cost seg and RE cost seg, when you go to our website and you fill out the form and you reach out to us, we’ll give you a proposal that literally says, “Here’s what you’re going to save. Here’s what it’s going to cost you. Here’s the payback ratio.” So we, in our whole world, we do houses that are $200,000 and we do buildings that are $100 million. We perform cost seg engineering studies. We have a couple of different ways we approach it. For smaller buildings, we use data and we model and then we review. We have an engineer review process around that. For kind of medium-sized properties, we do something called a virtual site visit, where we basically get on a FaceTime phone call and walk the property so someone doesn’t have to fly to your property, so it makes the whole thing certainly more affordable. And then for the $100 million industrial portfolio, we’ll fly out to you and walk around and take photos and perform the study kind of the old school way.
So what we’ve tried to do is be very nimble and build this product that can go a little bit down market and open up cost segs to people who couldn’t normally get them, just because it was $4,500 for a cost seg for a 2,600 square foot rent house. It just didn’t make sense, but now it does.

Rob:
Cool, cool. And then can you just, same thing, can you just give us a price range for that too, just so we have it concisely? What’s the price range for most investors that a cost seg would work for?

Mitchell:
Yeah, so you can cost seg a property that’s anywhere from 100, $150,000, all the way up to infinity. And these cost segs can cost anywhere from $1,000 to $20,000, $40,000, depending on the complexity. So we’ve really done a good job of just trying to hit the whole market with three different products, or kind of a good, better, best solution.

David:
Well, thank you very much, Mitchell. This has been fantastic. I hope our listeners got a lot out of understanding a little more about cost segregation, bonus depreciation. These big words with lots of syllables that are related to taxes don’t have to be as intimidating as they may sound. And at the same time, they are not a get out of jail free card. There is still a price to pay. But if you use them strategically, it should help accelerate your wealth building. I would also say if you use them foolishly, it can accelerate your destruction. Typically, how things like leverage tax strategies, they help you in one direction or the other.

Rob:
Leverage 101.

David:
Exactly, that’s a great point. Leverage 101. So thanks, Mitchell. For people that want to find out more about you, where can they go?

Mitchell:
Oh, man. Well, thank you all so much for having me. This was a great opportunity. I didn’t tell y’all, but I’ve listened to BiggerPockets since 2013 when I was sitting at my corporate job, so 10 years. I was an early listener of the pod, and it’s cool to be on.

David:
You’ve been here since the awkward years.

Mitchell:
Since the awkward years.

David:
Since BiggerPockets puberty, biggerpuberty.com.

Mitchell:
Back when you could just follow the 1% rule, and we should have just bought everything we ever saw, is what the lesson was.

David:
Of course, and we had reasons to complain and say it was too hard and wasn’t fair, and then we had 100% bonus depreciation opportunities and we had reasons to complain, and now it’s going down to 80, 40, 60, we’re going to be complaining about that.

Mitchell:
We’ll just complain forever.

David:
That’s exactly [inaudible 00:56:07]. The only reason we exist is to help answer all of the objections that people continue to come up with to get in their own way with building their own wealth.

Mitchell:
I love it. So you can find me, the main place I operate on the internet is on Twitter, now X @baldrigecpa. I have a newsletter called the General Ledger. I have a podcast called, Stupid Tax, with my friend Scott Hambrick. You can find me at STR Cost Seg, or RE Cost Seg, Better Bookkeeping, I’m everywhere, I guess. But thank you.

David:
Thank you for that. Rob, where can people find you, you handsome devil?

Rob:
You can find me over on Instagram @rawbuilt, at YouTube on Raw Built as well, and on the review section of the Apple Podcast app where we ask that you leave us a five star review.

David:
Yeah, if this saved you some money or prevented you from making a mistake, please do go give us that five star review so more people can find the awesome podcast. You can find me at davidgreene24.com or @davidgreen24 at whatever your favorite social media happens to be. Mitchell, thanks again. It was great having you here. Appreciate you sharing your knowledge and glad we were able to get a long time fan on the show. Let us know in the YouTube comments, what you thought, if we missed anything that we should have asked, or is your mind blown right now. We read those and incorporate them into future shows. This is David Greene for Rob, the Rap God, Abasolo, signing off.

While virtual reality (VR) is what gets most people excited, augmented reality (AR) has a considerable advantage. AR doesn’t require expensive headsets. It can run on hardware almost everybody has – a smartphone.

Because of this, AR might present more immediate opportunities compared to its sister field. In this article, we’ll discuss three industries that have great potential for innovative AR startup projects.

1. AR In Shopping

Augmented reality is reshaping the retail industry, offering a compelling avenue for startups to explore. According to a survey by Retail Perceptions, 61% of shoppers prefer stores that offer AR experiences, underscoring the substantial market potential.

Augmented reality enhances customer engagement by allowing them to visualize products before making a purchase. Shoppers gain confidence in their choices when they can see how products fit into their real-world environment, reducing the likelihood of returns.

Successful examples in this space include IKEA Place, where the AR app lets customers visualize furniture in their homes, and Sephora Virtual Artist, which enables customers to try on makeup virtually.

Example Business Idea: an AR app that uses AI to suggest clothing and accessories based on the user’s body type, style preferences, and occasion. Users can virtually try on outfits before making a purchase.

2. AR In Education

Augmented reality has immense promise in the field of education. AR has the potential to make learning more engaging and interactive, ultimately enhancing knowledge retention.

It also bridges accessibility gaps, bringing educational content to students in remote or underserved areas. The great advantage of AR compared to physical learning aids is the lower overall cost due to having the low scalability costs of software compared to physical products.

An example of a project in this niche is Merge EDU, a provider of AR-based science and STEM learning tools for schools, and SketchAR, which artists to create accurate drawings through AR.

Example Business Idea: a platform that offers virtual science and chemistry labs through AR. Students can conduct experiments in a safe and interactive virtual environment without the need for expensive tools and ingredients.

3. AR In Architecture and Design

The architecture and design sectors are ripe for AR innovation, as AR visualization tech provides great opportunities to improve the experience of customers of architecture and interior design companies.

AR allows designers to display their projects in a real-world context, making collaboration between the designer or architect and the client much easier.

Moreover, AR can result in substantial cost savings by identifying design flaws early in the process, and by allowing designers to iterate and test concepts cheaper.

The philosophy of testing hypotheses cheaply is the bread and butter of early-stage startups and it has led to a plethora of innovations in tech. Any tool that helps designers test their concepts cheaply is bound to result in more innovation in the fields of architecture and interior design. Combined with innovative tech like AI and 3D printing, AR could be the beginning of a Cambrian explosion of new architectural design trends and movements.

Example Business Idea: an app that allows users to plan and visualize interior design changes in their homes. Users can experiment with different layouts, colors, and furniture arrangements.

Dave:
Hey, everyone. Welcome to On The Market. This is Dave Meyer, your host, joined by Henry Washington. Henry, you really went out of your way for this one to go all the way to Maui and post up in a short-term rental just to set the mood for the show about short-term rentals. It’s very nice of you.

Henry:
Look, that’s the extra mile that I’m willing to go for you, Dave. I am willing to get on a plane and fly to Hawaii just so that we can do a show on short… I did this just for you, Dave.

Dave:
That is the Henry Washington experience, everyone. What a standup gentleman.

Henry:
I will go to a tropical destination just so that you can get the inside information at that tropical destination.

Dave:
Well, for you, we’re going to do one of these shows once a month so you can start traveling around and go to a short-term rental. Well, we do have a great show for you all today. Honestly, I feel like it’s been way too long. We’ve been doing On The Market for what, 140 episodes?

Henry:
Yeah.

Dave:
We finally have a real bonafide expert on short-term rental data. We’ve had some fantastic operators on the show already, but we have Jamie Lane joining us today who runs the Research Department. He’s the Vice President of Research for AirDNA which, if you don’t know them, is one of the biggest short-term rental companies out there. I’m super excited to talk to Jamie about all the headlines out there about whether short-term rentals are declining or what’s really going on in the industry, and Jamie is definitely the person to tell us what’s truly going on.

Henry:
Yeah. The internet says the sky is falling out of the short-term rental market, and headlines are sometimes just headlines, and sometimes there’s some truth behind it, and I think what a great way to… Actually, let’s find out what the actual data says so that people can make informed decisions about growing or scaling a short-term rental business.

Dave:
All right. Well, with that said, let’s bring on Jamie Lane, the Vice President of Research for AirDNA.
Jamie Lane, welcome to On The Market. Thanks so much for being here.

Jamie:
Yeah. Thanks, Dave and Henry, for having me.

Dave:
Jamie, let’s just start by having you introduce yourself. Can you tell our audience what you do for AirDNA?

Jamie:
So I am the Chief Economist at AirDNA and SVP of Analytics. I’ve been with AirDNA now for three years.

Henry:
So for our audience who maybe hasn’t heard about AirDNA, tell us a little bit about what kind of data AirDNA helps with and what you guys track.

Jamie:
Yeah. So we are a short-term rental data and analytics company. We track the global performance of short-term rentals. So every listing that’s online and available for rent across Airbnb, Vrbo, Booking.com. We track the performance of that listing and then provide that data back to our customers. So, for investors, they can understand what the earning potential is of new investments, what markets and sub-markets make the most sense to invest in today, and what the future earning potential of those investments might be.

Dave:
Henry and I have a long list of questions that everyone else probably cares about, but I have to ask questions selfishly. How do you track all of that data? I’m just very curious how you get it because it seems like a very unique dataset.

Jamie:
It is a very unique dataset. So we actually started tracking it back in 2014, and we do it by collecting it from the OTA. So, Airbnb and Vrbo. We are looking at the calendars of every single listing every single day, and then tracking the movements in those calendars. So is a night available? When does it go unavailable? We then have a proprietary machine learning algorithm that can tell whether that’s a booked or a blocked night. We then take the last variable rate for that unit for that night as the revenue for that booking, and then we do that every single day across 10 million listings around the world, so it’s a massive data undertaking. We’ve got teams of engineers that manage the pipelines. We have to check the accuracy. There’s changes happening across the OTAs every day that we have to keep up with that makes it a… It’s makes it a serious endeavor.

Henry:
So what you’re saying is it’s no big deal, it’s just a couple of inputs, and you just throw it all together? Easy-peasy?

Jamie:
Yeah.

Henry:
I am also a data nerd. I did data analytics for my career before I went into the real estate business. So thanks, Dave, for asking that question because that’s… I always have an appreciation to hear about how this stuff is put together because it’s crazy difficult, and then I’m cool that you guys get to do it now, and I just get to sit back and be a person that looks at the aggregate.

Jamie:
Yeah. I spent 10 years as an economist covering the hotel industry before joining AirDNA, so that was… Actually, I was one of the, if not the first, customer of AirDNA getting the short-term rental performance data and actually incorporating it into our analysis of the hotel industry and trying to predict its future performance because obviously, the short-term rental industry and its massive growth that we’ve seen has impacted how hotels are able to perform and the rates they’re able to charge.

Henry:
So let’s talk about what everybody else is thinking about when they hear short-term rental or AirDNA because there’s been all kinds of crazy, scary, the world is falling apart, doomsday headlines about the short-term rental space. Every time you turn on your phone, you’re hearing somebody say, “Airbnb is dead,” or, “Short-term rentals are dead.” So going into the fall, what do you see demand looking like for short-term rentals in this current market?

Jamie:
You’re not talking about Twitter X and the doomsday scenarios that we’ve been seeing on that. I don’t know what you’re talking about. Yeah. There’s been a narrative out there around the collapse of the short-term rental industry. That is not what we’re seeing really at all. We’re seeing a normalization of performance. So back in 2018, 2019, short-term rentals averaged about 55% in terms of overall occupancy. Now, that accelerated massively in 2021. So for a full year, it averaged about 63%, so 800 basis points higher for occupancy. While it might not seem big, that’s a big change for an industry that was typically running in 55% year after year after year. Though 2018, 2019 was the historical peak. That was one of the best years ever for travel, for short-term rental performance. That was a really good year.
If you think about how we got to that 63% occupancy in 2021, it wasn’t because we saw a massive increase in demand for short-term rentals. So the narrative that everyone started traveling and staying in short-term rentals in 2021, demand was essentially flat compared to 2019 when it had been historically growing 10%, 15% per year. What happened was we saw a massive decrease in supply. So supply dropped 25% roughly in 2020, and it took a long time to crawl back. So, in 2021, demand started coming back, supply wasn’t there, and that pushed occupancies to those record levels. So, now, we’ve started to see a normalization coming back down. We only expect 2023 to end up at 58% occupancy. So, yes, down from the 63%, but not nearly what we were at pre-pandemic. So it’s, in our opinion, a very healthy market.

Dave:
Where does supply sit now, Jamie? You said that it took a little while to recover. In 2023, how does it compare to pre-pandemic levels?

Jamie:
Yeah. We’re sitting about 25% higher today than we were at in 2019, but as I said, the trajectory of what we are growing at pre-pandemic was growing 10%, 15% per year. So we’re now what? Four years past the onset of COVID and have only grown 25% over that past year. So we’re well below the trajectory that we are on. We’re getting back to it. Last year was a good year for growth. Supply was up about 20%, but now where it slowed in 2023, we’re running about 12%, 13% growth this year.

Henry:
So tell us a little bit about where you are seeing… Go both ways. So where are you seeing dips in occupancy, and then what parts of the country are you seeing STRs are really rocking it right now?

Jamie:
Yeah. Where we’re seeing the dips is more areas that we’re seeing the most normalization. So there’s markets like Joshua Tree or Phoenix, Coachella Valley that did really well in 2021 into 2022, and both on the demand side. So we had, in a lot of these markets, abnormal seasonality patterns like people traveling to Phoenix and Joshua Tree during the summer. I don’t know if you’ve been to Phoenix or Joshua Tree during the summer.

Henry:
Why?

Jamie:
They’re not markets that you typically want to travel to. When you look at the occupancies that those markets were generating pre-pandemic, those were the slow seasons. So now we’re getting back to normal, typical seasonality patterns in this market, which is causing it to look like occupancy is declining all the while, and it is declining, but it’s still a very healthy normal market. Then, there’s other areas like a market like Miami that has seen significant supply growth and is actually seeing overall weakness in demand, and that’s a market that’s interesting because of the impact of domestic and international travel. So that was a really popular market for people that wanted to travel to maybe an exotic city, but wanted to stay in the US, wanted to be able to go to the beach.
Now, we’re seeing a lot of people start to travel overseas again, and Miami is a market that has historically been really dependent on international travelers coming into it as tourists, and we’re not yet seeing the recovery of international travel to the US. So that’s a market where we’re seeing some overall occupancy weakness, but it really is a different story for each city on why we’re seeing the declines. Just about every market is seeing declines in occupancy in 2023, but still just about every market is above 2019 levels of occupancy.

Dave:
Jamie, what if you cut and look at the data a little bit differently rather than trying to segment by geography? Do you have any insights into other characteristics of the rentals that are seeing more occupancy or declines in revenue? I’m just thinking, is there anything about tenure of the operator or scale? Is it upscale, midscale, something like that?

Jamie:
So we do actually segment all properties into different price tiers, and this is one of the changes we’ve had since in the past couple of years that you can go on and see the performance of luxury properties, or budget properties, or mid-scale properties. Throughout history and even today, luxury properties typically generate the lowest overall occupancy, and it’s much higher ADR. A lot of homeowners have a much higher ADR threshold for which they’d be willing to rent out their home and wanting to control the type of renters that are coming in, making sure their property is not getting trashed on a party or something like that.
So 2019 luxury properties are generating less than 50% occupancy. They saw the biggest increase over the past four years. So they’re generating well over 50%, almost 60% occupancy in 2021 now running about 56%. So they saw the biggest overall increase, and a lot of that was the higher-end traveler that’s staying domestic that would’ve traveled overseas without the pandemic. That’s especially true in coastal and mountain markets, and that plays into maybe the narrative in an area like Destin or Panama City that did really well, especially at the higher end because someone like from Atlanta that’s going to do a drive-to-beach vacation, drive down there instead of traveling maybe to Nice, or Cahan, or somewhere in Europe.
Those locations now are seeing the biggest overall decline at the luxury side because of the changing travel patterns for those consumers. So that’s an area we’re seeing overall weakness. Where we’re actually seeing the best performance is in that mid-tier. So reasonably priced properties are still relatively competitive to hotels and a really good product. So has key amenities, well-located, on the beach. These are the type of things you’d actually want to rent, and they’re doing really well today. So going after that core travel segment that uses short-term rentals on their vacations.

Henry:
Well, I love hearing that because I have mid-tier short-term rentals, and they have been doing fairly well consistently, and so hearing that makes me happy. Real quick, define ADR for the people who don’t know what that is, and then I have another question for you.

Jamie:
Yeah. So maybe I’ll go through the three main metrics. So occupancy and how many nights are you selling out of every night that you make your unit available. ADR is the average daily rate. So what is the rate that you’re actually selling that night for? Then, RevPAR. That’s one of the best ones. That combines occupancy and ADR. So what is the average revenue that you get for every night that you make available? Essentially, you just multiply your ADR times occupancy because you can manipulate your occupancy by either increasing or decreasing your rates. So if you want to drive up occupancy, you can lower your rates, fill your unit every night of the year. So RevPAR is that great mix. So you can really get to the overall health of how your units and how the industry is performing.

Henry:
Wonderful, and my next question, I’m asking for a friend. You said those mid-tier short-term rentals tend to do the best, especially if they have the right amenities with those mid-tiers. So what are you seeing? What are the right amenities or the best amenities for those mid-tier type properties? Again, this is for a friend. I’m just going to relay this information. No big deal.

Dave:
Such a nice guy.

Jamie:
It really depends on the market, and that’s where… In certain markets now, there are certain amenities where they’re considered table stakes. If you don’t have those amenities, then you just can’t compete for guests. If you’re investing in Gatlinburg right now, and you do not have a hot tub, you’re a budget property. You’re a property that’s going to… and 80% of properties, entire home properties in Gatlinburg have a hot tub. So it really depends on the market properties. Like in Joshua Tree, if you don’t have a pool in Joshua Tree, you’re seeing double the overall decrease in occupancy from the market average. So there are certain things like during the pandemic, maybe you would’ve got booked in Joshua Tree if you didn’t have a pool, but now you’re having to really compete to find guests if you don’t have those basic amenities.
There are amenities that can take you over and above like having game rooms, having pickleball courts, having just unique things that really make your property stand out, and those unique things are what’s driving outsized performance in those markets, and those are constantly evolving as like in 2018 in Gatlinburg, if you had a hot tub, you’re like, “Oh, yeah. I’ve got the new hot amenity,” and then everyone copies you. So you constantly have to be seeing what those top-performing properties are doing to make sure you’re staying competitive.

Henry:
So what you’re saying is that your answer is saying people should look at the data from the data company.

Jamie:
You caught me. Yeah.

Dave:
Well, I think the best business in all of real estate is being a hot tub repair company in a short-term rental market because the amount of money I pay the service company for a hot tub because you have to have it like you just said, Jamie, is ridiculous. In these small towns, there’s two of them, and they definitely collude on prices, and good for them they’re making a killing. Anyway, I digress. So we’ve talked a little bit about supply, demand, and occupancy. I’m just curious a little bit about average daily rate and how that compares not just to the short-term rental industry, but how it also compares to the hotel industry because I think… We talk about this a lot on the show, Jamie, is that short-term rentals, they’re, of course, real estate investments, but your competition is as a hotel, not a rental property or not a flip. So I’m just curious how that all stacks up in today’s climate.

Jamie:
Yeah. So one of the things that have made short-term rentals such an attractive investment over the past couple of years is the massive increase in ADRs that we’ve seen. So ADRs today are 40% higher than they were in 2019 overall for the short-term rental industry. That makes the returns on investment that much more attractive because it’s not like you’re having to turn over more units, pay more for cleaning, all those things. This is just the exact same home that you’re now being able to rent out for 20%, 30%, 40% more, and that comes essentially right down to the bottom line in terms of your profitability of operating these investments. What we are seeing though is the rate of increase is slowing substantially and even declining in a lot of markets around the country, and it plays into the overall inflation picture that we actually see in the economy.
So, last year, last summer, inflation was what? 9%. That was what caused the Fed’s reaction to start raising interest rates. Short-term rental ADRs were growing up 11%, so we were outpacing the rate of inflation. That was great for short-term rentals, not great for the Fed’s reaction to all the rising prices that we’re seeing across the overall economy. Now, we’re actually seeing ADRs decline slightly. So, last month, we saw about a 1% decline in overall ADRs for short-term rentals. We’ve seen a few months now of consistent year-over-year declines which means… and overall, you’re not getting as much. A lot of what’s playing into that is the declining occupancies.
So if you’re seeing your unit not being rented as much, you want to maintain the occupancy that you’re getting. You’re cutting your rate to stay competitive. Bring guests into your properties. That’s happening across the country. Not necessarily great for our industry, but great for the price pressures that are going to overall impact the real estate industry long-term of the Fed feeling comfortable that prices aren’t going to overall spiral. Then, how that competes with hotels is hotels had seen overall weaker performance coming out of the pandemic. So people were much more likely to stay in a short-term rental relative to a hotel.
Now, that’s largely flipping. Hotels have seen really strong performance in the past couple of years. A big part of that is the return of business travel or return of conferences, people going to these big events, and hotels now have significant pricing power. So they were growing rates 5%, 6% this summer which actually means hotels are starting to look a bit more attractive. Overall, hotels are still more expensive, comparable units in major cities. Short-term rentals is more expensive in coastal destination markets, and it’s not necessarily a fair comparison given that you get a kitchen, more amenities, and short-term rentals relative to hotels.

Henry:
Yeah. I mean, you do get more amenities, it seems like, in an Airbnb. I think what makes it attractive for myself in particular is when I travel… and I like to bring everybody. For example, I’m sitting in a short-term rental right now, and we chose short-term rental over a hotel because I can get multiple bedrooms because I brought my kids, I brought my two kids, and then we brought a nanny with us so that my wife and I can actually get some quality time in this vacation destination. So when you’re going to be stacking multiple rooms in a nicer luxury hotel, it gets super pricey compared to a short-term rental. But in that same vein, are there certain clients that you see that are more attracted to hotels or more attracted to Airbnbs? What’s that client base look like?

Jamie:
Yeah. So, overall, and this narrative that’s really held over the entire four years since the onset of COVID has been the larger the property, the better your performance. So people that are traveling with groups, traveling with families maybe started staying in short-term rentals for the first time and are continuing to choose short-term rentals for that type of travel. If you look at the hotel industry’s response, it’s been like Hilton saying, “We’re going to now let you confirm adjoining rooms, and that’s our response to all the demand for short-term rentals.” Over half the pipeline for new hotel investment is extended stay properties, so properties with kitchens, properties with additional bedrooms, suite-style hotels.
So they’re seeing what’s happening in terms of the popularity of the short-term rental product and trying to adapt to it. I think they’re going to have a hard time overall really competing, and we’ve actually done a lot of studies in terms of what’s happening in terms of short-term rental share of overall paid accommodation. So the total number of rooms being sold across hotels and short-term rentals. The short-term rental industry had been growing their share of overall travelers and pretty significantly. That obviously increased in 2020, came back down in 2021, and now we’re slowly pulling back share again from hotels. Still, 85% of overall travel is happening in a hotel room, so there’s still a much bigger slice of the overall pie of travel, but short-term rentals were 8% of overall demand in 2018, and now we’re up to almost 15%. So this industry is growing more and more. People are trying it for the first time, and seeing that for certain types of travel, it is a much better fit for how you want to interact and have accommodation when you go on vacation.

Henry:
Yeah. If hotels figure out how to compete with this multiple-room, large-family scenario, but in a hotel environment, I will be a sucker for it because I love a good hotel bar and delicious restaurant access by just walking downstairs. So I’m their huckleberry if they figure that out. That’s for sure. One more thing I wanted to ask about hotels and Airbnbs. So are you seeing certain markets where hotels are beating out Airbnbs particularly?

Jamie:
Absolutely, and it’s interesting the types of markets that are really beating out hotels. It’s not because of anything the short-term rental industry is doing. It’s what’s happening in terms of regulation. So we just saw new laws going to effect in New York which dropped the short-term rental supply by almost 80% overnight. We had regulation go into effect in Los Angeles, and Chicago, and Boston, and Dallas. So there is an impact there in terms of the short-term rental industry able to and just provide the accommodation that people want in the types of units that they’ve showed historically that they want to be able to stay in because of new laws and regulation going into these markets.
So if you look at the overall share of demand staying in short-term rentals in urban areas, we’re now essentially at 2018 levels of share. So all the growth that we’d seen in 2018, 2019, 2020, 2021 has essentially disappeared because of lack of supply in those markets to accommodate guests in the areas where short-term rental supply has been growing the most, so beach and mountain markets, small and mid-size cities. Short-term rental share in those areas is just going gangbusters and continues to grow at a great rate.

Dave:
What about international markets, Jamie? I’ve read a lot about US travelers going internationally a lot particularly this year. Are you seeing a lot of growth there?

Jamie:
Yeah. So I talked a little bit about areas that we’re seeing weakness in the US because of Americans now traveling overseas. That has been a real bright spot for the global short-term rental industry of Americans really coming back at an amazing rate of traveling overseas again. So we track the overall share of international travelers in these destinations. It’s now at record highs. There’s markets like Ireland, Switzerland, Italy, Portugal, and over 15% of the demand for short-term rentals in those markets is coming just from Americans over the past year.

Dave:
Wow.

Jamie:
So a massive increase in demand there. There’s events really coming back now, so we are tracking… I had the team just look into what was going on in October Fest, and we’re seeing demand up 30% this year for stays in short-term rentals compared to last year. So, now, fully recovered back to pre-pandemic highs and seeing strong growth. So people traveling for these fun events in Europe, again, going back to the beach, going back to Greece, going back to south of France, and it’s really a healthy market where Europe… If you looked at the data in 2021 and 2022, it was really struggling. So lockdowns were much more stringent there. People were really reluctant to get on a plane for 10 hours. Now, that really shifted, and people are getting back to traveling, and it’s… The Americans are back.

Dave:
Yeah, man. Tell me about it. All my good deals on Airbnbs in Europe have evaporated over the last two years. Everyone stay away.

Jamie:
So a data point there for you, Dave, you laugh, but I had mentioned how ADRs were down in the US. ADRs this summer were up 15% in Europe year over year.

Dave:
Wow, wow.

Jamie:
Yeah.

Dave:
Yeah. I mean, you see it firsthand. Everywhere is just bustling right now.

Jamie:
Yeah.

Henry:
Okay. So, obviously, you have access to all this amazing data, and I’d imagine most people listening to this show are either current short-term rental operators who are wondering should they be growing and expanding their portfolio, or they’re aspiring short-term rental operators, and they want to get into this space. So what advice would you give to those people who are looking to either grow or get started in this space? What should they be looking for, not looking for, adding, or avoiding?

Jamie:
So this may sound self-serving, but you got to be looking at the data.

Dave:
You’re a good company here, Jamie. Our audience will be receptive to this idea.

Jamie:
Your audience is going to know that affordability of housing is at all time lows, and you’ve got interest rates over 77%. We’ve got housing values still at all time highs. So we had seen a little bit of dip. That’s now come back and reaching all time highs again in terms of housing values. Short-term rentals revenue peaked early last year. We’re not seeing an overall decline, but it’s essentially plateauing at the peak, which makes it where you’ve got to be really careful and really, I would say, intentional in where you’re going to make an investment today where if you were looking in maybe 2020 and 2021, you could throw a dart on a board, hit a market, and probably have found a great investment. That is much harder now. We’re seeing way more activity in small and mid-size markets today.
Essentially, the best investments for short-term rentals in a lot of ways the areas that haven’t seen significant upticks in housing values over the past three or four years. Those markets are becoming harder and harder to find, and you’ve got to find ones that still have the drivers of short-term rental demand. So maybe a state or national park nearby, maybe a hospital or a university that’s driving a demand to that destination, but there’s still great markets out there, and we’re trying to build new and innovative tools to help people find those diamonds in the rough. Not only the best markets to invest in, but I would say just about every market has got a sub-market that is investible today. It just might not have been the same market or sub-market that you would’ve invested in even just last year.

Henry:
Your advice does sound a little self-serving, but I appreciate it because we’ve been saying this, really, about all aspects of real estate investing when we talk about it on this show, right? This market is forcing people to be more fundamentally sound investors because it’s a much more unforgiving market. So education in any real estate investment industry is so much more important right now because you can’t make the mistakes you could make two or three years ago. Two or three years ago, you make a mistake, your value was going to go through the roof, and you’d be fine. Right? Two or three years ago, you make a mistake with a short-term rental, and you were still getting booked up. It didn’t matter. The market is just not allowing for that now, but it doesn’t mean that it’s falling apart. Right? You have to ignore the headlines, and dig into the data, and do the research. There are always opportunities in every market, and essentially, what you’re saying is you’ve got to do the research. Find the areas where there’s opportunity, and then capitalize on that opportunity. That’s investing fundamentals, so I really do appreciate that answer.

Jamie:
Yeah. When you’re looking at the data, and just to give a tangible example, if you’re looking at the current occupancy that your market is running, go back and look at what it was running in 2018 and 2019. If it’s still magnitude is higher, you’ve got to expect it to normalize back to those levels, and you can’t expect the highs that we’ve been running to continue. That’s, I think, unsafe, maybe conservative underwriting, but I think prudent in the type of environment we’re at.

Dave:
Well said. Well, Jamie, thank you so much for joining us. You don’t know this yet, but you will be appearing on this show again. Well, if you’ll have us, but we would love to have you back. This was super helpful. If people want to follow you and AirDNA, where should they learn more?

Jamie:
Yeah. So, AirDNA. Our website is airdna.co. Me? I’m active on Twitter, @jamie_lane, or on LinkedIn. Please follow me. I talk about short-term rental data all the time, and we also, if you like the podcast format, have a data podcast on short-term rentals called the STR Data Lab, and you can hear me every week talking about this sort of stuff.

Dave:
Awesome. Great. Thanks again, Jamie.

Jamie:
Thank you.

Dave:
So it sounds like even though we are both short-term rental investors, we both prefer hotels. Is that why?

Henry:
It’s 100% accurate. If I have a choice, price excluded, I’m going to stay at a hotel 10 out of 10 times.

Dave:
Dude, I’m exactly the same way. I find going to cool hotels to be one of the most fun things to do about traveling. I love checking out new hotels.

Henry:
For me, too. It’s nostalgic for me. My parents used to take us on all these trips. They didn’t believe in taking vacations without the kids, and this was back when you could just let kids wander. So we’d check into a hotel, and then the only rule we had was we couldn’t leave the hotel grounds. We would just wander around exploring the hotels, and I still have that sense. So when I walk into a new hotel, I feel childlike. I don’t get that same feeling with an Airbnb.

Dave:
Totally. I’m with you. You mentioned the bar and restaurant, which I love. It’s like a fun place to socialize, but I mean, a hotel breakfast… I walk into a hotel, and I’m like, “I am going to make sure this hotel loses money on me based on how much I’m going to consume at the hotel buffet. I will get them,” and I make it my mission.

Henry:
I think that’s a fair mission in life.

Dave:
But there is something true about the group travel. When I go on a ski trip with friends or for example, we’re planning a family reunion for next summer, I think Airbnbs are great for that, having nieces, and nephews, and cousins running around, that kind of stuff. It’s really fun for group travel, but if it’s just me and Jane alone, it’s definitely going to be a hotel.

Henry:
Agreed. 100%. I’m with you, bud.

Dave:
But that’s it. I learned a lot. I did not realize that demand continues to just grow. You see these headlines that occupancy is down, and it is a normalization, but what he said was that supply was up 25%, but occupancy is still up relative to 2019 over the same time period. So, clearly, there’s still plenty of demand, and he also told us that hotels still make up 85%. So it’s not like Airbnb at this moment in the summer is capturing some huge portion of market share. It’s still just a fraction. So it doesn’t feel to me anymore like there’s some risk that all of a sudden, demand might evaporate.

Henry:
I mean, what I heard was that there is still plenty of opportunity all across the country to be a successful short-term rental operator, and I think what I hope people are seeing and hearing from shows like this is that you just have to learn how to find the opportunity. You have to learn how to research the markets, and then interpret that data, and yeah, you’re going to take some risk, but you’ve got tons of data at your fingertips. Think about investors who were doing vacation rentals before. They didn’t have this level of data to use to make their decisions, and so you really have a superpower with access to this information. If you spend a decent amount of time researching your market, and then understanding what you need to provide to that market and where you need to provide it, I think you can be successful. It’s just not like it was two years ago when you could throw anything out there, and you’re going to get a booking. I mean, you’re operating a business, which means you have to figure out a way to set yourself apart, and then solve a problem.

Dave:
Totally. I’ve been saying this for a while, and I think it’s still true is that in a lot of new industries or new asset classes, when it first comes on, there are these pioneers, and there’s a gold rush. I think that happened in short-term rentals, and it’s before the market becomes efficient. It’s relatively easy to make money. There’s not great systems. You just get in there and figure it out. Over time, if it proves to be a profitable asset, you can sure as hell bet that sophisticated investors are going to start moving into the space, software companies… It’s going to become an efficient market just like the stock market is efficient, just like the rental and the multifamily market is efficient. That doesn’t mean they are bad investments. They’re still investments. It just means that they are more driven by the same fundamentals and need for good operations and good decision-making as every other asset class.

Henry:
100%.

Dave:
All right, man. Well, enjoy your short-term rental. We were just talking about hotels. Go sneak into a hotel breakfast and find yourself a buffet.

Henry:
If you think I already haven’t gone next door to the Four Seasons and acted like I was staying there, you, sir, are mistaken.

Dave:
You get the best of both worlds.

Henry:
Absolutely, absolutely.

Dave:
You got your whole family in one spot. You got all the amenities at the Four Seasons.

Henry:
100%.

Dave:
You’re living the dream, right? All right, man. Well, thank you for joining us from your vacation, and thank you all for listening. If you appreciate this episode, make sure to leave us a review on Spotify or Apple. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Caitlin Bennett, produced by Caitlin Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Libraries aren’t just repositories of books. They’re also a great place to inspire your business’s content curation efforts. After all, the library system is based on finding exactly what you need when you need it most.

Whether I walk into a library searching for a genre or a fellow entrepreneur’s book, I can locate it fairly easily. (Thank you, Dewey Decimal System.) All I have to do is type some information into the library’s database and I’m rewarded with an answer. It’s efficient, convenient, and accurate.

How does all this relate to curated content? Simply put, the content your team curates serves as a sort of library for everyone in your company. When you or your colleagues need a whitepaper, case study, article, or related asset, you should be able to count on your content library as a trustworthy resource.

Having a wealth of curated content at your fingertips isn’t just nice to have, either. In today’s fast-paced marketplace, it’s essential. It can take days or even weeks to pull together useful, high-quality content pieces. Rather than waiting — and potentially losing a sale, budding investor, employee, or new partner — you need your content to be ready to go.

The good news is that you probably already have the beginnings of a curated content library in the form of existing collateral such as blog posts. However, to give your people the tools they deserve, you’ll need to begin building out your content collection. Try these techniques to keep your unique content flowing and leverage it in your branding, marketing, selling, and support efforts.

1. Add a content curation element to your existing content development strategy.

Search Engine Journal reports that around seven out of 10 marketers rely on content. Accordingly, the chances are very high that you have a content development strategy in the works. That’s great, but you need to make certain you’re actively curating content that will be useful later.

For instance, you might want to add a task like “write one client case study per month” to your existing content development strategy. Even if you’re not sure how you’ll use the case study beyond publishing it on your site, that’s okay. For instance, case studies can be extraordinarily helpful as educational pieces and call-to-action triggers. A case study you write this quarter may not seem pertinent immediately. But a salesperson could depend on it next year to move a lead through the sales pipeline.

Remember: Your curated content is basically bulking out your corporation’s private library. To ensure that your library grows, you need to add curated content generation into your strategic marketing mix.

2. Teach your team members how to use your curated content.

Once you begin to increase your available content, be sure to store it in a centralized place. That way, it’s accessible to all employees. However, never assume that your team members will begin using your curated content just because it’s available. On the contrary, you’ll have to train them on how it can assist them in their jobs.

For instance, let’s say you’ve assigned one of your marketers to keep your business’s social media presence strong and consistent. That’s important because letting your social media engagement wane will hurt your brand’s perception. Ideally, posting two to three times weekly can help you stay in front of your target audiences.

Of course, it can be tough to add variety to posts. One way to be more versatile is to pull some quotes or snippets from curated content, which is something your employee might not know how to do without a little prompting. Most longer content like pillars and studies contain compelling blurbs. A quick quote could drive readers to click on a link to find out more or share your insights with their followers. The result is more interaction for your brand thanks to the clever use of curated content.

3. Think outside the text-only box when engaging in content curation.

There’s little doubt that traditional digital marketing items like blogs, whitepapers, and even transcripts are essential elements of your content library. They’re hardly the only types of content that belong there, though. Other types of media can be just as valuable.

Take videos. Did you know that Oberlo statistics suggest 91% of consumers are eager to get their hands and eyes on more branded video content? If you’re not producing video content as part of your curated collection, you’re missing out on a golden opportunity. The same goes for content in the form of imagery, such as infographics, slideshows, and charts.

If you’re worried that you’ll be spending too much time producing all this extra content, think again. It’s often simpler to get more mileage out of a single piece of content than you might assume. One blog post containing statistics could be spun into an informative graph, a topic-adjacent video “teaser”, or a bulleted PowerPoint presentation. Rather than reinventing the wheel, you just squeeze a little more juice from content you’ve previously invested in.

4. Add some outsider media to your curated content.

There’s nothing that says your organization’s content has to all come from internal sources. Outsider pieces like recently published journalistic writings, industry-related deep dives, and YouTube or Vimeo videos can be included as resources. Truth be told, they can help motivate leads by providing objective, third-party viewpoints.

Pretend you’re trying to close a deal with a qualified prospect. You’re not having much luck, so you go to your centralized repository of curated content. After a little searching, you discover a recently published piece from The New York Times that you believe would nudge your prospect closer to conversion. You compose an email, send the link to the article, and ask to schedule a follow-up meeting.

The point here is that you don’t have to depend only on your staffers to produce all your curated content. In fact, having content from diverse places can sometimes be the best way to add credibility to your company’s position. Even content like user-generated reviews that talk about your competition can have a positive impact depending on the situation.

Does it take time to aggregate a library of curated content? Sure. You’ll never regret making it part of your overall marketing strategy, though. The first time you’re able to move the needle on a sale or educate a new hire with curated content, you’ll be glad you added “librarian” to your title.