September 2023

Ashley:
This is Real Estate Rookie episode 323.

Matt:
My system now is I have my contractor come in on every job and just walk through everything we want to do and then just bid a price. And then we set that price and then his, that’s kind of like his incentive because it’s like, okay, if this job is going to cost us 20, if I’m going to pay you 20 grand and you get it done in three weeks and you just made 20 grand in three weeks, if I’m going to pay you 20 grand, but you’re going to take eight weeks and you made 20 grand in eight weeks.

Ashley:
My name is Ashley Kehr and I am 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 today we’re back with another guest, we got Matt Ramirez on the podcast. And Ashley’s going to talk a little bit more about Matt as an individual and why his story is so unique. But Matt’s going to share a couple of really important things for you. He’s going to share the worst way to pay a contractor. He’s going to share how a panic attack at work pretty much changed his whole life trajectory. And he’s going to talk about how to find off market deals. Lots of great content coming your way.

Ashley:
One thing that we learn about Matt in this episode, he’s going to tell us how he lost 80% of his income during COVID. Then he has these life events that happen and almost forces him to become a real estate investor to survive. He also ends up having to move cross country to live with his father-in-law and how that actually might’ve been a good thing for his real estate investing. Matt, welcome to the show. Thank you so much for joining us today. I want to have a little fun before we actually get into the full episode and play a game. Are you up for it?

Matt:
Always up for a game.

Ashley:
Okay. So we’re going to play two truths and a lie. I am going to read these and I want our audience to guess which is actually the lie. So if you’re listening right now, pay attention. And don’t reveal what are the truths before we’ve let Tony guess. Let Tony be our guesser. Okay?

Matt:
Perfect.

Ashley:
Okay, so here are the three things. Made six figures as an entrepreneur operator of a corporate focused fitness company for 10 years. Second one is trained sea animals and performed on stage weekly with a walrus named Gus for five years. And the third is you were a part-time stuntman on 50 different TV shows and movies. So Tony, what do you think is the lie?

Tony:
I feel like the most outrageous one is usually the truth. So I’m going to say the lie was a part-time stunt man on 50 TV shows and movies.

Ashley:
Okay.

Tony:
So you really were friends with the walrus named Gus is what I’m getting at here. Ash, what about you?

Ashley:
I’m going to say, I’m going to say the corporate focused fitness company for 10 years. I’ll say that. I’ll say the two more outrageous ones are correct. And I’ll say the fitness company for 10 years is a lie.

Matt:
So I wish I had experience working with walrus, but yeah, that one is a lie.

Ashley:
We should have known our producer’s imagination was that good.

Matt:
Yeah. So I did own a corporate fitness company for about 10 years, and I have been a stuntman since 2015, so almost getting into the 10-year mark.

Tony:
So Matt, I’m super curious, man. We’ve had over 300 guests on the Rookie podcast, and I think you might be the first professional stuntman that we’ve interviewed. How does one even get into that line of work? Is there a stuntman school? Do you have to get a certification? Just give me the quick 30 second background on how you became a stuntman.

Matt:
Yeah, so there is no school. I mean, there are schools that you could go to, but there are no requirements as far as becoming a stunt performer. Essentially it’s the same as becoming an actor. I mean, you just got to be in LA mostly, you could be in Atlanta now and a couple other places, but you just have to be in the scene and then you just have to kind of network with the right people and just find auditions and different things. And it’s really just a networking game. I mean, obviously you have to have the skillset and put in the reps to get there, but at the end of the day, it comes down to being in the right place, right time and going from there.

Tony:
Ashley, you face planted off the wake boat last weekend, I feel like you might have a future in-

Ashley:
And I took it like a champ.

Matt:
There you go.

Tony:
Took it like a champ. So Matt, I mean, I guess I’m super curious, man, how does one go from being a stuntman to then being a gym owner to then being a real estate investor? What was the kind of progression there for you?

Matt:
So as far as that goes, it was really the pandemic. So in 2020, business was doing pretty good. We were probably doing 12 to 15 grand a month with the corporate wellness. And then I was doing stunt work a little bit on the side as well. And then pandemic really just flipped our lives upside down. We had just had a baby and my wife and I were living in Santa Barbara at the time, and quickly within probably three months, lost 80% of my income just because all my contracts were with companies and everyone went to work from home. So I had no money coming in from that, and then the film industry shut down, so I had no money coming in from that. I did have a couple clients that I was seeing just via Zoom, so that kind of saved me a little bit. But that was kind of the start of it.

Matt:
And then I actually did have a backup plan already in place, not because of pandemic, but I wanted to step out of the corporate wellness realm, and I was trying to become a firefighter for LA Fire Department. And I had a couple friends that are already on the department, they’re like, “Oh yeah, you’re a shoo in. You already got a company, you’re well set up for that. You’re pretty fit, not as fit as Tony Robinson, but you’re up there.” And then I was going along in that process, and then I got to the last interview, and from that point it was going to be one interview and then go to the fire academy. So we had about three to six months before really anything started. So my wife and I decided to just take kind of a road trip and go to Tennessee just because we knew we had some downtime and I was just working remotely anyways.

Matt:
And on the way out there, I got a call, or I guess it was probably an email, and they’re like, “Oh, unfortunately you haven’t been chosen for the last interview. You’ve been cut from the process.” And it’s kind of one of those moments, just stomach dropped. And I was like, “Ah, but what do you mean? I just lost all my income. This is my next play. Where do I go from here?” And yeah, that was kind of the start for searching for something new. And during that process is when I came across originally the BiggerPockets, the OG podcast, and I started listening to it, but really listening to those episodes, I was like, “Oh man, this guy’s a neurosurgeon. I’m not smart enough to get into real estate, or this person’s got 100 houses. How am I ever going to get to that point?”

Matt:
And then luckily, I came across your guys’ podcast and there’s just people that I felt were relatable and I was like, “Wait a minute. I feel like I’m in the same walk of life as them. I can figure this out.” And that was kind of the beginning of my real estate journey.

Ashley:
So once you started doing all this research, was your wife on board as to you’re going to completely change what you’re doing and kind of start into this new business?

Matt:
Yeah. I mean, she was on board from the sense of at the time, really, I was like, well, I lost my business. Firefighting didn’t work out, at least at the moment. And then stunts was still shut down, so I was like, “I don’t know what else I’m going to do.” So she was on board just because she’s like, “Well, we got to do something to make money, so why not try something new?”

Tony:
So just one thing I want to just pause on really quickly, Matt, because you’re talking about this very, very calmly now, but I would assume in that moment there was maybe a level of stress that you were dealing with. Your business comes to do a fraction of what it was doing before, you’re side hustle, the whole industry gets shut down, and then this other kind of steady, stable job as a firefighter, you end up not being able to take that opportunity as well. So just in that moment, what was going through your mind? Where you were in survival mode? Were you going great? How does one kind of deal with that kind of setback?

Matt:
Yeah, I mean, to be honest, when we got to Tennessee, I was looking at jobs every single day and what can I do to make money? And at one point I just hit the panic button and I was like, “All right, I’m just going to get a sales job.” And it ended up being cold calling. And actually I guess to take a step back, first I was like, “All right, I can flip a house, I can figure it out.” My father-in-law who lives in Tennessee, who we were living with at the time in his guest house, used to be a contractor. And I was like, “I know I can use him to help me, I’ll find a house and I can renovate it with him and we’ll get the ball going.” But I went to get, because I didn’t know about hard money or anything like that, so I went to get pre-approved and the lender was like, “No, you were making good money, but you’re not now.”

Matt:
And I was like, “Well, but I have the stunt income and it’s starting to ramp back up.” And I don’t know, different lenders might’ve said different things, but he was like, “No, because we pretty much look at that like it’s a business. So since you had to decline last year, you need two more years of an incline in the stunt, in that world in order for us to lend to you.” So then I was like, “Oh, all right.” So then I hit the panic button there, went and got a 9:00 to 5:00, and ended up working there and just hating every day of it, just cold calling. And I was like, “This is not me. I’m not meant to be sitting in an office doing a job like this.” But fortunately through that job we were able to buy our first property, which when I got it under contract, my intention was to flip it.

Matt:
And then my wife just dropped the bomb and was like, “Well, we’re actually pregnant and having another baby, so we need to get out of my father’s house and live in this house ourselves.” So I was like, “Well, all right, here we go.” So we ended up, instead of, that one still need to be renovated, but instead of flipping that one, we just moved into it. And then I was probably about three weeks into the job and I had, I don’t know if you’d call it a panic attack or what happened, but just passed out essentially at my desk and my wife took me to urgent care and everything checked out luckily, but I ended up putting in my two weeks. I’m pretty sure I bought that house or closed on that house without even having his job. So I don’t know if there’s such a thing, but I think I might’ve job hacked myself into the house.

Ashley:
That’s what I wanted to ask is how long did you have to have your pay stubs for to get that financing lined up? Because they’re saying for a business you need two years of income for your business, but then for a job, I mean, it doesn’t seem like you worked there for two years and is it four weeks of paychecks you need or how was that for you?

Matt:
And it might be different in different areas, but I learned that from this show, and I don’t know if it was you, Ashley or you, Tony that said this, but one of you was talking about how somebody kind of did this and just got their first pay stub and then was able to go do it. So that’s literally what I did, yeah.

Ashley:
It was probably maybe my sister, because she didn’t even have her pay stub yet. She just had her offer letter that she was starting in a month or something like that, yeah.

Tony:
Same thing happened to me on my first deal. I had gotten a new job and they approved me based on that offer letter as well. So it is a common thing that some lenders will do.

Ashley:
But isn’t that crazy, that comparison of like, okay, you’re an entrepreneur, you need two years of your tax return to show income?

Tony:
Oh, you’re unemployed.

Ashley:
That’s way better.

Matt:
That was the crazy part about it too, because with the stunts, I mean, I wasn’t killing the stunt world, but I think in 2019 or 2020 even maybe, my tax return said I made like 80 K, and then this job, it was entry level. So I was starting out at 50 or 55 K, and I was like, “Wait, I made more than this last year, but you won’t approve me because it was a decline from the year before, but now you’re approving me based off this lower number.” And that was just one of those things that I was like, “All right,” just threw my hands up. I was like, “Whatever you say.”

Ashley:
How long did you actually work at the job for then?

Matt:
Honestly, I think it was right at a month I had that panic attack or whatever, took two, three days off, and then I went in, put in my two weeks. But they were like, “Well, we have sensitive information, so if you’re quitting, this is your last day.” And I was like, “All right.”

Ashley:
Like that’s a bad thing.

Matt:
Yeah, I was like, “Ah, if I must.”

Tony:
But Matt, can I ask what was the plan? Because your other sources of income, it’s still kind of been impacted. This was supposed to be the kind of thing that kind of got you over the hump, at least for a little while. You bought this house with the intention of flipping it, but it sounds like now this became your primary residence. What was the plan in that moment to I guess survive and put food on the table and kind of keep the income flowing in?

Matt:
Yeah. So fortunately at this time, so now we’re early 2021, so the film industry had opened back up and I was doing stunt work again, and just because of proximity, living in Tennessee, the cost of living was so much more affordable than California, I was at a point where I was able to make enough just based off of the stunt work. And it was tight, and it definitely wasn’t at all where I wanted to be financially, but I just knew, okay, I’m making enough that we can get by and then I’ll figure out what to do from here. And I was still interested in real estate, but that was still actually before I even did my first real flip.

Ashley:
So let’s talk about the first flip, because the first property you actually moved into and made it your primary, correct?

Matt:
Yes.

Ashley:
Okay. So then you’re going on and you’re buying the next property. How long after that first initial purchase did you find your actual first investment property?

Matt:
So it was probably about three to six months, somewhere in that window because I definitely had a lot of just analysis paralysis and just really scared to take the leap of faith. And then finally, it was actually one of my cousins that kind of pointed this out to me, and he’s like, “Well, you’ve already done a flip.” And I was like, “No, I haven’t.” And he was like, “Well,” he’s like, “You have this house that you live in, you renovated and added value.” And I was like, “Yeah, but I haven’t sold it.” And he’s like, “Well go out,” and I forgot what it’s called, but essentially when you have a realtor come and tell you what they think your house is worth, so he’s like, “Go out and have a realtor come over and just tell you how much they think the house is worth.”

Matt:
And we bought the house for 225, and then the realtor was like, “Yeah, you could probably sell it today for 280.” So he was like, “Well, there you go. You’ve already proven that you can make money doing this.”

Ashley:
Add value.

Matt:
Yeah, add value. So then I was like, “All right.” So then luckily at this point, I’m a year into listening to BiggerPockets, so I know about hard money, I know about wholesalers. Granted I didn’t have any in my pocket, but I just started doing my homework and connected with a wholesaler and then ended up using hard money to get myself into my first flip.

Ashley:
I think a really big common question is how do you get hard money as a rookie investor, especially with having no experience? And even though you did your primary residence, there wasn’t that actual appraisal or that sold comp to kind of show what you had done there. How did you find a hard moneylender that would lend to you?

Matt:
So for me, I found one that would lend to any rookie or really anyone, and they just had higher rates and higher points upfront. And then once you were vetted, I think once you had done four deals with them, then you got a veteran package or your rates got low. But in the beginning, yeah, I mean, because of that risk they’re taking on you, they just charge more upfront and you’re just paying for it in that sense.

Ashley:
But you factored into your numbers so that it all works out, so you’re still making a profit on it.

Matt:
And that was the thing too. At the time I didn’t really, because I didn’t have much income coming in, I had a little bit from the stunt world, I was like, “Well, if I make 10, 15 K, that’s a lot more money than I’m making not doing anything else.” So the margins were pretty tight on that first one. And honestly, the market, I won’t say necessarily saved me because I definitely, even if I was wrong, I would’ve made 10, 15,000. But because the market was so good in 2021, I made a lot more than I thought I was going to make.

Tony:
Matt, if I can ask, I think a lot of new investors feel like they have to kind of have all the answers before they get started. We actually just record another podcast episode earlier today, and that same guest kind of touched on that same idea about you have to push past that fear of not knowing kind of the finish line and just knowing the next step. But for you with this rehab, I mean, you came from a totally different world fitness, entertainment industry. How did you even educate yourself on, hey, what are the steps of rehabbing a home? Were you doing YouTube University? Was there some other resource you had? How did you even know what to do?

Matt:
Yeah, so that’s where I was super fortunate and blessed in the sense that my father-in-law, who lives out in Chattanooga, was a retired contractor. And I kind of brought him out of retirement and was like, “Hey, help your grandkids and your family by helping me and teaching me what you know.” And so he came alongside me on the first two flips I did, and just kind of taught me some basic drywalling and painting stuff. And I by no means picked it up quickly or am good at it, but I learned what I needed to learn to get through those first couple deals.

Tony:
So Matt, were you DIYing, it sounds like on a lot of those, or were you bringing in subs or how did you kind of manage the workload?

Matt:
Yeah, so the first two flips I did, it was 100% DIY. It was just me and my father-in-law, and we did everything from painting, installation, some basic plumbing. I mean, they were a little bit more cosmetic flips, the first two at least, but definitely it was all us.

Ashley:
And then have you progressed to using contractors? Actually, we haven’t even touched on how many flips you’ve done yet. Do you want to just give us that little breakdown first as to how many you’ve actually completed since that first one?

Matt:
I think I just sold one, closed on one yesterday that I sold, I think that was number 10. And then I’m working, I have two going on right now.

Ashley:
And what timeframe is this in? This is a little over a year?

Matt:
Yeah, about a year and a half.

Ashley:
Yeah, that’s awesome.

Tony:
Congratulations.

Ashley:
I think that’s something we really need to go into detail on here is how were you able to scale and take on that many flips at once? Because here you are, your first investment property, it’s you and your father-in-law in there doing the DIY. So how were you able to scale your business so you’re able to do that many flips within a year and a half?

Matt:
Yeah, so it was really, I mean, like you said, just go back to the question, scaling, I had no clue how to do it at first, and I still can’t say I really know how to do it. But the third one I took on was when I really, I tried to, because my father-in-law was kind of a little burnt out and the house that I purchased was a little further out, so he didn’t want to drive out there every day. So I was like, “No problem. I’ll hire a contractor, I’ll just kind of go out on my own.” And that one was by far the biggest learning lesson, that’s the only one to this day that I actually lost money on, just because there are so many lessons for me to learn along the way.

Matt:
And it was through that one that I kind of developed most of the relationships I have now. My contractor that I have now, I found through that job, but he was the third contractor I hired for that one house, which is how I ended up losing so much money is just because I kept hiring people and firing them and just kind of jumping from one to the next. But it was definitely a process to get to the point I’m at now.

Tony:
I just want to give a quick shout out, episode 311 with a guest by the name of Shaun Kelly. He breaks down how he DIYed, I think all of his rehabs, least the first several as well, similar to you, Matt. But if you guys are looking for kind of a masterclass breakdown on how to DIY your own rehab, episode 311 with Shaun Kelly would be a great resource. So Matt, just going back to you, so you said that you had to hire and fire a lot of people with that first one you kind of did on your own. I think that’s the fear for a lot of rookies who are thinking about flipping properties is that they’re going to get scammed by a contractor, they’re going to get bad work, that someone’s going to run off with their money. What were your steps for sourcing these different folks you were working with, the different subcontractors and contractors, and I guess what were some of the lessons you learned that you’ve applied to your future deals?

Matt:
Yeah. So as far as sourcing, really, and I still rely pretty heavily on this, I just went, there’s a local Facebook page here in Chattanooga where you can just ask for what you’re looking for as far as businesses go. And I mean, it’s not specific to real estate, but I just said I was looking for, I think originally I might’ve said I was looking for a contractor, but anyways, said I was looking for a contractor and I just hired this guy because I interviewed, I think, three of them, and I made the mistake of just hiring the one that I jived with best. I was like, “Oh, he’s young, he’s an entrepreneur. Yeah, you got the job.” And I didn’t realize at the time that he actually didn’t really have much construction knowledge, because a thing that I didn’t know in Tennessee at the time, but you can essentially get your contractor’s license in Tennessee without any work experience. It’s just a test that you have to pass and anyone can more or less hack the test.

Matt:
So he had a crew, but he himself had never really done construction. And his crew was, I won’t say they were awful, but they were learning, and I was not in a position where I could afford to pay someone to learn. So I ended up letting him go and then you would’ve thought I would’ve learned from the first time, but I went the exact same route, went on the Facebook group, hired another guy that then was charging me by hour, which was another mistake I learned, never hire a contractor, at least in my opinion, and paying by hour because he was just dragging his feet. And I think three weeks went by and they had put up some trim and that’s about it. And I was like, “What do you guys do all day?”

Matt:
They’re like, “Oh, well, we got to fix this and fix that.” And just blaming it on the other contractors, which some of that was probably true, but I think most of it was just them dragging their feet. And then through that process, the first crew that I hired, at one point one of their cousins came in and just was essentially showing them how to do drywall. And that was kind of one of the first red flags. I was like, “Wait, you guys don’t know how to do drywall?” Anyways, I got that cousin’s number just randomly, and he reached out to me a month later and was like, “Hey, if you ever have any other work.” I was like, “Ah, yeah, I need you yesterday.” He came in and just saved me towards the end. And that was flip number three, and we’re on 12 now, and I’m still with that same one.

Tony:
I just got to add really quick, what a nerve wracking thing to walk into as an investor to see the guy that you hired to hang your drywall, getting coached by someone else on how to hang drywall. It’s like the ultimate red flag. The only thing that might be worse is them, I don’t know, having a YouTube video up like hanging drywall 101 or something.

Matt:
Yeah, that was pretty much the extent of it though. I mean, yeah, those two go hand in hand.

Ashley:
Well, Matt, Tony and I have definitely had similar experiences where we’ve had to fire contractors during the middle of projects and go with someone else. What was the final decision of it is going to be more cost-effective in my mind to fire them than to just continue the project? Because for me, it was like I let it go on for a while because I just thought it’s going to be, we’re have to stall the project, we’re going to have to wait and find new contractors. We don’t know when they’ll start. Do we take the risk and fire these ones or is it worth the wait to find new contractors? So what kind of went through your mind during that process of I need to fire them now?

Matt:
Yeah. So with that first crew, it was really, I felt like I didn’t have a choice because it was just very obvious, after first week and a half, two weeks, they don’t know what they’re doing. So it was just like, I can’t afford to let this run to the very end and then find out, oh, I actually have to redo everything. So it was kind of just cutting my losses there and just letting them go. With the second crew, that, I just lucked out timing wise, I was scared of letting them go and not having someone else to come in. And that’s when my contractor I have now reached out to me and was like, “Hey, if you ever need any work done, here’s my number. I’m available, dah, dah, dah.” And I was like, “Yeah.” So I essentially the next day went to the existing contractor and just let him go. And then that guy started a couple days later. So I mean, if it wasn’t for him reaching out to me, honestly, I probably would’ve let it drag on for another couple weeks and who knows where that would’ve gone.

Ashley:
Yeah, Tony and I definitely struggled with that for a little bit on two of our projects, of having to make that switch to a different contractor.

Tony:
But you mentioned, Matt, about the paying by the hour. Just before we move on, I want to get your insights on that. What is the downside to paying by the hour and what is the better alternative?

Matt:
So I would say the downside to paying by the hour is just I feel like it just gives the contractor, whoever you’re paying, I guess, by the hour, just the opportunity to just kind of drag their feet and a job that might take them two hours, they’re going to do in four hours because you’re paying them by the hour so they have no incentive to work faster and work harder. So I would say that’s the biggest downside is just there’s more incentive for them to work slower than there is faster.

Matt:
And then as far as the alternative, my system now is even though I’m going to hire him no matter what, just we have a good thing going, I have my contractor come in on every job and just walk through everything we want to do and then just bid a price and then we set that price and then that’s kind of like his incentive because it’s like, okay, if this job is going to cost us 20, if I’m going to pay you 20 grand and you get it done in three weeks and you just made 20 grand in three weeks, if I’m going to pay you 20 grand, but you’re going to take eight weeks and you made 20 grand in eight weeks. So he’s got that incentive to just work a lot harder and work a lot faster.

Matt:
And I mean, I’ll show up to my jobs on Saturdays at 6:00 PM and they’re there just working. I mean, him and his crew, I’m just so blessed to have them because they’re just workhorses and they get it done. And I mean, if I had that last guy who was I was paying by the hour, I would probably be paying him twice as much as my current crew.

Tony:
Yeah. The right crew makes all the difference when you’re, honestly even taking a step back, the right team as a real estate investor is probably one of the most important things to get right, because if you can surround yourself with the right boots on the ground, with the right contractor, with right property manager, with the right whoever, it makes your job as the investor, which is really trying to find the deals and maximize the profitability, makes that job easier. But I guess on that note, finding the deals, Matt, what steps have you taken to find out of these, I guess 11 or 12 properties you’ve done or in the progress of completing, how are you finding these deals? Are they all MLS? Are you going direct to seller? Are you using a wholesaler? What methods have you used?

Matt:
So I’ve kind of used them all. I think out of the 12, I bought three on market, and then the other nine have been off market. I would say I had a good wholesaler that I was working with pretty consistently, and I probably bought six deals with them. And it was just like, I literally got to the point where I was like, “Am I doing something wrong? This seems like it’s almost too easy right now.” I had this person feeding me deals, I got a good crew, everything’s lining up. And then I didn’t hear from them for a while and I reached out to them and they just kind of ghosted me. And then finally one of their employees reached out to me and was like, “Oh, I’m so sorry. They let me go and they just shut down shop.” I don’t know what happened. But anyways, that was the beginning of this year, and at that point I was like, “Uh-oh, what do I do now?”

Tony:
Well, let me ask that question. I mean, how’d you find that first wholesaler? Because I think for a new flipper, the deal flow is oftentimes one of the biggest constraints, it’s like, how do I find these good off-market deals? So what steps did you take, Matt, to find that first wholesaler and then once that one kind of shut down shop, what steps did you take to find that next wholesaler?

Matt:
So that first one I found through our local real estate REA or meetup group or whatnot. I think I was on their Facebook group and somebody, another wholesaler was posting something, and then I just started scrubbing through the Facebook group and looking for all the wholesalers and just either emailed or called all of them just to get on their list. And then this one just seemed to be the most consistent as far as just putting out deals. And then I guess as far as the second part goes, just luckily from being in this area and doing the real estate for the last year and a half, I kind of knew even if I wasn’t working with them, I kind of knew of and about a few their wholesalers. So I just immediately started reaching out to them and was like, “Hey, I’m looking for deals if you have anything.” And then now the last couple deals have been through various different wholesalers. I haven’t really found one that feeds me my deals like the original one was.

Ashley:
Tony, I’m curious how you are sourcing deals right now.

Tony:
Yeah. So honestly, we haven’t been buying as much on the single family side right now. We’re looking more into the commercial space. So my team and I are really just trying to network with commercial brokers at the moment to find most of our deals. So we just got a purchase agreement, or at least an LOI that we agreed to over the weekend, for a hotel in Utah. And on that deal, it was just us networking with a broker that I met last summer that ended up having another deal in that same city. So that’s kind of been our approach on the commercial side, but on the single family space, a lot of our deals honestly have just kind of come from relationships. So we have relationships with realtors that send us off market deals, whether it’s a pocket listing or maybe a wholesale deal that they found. We do know some wholesalers in the markets where we flip. And really, yeah, it’s been a lot of relationships for us. What about you, Ash?

Ashley:
Yeah, relationship based is such a big, big way to get properties, but really a lot of it is referrals as far as word of mouth. So somebody saying like, “Oh, my aunt is selling a property.” Darryl was working on a property the other day and somebody stopped and was like, “I want to rent this because I am going to sell my house.” So right away when Darryl tells you this, I’m like, “You call him back right now and tell him we want to come and see his house and we could buy his house and he can rent this apartment. It’s a win-win.” But also we have a property under contract that’s on the MLSs. And then the other property that’s under contract right now was a word of mouth, one of my dad’s best friends, his mom’s house that we’re buying. So that’s really been the biggest deal source for us right now.

Tony:
Ash, have you cold called before? Have you done just straight cold calling owners?

Ashley:
I have before a couple times, but I actually had Nate Robbins here who is actually going to be a guest on our episode because of my experience with him. So he came to visit me and we’re just driving to get a chai tea and he sees this house with letters in the window, which usually can signal that somebody is not living there, or maybe they are, but there’s a third party company taking care of the property, doing the lawn maintenance or the bank has foreclosed on it or there’s a violation, whatever it is. So he found the owners and he cold called them and he didn’t get any response, but it was so nerve wracking for me because I do not like cold calling.

Ashley:
And then he actually found somebody who’s related to the person that owns the property and he’s like, “They live five minutes from you, I’m going to drive over there and go talk to them.” And that even more was like, “I’m not going to go, you guys just go, I’ll stay here.” And he was like, “The lady was so nice. You can’t be afraid of those things.” And so that’s why I have Darryl, he does all the direct mail, the cold calling, he’ll door knock, no problem. But for me, that’s out of my comfort zone and I’d rather have my partner do that.

Tony:
Someone else do it, yeah. And that’s always leaning into where your strengths are as a real estate investor, and each of us has to kind of know where we naturally thrive. Matt, just one other follow-up question for you on the wholesaler piece. So you said that you reached out to all these different wholesalers. What kind of information were you giving them about you as a buyer and how were you able to tell between who the good wholesalers were versus the not so good? Because I’ve shared my email address on Instagram before and said, “Hey, send me deals if you’re in this market.” And a lot of times I get just things that aren’t good deals. So how do you kind of suss out between the good and the bad, and then what information are you giving them about yourself?

Matt:
Yeah, so as far as information, I mean, I think I’m just essentially kind of telling them where I’m buying. For me personally, I’m mostly focused on flipping single family homes right now, so I kind of just share that, and then just the general area. And then I honestly haven’t figured out how to tell just by talking to them, the good and bad ones. That really just comes down to once I get on their radar and they start sending me deals, it’s like I’ll just start looking at the deals and use PropStream and comp them out. And with that I can kind of just tell like, okay, this guy just sent me five properties in a row that are all junk and you can’t really flip any of these. I would be in negative on all of them. Versus this guy, maybe he just sent me two in the last month, but both of them seem pretty profitable. So just kind of going down that path.

Ashley:
Matt, if you had to give three pieces of advice to somebody who’s starting out flipping a house, what are the three things they should focus on to maximize the value of that property?

Matt:
To maximize value? I would say the biggest things are kind of curb appeal because obviously when you come up to the house, that’s the first thing you’re going to see, and then even going just back, before you even get to the house, looking at Redfin or Zillow or whatever you use, the first photo you see is that the exterior of the house. So making sure that looks nice because I feel like a lot of people focus on the inside so much that they kind of forget about the outside and it’s like, oh, I just kept the old mailbox that’s fallen over and that’s right in the center of the frame of my photo. So that’s a big thing, and you don’t have to do anything fancy, but just some landscaping and just maybe a new mailbox and obviously fresh paint, whatnot.

Matt:
And then I’ll go from there to the kitchen because I feel like for a lot of people, that’s kind of the first area they walk into, even if it’s not, I mean, obviously usually it’s not the first room you walk into, but a lot of people kind of just walk straight through the living room or whatever, don’t really pay too much attention to that and just go to the kitchen. So if you can create that wow factor in the kitchen, which is one of the things that we go for. And then the third thing, which I think I actually stole this from AJ Osborne, is that his name? He’s like a-

Ashley:
Self storage guy?

Matt:
Oh no, not AJ. Who’s the one that’s …

Tony:
James Dainard?

Matt:
Yeah, one of them. And he was talking about just value add in the bathroom and just doing tile floors versus LVP. Just because he’s like, at the end of the day, it’s going to cost you pretty much the same price, maybe 50 bucks more or something. So just things like that, it’s like we always tile all the bathroom floors and put in tile in the background. Just little things where you can add a lot of value without adding a lot of price out of your pocket. So yeah, I guess just starting with outside the house, then moving to the kitchen and then the bathrooms, those are the biggest three areas, I feel like if you can control those three areas, then the rest you can kind of play with and you’ll definitely win or hopefully win.

Tony:
So Matt, one of the questions I always have for our friends and the guests that flip homes is the systems they’re using to make this whole operation run efficiently. So I’m going to hit you with some rapid fire questions and just let me know what system software, yeah, whatever, we can do that now, just what kind of systems are you using to manage that? So first, when it comes to budgeting, how do you keep track of the money coming in and out for your flips and kind of comparing that to your original budget versus what you actually spent?

Matt:
Yeah, so essentially I have two spreadsheets that I use and it’s, I mean, very basic Google spreadsheets. I don’t pay for software as far as that goes. But I have one of my initial budget that I create and then once I go live with a project, I have another, and then I just kind of plug and play all those numbers and then I’m able to compare of what I originally thought I was, to where I’m actually at. So that’s, I don’t know, it’s pretty basic to be honest, and I just enter everything myself. I don’t have anyone doing the accounting for me, but kind of helps me keep on track.

Tony:
And then in terms of scheduling, are your contractor, is your GC the one that’s kind scheduling all the subs at this point, or are you manually scheduling the subs yourself? And if so, do you have a tool for making sure that your countertop guy is going in before your guy doing the back splash?

Matt:
I don’t, and that’s something that I’m still kind of learning the process on. So I am the one that hires out all the subs and kind of sets the schedule for everyone. I kind of know just from trial and error of who needs to go in when, and I’ve made that mistake before of my hardwood floors one time I had done before we painted just because I didn’t know and I didn’t really think about it and he was like, “What are you doing?” But yeah, I don’t have a system for it, it’s just kind of in my head. And to be honest, that’s one of my goals for this year, is just to get better at systems and processes as far as that stuff goes.

Ashley:
Well, Matt, I want to take us to our rookie request line, and this is where a rookie investor sends in a question for a guest to answer on our show. And if you would like to leave us a question, you can go to biggerpockets.com/reply. Today’s question is from Tyson Masingo.

Ashley:
“Okay, I am having trouble with finding a market, as well as trying to determine what types of deals I will do in different situations. My plan is to find a very low cost area to invest in since I have very little money to get started, I want to flip a couple properties to build up capital and then begin to BRRRR as much as I can, continuing to flip some deals at the same time. Here are what my problems are. One, what metric should I use to find a market? If you can break it down step-by-step that would be amazing. Number two, how do you decide if a deal would be better suited to flip verse BRRRR? I intend to do both to continually build capital as well as cashflow, but I need to figure out how to decide which strategy I’ll use for each specific deal.” So Matt, the first question is how to find a market. So how did you decide on the market that you’re investing in?

Matt:
So I mean, I kind of just decide on the market that I was in because me personally, especially the approach that I was first taking is I was completely hands-on. So I wanted to work within a market that was 30 minutes to an hour of my house so I could realistically drive there every day and be the one swinging the hammer and hanging the drywall and doing the work. So I would say if that’s possible, I feel like that’s the easiest place to start, is just start in your own backyard, obviously, depending on where you are. I was in Santa Barbara prior to this and I wasn’t going to … I don’t see a way that I could have started with multimillion dollar homes, flipping those.

Matt:
So yeah, you kind of just have to hopefully start with where you are, but then if that doesn’t work, then I would say the next thing is just kind of looking around and starting with maybe where you have connections, because that’s going to be the next biggest thing, is who do you know in those areas that can help you out and be the boots on the ground for you.

Ashley:
Yeah, that’s great, as to where you have an opportunity or an advantage, maybe that’s knowing someone or maybe you grew up there and you know the streets, something to give you that little bit of edge and make you feel a little bit more confident. Okay, so the second part of this question was how do I decide if a deal would be better as a BRRRR property, to rehab it and rent it out or to flip the property?

Matt:
So I think that’s just up to each individual and their finances and what they have going on, because I mean, I guess if you have the money and you do a perfect BRRRR, then yeah, you can kind of just keep going with it. But I actually just finished my first BURRRR about, I don’t know, well, I’m actually waiting for the money to come through today, but just finished the project about a month or two ago and got some renters in it. And I mean, I’m not leaving a ton of money in, but I’m going to have to leave in, I found out, about 30 grand into it. And luckily because of the flips and I have that income coming in, I’m okay with not having that money and it’s not going to hurt me per se to not be able to recycle that money right away.

Matt:
But I think it really comes down to that, if you were to do the numbers and it turns out like, hey, I need that 30 K in order to keep the ball moving, then flip it because then you can take that 30 K, buy another house, and then once you build up a nest egg, then you can go back to the BRRRR method. But I think it’s just deal by deal and just what kind of resources you have under your belt.

Ashley:
And I think another thing to point out too, Matt, is you did a great job of becoming experienced and knowledgeable at flipping a house first before you went in and did this BRRRR. You focused on that one strategy before trying to navigate two or three different strategies at once. And that would be my advice to Tyson, is to pick one market and pick one strategy to start and kind of get a feel for that one strategy and become knowledgeable and confident in it, and then kind of branch off and do something. Because you’re going to have a lot more deals to vet, to analyze if you’re trying to go after more than one strategy. And you’re also going to be building systems and processes for two different types of strategies also, which is just going to weigh you down and you won’t be able to grow and scale as fast too.

Matt:
Yeah, I will say my third flip that I did, I actually went into it thinking it was going to be a BRRRR and something that I stole from one of those episodes was doing the rent by the room. So I took a four bedroom house, turned into a seven bedroom, four bath, and I was like, “Oh, this is going to be great. I’m going to just make so much money.” And just spent way too much money, went way over budget, realized I couldn’t BRRRR it and then had to flip it. And then it turns out that not that many people want a seven bedroom, four bath house that’s just only 2,200 square feet or something like that.

Tony:
Lessons learned though, and that’s the part of being an investor is each deal kind of teaches you something new, brother. So I’m happy to hear that you learned something at least. Cool, man. So last thing we’ll finish out with is our rookie exam. So Matt, these are the three most important questions you’ll ever be asked in your entire life. So are you ready for question number one?

Matt:
I’ll try.

Tony:
All right, man. What’s one actionable thing people should do after listening to your episode?

Matt:
I think just reaching out, if you’re interested in whether it’s flipping or any aspect of real estate, finding one person that you can reach out to. I think that was a game changer for me. I would listen to an episode and if it was somebody I jived with, I would literally just DM them on Instagram or just find a way to reach out, even if it’s just going to a local meetup. But I would say just starting by just networking and putting yourself out there.

Ashley:
The second question, what is one tool, software or app that you use in your business?

Matt:
PropStream is definitely probably the most important one that I use, because I probably comp out two, three houses a day and I’m constantly looking at things. And if it wasn’t for PropStream, I’m sure there’s other software, but I don’t know how people comp outside of that.

Tony:
All right. And then in question number three, where do you plan on being in five years, Matt?

Matt:
So five-year plan would be essentially to be financially free from the aspect of just having enough rentals and passive income that I can … I mean, I truly do love flipping and I don’t see myself stop doing it anytime soon, but I would just like to have that comfort level of knowing like, oh, if I want to take this year off and go travel in Europe with my family, I can do that, and I’m in a place where I can dictate what my life looks like on a day-to-day basis.

Tony:
Love that, man. Yeah, we’re excited to see you hit that five-year goal. Before we wrap things up today, I just want to give a quick shout out to this week’s Rookie Rockstar is Michael Mills. And Michael says, “Finally sold our first flip, eight months of work and then under contract to sell for four months. I was beginning to think it would never happen.” Michael, kudos to you for getting that first flip done, and we’re excited to see where your next one takes you.

Ashley:
Matt, can you let everyone know where they can reach out to you and find out some more information about you?

Matt:
Yeah, so I think the easiest way probably is Instagram. It’s very fancy, it’s Matts, M-A-T-T-S, double underscore because I was late to the game, adventure. And if you really just are bored and want something entertaining, you can just Google Matt Ramirez stunts and watch my stunt reel.

Ashley:
Well, thank you so much for joining us today and taking the time to educate our listeners on your real estate investing journey. I’m Ashley at Wealth From Rentals, and he’s Tony @tonyjrobinson on Instagram, and we will be back on Saturday with a Rookie Reply.

Ashley:
(singing)

Kyle:
I think I would encourage people to ask themselves if they’re a “late starter,” why are you transitioning to real estate? If you’re someone who is like a go-getter, go for it. And especially if you have kids watching you do this awesome transition into something new and exciting when you’re 50 or 55, what a great example to show them of how you can make a transition and learn a new skill.

Kim:
It’s never too late. It really isn’t. I mean, there’s expiration on a milk carton, right? But that’s not us. I think we get better, we get wiser, we have more fun in life. We enjoy things more because we’re not so uptight. I like this stage in life. I really enjoy that I started later.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with Henry Washington co-hosting the show with me. There are many people out there that think that they are too old or it’s too late to start investing in real estate. Well, today, Henry and I are going to do our best to debunk that myth. Today’s show is going to be a late starter’s guide to real estate investing. It’s all about the belief that it’s never too late, whether in your forties or your sixties.
There may be some mental hurdles you have. And this conversation should hopefully help you clear some of those blocks and start taking the action that you need to start building wealth to prepare yourself for retirement now, rather than waiting even longer. And today’s episode is going to be a little different because we have not only one, but two interviews with different guests. The first part of the show, we’re going to speak with Kyle Mast. He’s a certified financial planner and a regular contributor to BiggerPockets money. Kyle is going to fill us in on how people that are starting late may have some advantages when it comes to investing in real estate.

Henry:
And in the second half of the show, we interview Kim Bosler, who started investing at 56. She’ll tell us how she was able to build such a strong portfolio that set her and her husband up for retirement and allowed her to purchase her dream home in Utah. And before we get into the show, we want to add a caveat. In this episode, we’re going to make some assumptions. We’re going to assume that you’re already ready to start investing, which means that you’ve got somewhat of a financial basis. So we’re going to assume that you don’t have any crazy amounts of debt, heavy credit card debt. We’re also going to assume that you have your finances under control and you have a budget. We will also assume that you have some savings and an emergency fund and that you may already have some investments outside of real estate.

David:
And lastly, that you have a cash position, which means you have assets in the bank in a 401(k) or even equity in your primary residence, anything that will help you start investing today.

Henry:
And for those of you who may not be in this financial place just yet, we recommend that you listen to our sister podcast, the BiggerPockets Money show, because Scott and Mindy on that show will guide you through that journey. They will help you get your financial books in order. And once you’re there, you can come back, listen to this episode and get started in real estate. So grab your pens and paper, take some notes. This is going to be a good one.

David:
Kyle Mast, welcome to the BiggerPockets Podcast. Happy to have you on today.

Kyle:
Thanks, David. It’s really good to be here. I appreciate it.

David:
For those who haven’t heard you on BiggerPockets Money, can you tell us a little bit about yourself?

Kyle:
Yeah. I’m sure some people have listened over there, but I am a farm boy from Oregon. Grew up on a Christmas tree farm. Became a CFP soon out of college. Spun off a little bit from the firm that I was working at, started my own firm. 10 years later, which would’ve been last year, sold that firm. And in the meantime, invested in real estate throughout that time. And I guess you can put the FIRE label on last year. That was the final stroke. But yeah, I have twin boys that are two years old and a boy who’s six and a wife, and we enjoy spending lots of time together, fishing, outside all that jazz.

David:
And FIRE stands for financially independent, retire early. Correct?

Kyle:
That is correct. Yes. Sorry, we have to explain that acronym for sure. Yeah.

David:
It’s the new flex instead of a BMW. You hit the fire designation.

Kyle:
Yeah, it’s funny. You still keep working even though I hit that, but it’s more fun, I guess.

Henry:
You don’t just stop doing stuff when you hit FIRE?

Kyle:
I tried, yeah, but my twins wouldn’t let me.

David:
Basically means you don’t have to tuck in your shirt or wear a tie. That’s the real flex, right?

Kyle:
For sure. For sure.

David:
Well, today, we’re going to be talking about how a late starter can get into real estate investing. What advantages a late starter has versus someone in their twenties. So let me ask you, Kyle, for someone who’s a late starter, do they have an advantage over someone who’s younger?

Kyle:
Yeah, definitely. I think a lot of times, people who are a late starter… And maybe we’ll put some parameters around that. It could be anywhere from 40 into your sixties, I would say. You can start anywhere in there. And sadly, I’m getting close to that 40 mark, so I would be a late starter here coming up. But I think there’s a lot of advantages that someone might have. A few of those would probably be, you’re very established in your career. You might have some savings, some nest egg, some 401(k), some IRA, some Roth IRA, potentially a decent amount of equity in your own home. Some of these things that someone who’s starting out right out of high school, right out of college is just not going to have.
Those are some of the basic things and we can get into a few more as we go here, but that’s setting up the stage for someone that we’re maybe assuming has got their financial foundation under them, but they’re just now looking at real estate.

Henry:
I actually used a 401(k) to get started investing in real estate. And it wasn’t something I knew about prior to. I just stumbled on learning that that was a thing. And so if you’re looking at 401(k)’s, the average 401(k) amounts around 76,000 for people who are typically between 35 and 44. And then it goes up to 142,000 for folks between 45 and 54. And then it really jumps to 207,000 for people between the ages of 54 and 66. So how can someone leverage their 401(k) if they want to start investing?

Kyle:
Yeah, that’s a good question. I’m going to shoot it right back at you, Henry. How did you use yours? And we’ll go off of that. What did you do?

Henry:
Yeah. I took out a 401(k) loan and they allowed us to… Well, let me caveat this correctly before I get myself into some big trouble, Kyle. We, my wife and I, took out a 401(k) loan on her 401(k) because I wasn’t financially savvy enough at the time to have one. And so she allowed us to tap into her 401(k) for our first deal. So we did a 401(k) loan. I think we could have borrowed around 60 grand or something like that, but we only took like 20, and just enough for the down payment for a deal, bought a rental property, and then used the rents to pay off the 401(k) loan.

Kyle:
Love it. Yeah, that’s probably the most beneficial route that people would go. There’s a few other ways you could go about it. A couple of things to keep there. And I should throw a caveat out there too. I am a CFP, but I’m not your CFP or anyone listening to the shows’ CFP. These are just some ideas. But the 401(k), every plan is a little bit different on what you can withdraw and how you can withdraw and how you have to pay it back. And one thing to keep in mind too is that if you leave that employer, be really cognizant of what you have to do with that 401(k) loan if you leave. Usually it’s a quick payback about a 12-month timeframe or less. So just keep that in mind.
There’s a couple other things that you can do too. One, the thing that I’ve done a couple of times for short term needs in the real estate arena. There’s something that’s called a rollover. When you move a 401(k) to an IRA, or a 401(k) to another 401(k) at another employer, or even to a Roth IRA as a conversion rollover, all that to say you’re moving it from one retirement account to the next. Usually, it’s a direct rollover where it goes straight from the custodian like Fidelity to Schwab. But there’s something else that’s called an indirect rollover, that you can actually take the funds in possession yourself for a certain amount of time, and then you have to get them into that account or they become taxable and penalized depending on what age you are.
So in that case, it’s actually a 60 day timeframe and you can do it once every 12 months. So I’ve done this for short-term projects, a fix and flip type of scenario. But you need to have a way lined up to be pretty sure to be able to pay that money back in that 60 day timeframe. But that’s a little hack that someone could get themselves in trouble or use it potentially down the road. But you can only do that every 12 months. But I’ve switched between me and my wife being able to do that a couple of times every 12 months for different things. Haven’t done it for a few years now. But there’s different ways you can go about things with the retirement accounts.
And one other thing I should say is that, that loan that you took out, there are ways to put real estate inside, say, a self-directed IRA and that if that’s the only way you can get started, that’s a great way to get started. But in general, it’s best to keep retirement accounts and real estate investing separate. That’s a big generalization. But the reason I usually make that generalization is that you’re losing tax benefits from both accounts if you muddle them together. They both have their specific tax benefits, and real estate has so many specific tax benefits that if you put it into a retirement account, you lose some of those. If it’s the only way you can get started, that’s great, that’s fine. But something to keep in mind when you are thinking about going that route.

David:
So for someone who’s a little older that isn’t thrilled about the idea of house hacking, maybe they’re not willing to compromise on comfort, they’re used to the place they’ve been living, it’s kind of like their life is set up, a lot of them may have boat storage at that point or a workshop and they’re not willing to move from one house to another. How can someone still leverage their primary home to get them started in real estate investing?

Kyle:
Yeah. I think the late starter, you guys have covered this on the show before, one of the biggest things is going to be your home equity and your primary residence. If you’re doing a good job of saving and you’re paying down and say you’re 10 years into a loan on your primary residence and maybe it’s your second or third house that you’ve rolled equity into over the years, a home equity line of credit is a really good way to at least prepare for real estate investing. I would say that’s one of the first places that I would go and one of the easiest places that I would go.
And sometimes, people worry about taking out a home equity line of credit and they think, “I don’t want to have this big loan that I have to pay extra interest on and it’s risky to have more debt on my house.” Well, you’re not adding risk until you draw on that line of credit. It’s a line of credit. And that’s sometimes people maybe get that confused, but it’s just a great another plan B, C, or D in your arsenal of another financial well that you can go to if something bad happens or if you want to invest. What you do down the road to create a permanent financing for your real estate might look differently than the HELOC, the home equity line of credit in the short term.
But that’s a great route. Go to your local credit union. If you’ve got a lot of equity, go put a HELOC on your house right away as big as you can, just so you have it. You don’t have to use it. They usually cost $75 to a $100 a year for their maintenance fee. And that’s it. A couple of things to keep in mind. They usually have a variable interest rate on the stuff that you draw out of it. But again, if you’re not using it initially, just have it there ready to go. When that house across the road from you goes up for sale and it’s the lady that passed away and it’s a smoking deal, you know it’s worth a lot more that you can pounce on it with a cash offer and then turn it into something. Just have that dry powder in that HELOC. It’s a great way to be ready.

Henry:
Yeah. I was going to follow up there. I think you touched on a little bit of what I was going to say is that there is a lot of fear around HELOCs. And I think you did a great job of explaining like, what we’re saying is, you can go get access to the money now. And yes, there may be a variable interest rate, but you don’t pay for any of it until you use it. And yes, some can have variable rates. I’ve had fixed rates on my HELOCs at times. And so you can get access. And it’s just a way of… It’s like having a credit card almost, right? You’re not paying anything for having the credit card, but if you need the money, it’s there.

Kyle:
Yeah, definitely. Some of them have a conversion feature that you take it out and you can convert it to a fixed loan at some point. That’s something to keep in mind when you’re signing the initial HELOC. They usually have-

Henry:
I did that.

Kyle:
… certain different… Yeah. So that might’ve been what you did. There’s different features that come. And every bank is different. That’s a very unique product to different ones. So it’s definitely something to throw in there in the mix of things if you’re getting ready to go.

Henry:
I often see that there’s two camps when it comes to HELOCs, right? Because people are right, they’re like, “Oh, don’t take on extra debt in your personal home. That’s a crazy idea.” And some people love it as a means to get started. So what are some of the risks in the current market environment you see as to using a HELOC to get started?

Kyle:
That’s a good question. I don’t know in the current market if the risks are a whole lot different than they would be in just about any market. The one that jumps out to me right away, and David, you’d be on this too with a mortgage company, is just rates being higher and it being harder to permanent financing on something. If you use that HELOC for something and you’re not able to find good permanent financing to put on that investment afterwards, you now have variable rate debt on your primary residence where if you lose your job and you’re not able to make payments on your primary mortgage or your HELOC or both, that gets you into the foreclosure territory.
And I just went down a rabbit hole of fear right there. So I’m going to back up just a little bit because even if you… So maybe take myself as an example. So last year, I sold my firm. My income went from a good income to zero on paper. From a financing standpoint, I have a HELOC on my house that I use for different purposes for investing on and off, pull out of it, pay it down. The HELOC stays there. The bank doesn’t come and say, “Hey, you’re not working, your income changed, we’re calling your HELOC, we’re calling your first mortgage on your property.” That doesn’t happen. It’s if you don’t have the resources or the reserves somewhere else to continue to make those payments if something in life changes.
So just like with any debt, with any obligation, have reserves. If you’re getting to the real estate investing, have reserves. This is something that is very important. And that ties back into these accounts that you have at the late start that you don’t have when you’re younger, is that these accounts… And again, David, being in the mortgage business, you know that these accounts can be used as reserves for qualifying for certain loans for properties, and they can be accessed if you get into trouble. Like a 401(k) or an IRA, if you need to pull some money out of that to help push a property through a bad period of time, you can do it. It’s going to hurt a little bit.
Say you pull 50,000 out, that’s going to get added to your income for the year, so you’ll pay tax on it. You’re also going to pay another 10% penalty on top of that if you’re under age 59 and a half. But if you’re a late starter and you’re over 59 and a half, you don’t get that 10% penalty. So there’s a few things to keep in mind there, but you having these big accounts that you’ve built up at a job or a few jobs over the years is definitely an advantage over someone just starting out.

David:
So what about if somebody wants to add a little bit more income to their primary residence? We’ve talked about HELOCs, we’ve talked about 401(k)s. What’s your thought on if they build or convert a part of their house into an ADU to add a little bit more rental income? Good idea or bad idea?

Kyle:
I love it if they’re going to love it. I think it depends on how passionate you are on this whole real estate journey. Are you going down the road as just like a little diversifier or are you’d making a big switch to it being your main retirement income? Because at this point, people are thinking… As a late starter, you’re thinking about retirement income. This is not like, “I’m 20 and I’m thinking of this is what I’m going to do for the next 30, 40 years because I enjoy it, or I want to be financially independent.”
When you’re 45, 50 to 60, now you’re thinking, “I’m getting older. I might not be able to do the job that I’m doing now forever. I need to have some income.” So all that to say, ADU on your property, short-term rental, these are great things, especially if you’re a hospitality minded person. And if you have a little business acumen, you got to run it like a business. You can’t Joanna Gaines your [inaudible 00:16:01] and have some people come stay there and you charge them $95 a night and book it a 100 nights out of the year and you’re negative 200% every year.
So you got to run it like a business. You got to run it with a hospitality mindset, especially in the short-term rental industry. That is what drives the reviews, which drives your occupancy, which drives your rates, which drives your profitability on it. So I think it’s great. We have several short-term rentals and I love it. I worked at a resort when I was in college and the hospitality piece is just fun. But you also get some weirdos too. So you got to be ready for that too. And if it’s on your property, that brings another level to things. Do you want somebody on your property? Are you okay with that, with people coming into your property? The proximity can make a difference there too. But it is a good way to get some extra income faster as opposed to straight up house hacking.

David:
So here’s what we’ve learned so far. Late starters are more likely to have a stronger cash position, a possible 401(k) that they can tap into or other form of retirement account, a primary residence that hopefully has some equity built up, and a little more life experience. I imagine they’re a little more savvier when it comes to picking the right contractor, making the right decision. Their algorithm is more developed because they’ve seen more things go on in life. Anything that I missed there, Kyle, that you would add to this that advantages to a late starter?

Kyle:
I don’t think so. I think you hit the one right at the end there that we haven’t touched on yet, is that they have life experience. And I think I would encourage people to ask themselves if they’re a “late starter,” why are you transitioning to real estate? Why haven’t you done it in the past, actually might be a better question. Is it because you didn’t know about it? Well, that’s great. Now you’re finding out about it. You’re maybe excited about it. What’s your personality like? Are you someone who takes action, and if you get under this real estate umbrella, you’re going to drive forward and do it? Or is it because people have told you about it? You’ve meant to, you’ve meant to, and you haven’t done it.
We all have friends who have thought about it, and thought about it, and it’s five years later, and it’s 10 years later, it’s 15 years later. And man, if they would’ve bought 10 years ago, things would’ve been different. So you need to really self-assess what personality you are. Because if that’s your personality, you’ve got some work to do before you dive into something new at this point in your career. If you’re someone who is like a go-getter, go for it. I mean, this could be a cool exciting point in your life.
And especially, if you have kids watching you do this awesome transition into something new and exciting when you’re 50 or 55, what a great example to show them of how you can make a transition and learn a new skill. And a 10 year timeframe, for just about anything, you can crush it. 10 years is a decent timeframe to just nail any new endeavor if you really put your mind to it.

Henry:
And for anybody who’s sitting back cringing at the idea of hearing us talk about leveraging these investment vehicles they’ve worked so hard to build up in order to buy real estate, we’re not saying go buy anything. We’re saying, you’re going to go buy the right thing. Right? You’re going to use that wisdom to understand that we’re going to buy things where we have a lot of opportunity cost, where there’s a lot of equity built up. The better deal you buy, the less risk you’re taking on. And so it’s really all about being savvy about what you’re choosing to buy and not just buying real estate for real estate’s sake.

David:
That’s true. And I’ll put one last cherry on top of what you said there, Kyle. The worst time that I’ve ever seen that anyone could have bought real estate in was 2005. In recent history, I don’t think you could have had a worst perfect storm of all of the fundamentals being wrong, real estate values going up for all the wrong reasons, and then a nasty crash in 2010. But if you bought in 2005 and you waited 10 years, by 2015, not only were you not underwater, you had made ridiculously good money. That’s how quickly it turned around.
So as you’re thinking about these scary decisions, stop thinking about the immediate, what’s right in front of my face? What if the market crashes tomorrow? And start thinking about what’s it going to look like 10 years from now? Because 10 years becomes 20, becomes 30, becomes retirement. And the worst thing you could have done would be to do nothing at all. Thanks for being here, Kyle. Appreciate you, man. If everybody would like to hear more of Kyle, check him out on the BiggerPockets Money Podcast. Or Kyle, where can people contact you directly?

Kyle:
Yeah. You can just check out my website kylemast.com, or I’m on Twitter @whoiskylemast?

Henry:
So far, we’ve already spoken to Kyle Mast about advantages a late starter may have when investing in real estate. We talked about 401(k)s and HELOCs and as well as adding value to your property. And so now we’re going to talk to Kim Bosler about her journey as a late starter. Kim Bosler, welcome to the show.

Kim:
Hi. I’m so thrilled to be here. Thanks so much, Henry.

Henry:
Give us a little background, Kim. At what age did you get started investing in real estate?

Kim:
I was 56. And I have six children and 20 grandchildren. So I put everything into being a mom. I absolutely loved being a mom and raising kids. And as they started to leave and no one was in California, I thought, “Wow, I’m going to be having to take a lot of plane flights.” So one day, I was on a plane and I ran into a really dear friend whose husband had just passed six months prior. And I was consoling with her and she said, “You know, but one of the greatest gifts that Gordon ever gave to me was five homes.” And I said, “What do you mean?” And she said, “Well, he bought five homes, and now that’s my play money. And so I’m able to go visit my grandkids whenever I want to.” And I was like, “Ding, ding, ding. That’s exactly what I want to do.”
So we had fiddled with real estate early on in our years when we were first married. And we didn’t know what we were doing. So we bought a little old home that took a lot of maintenance. And we didn’t have property managers. And every weekend, Bruce was fixing a dishwasher. And also, we were in the red from day one, so we hated real estate and we were never going to do it again, especially my husband. He said, “No, this is not for us.” And so I was always thinking, but to me, it seems like the closest thing to printing money. If you buy a home and someone else is living in it and they’re paying off your mortgage, how is that not like printing money? Really.
I mean, I kept thinking about it like, “There’s got to be a way because I know that there’s people that are successful in it.” Especially single family, it seemed like. So I was at the gym one day. And this is after all my kids had left. I think my son was a senior, but all five were married. And I was jogging along on the treadmill next to a dear friend that had invested quite a bit. He had several properties. And I said, “How did you do it Rusty?” And we were talking and he said, “Well, I think you should just hook up with… My wife loves RealWealth Network with Kathy Fettke.”
So I didn’t have a pen or paper, and I’m thinking the whole time as he’s talking, “RealWealth Network, Kathy Fettke.” So I go home and I looked at the podcast and I started going to events and I just loved it. I thought, “There’s so much information on here for beginners. This is fantastic. Maybe I can do this and I can get some homes and have some play money and great retirement.” We don’t have a pension. We have a 401(k). But you never know how long you’re going to live, right? I mean, how do we know? So I went home and I put on my vision board six homes, because my friend had five. So I thought, “Well, I better have six.” I don’t know why.
And I really laughed out loud. I thought, “There’s no way Bruce was going to go for this.” And I finally took him to an event. And it was a great event. It was North Texas. And the presenter was saying about these homes. And we looked at them and the math just made sense. You don’t have to really be a rocket scientist. They were $120,000 and they rented for 1200, and that was at the time. So Bruce looked at me and he said, “Well, I think we should buy six. And I was like, “You’re kidding.” I was just so excited. I said, “Okay.” And he said, “But you’re going to have to take it out of the HELOC because this is going to be your thing and I want you to prove that you can pay this back out of the rents.” So I said, “Okay. Deal done.”
And they were new construction, so there wasn’t a lot of maintenance. And I know a lot of people in the audience are thinking, “Oh, that was the day. Okay. 120. You can’t do that anymore.” But I hope that everyone knows that there’s always a way, there’s still deals out there. And we can get to that later. It’s never too late to invest in real estate. It isn’t. So that was the start. And then from there, we went to 1031 exchanges after a while. Your home builds up in equity. And then you can do a 1031 exchange. You don’t pay any capital gains and it goes straight into a bigger property.
So this week, I am not kidding, I am so excited, I found my dream home. And I was able to sell five properties. And I also bought a duplex with it in Texas, and was able to buy my dream home. It’s beautiful. Beautiful views, right near my mom family. I’m just absolutely thrilled. Now, you can’t take 1031 money and put it towards a personal home. Correct? So we will rent it out for two years or as long as we want, and then eventually move in, and then it becomes our personal property. So I’m just over the moon, to be honest. Absolutely thrilled.

David:
Now, when you first started investing in real estate, Kim, did you have any fears or hurdles that you had to get over? And what did you do to get over those?

Kim:
Well, there’s always fear in everything you do that’s big and exciting and you’re learning. And so I think part of it was just hanging out with people that were experienced and did it. I think it’s really important to get a great team that you can trust. That’s the most important thing. You’ve got to get a great lender, you’ve got to get a great property manager, turnkey provider, unless you want to find them on your own. And a lot of people do. But when you’re really busy with other jobs, maybe a good turnkey provider, maybe a build to rent, or somebody like Lori Woodworth in Texas who just works her buns off at Hello Texas to just find these properties that actually builders will lend you. She finds builders that will lend at 4.75. She finds properties that are assumable loans. Things like that, that are still available today.
So you just have to find a trusting accountant. I got a bookkeeper right away too because I didn’t want to do all of that. So I think it’s important to get a very trustworthy team because, guess what? Every single person that you meet in real estate is absolutely amazing. And then you start to work with them and you start to realize that some can be sharks, amazing sharks, but they are not honest. And so I’m a trusting person. I believe everybody. And I have been burned a few times because I’ve believed people. So that’s why getting in a network like RealWealth Network, who they’ve already vetted all these people, is really valuable. And I just adore Kathy Fettke. So that’s another thing.

Henry:
One of the biggest hurdles that new investors face is, they’re not really sure where to invest. And so talk to us a little bit about how you picture market when you got started.

Kim:
Well, when I was looking, of course it was Leah Slaughter that was presenting these properties, and she was telling all about North Texas. And it made sense because of the jobs that are flooding in. I just know, I live in California and it seems like half the businesses are going to North Texas. And the new freeways that they’re putting in. And so you want to look for real job growth. You don’t want to go out in Timbuctoo where if we have a financial crisis in the nation, it is going to be harder to get those places rented.
An interesting thing that I’ve noticed is, as things tighten up, the squeeze and the interest rates get higher, you’re also getting more renters because more people can’t seem to afford homes in the beginning. So it’s always good to have, I think, real estate. It just is.
But that’s one of the things I look for is mainly job growth. I mean, where would you like to live? I like the Sunshine State. So I like to invest in Florida too. That’s just a fantastic place. I was fortunate to do some 1031s into Florida before the pandemic and all of those homes doubled in value and they’re just continuing to go up. There’s build-to-rent and rent-for-retirement, and they do things like they actually build for investors to rent, and they’re all new construction. So there’s just a lot of great places.

David:
So with these investments that you bought, what was your strategy? Were these buy and hold? Were they BRRRR properties? Were they short-term rentals? What were you doing with them?

Kim:
You know what? That’s such a great question because all of those are such great possibilities. Some people feel very uncomfortable with leverage, and I was one of those. We were solid inlets. Just buy 10 homes and pay them off and be good. But at the time, I’m really glad that we did leverage because we were able to buy twice the properties or more. And all of those properties just, it was good timing too, but they all just really went up a lot in value. And I love Florida. So that was a good move to do the 1031s.
And so, I think you just have to look at the market and the strategy and do what you feel best about. My friend that I was on the plane with, she had five to just buy and hold. He had those almost paid off. Some people are extremely against that because they think you should leverage as far out as possible and buy as many properties as possible. So it’s all your comfort zone, it’s all what you feel best about. And really, there is probably no right or wrong. It really depends on you and what you’re comfortable with.

Henry:
Okay. So just to clarify, it sounds like you were buying and then renting them out for a period of time, and then you would sell them in 1031. Is that correct?

Kim:
Right. We held them for about five years, and then we switched a few of them out right before the pandemic, which was a good timing. And then we took those properties, some of those that have gone up so much in equity, and were able to buy this dream home. I mean, honestly, I’m so happy about it. Every day I am like, “I can’t believe this happened and that I was able to it.” Because also now, we’re able to keep our primary home, the one I’m living in now. We didn’t have to sell that one to move.
And this home, we’re trying to decide, should we just have two homes or should we maybe rent this one out? This one will rent for $4,000 a month because we live next to Travis Air Force Base, and the military is constantly looking for housing. And so a lot of our friends… Not a lot. A few have moved out of their home into a trailer park. And they’ve fixed it up and it’s cute, but then they get this extra income on the side on their primary home which is really valuable to them. It’s equal or greater than their social security check. So anyway, it’s nice to be able to have that option.

David:
So when it comes to management, did you self-manage these or did you end up hiring a property manager to take care of them?

Kim:
Oh, heck no. I would never self-manage, or that would be really full-time. I’m a real estate professional now, which I did want to mention is great. If your partner is working and you can become a real estate professional because you can put 17 hours or more a week, which is things like bookkeeping, it’s looking at properties, it’s podcasts, it’s travel, it’s a lot of things that can equal that 17 hours. So it’s really easy to do 17 hours a week. It’s very easy. So you want to be a real estate professional without having to self-manage. And I only self-manage one, and it’s because I have perfect tenants.

Henry:
So give us an example now. How big is your portfolio today?

Kim:
Well, I started out just wanting 10 properties. And so now, it’s probably just double that. It’s because we sold some. And for my comfort level, that’s good. I think, there’s some people that have 400 properties, not very many probably, but I do know some. And to me, that would be overwhelming. So it’s just your own comfort level. And I think those will be pretty sufficient. What you should do is just decide how much do you want to live on. How much do you want to live on when both of you aren’t working anymore?
And then you just look at your rentals and say, “Is that going to be enough?” And then you can stop there. You can keep going. It depends on how much you love it. I mean, some people just get really addicted to it and they’re always trying to find deals and BRRRRs and all kinds of things. My brother, for example. He would never buy a new construction home. He likes to buy these total fixer uppers and do it himself. So it’s whatever you like. That’s what’s so great about real estate. What do you like to do? What do you want to do?

David:
Yeah. There’s a lot of creativity they can work into it. And the people who have the blueprint lenses that they put on, these blueprint glasses, like, “What’s the blueprint, Henry? Tell me exactly what you buy. Or Kim, what did you buy? What did it look like? Was it three bedrooms or four? I have to know. Was it three or four?” That miss out on all of the different ways that you can structure this to work based on your personality, your skillset, where you want to go, what you want your retirement to look like. So on that note, how many years did it take you to build a portfolio that you feel you could retire on? And what were your target properties that worked for you, Kim?

Kim:
Well, it just depends on your properties too. But I would say 10 years. And then, like I said, you just take what you think it will take you to live on. We have 401(k)s and things like that. And I would say, do a mixture. Some people are a 100% real estate or a 100% stock market, but I would really advise to do both, just in case. I like having hard assets in case the stock market crashes. And when the stock market is climbing, then I want to have stock too. So I would just say, have a balance. And then you never know about anything really. You just do your best and hope that you can live your life in gratitude and joy for right now, because that’s all we have is really right now. But you want to still prepare for the future.

David:
But it sounds like you wanted simple, right? You didn’t want a big fixer upper like your brother. You didn’t want to run a construction zone. You wanted something that was sort of plug and play like Monopoly. I want that little greenhouse and I want to stick it on the board and I want to start collecting rent. So you picked a market that you believed was going to grow over time, would have a solid tenant base. Maybe it’s not incredibly sexy. You’re not going to scale to 500 units using the BRRRR method, but the simplicity of it was attractive to you.

Kim:
Absolutely. That’s what I wanted. And I found that 3/2s are excellent. For me, it worked out really well. One or two car garages. Preferably, people like two. But I always would say, “Well, what would I want to live in? And what neighborhood would I like living in?” Because sometimes, people will try to sell you a home that is really nice online, but when you go to Google Maps, or actually I would fly there, and I would say, “I wouldn’t want to live on this street. This is the only good house on this street.” And so you have to work with people that you trust. So important.

Henry:
Well, I think that that’s a great piece of advice. What other advice would you give someone who feels like they’re getting started a little late, but are interested in doing this?

Kim:
Well, I have a little saying, and Michael Jordan said, “Some people want it to happen, some people wish it to happen, and some people make it happen.” And some of those people… We all know about Ray Kroc, right? McDonald’s. And Ronald Reagan, he was 54 when he switched from acting to being governor of California. Martha Stewart didn’t start till she was 50. I mean, really, you hear about these big names that start later, but it’s never too late. It really isn’t. I mean, there’s expiration on a milk carton, right? But that’s not us. I think we get better, we get wiser. We have more fun in life. We enjoy things more, because not so uptight. We’re just enjoying our kids and grandkids. And we’re just… I don’t know. I like this stage in life. I really enjoy that I started later.
I actually don’t think I could have done this with kids because I was so into all the things they were doing. If anyone called me about a property, it would be a week till I got back to them. And now that I’m home and I am an empty nester, it’s really nice. And another thing about it is we wouldn’t have been able to buy six properties, even on a HELOC, if we were just newly married. So there are some advantages to being older. You’ve got better credit. Hopefully, you have more savings. You’ve got more wisdom. And you’re enjoying life. And so it’s just icing on the cake.

Henry:
Wonderful. Well, there you have it, folks. You heard it right here. Kim is letting you know it’s never too late to get started. I really, really appreciate you taking the time and sharing this experience with us. And I am super happy for you that you’ve now been able to purchase your dream home. That sounds like you are loving that. So thank you so much for sharing the story. If people want to learn more about you or get in contact with you, is there a way they can do that?

Kim:
Well, I’m on Facebook. And it’s Kim Woolf, that’s my maiden name, W-O-O-L-F, Bosler, B-O-S-L-E-R. And you can DM me and I would be happy to get back to you and guide you to some people that I trust personally and I’ve worked with, and just encourage you if there’s something you need, because I do think it’s an amazing way to have passive income. I really do. Or I wouldn’t be here.

Henry:
David, how can people get in contact with you?

David:
Well, I sure hope they do because I’m lonely and I need more people to be my friend, if I’m being frank here. They could do that by visiting davidgreene24.com and checking out my chat option and seeing the stuff that I have going on. Or they can DM me on their favorite social media. I’m @davidgreene24 everywhere. Henry, where can people get ahold of you if they just want to see how your big brain works?

Henry:
The best place to reach me is on Instagram. I’m @thehenrywashington on Instagram. Or you can go to my website, www.henrywashington.com.

David:
Alrighty. Well, thank you, Kim. What a cool and inspiring story that you shared. And thank you for relaying it in such a positive way that there is hope out there for people even if they feel like it’s too late to get started or they’ve passed up some opportunities in their past, that does not mean that they cannot do this now. In fact, it’s probably more important than ever that they do. Thanks for being here today. We hope we see you again.

Kim:
Thank you, David and Henry.

Henry:
Thank you.

David:
This is David Greene for Henry big brain Washington. Signing off.

One of the most critical factors that determines how successful any business can be is its pricing structure. A model that both earns high profits and satisfies customers’ needs is one that will support a business for a long time to come. But a model that fails in any way could spell disaster for a growing company. In this way, it’s important to check in on your pricing strategy from time to time to evaluate how it’s performing and what you can do to improve it.

To get you started, nine members of Young Entrepreneur Council list some of the signs you may notice when it’s time to reevaluate your pricing structure, as well as discuss what your first step should be upon noticing them.

1. You’re Seeing A Decrease In Business Coming In

It’s essential to keep a close eye on your pricing structure to remain competitive. It may be time to reevaluate your pricing if you notice a decrease in the number of clients or a lack of new business coming in. This could indicate that your current pricing is no longer meeting the needs or expectations of your target audience. If you notice this sign, you should first research your competitors to see how they are pricing their services. This will allow you to make informed decisions when it comes to adjusting your pricing structure to better meet your target audience’s needs. – Michael Garrido, E-Valve Technologies

2. You’re Unable To Invest In Talent Or Service Quality

One sign that you may need to reevaluate your pricing structure is if you’re unable to invest in top talent or enhance service quality due to tight margins. In a B2B environment, delivering superior value and service is vital for competitive differentiation. If your current pricing doesn’t allow for these improvements, it’s a clear indication that a reassessment is needed. Your first step should be to analyze your costs while keeping this in mind and targeting a sustainable margin. From there, devise a strategy that allows for investment in talent acquisition and service enhancements, ensuring these are factored into your new pricing. Ultimately, this reevaluation supports a shift from competing on price to competing on value, better positioning your agency in the marketplace. – Andras Berczeli, Sprintform

3. You’re Experiencing Negative Unit Economics

Negative unit economics is an immediate sign you need to reevaluate the pricing structure of your business. One way to quickly evaluate this is determining that your cost of sales does not exceed the revenue generated for your product or service. This exercise may result in needing to increase your price or lowering your cost of sales. Another metric to test to make sure your unit economics works is whether your customer acquisition cost exceeds the customer lifetime value, which is the amount a customer will pay you in the entirety of their journey with you. You may need to adjust how much marketing you can spend on converting a customer or you’ll need to improve the customer lifetime value. – Nanxi Liu, Blaze.tech

4. You’re Hearing Complaints From Customers

If your customers think that your pricing model is higher than what it should be, they will definitely start complaining about it. So, keep an eye out for negative feedback from your users. Customers will start comparing your prices to those of your competitors as well, so keep a close eye on how your competitors are structuring their prices. This will help you understand whether or not you need to reevaluate your prices. – Thomas Griffin, OptinMonster

5. Your Competitors’ Prices Are Changing

One of the best ways to tell when it’s time to update your pricing is to keep an eye on what your competitors are doing. If your competitors’ prices are much lower than yours, it may signal that there’s some mismanagement within your resources or tools. If their product is priced much higher, it’s time to reevaluate whether your undercut strategy is working. Armed with this information, begin the process of reevaluating your product. Do you want to appeal to bargain hunters by pricing your product lower? Or would you rather corner the luxury market by attracting a small but high-value customer base? While other factors like customer and sales representative feedback are valuable, researching a competitor’s pricing can offer a more comprehensive look into pricing strategies. – Bryce Welker, Crush The EA Exam

6. You’re Planning To Release New Products

In many cases, consumers expect the prices of older products to be more affordable as new versions are released. If this sounds like something you’re going through, I suggest researching the market and your competitors so you can adjust the price of your old products to make them appealing to first-time customers. Convert these people with an old product, and there’s a good chance they will eventually pay for the upgraded version. – Chris Christoff, MonsterInsights

7. You’re Running Frequent Discounts And Promotions

If you’re frequently discounting or running promotions just to generate sales, it’s a red flag. Relying on discounts implies your standard pricing isn’t resonating. What to do first? Remember, data is king. Analyze your sales data and determine which products or services move well only when discounted. It’s time to evaluate if the problem is with the product, its perceived value or if it’s genuinely priced too high. This analysis will guide your new, more effective pricing strategy. – Idan Waller, BlueThrone

8. You’re Noticing A Big Difference In Perceived Value And Price

One telling sign you need to reevaluate pricing is when you notice a significant disparity between perceived value and price, either too high or too low. If customers consistently balk at the price or competitors offer a similar product at a different price point without clear justification, it’s time to reassess. The first step should be a comprehensive market analysis. Understand what competitors are offering, your unique value proposition and customers’ willingness to pay for those unique features. Aligning your pricing with both market trends and your value will help you sustain both competitiveness and profitability. – Michelle Aran, Velvet Caviar

9. You Find Yourself Unwilling To Change

One sign your pricing model needs reassessment is if you catch yourself saying things like, “We’ve never raised our prices,” or “We haven’t raised prices in X years.” Business owners share such information with a sense of pride and think that it’s a good thing—not realizing it’s been unintentionally hampering their growth and profitability. The first step isn’t just to raise prices, but to review your offer within its broader context—brand, market positioning, perceived value, customers and competition. Pricing should never be a static aspect of your business; it’s an evolving strategy that should reflect the value you deliver. When in doubt, start higher, because it’s relatively easier to give a discount, run promotions or just lower prices later than it is to raise prices if you started lower in the first place. – Devesh Dwivedi, Higher Valuation

Dave:
Hey, everyone. Welcome to On The Market.
James Dainard, what’s going on man? Good to have you here.

James:
I’m happy to be here. Just landed on a Red Eye in Naples, Florida. So I’m in a random hotel room right now.

Dave:
Why are you in Naples, Florida?

James:
It’s for a sales retreat. We’re having a bunch of guys meet at one of our partner’s houses, so it is pretty cool. But I literally landed, got in the Uber and pulled over to a random hotel to hop in for the podcast.

Dave:
Oh, my god. So that’s not even where you’re staying.

James:
No, this is halfway mark.

Dave:
You just rented a room to record the podcast.

James:
Got to get that good wifi.

Dave:
Wow. Oh, my god. Wow. You stay at nicer hotels than me. My wifi is always terrible there. But that is dedication, we greatly appreciate that. Well, today we have a great show. Let me ask you, have you heard the term “doom loop” recently?

James:
It is on repeat. It is the term of the month, at least. I know that much.

Dave:
Well, if you haven’t heard it, to our audience, doom loop is the scenario that a lot of journalists and analysts are talking about where commercial real estate defaults start, banks stop lending, credit tightens, which puts more downward pressure on prices, more people default, and it becomes this negative downward spiral. And this has happened in the past. This is not fiction or theory. This has happened and a lot of analysts are thinking that it could happen in the U.S. with commercial real estate.
So today we have brought on an incredible guest. It is Richard Barkham, who is the Global Chief Economist and Head of Global Research for CBRA, which if you’re not familiar, one of the very biggest commercial real estate firms in the entire country. He maintains a massive team of analysts and economists, and we have an incredible conversation with him about the doom loop, about what’s going on in the international property market, and how it could impact the U.S. And so I think we’re going to hear some really fascinating stuff in this conversation.
James, do you have any questions you’re particularly interested in asking Richard?

James:
Yeah, where are the deals going to be? We haven’t seen the huge deals yet.

Dave:
Give me those deals.

James:
Where are they going? Let’s go find them.

Dave:
Yeah. All these economists, they talk a lot about theory. They’re wonderful guests and they’re super helpful, but I don’t think they’re going to be showing you any properties that are going to be big deals for you.

James:
They drop you those little gold nugget hints that you should start looking.

Dave:
Yeah, they inform your strategy.

James:
Yeah, take notes and go dig on all the sectors he’s going to talk about.

Dave:
Before we get into our conversation with Richard, I just wanted to call out that you’re going to hear two different terms that you may not know. One is cap rates. We do talk about that a decent amount on the show. But cap rates are one way that commercial real estate is often valued. And it’s basically just a measurement of market sentiment and how much investors are willing to pay for a particular stream of income, or a particular asset class. The higher the cap rate, the less expensive the building is. So buyers usually like high cap rates. The lower the cap rate, the more expensive the building is. So sellers typically like that. So just keep that in mind as we go through this interview.
The other thing we are going to talk about is IRR. If you’ve never heard of it stands for Internal Rate of Return, and it’s basically just a metric that real estate investors really of all types use, but it’s used particularly often in commercial real estate, and it is a preferred metric for commercial investors because it is a very sophisticated one. I’ve written about it in my book, but I can’t even tell you the formula off the top of my head.
Basically what IRR does, in the most simplistic sense, is allows you to factor in all the different streams of income that you get from a property. So a lot of people look at cashflow and cash-on-cash return ,or they look at their equity growth and look at equity multiple. What IRR does is it looks at the different cashflow that you’re getting, the different equity that you’re building, the timing of that income, and gives you one solid number to understand your overall return. And it is a great thing to learn if you’re a real estate investor. We talk about it in Real Estate by the Numbers. Just know that Richard and James and I are going to talk about IRR and that’s what it means.
All right, James, with no further ado, let’s bring on Richard Barkham, the Global Chief Economist for CBRE.

Dave:
Richard Barkham, welcome to On The Market. Thank you for joining us.

Richard:
Very glad to be here.

Dave:
Let’s start by having you tell our audience a little bit about yourself and your position at CBRE.

Richard:
So I’m Global Chief Economist at CBRE, and CBRE is the world’s biggest property services company. I’ve occupied this role for eight years. Prior to that I was with a very well-known English company called Grosvenor, and prior to that, for my sins, I was a university professor.

Dave:
Excellent. And can you tell us a little bit about what you, and I presume your team as well, work on at CBRE in terms of economic forecasting and analysis?

Richard:
Yeah. So my team is 600 people around the world, and we are primarily engaged in collecting and managing data about real estate markets. Now just keeping connected with global real estate markets is what we do, and we like to be first in the market with commentary on recent trends in real estate, and we like to have the best big ideas about the forces that are driving real estate.

Dave:
Oh, good. Well, we want to hear about your big ideas. Let’s start though with just a general outlook. Everyone has a different opinion these days about where the U.S. economy is heading. What’s yours?

Richard:
The U.S. economy has been surprisingly resilient, but we still expect a recession to come. We’ve got it penciled in for Q4 of 2023 and Q1 of 2024. But given the resilience in the economy we can’t be exactly certain with that. I could see us pushing that out a little bit, but the sharpest rise in interest rates in 40 years eventually will bear down on the economy. It’s already bearing down on certain sectors, real estate’s one of them. Global conditions are worsening as well, which points us more in the direction of a recession.

Dave:
And what are some of those global conditions that you’re referencing that you think will have the biggest impact on the U.S. economy?

Richard:
Well, I think first and foremost, we’d expected China when it bust out of Ziglar, that covid lockdown, to take off into really rapid growth. And it did for a quarter. But in Q2 the Chinese economy has slowed up quite a lot, and it’s partly because people spent all of their money in Q1 and have restrained themselves a little bit in Q2. But I think there are more fundamental issues in China to do with the weakness of the housing market, particularly in tier two, tier three cities. And also the Chinese economy is running into its normal channel of growth is exports, but western markets are very sluggish.
So I think the Chinese economy has got problems. Now why does that affect the U.S.? It’s because behind the scenes over the last 20 years or so, China’s been an increasingly important driver of global demand. And although the United States is a fairly isolated and resilient economy it can’t completely get away with weakening global demand. And that’s the big thing about China. But I also noticed Europe has weakened as well. Germany, France, Italy, all had negative GDP growth in Q2. So the bigger developed economies are beginning to feel a pinch as well.

James:
Glad you brought that up because I’ve actually been reading up on the Chinese economy quite a bit and how much it’s been cooling down and possibly heading towards stagflation. That’s a huge deal because it’s a massive economy that’s been emerging. What is that going to do to our possible recession locally? A concern of mine is that could actually send the world into somewhat of a spin which could keep rates a little bit higher. Do you think that that’s going to affect rates going forward for the next 12 months with the impact of any kind of global slowdown as well?

Richard:
No, I think it’s the reverse in the case of China. I think China’s going to send a deflationary impulse, a slowdown in China, because China’s a very heavy user of resources and commodities in the world economy. If the Chinese economy slows up then that puts downward pressure on commodities and that helps to reduce inflation in the developed world. And I also think China drives a lot of the emerging markets. China and the emerging markets together may be 35% of the global economy. U.S. companies export to those markets. So I think through that there’s a slow down impulse sent to the United States economy and the other developed markets. But I don’t think it’s inflation, I think it’s deflation.

Dave:
So one question I keep asking some of our guests is, for those who believe a recession is in the future, what is going to change between now, which you described as resilient, to one that actually dips into a recession? What do you think some of the drivers are going to be that tip the scales?

Richard:
I think at some point corporates will want to reduce their headcount. If demand slows up corporates will want to let labor go, and I think what we’ll start to see is unemployment ticking up. We’ve got incredibly low unemployment. It’s been at 3.5. The last number was 3.8, but I think over the course of a recession that could easily get up to 4, 4.5. And indeed, it was much higher than that in the great financial crisis. So fewer jobs, harder to get a job, longer between jobs, and that feeds through into consumer sentiment. And I think then that triggers households being much more cautious about what they spend. And we’re beginning to see some element of that, because at the moment the U.S. economy is continuing to add jobs, the new jobs that is offsetting the slowdown in spending from people who are already employed.

James:
So Richard, when do you think… The jobs report is starting to turn. I think this last month was indicating that it’s starting to cool. It’s definitely starting to cool down, and as far as what I understand is a lot of the interest rates that are being hiked up is high, it’s to (a) battle inflation, but also to cool down the labor market. Do you think, until we see more unemployment, do you believe that the Fed is going to continue to keep raising rates to try to battle the labor market? Or is it something that they can make it more of a soft landing to where we’re not going to have to see a ton of unemployment to get rates under control? Because right now cost of money is excessively high. I know I’m paying it in all my daily activities in real estate. I think we’re all waiting for them to come back down, and we’re seeing inflation starting to tick down. The job market’s starting to slow down, but do we really need to see a break in the labor market for that to start changing the other way?

Richard:
I think the Fed would love to slow the economy up without actually impacting the labor market. So I don’t think the Fed is attacking the labor market, but at the moment today’s data shows that the employment cost index was revised up. So the cost of labor is still higher than is ideal. And one simple way of expressing that is the rate of growth of hourly wages in the U.S. economy right now is 4.4%. The Fed would like to see that at about 3.5% because, and this is a technical economics answer, 3.5% wage growth plus 1.5% productivity growth gives you 2% growth in unit labor costs, and that’s the rate that is consistent with 2% inflation. So 4.4% is above the rate that’s consistent with 2% inflation, and indeed, actually productivity is flat lining, so that impulse from the labor market.
Now there’s two ways that that can ease. One, we can get more workers back into the labor force. So labor force participation can rise, and that has been happening. But the other way that it can happen is through taking demand out of the labor market. And demand for jobs, jobs created is going down, but I think there are still something like 8 million vacancies in the U.S. economy. So for all that it’s slowing up it’s still a robust labor market, and I don’t think the Fed wants to cause unemployment, but it’s going to keep interest rates high until that wage growth eases back substantially, and that may then trigger a rise in unemployment.

James:
Yeah, I’m hoping it cools down. We’re still trying to hire right now and it is impossible to get people, like at the Pacific Northwest, it is just terrible. Every time we put a job ad up it takes us three to four months to fill it, rather than 30 days, like it used to be.

Richard:
Well, I think you’re not the only business feeling that really. And there was a sense I think that manufacturing industry was slowing up. But if you look at surveys of manufacturing industry, the biggest issue is not cost of financing manufacturing, it’s access to skilled labor. It’s a real thing. One of the drivers of that, of course, is demographic. You’ve got a lot of boomers leaving the labor market. On top of all of the cyclical stimulus and all of the macroeconomic cycle, you’ve got demographics overlaying that, and you’ve got boomers leaving the labor market. And some forecasts actually say the U.S. labor market is going to shrink over the next five years. So that needs to be replenished, I think, with I would say, legal migration of skilled people. And that is picking up, but it is, as you suggest, labor market conditions have cooled but they are still tight.
Getting back to the original question, that is of concern to the Fed. Absolutely it is.

Dave:
All right, Richard. Well, we’ve peppered you a lot about macroeconomics, but we would love to hear, given your experience at CBRE, your take on the commercial real estate market. It seems every single day we read a headline about some doom and gloom scenario, and would love to hear if you feel the same way? Or what is your thought on the commercial market?

Richard:
Okay. Well, let me just put that in context for folks, just big picture, just before I start. Commercial real estate in the United States is worth about 10 trillion. It’s a little bit more than that. Single family homes, or residential real estate, is worth 45 trillion. So the residential real estate market is much, much bigger, and that is in good health actually. Prices are going up and even construction is looking up, and that’s really odd given that we’ve got mortgage rates at 7.5%. I think what accounts for that is post great financial crisis. We’ve just failed to build enough homes in the United States. There’s a deficit of three to 4 million homes, so the demand and supply balance in the residential market is reasonably healthy.
Now we can come on to how that affects the apartment market. People talk about doom and gloom. Let’s just get commercial real estate in context. And the real recessionary sector in commercial real estate is the office sector. And of that 10 trillion, offices may be 25% of that. So again, it’s a big sector, it’s very visible, it’s in our face. And vacancy in the office sector is 19%, up from 12% a couple of years ago, which is a rate of vacancy we haven’t seen since the savings and loan crisis in the early 1980s. Companies are really cutting back on the amount of space that they’re going to use because of remote working.
And also, we’ve got a delivery of new real estate into the market from the previous construction wave. So fundamentals in office, very weak right now. This is a nuance, I’m going to talk about real estate stuff.

James:
Please.

Richard:
It’s not true that the market in offices is completely dead. I’d looked at the number of transactions that CBRE is doing in 2023, and it is only 5% down on the number of transactions that we did in 2019. But when companies are taking space which is 30% less than they took in 2019, so the market is active, just companies are taking lesser amounts of space, and they’re also preferring the newer build. The real flight to quality and experience, I think. Market not dead, but the unoccupied stock has increased from 12% to 18%.
Looking across the rest of real estate, by which I mean apartments, by which I mean the retail sector, by which I mean industrial, and increasingly alternatives such as data centers, medical office, life sciences, I would say the fundamentals there are actually reasonably robust. It’s really surprising when you look across it. Vacancy rates are notching up, demand is not quite what it was, but I would say fundamentals in all of those sectors are reasonably okay. By which I mean to say that people are active in the market, taking space, and there’s not a big surge in vacancy rates and unoccupied space.

James:
Richard, have you seen much price compression? We’ve seen it across some of the residential space, but now we’ve seen the median home price creep back up. Have you seen much compression with interest rates rising and the demand? Like you were just saying, tenants are occupying less space. Have you seen much compression in all those segments, like industrial, office, retail and pricing? What adjustments have you seen? Because I have seen pricing start to tick down in those sectors, not as many transactions going on, but what kind of price adjustments have we seen year over year, based on the demand being smaller?

Richard:
Yeah. I mean, that’s a complex story, so this’ll be a bit of a long answer, but let’s kick off with apartments. If you’re a user of apartments the price you pay is the rent, obviously. In that period 2020 to 2022 when people really bust out of Covid, we saw apartment rents going up at 24%, on average across the States. It’s terrible. I would say apartment rental growth has dropped to about 2%. So prices are still creeping up but it’s below inflation. And there are certain markets I think where there’s quite a lot of new apartments being built where you’ve actually seen some price declines. But on average, I think prices across America in apartments are still creeping up slowly.
In the case of retail, that’s another strange story. We haven’t built any retail space for 15 years or so. And the retail sector has gone through Covid. It’s cleaned up its balance sheets, it’s reinvented itself as a omnichannel operator, very snick omnichannel and I think part of the fact the consumer exuberance has sent people into retail centers. So actually in the retail sector our brokers tell us there’s not enough Grade A space. Companies are being held back from expanding because there’s not enough good space. We haven’t built enough. So rent’s still creeping up in retail, actually. That’s not to say there isn’t a problem with Grade B and Grade C malls. I think everybody would see that in their daily lives, but even some of those are reinventing themselves as community hubs and antique mall destinations. And they’re finding other uses, even flex offices are going into some B and C malls.
So that’s apartment, that’s retail. Industrial, that’s got the tailwind of the digital economy, of e-commerce, still well and truly behind it, and we are going to see leasing in industrial down 30% this year from a billion square feet last year to maybe 750 million square feet, but it’s still going to be the third-strongest year on record. So rents are moving up and more than a little in industrial, maybe around somewhere between 9 and 12%. So that’s a very hot market. And of course, other things like data centers. There are folks here in Dallas, where I’m based, leasing space six years out. There’s really huge demand for data centers around Cloud computing, artificial intelligence, it’s an incredibly hot sector.
So I’ll pause there. There are other sectors I could talk about, but I think the fundamentals in real estate, apart from offices, are surprisingly strong, which is not to say that investors are active. If you make a distinction to people who use the real estate for what it’s built for and they pay rent, and the people who own real estate, which are pension funds, life insurance companies, university trusts and other private capital, it’s very quiet on the investment front right now. And prices are dropping. The actual price that you would pay for real estate as an asset will be down anywhere between 15 and 20% on where it was two years ago.

Dave:
So just in summary. Yeah, so demand among tenants, whether they’re apartment tenant, retail tenant, seems to be holding up relatively well, but demand among investors is slipping. That is what we’ve been seeing, and the data I’ve been looking at shows that cap rates are moving up. Is that what you’re seeing? And if so, outside of office, I think we all understand office as being the biggest hit, but our audience is particularly interested in multifamily apartment type of audience so I’m just curious how cap rates are performing in that specific sector of commercial real estate.

Richard:
Well, I think it’s like all of the other sectors. Cap rates would be out approximately 125 basis points to 150 basis points, depending on the type of asset and the location, from somewhere around 3.5% out to 4 or 5%, depending on the location. And maybe higher than that, depends what the starting point is. There are a range of cap rates reflecting the different gradings and the different locations. I would say, as a general, prices are out 150 basis points, and that is the equivalent of approximately a 20% drop in prices.

Dave:
And do you think that’s going to continue?

Richard:
Yes, I do, actually. I see… Not forever.

Dave:
No, I just love someone who gives a direct answer. So usually when we ask something like that they, hey, well. Because it is complex, don’t get me wrong, there are many caveats, but I do always appreciate a very clear answer like that.

Richard:
Yeah. I think there could be further loss of value, and it won’t reverse itself until investors begin to see a clear glide path for interest rates. We began to see, I think maybe two months ago, just a little bit of a sense where people were… Looking at what I saw, which was actually offices, that’s got a problem, but fundamentals in real estate actually not too bad, we seem to be getting on top of inflation. And those forward rates of return, take a 5% cap rate, add 2% rental growth and we’ve got notionally a 7% forward IRR, and that equates to debt costs somewhere between 6.5 and 7.5%. People began to think maybe we’ll start looking at deals again.
But I think the spike in the 10-year Treasury, when it went from 4.2 to 4.4 in the last two weeks, again brought that uncertainty about the glide path for interest rates front of mind. So people just put their pens down again and thought, well we’re just going to wait and see what happens. We’re in this world, I think, that good news is bad news, whereas between 2009 and 2020, for real estate bad news was good news because it kept interest rates down. Now we’re in the opposite world, it’s the same world but it’s opposite. But good news is bad news because it increases the people’s worries about interest rates higher for longer.

James:
So Richard, you’re saying we could see some more buys over the next 12 months. I feel like the multifamily market has dropped a little bit, but the sellers are still hanging in there and there’s not a lot of transactions going on because the cap rates, they’re not attractive enough for us to look at them. Because I’ve seen the same thing, we were seeing cap rates like 3.5, maybe low 4s, and now they’re up to 5.5. It is not very attractive with the debt out there right now.

Richard:
No, no. I mean, I think if people had more confidence you wouldn’t just look at, to get technical, you wouldn’t just look at the cap rate. You’d have to look at the IRR, which takes into account the rental appreciation that you would get.

James:
Right.

Richard:
And I think the IRRs, even if you assume 2% rental growth, 2.5%, it gives you an IRR that is getting in the ballpark. But I think when confidence evaporates people are not IRR investors. IRR investors involve making assumptions about rent in the future, and people don’t want to do that. And just, as you say, there’s no positive leverage right now and people are unwilling to accept negative leverage in the marketplace.
But it won’t take much to tip that equation, I don’t think. We’d like to just get a bit more obvious direction on where inflation is going, a bit more obvious guidance that we’ve reached the peak of the Fed funds cycle, the Fed have been very equivocal about that, then I think things will tip. Because on the leasing side, leasing disappeared in Q2 of 2022, just when interest rates started going up people dropped out of the market. Well, leasing is back. Q2 of this year leasing came back. And we’ve got quite a high level of new construction, maybe 90,000 units per quarter, but the market is absorbing 60 to 70,000 units per quarter, at least based on Q2 evidence and Q3 trajectory.
So demand has come back up. Vacancy is probably increasing slightly. But with demand coming back it won’t take too much, in terms of that expectations for people to say there are some bargains to be had here. I would say, just on your point about sellers holding out, if the Fed hadn’t intervened and provided liquidity to the banking sector, which has allowed the banking sector to be able to transit through a period of loans. They might still be paying the interest but they’re below water in terms of value. We might have had a different situation. The Fed has been very active in providing liquidity to the banking sector. And of course, I think that’s kept pressure off the owners, and therefore you’ve got this standoff between buyers and sellers, or owners and potential buyers.

Dave:
Richard, I do want to follow up on the banking sector and what’s going on there. Just yesterday I was reading an article in the Wall Street Journal where they were positing about a “doom loop” in commercial real estate. The basic premise is that their valuations are already down. It’s put some properties under water and now people are starting to default on those loans. Bank credit is tightening up, which means people can’t refinance or they can’t purchase, which puts further downward pressure on valuations, and it creates the spiral that creates sustained downward pressure on prices in the commercial real estate space. I’m curious if you think there is a risk of this doom loop, or whatever you want to call it, if there’s more risk in bank failures and the lack of liquidity impacting the commercial market?

Richard:
I mean, what I’m going to tell you is rather a complex argument, which is somewhere in between, there’s no problem and there’s a doom loop.

Dave:
Okay.

Richard:
I think, with great respect, the journalistic maxim is to simplify and exaggerate.

Dave:
Right.

Richard:
And I think, to a certain extent, with real estate that’s what’s going on. And I’m not saying that there isn’t an issue with loan impairment, but I think what we are hearing and what we’re seeing is banks have got ample access to liquidity, and because of that they’re not suffering deposit flight. So where they are making losses or they have to write down loans, they’re able to bring that to their P&L account on a relatively orderly basis. There is no doubt that the cost and availability of credit for new financing is much tighter. It’s incredibly tight. But I don’t think the banks want to end up with real estate on their books. I mean, they’ve been through this before. They don’t want to put people into default and then they’ve got the real estate that they’ve either got to manage or they’ve got to sell it at some discount to somebody who holds it for two years and then makes a profit two years down the line. They’ve been through that before and they don’t want to go through that again.
So I think what we’re seeing is that, where possible, banks are extending. I’d go as far as to say extending and pretending, but there are lots of creative ways in which banks can work with borrowers in order to get through the period of acute stress. And I’m not saying there aren’t going to be losses. Our own research tells us probably 60 billion of loans are likely to default. There’s 4.5 billion of loans to commercial real estate. That 60 billion, maybe it’s 1.5% of total bank assets. So it’s going to be painful, but it is not going to bring down the banking sector. Therefore, the doom loop, it’s not good, and making losses is never good, but I don’t think it’s quite as an aggressive doom loop as we have seen in previous real estate crises. We’ve seen doom loops do exist in reality. They did in the savings loans crisis, they did in the great financial crisis, but at the moment, for a variety of reasons, I don’t think we’re there yet.

James:
There’s definitely a lot of articles with that word doom loop going on. It’s the new in-term I’m seeing on every article, where it’s doom loop, doom loop, that’s all I’m hearing.

Dave:
Just wait, James, the episode is now going to be called doom loop, and we’re going to probably have our best performing episode of all time if we call it the doom loop.

Richard:
Can’t we talk about virtuous circles rather than doom loop?

Dave:
Yeah, no one wants to hear about virtuous circles, they want to hear about doom loops, unfortunately. I would love virtuous circles.

James:
But if there is a doom loop coming, Richard, because it sounds like you feel confident in some commercial sectors going forward, what sectors do you feel are the most investors should be wary of right now? If you’re looking at buying that next deal in the next 12 months, what sectors are you like, hey, I would cool down on that or be wary of?

Richard:
Well, it’s very tempting to say offices, because offices, as I say, we’ve got that jump in vacancy from 12% to 19%. We’ve got no certainty about the return to work in U.S. office. We think the return to work will gather pace, but just over a longer period, but there is no certainty about that right now. On the other hand, as a professional in real estate of 40 years or so, you get the best bargains in the most bombed out markets. So amidst all of that repricing there are going to be some very good opportunities in the office sector. And if you really want to be contrarian you run in the opposite direction. All those people running one way saying doom loop, doom loop, you work out where they’re coming from and move in the opposite direction.
I think also retail has got quite a lot going for it right now. We were seeing quite a lot of private capital. And it’s not like office, the asset sizes can be smaller. It is possible for smaller investors to get involved in retail, and we are seeing a shortage of space, and we’re seeing some very, very interesting trends in retail. The sexy sectors, if I want to put it in those terms, or the sectors that we are most confident on, I think, because of the tailwinds are the industrial sector and the multifamily sector if you want to invest in longer term rental growth. But once the market starts moving that’s where the prices will rise quickest. So if you want to invest in that long-term story then you need to move quickly, I would say.
Don’t get me wrong, there are certain parts of multifamily and apartment that I think will run into some problems. There was quite a lot of very cheap bridge financing in the multi-sector where people were, in the boom years of 24% rental growth, people were buying Grade C assets with very low debt, and they were looking to refurbish and reposition those as B or B plus or A Grade space. Given the general weakness and the level of interest rates, I think some of those could end up defaulting. So if you’re a student of these matters there might be assets to be picked up or recapitalized in that segment of the market.

Dave:
James is going to start salivating now.

Richard:
Oh, I was. I was getting worked up.

Dave:
That’s his wheelhouse.

James:
I was getting itchy fingers all of a sudden. I’m like, yes, here we go. And I think Richard nailed it. It’s like everyone was buying these deals on very tight performers and then they’re debt adjusted on them in midstream, and your construction costs are higher, your permit times are longer, and then all of a sudden your cost of money’s gone up and it’s definitely got some trouble in that sector. It’s like the stuff that’s stabilized is still moving as well, but the stuff that’s in mid-stabilization that’s where we are seeing opportunities. And that’s definitely where we’re looking.

Richard:
That’s right. And again, over a long career, people who’ve made very good buying decisions have bought from troubled developers or troubled construction companies. We’ve seen this one before.

Dave:
Well, I hope no one loses their shirt. I’m not rooting for that at all. But I think it is helpful to recognize that this is happening and that there are likely going to be distressed assets that need to be repositioned by someone else other than the current owner.

Richard:
Yeah. I mean, the banking sector at the moment is writing off a lot of debt that’s below water so there is an economic cost to this, but it’s just not got out of control at the moment. And thankfully it hasn’t quite hit the consumer sector, the housing market yet, because that then impacts ordinary people, and that’s not very pleasant at all.

Dave:
Well, Richard, thank you so much for joining us. This has been incredibly insightful. I do want to share with our audience that you and your team have authored an incredible economic report, called The Midyear Global Real Estate Market Outlook for 2023. It’s a fascinating read and there’s a great video that goes along with it as well.
Richard, can you just tell us briefly about this, and where our audience can find it if they want to learn more?

Richard:
Yes, it’ll be on the CBRE website, cbre.com. Go to Research and Insights, and click through on that. It might take two or three clicks, but it is there. I have my research experts from around the world and we try to be neutral and balanced and data driven. We just give a broad overview of real estate markets in the United States and around the world. Actually, I participated in it and I learned from it as well, actually.

Dave:
That’s the best kind of research project, right?

Richard:
Yeah, absolutely.

Dave:
All right. Well, Richard, thanks again for joining us.

Richard:
It’s my absolute pleasure.

Dave:
So James, Richard has told us that he thinks asset values are going down, which obviously is not great for anyone who holds real estate, but also, that there might be some opportunities, which I know you are particularly interested in taking advantage of. So how does this type of forecast or prediction make you feel about your business?

James:
Well, I like he gave me verification that you should be buying when other people don’t want to buy, essentially. There were so many key little things when he was talking about how industrial the rents are going up, but the pricing’s going down. So there is some opportunity in those sectors of going through and just looking for those opportunities right now, because you hear it all the time that people are like, “Ah, you can’t buy anything. You can’t buy anything.” But that stat alone that he was talking about, industrial, rents are going up but the pricing’s going down, that is where you want to go look at. So I am getting more and more excited for the next 12 months, and it’s going to be a matter of being patient and finding the right opportunity.

Dave:
You mentioned on the show that cap rates where they are now, you said Seattle, what are they 5.5?

James:
Yeah, I would say 5.25 to 5.5, in there, somewhere there.

Dave:
But given where interest rates are, that’s negative leverage, that’s not something that’s typically attractive to investors given where debt costs are. At what point would cap rates have to rise for you to feel really excited about the potential of the deals you could buy?

James:
Well, you can always get a good cap rate if you buy value add. That’s where you can increase it. But I mean, in theory, I don’t really like to buy below cap rate. I would want to be in that 6.5. If it’s stabilized with little upside, I want to be around a 6.5 right now.

Dave:
And just so everyone understands, cap rates are a measure of market sentiment. And as James is indicating, it ebbs and flows based on cost of debt, how much demand, perceived risk. And generally speaking, cap rates are lower for stabilized assets. And when cap rates are lower that means that they trade at a higher cost. When cap rates are higher, they’re cheaper. And usually you can get a higher cap rate as a buyer if you’re buying, as James is saying, a fixer up or something that needs value add.
But sorry, James, go ahead.

James:
Yeah, I think that’s what we’re seeing right now. A lot of the transactions we’re seeing in this last six months it’s a lot of 1031 movement of money, but not a lot of new buyers walking in for that general 5.5 cap. If they have a purpose to go buy, they will. Other than that, everyone’s chasing that value add where you got to roll up your sleeves, get to work. But there is some really good buys right now. I know our IRRs have increased quite a bit over the last nine months to where we’re now hitting 17, 18%, and so those are all good things.

Dave:
That’s a very good thing. Well, we’ll just have to keep an eye on things and see how it goes, but I generally agree with Richard’s assessment. Cap rates are up, and I do think they’re going to continue to climb while my guess is that rents, at least in multifamily, which is the sector I understand the best, are probably going to slow down. They might keep above zero and grow, but I think these insane rent growth rates that we saw in multifamily are over for the time being. And so that combined with cap rates increasing we’ll bring down multifamily values even further past where they’re today, which might present some interesting opportunities. So we’ll have to keep an eye on this one.
James, thanks so much for being here. We always appreciate it. And for everyone listening it, we appreciate you. If you like this episode please don’t forget to leave us a review on either Spotify, or Apple, or on YouTube if you’re watching it there. Thanks again, and we’ll see you for the next episode of On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, 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.

Bill Rudin, Rudin Management Company CEO and co-chairman, joins ‘Squawk Box’ to discuss New York City’s real estate landscape, the looming commercial real estate crisis in the city, and more.

You’ve seen the headlines and felt the pressures of the realities of a post-pandemic economy. As businesses flex their creative muscles to return profit margins to their former glory, many are looking at product size. While shrinking sizes can be a cost-efficient and timely switch with fast results, it also draws immediate customer impact. There are better ways to navigate this economy while protecting quality and brand promise.

1. Review Sales Data to Discover Efficiency Opportunities

Let data be your guide as you explore opportunities for greater efficiency. Take a broad look at the total data set for your sales patterns to establish a baseline. Then, drill down to more recent segments where you may better project current buying behavior.

If you have loyalty programs where you can assess individual customers’ buying habits, extract buying frequency and product size data. Isolate buying patterns against product size to see what’s most preferred and when. Doing so can reveal otherwise missed opportunities, like the ability to reduce a product option.

For example, imagine you’re selling tea in 20-count boxes, but your most popular options are available in a 40-count box. Customers may enjoy not having to buy boxes as frequently, but at what cost to your business? The manufacturing costs, labeling changes, and shelf space may be costing you more than you think.

Store data may also reveal that the best sales and coupons are applied to the 20-count boxes. By eliminating the larger quantity item, you can boost manufacturing efficiency without sacrificing quantity or quality.

2. Break Down the Product Lifecycle to Determine How Much Size Matters

Don’t close that spreadsheet just yet; there’s more insight to uncover from your customers’ buying habits. After looking at buying frequency to explore product range, it’s time to dig into individual product sizing.

The term ‘shrinkflation,’ when a product size changes but the price remains the same, can be seen everywhere. The amount of cans in a seltzer water case goes from 12 to eight. The ounces in a bottle go from 16 to 12. However, not all product sizes shrink with the same customer impact. Sometimes, product size changes are welcomed in certain categories.

In the fast food industry, it’s widely understood that sizes have moved beyond super, reaching even mega size. As customers consider how they want to buy and enjoy such items, many are intentionally buying smaller. Whether it’s a health preference or a budget move, it’s a change worth noticing.

Launch a post-purchase survey, isolating those buying smaller sizes to a subset of questions. If the data indicates that they’d prefer more modest sizing, stress-test this change in sample markets before converting completely. By responding to customer preferences in size, you can maintain quality and price and delight customers at the same time.

3. Rethink How You Fulfill Products in a New Economy

Shrinking sizes often track back to the journey your product must make after manufacturing. Shipping weight matters and small changes in individual package sizes can present attractive opportunities for brands. Before you shrink, rethink and retool your product fulfillment process to ensure you’re at your most efficient.

Examine your shipping process at every level. Identify the cost per shipment, taking into account surcharges for fuel, timing, and parcel sizes. Product weight is one of the immediate benefits of changing product sizes, but changes like better route planning can be cost-saving too.

Upgrade your direct-to-consumer experience to make direct sales efficient and enjoyable. Explore subscription options, a strategy that benefits you and the consumer. If you’re selling bath and body care for the whole family, offer subscriptions supporting the demands of your busy customers.

A subscription creates sales consistency and shipping planning opportunities, which can help determine manufacturing needs. For your customer, a subscription eliminates a to-do list item and often results in savings on products and shipping. Keep in mind your warehousing relationship will be integral to this strategy, which can ensure subscriptions are fulfilled and expectations are met.

Preserve Product Quality and Customer Loyalty

As you navigate today’s economic pressures, shipping landscape, and customer expectations, let quality be your north star. Preserve the features and benefits of your product with a vengeance, ruthlessly protecting what your customers have come to expect.

If product changes are needed, go above and beyond on service and training to ensure your customers are well taken care of. Monitor and address customer feedback through whatever changes unfold, taking action and updating processes in response. By prioritizing the customer experience throughout change, you can improve your initiative’s effectiveness while preserving trust, loyalty, and brand legacy.

The truth is, we’re not quite there yet. While the term “quantum computing” trips easily off the tongues of policymakers, business leaders, scientists and engineers, it could be five years or even longer before this new data-crunching technology begins to make any meaningful impact on our lives.

And here’s the problem? As things stand, companies working in the quantum computing space are engaged in cutting-edge development work at a time when no one can be totally certain what the market will look like in five or ten years’ time. The assumption is there will be customers and use cases but, as things stand, it’s impossible to predict which technologies they will choose to adopt. In the meantime, startups must continue to fund their development work while trying to establish some kind of traction in a market that doesn’t really exist.

So what does that look like in practice? How are young companies finding their feet in an industry that promises to change the world – but not just yet ? I spoke to two U.K. quantum startups about their progress from drawing board to marketplace.

Market Confidence

According to figures published by Markets and Markets, revenues in the sector are expected to come in at around $899 billion in 2023, rising to $4,375 million in 2028. The development of quantum hardware and software is something that governments are keen to encourage. For instance, the U.K. government sees Britain becoming a “quantum-enabled” country by 2033 and has committed £2.5 billion to supporting development over the next ten years.

So there is confidence and consequently, there is VC cash available. For instance, Oxford Ionics – a hardware company with 50 people on the payroll – has raised £40 million so far. Phasecraft – a software startup – has secured £17.4 million in equity finance, plus a further £3.7 million in grants.

Oxford Ionics co-founder and CEO, Dr. Chris Ballance says that despite the risks associated with technologies still under development, it’s difficult to see how machines that perform calculations significantly faster than conventional supercomputers will not have enormous value. “As a company, we have been willing to take a bet on this and we are asking investors to do the same,” he says.”

The key, he adds, is to find the right investors – those who understand not only the potential rewards in the market but also the risks. There is, he adds, a need for a certain amount of investor education. “We are tough with our investors. We will tell them why they shouldn’t invest.” This is not an exercise in gratuitously scaring sources of finance away. It is about ensuring that the investors and the company are aligned.

And as Ashley Montanaro – CEO and cofounder of Phasecraft – sees it, VC finance has been crucial to enabling his company to develop its software algorithms. “There are different ways to fund yourself,” he says. “For instance, some companies offer consultancy. We see that as a distraction. VC finance allows us to focus on the hard R&D.”

Grant funding has also played a part in the Phasecraft journey. “Financially, that’s been important but not essential,” says Montanaro. “But grants are important in enabling collaboration and also in providing validation for what you’re doing.”

Commercial Viability

Perhaps the most crucial aspect of attracting enquiry is the ability to demonstrate commercial viability. In the Quantum Computing world, the basic unit of information is the Qubit. Oxford Ionics controls its Qubits – which are individual atoms – using a proprietary system designed to be scalable.

Ballance says there has been a focus on technology that will scale to meet the demand. The key is the development of reliable hardware that not only provides a sufficient number of Qubits to outperform supercomputers but also a low enough error rate to make the technology useful and workable.

And In one way or another, that’s what all the quantum hardware companies are working on at the moment. While there are a range of hardware technologies that are proven to offer quantum functionality, the tricky part is ensuring the kind of consistent performance that can be commercially exploited. That’s when the banks, the research institutes, the multinational corporations, and indeed all those who will benefit from the technology will begin to buy in.

Finding Customers

But here’s the question. How do those who are developing the technology know what their potential customers are looking for?

“We spend a reasonable amount of time talking to customers, precisely for that reason,” says Ballance. “Typically, we’ll be talking to people with PhDs in Quantum computing. We ask them what they need.”

Styling itself as a quantum algorithm company, Phasecraft specializes in the quantum simulation and analysis of materials with solar panels and batteries being a particular specialism. It is also in regular contact with potential users of its services. “We have a number of partnerships,” says Montanaro. “They include Johnson Matthey, Oxford PV and Roche.” These partnerships are helping the company develop algorithms that will solve real-world problems. In addition, it is working with IBM, BT and Rigetti.

The business models are also being developed. Both Ballance and Montanaro believe the main route into quantum solutions for the majority of organizations will be through a quantum-as-a-service model, using third-party hardware and software. That doesn’t necessarily mean an arms-length relationship with providers. This is a complex area where users and suppliers are likely to work closely together. A few organizations will buy their own in-house systems.

The adoption of quantum computing will depend on precision engineered hardware that can outperform supercomputers on a reliable basis, something that will in turn feed a specialist software industry. Ultimately, some technologies will win through with others failing to gain traction. But with quantum likely to revolutionize functions such as drugs discovery, materials development or financial modeling, the expected rewards mean that startup capable of demonstrating the viability of their technologies have a fighting chance of securing VC capital.

Ashley:
This is Real Estate Rookie episode 322.

Tony:
So we only do welcome gifts at a few of our properties right now and ours are pretty plain. It’s a little note card that we have. It’s a little package of popcorn and it’s like some candies. I personally probably wouldn’t standard include wine as a welcome gift for a lot of the reasons that you mentioned. We have sent gifts like that in the past, but only if we know if we get something from that guest before they check in. So someone’s like, “Hey, my wife and I are celebrating our 10th anniversary.” Anyone who’s celebrating an anniversary 10 years is probably over 21 years old, right?

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’re bringing the inspiration, motivation, and stories you need to hear to kickstart your investment journey. Today we’ve got a really good rookie reply for you guys. Ashley kind of goes off the rails at one point and she just goes rogue and comes up with her own question. But we get a few good guest questions as well, or rookie questions I should say. So we talk a little bit about mortgage interest and is it a business expense or is it not? We talk about the pros and cons of buying your properties in LLCs or just doing it in your personal name.

Ashley:
I love it how Tony said Ashley has a question and then we have really good questions from the rookies.

Tony:
She’s reading into that guys.

Ashley:
So yeah, some of the things we talk about today are about mortgage payments and how they should be broken out on your tax return and in your own bookkeeping for your profit and loss statement to show your income and expenses. You have your principal that is included in your mortgage payment, and then you also have interest, and then you may also have escrow, which would be your insurance and property taxes too. So we’re going to touch on that and why a bookkeeper can play a really big important key role in helping you decipher that.

Tony:
All right guys, so I want to give a quick shout out to someone by the username of Alyssa A. And Alyssa says, “Favorite podcast. Been listening to The Real Estate Rookie for the last year. One of my favorite podcasts for being a newbie and real estate, always have the best guests, inspiring stories and advice.” So Alyssa, I appreciate the five star review and if you’re one of our rookies and you haven’t taken just a few minutes to leave us an honest rating and review, please do. The more reviews we get, the more folks you’re able to reach and the more folks we can reach, the bigger impact we can have, which is what we want to do here at The Rookie Podcast. So take two minutes, leave that review, and we just might shout you out on the show.

Ashley:
So for this week’s Instagram, shout out, I want to give a shout-out to Dell Collective. So this is an Instagram account that hosts unforgettable stays and so they share their journey about the three different short-term rental properties that they have, and I want to stay at one of them because they’re so beautiful. So if you are looking for design and experience ideas, I’m pretty sure they have a camel I think on the property even that you get to hang out with while you stay there. So definitely check out Dell Collective. They have a really unique Airbnb experience along with some of the different, I guess, amenities that are provided along with your stay and the really cool animals that you get to meet while you stay there. So go ahead and check out Dell Collective on Instagram.

Ashley:
Okay, today’s first question is from Heidi Keywood. “Why is mortgage interest not considered a loss in income or an expense? Is it just the cost of doing business? A $100,000 mortgage costs 50,000 in interest over 30 years, that’s $50,000 you’ve lost, even if the tenant is paying it. I know it’s a tax deduction and leveraging your money allows you to buy more properties and everyone has different goals, immediate cashflow pay down and larger cashflow for retirement, et cetera. But I don’t see interest expenses in the equation in any discussion and that affects how to use your cash. Thanks.”

Ashley:
So first of all, interest expense or interest on your mortgage is an expense and it should definitely 100% be included on your profit and loss statement. So if you’re using the BiggerPockets calculator and you put it in there that you’re going to be using a mortgage, the interest will show up as an expense when it is showing your profit or loss on the property. Your mortgage principal payment, that is only calculated since it is money borrowed against your cash flow. That is not calculated as a loss or as a loss in income or an expense as Heidi had put it.

Ashley:
So 100% it definitely should be accounted for. So Heidi had said that she has seen it places where it’s not included and I’m not sure where those are. Maybe people are posting examples, but it definitely should be included when you are running the numbers as to how you’re going to fund the deal. If she saw maybe properties that were being paid for in cash where there was no interest, that could have been the scenario, but it definitely should be included on your tax return and it also should be included as an expense on the profit and loss statement. And what having a bookkeeper can do is every month when you make your mortgage payment, they will take that say $585 and they will take say the principal that you’re paying is actually only $115 of that, and they will take it and they will allocate that $115 to the mortgage principal to show, okay, your mortgage balance is now this, and then they will also take the interest expense and put it as an expense for you to bring down your bottom line.

Tony:
Yeah, well said Ash. I think the only thing that might be kind of causing some of Heidi’s confusion, and maybe this is something that’s affecting some of our other rookies as well, is that a lot of times you’ll just hear people refer to what they pay monthly for their home as their mortgage payment. So they just use that as a catchall phrase, Hey, my mortgage is X, Y, Z, when in reality that mortgage payment is a combination of your principal interest taxes and insurance. So your PITI. So if you hear someone say, Hey, my mortgage is 2,500 bucks, a lot of times you’re including that interest payment as part of that 2,500. But yeah, it’s Ashley’s point, you should definitely be including your interest as an expense on your P&L. And if you are not or your bookkeeper is not, I would probably go find a new bookkeeper.

Ashley:
Okay, the next question is from Mark Urban. “What are the pros and cons of purchasing in your personal name versus in LLC? And if you go the LLC route, do you put all your properties in one or a separate LLC for each property? I’m relatively new, so pardon, if this question has been asked before.” Mark, we welcome every question here and we are so excited to have you part of the real estate rookie group and that you’re going to be starting your real estate investing journey. This question has been asked before and it gets brought up a lot. Definitely is something that people are unsure about because there is not one defined answer. Is this 100% what you should be doing? We’ll go through the pros and cons. Putting it in your personal name leaves you up for liability that someone can sue you personally if something goes wrong with the investment property, but you can also get better financing by having it in your personal name.

Ashley:
So the bank will give you a better rate and terms because it’ll be on the residential side and not in an LLC. If you put the property in an LLC, it does provide you more liability protection against you personally and your personal assets as long as you are following the rules of having a business that is an LLC such as properly maintaining your books. Downside of an LLC is that the bank loans are not as term and interest rate friendly. So for example, if it’s in your personal name, you can probably get a fixed rate over 30 years. With an LLC, you’re probably only going to get a fixed rate over five years and only amortized over 15 or 20 years. So those are some of the differences. If you go the LLC route, do you put all your properties in one or separate LLC for each property?

Ashley:
So the main reason for most people to put a property into an LLC is for that liability protection. So I would not look at how many properties, I would look at what your total equity is. So if somebody were to sue you, how much equity do you have available where the judge would say, okay, you have half a million dollars in equity, you sell all your properties. If you have them leveraged and maybe you only have $50,000 in equity, then there’s not that much to lose.

Ashley:
So I would look at it more of an equity position. I have LLCs based on my partnerships, but one partnership, the equity got too high for our comfort, so we started a second one, a second LLC, now that properties are going into that. So it really depends on your comfort level as far as how much equity is in that you’re doing the properties. And then there’s also a lot of people that just put one LLC in each property, or I’m sorry, put one property in each LLC, but Tony knows it is very expensive in California to have 20 different LLCs to maintain. You’re paying the, what’s it in California? $800.

Tony:
$800. Yeah.

Ashley:
And is that per year?

Tony:
Per year.

Ashley:
Per year. And then you also have your bookkeeping for each LLC, it’s to file a tax return for each LLC. So that can completely diminish your cashflow if you only have one property in that LLC. So that’s definitely something else to take into consideration. One more thing I will add is if you do go into your personal name, definitely get an umbrella policy from your insurance broker that all encompasses and gives you some kind of protection. So if somebody does sue you personally, they will pay up to a million, 2 million or whatever that umbrella policy is in legal fees or most likely they’ll settle for that amount of money and you won’t lose anything.

Tony:
Yeah. Just to add on to that last piece you said, Ashley, is that a lot of new investors, I think they get understandably, but they get kind of freaked out about the liability that comes along with being a landlord. And for a lot of people their minds go worst case scenario. And the truth is that there’s tons of ways to protect yourself and actually kind of alluded to this, but I think the bigger question you need to ask yourself is how much do I really have to lose If you don’t have much net worth and if someone came after you and there’s maybe a car, there’s not a whole lot for you to risk there. And for a lot of people, especially when you’re just getting started out, a lot of times the protection you can get through your home insurance policy and through your umbrella policy can give you pretty decent coverage, as you said, up to millions of dollars, which hopefully would cover a lot of incidents that happen at your property.

Tony:
To Ashley’s point, we don’t have one LLC per property. We have a couple of LLCs that kind of manage a lot of our holdings and we do that because we feel that’s the right structure for us. But I think the best thing for you to do Mark, is to go talk to an attorney in your estate, someone specifically that and maybe not even in your state, but really more so someone that understands real estate investing and all the different kind of nuances that come along with that and kind of lay out like, hey, here’s what my picture looks like, here’s what I’m worth, here’s the assets that I have, and let them kind of understand, hey, what’s the right way for you to do this? Because I don’t know, some people that spend $50,000 in legal fees for asset protection, but it’s because they’re protecting tens of millions of dollars. I myself today probably wouldn’t pay a lawyer $50,000 to set up asset protection for me because in comparison to my assets, it doesn’t make sense for me to do that, right? But someone that’s got thousands of units probably.

Tony:
So I think you want to weigh the cost against the benefit and see what structure makes the most sense for you, but I think getting some good legal advice is a good first step as well.

Ashley:
So the next question is actually I’m going rogue on this. This is a question that I have for you, Tony, that I wanted to submit today to Real Estate Rookie. So I never ever go on Facebook, but I actually once in a while go on Facebook marketplace and look for properties for sale and I actually found one, so I’ve been logging into check if the guy has messaged me back on it and he did today, but I also just scrolled through my feed and it was just, I’m not in this group, it’s like an Airbnb, VRBO, booking.com host group and it must have came up as a recommendation.

Tony:
Suggestion group.

Ashley:
So it’s a picture of a fridge and it has six different beers and a little wooden crate thing and then a bottle of wine and it says, here’s a choice, beer or wine, have a drink, it’s vacation time. And then the person wrote, “This is a little something that I do for each guest and the refrigerator. I have a nice bottle of wine and a variety six-pack of beer along with a 12 pack of waters.” And then of course, this cute little sign. “I would like to see what other hosts do for their guests as a special little welcome.” So in my brain, the first thing I think of is, Okay, what if they’re underage kids in there and they drink alcohol? I always think worst case scenario.

Ashley:
So I go into the comments and there was actually a mix of them, some just being like, you know what? It’s the person’s choice. This is a very nice gesture. Other people talking about recovering alcoholics, how this may be a trigger for them and that it’s not a good idea to put it in the home. Also, other people talking about liability or saying that it’s actually illegal for you as a business owner to provide the alcohol on the property because you don’t have a liquor license depending on what their state was. So I was just wondering if you have any take on this as to what are your thoughts on it?

Tony:
That’s a great question. I’ll answer with a little anecdote first. There was this podcast I was listening to, and it was a podcast about the court system and this lady was going to the courthouse every day following these different court cases that were happening. But one thing that she called out in the podcast was that as she was in the courtroom, there were TVs in the waiting areas, but the TVs were always only set to the food network. And she asked someone there, she’s like, there’s so many other options, why the food network? And they kind of started rattling off the different possibilities. They’re like, “Oh, well we could put the news but it’s too polarizing. Or we could put sports, but not everyone likes sports. Or we could put a kid show, but not everyone’s in here with kids.” And they just rattled off all these different reasons why all these other options were potentially bad ones and they landed on the food network because they’re like, “Who doesn’t seeing good food getting cooked?”

Tony:
So when I think about from a host perspective, it’s almost that same approach. We’re like, okay, what’s the food network of a welcome gift? So we only do welcome gifts at a few of our properties right now and ours are pretty plain. It’s a little note card that we have. It’s a little package of popcorn and it’s like some candies and we do that at I think two or three of our properties right now and that’s it. And for most people, there’s not a super high allergic reaction to popcorn. We thought about maybe home baked goods but don’t like what if people are allergic to nuts or peanut butter or whatever’s inside of them. So we said, what’s something simple, something generic, something that most people can be happy with. So I personally probably wouldn’t standard include wine as a welcome gift for a lot of the reasons that you mentioned.

Tony:
We have sent gifts like that in the past, but only if we know if we get something from that guest before they check in. So someone’s like, Hey, my wife and I are celebrating our 10th anniversary. Anyone who’s celebrating an anniversary 10 years is probably over 21 years old. So in some of those situations we’ll send a bottle of wine or if a guest maybe has an issue getting into the property because they’re checking coat working, we’ll send a bottle of wine or something like that. But as a standard catch all, give for everyone, I probably wouldn’t do it.

Ashley:
Yeah, we’ve done it twice in our A-frame property and the one was for the first ever guest, and you could tell by the picture they were definitely over 21. And then the second one was for a couple getting engaged where he had just asked us a couple different questions about how he was planning his proposal and things like that and asked, where’s a good place to go get drinks? We’re doing this hot air balloon ride or whatever. And so our manager had given recommendations, and so this was all done ahead of time, so we left them a bottle of champagne, but we actually hid it and then we told him where it was so that after he proposed and stuff and they came back [inaudible 00:18:09].

Tony:
That’s super cool. I do think welcome gifts in general are a good idea because as supply continues to increase on the platform, competition continues to increase, the hosts that really separate themselves through the experiences, the ones that I think will do relatively well. So we’re always kind of reevaluating what can we do to improve that experience for our guests.

Ashley:
Yeah, one thing that I’ve never seen feedback on is that we bought $150 Marriott plush bathrobes and our cleaner takes them home every time and does them as we have, I don’t know, four of them, whatever, but we leave two at a time and does them as part of her sheets wash cycle, and we have never had anybody say that they like them or even use them or what. We found someone in the hamper and everything that cleaner says, but nobody has cared about that. Then we also get at weddings, people sometimes provide flip-flops or whatever, or even slippers for your guests or you’re doing a bachelorette party or bridal shower, whatever, and so you can buy in bulk slippers. And so we actually tried that out too, and people use them, but nobody has ever left in their review or private review like, “Oh, we love this little touch.”

Tony:
We love the slippers.

Ashley:
Yeah.

Tony:
It’s an interesting concept and it’s something that I struggle with as well. I read this book about Disneyland and how they create the magic at Disneyland, and it started to give these little examples of things that Disney does that go above and beyond what a typical amusement park will do, and it’s all with the goal of creating this magical experience. If you walk through a construction zone at Disneyland, you never see the construction because they decorate even the gates that they put up over the construction. If you walk through a different amusement park, you’ll hear the tractors going off in the background, you can see everything that’s going on. Disneyland has people that are going through scraping up gum all day, just all these little things that they do, and no one’s probably ever commented at Disneyland. I love going to Disneyland because there’s no gum on the ground, but they can feel the difference.

Tony:
All these things kind of just combined, it creates a significantly better experience for people when they’re there. So I struggle with that. It’s like, do we invest in these little things that may not themselves create that positive review, but it’s the combination of all those small things together.

Ashley:
What’s your biggest complaint, would you say, as to far something that’s very little, that’s not like you wouldn’t think somebody would even put their time and effort into actually sending you a private note when they read a review.

Tony:
I feel like it’s either something related to cleanliness, maybe a cleaner missed something. That’s probably the biggest beef that most guests have these days. But outside of that, I wouldn’t say there’s anything that’s consistent. It’s usually some one-off thing where it’s like, for example, our AC was leaking at one of our properties and the mini split is right above the bed. So that guest complaint about that, but I don’t, there’s nothing that’s like all the time we get this same complaint. So it’s kind of hard to say.

Ashley:
Yeah, I was trying to think too, and none of our stuff is really about cleanliness or things that need to be fixed or anything like that. It’s more of like, oh, could you add this in? Or we actually got one the other day, they still gave us five stars, but there was like, there’s nothing to do here. And I don’t know if they meant in the house outside or the location of the property, but I was like, Hey, there’s board games. There’s a TV, I’m not sure exactly. There’s a fire pit, there’s a basketball net.

Tony:
We’ve kind of gotten dinged on some of our properties for location as well. And when that happens, there’s the location description on Airbnb. We can talk about the location. We’ve tried to go back and update that so people really get a good sense of where they are. One of our properties, it’s literally as far north-west, it’s in the far edge of Joshua Tree. Literally. If you go the next parcel doesn’t even belong to anyone. It’s all government land. So that’s how far out it is. And initially we were getting reviews from people that were saying like, ah, it’s a little bit far. There’s a two-mile dirt road to get there. So we put that information out into the listing. We say, Hey, you’re going to love being so remote. If you’re really looking for a solitary desert escape, enjoy the two-mile bumpy dirt road on your way to get there to really experience the desert. So we try to hype it up inside the listing so people understand that, but when we do get comments like that, we try and go back and optimize the listing to make it more apparent upfront.

Ashley:
Yeah, it’s so funny. The things we thought were going to be issues haven’t been issues at all. The driveways actually really steep, and if it rains, it can get really muddy and we put in there, we highly recommend bringing four wheel drive and stuff like that. And nobody has complained about that at all, which has been super surprising. But yeah, I was just looking at the review that we got today that kind of made me want to ask you that is the only thing that they complained about was the difficulty of finding light switches. And I mean, this is the tiniest little property ever, and they could have, and I still have the messages hooked to my phone, so I’ll still get like… Sometimes they’ll pop up for me. And so I read it and they had asked our manager who we can’t find it, she responded right away, told them the exact one they were looking for, where it was located or whatever.

Tony:
We do label our light switches, as silly as that sounds, but it’s like we’ll have one sink light, kitchen light, patio light. That way people, because we were getting those questions a lot too, like, “Hey, which switch does this thing?” and, “I can’t turn thing on?” So yeah, you got to dumb it [inaudible 00:24:21].

Ashley:
Yeah, I think the only one we have labeled is the exterior camera, and we give them the option of shutting it off.

Tony:
Really?

Ashley:
Yeah, exterior.

Tony:
Interesting. We literally just argue with the guest maybe two weeks ago, two or three weeks ago, because we said, say in our listings like, Hey, there’s an exterior security camera for your safety and for us to make sure that nothing goes wrong with the property. At this particular property, we had two, one at the front and one on the side that pointed towards the backyard. And for most of our properties that have big backyards, we do that. One on the front and anywhere there’s a point of entry. And she was making this big fuss because the listing only said security camera and not security cameras. And she literally reached out to Airbnb and she was like, their listing is incorrect and they’re watching me. And anyway, we’re pretty staunch about keeping our security cameras on at all times because in case something happens, we want to be able to check.

Tony:
For example, someone literally broke into one of our properties last week. There was one night that was unbooked and our cleaners had cleaned the property on Monday. No one checked in Monday night. The next guest was checking in on Tuesday and the cleaners cleaned the property Monday. We saw them come in, we saw them leave. They finished their checklist. The guest gets there Tuesday and he’s like, “Hey, the property looks a little dirty, and someone left some white residue on the countertop and there’s some weird things happening.” So we went back like, yeah, okay, cool. The cleaners were there. We go through our cameras, and turns out someone broke into the lockbox and stayed the night at the property, and we saw them at two o’clock in the morning. They were literally trying to creep past the camera so we couldn’t see them. So anyway, we never turn our cameras off because you never know what could happen.

Ashley:
So I should start leaving them on. Make them-

Tony:
You should always leave them on.

Ashley:
Well, they have to turn it back on when they leave, which everybody has been super good at that. But yeah, so basically it’s when they’re there, some people don’t. Yeah.

Tony:
Because we had one guest that reached out to us saying that she slipped and fell out by the hot tub. And again, we have a camera that points to the backyard, and we were able to go through all the camera footage, and the only time she slipped and fell was because they were drinking sitting at the outdoor patio table, and she tried to sit down and she missed her chair, but she tried to message us and say that she slipped because it was so wet by the hot tub. So even just for reasons like that, we never turned the cameras off.

Ashley:
So let’s go back to some of our other questions here. The next one is from Julie Glazer. “Is there a way to find out what a property sold for other than asking a real estate agent? Zillow and the assessor’s site does not seem to be accurate. For example, I purchased a property in September, and it’s not updated on Zillow for the price I paid, thank goodness, the assessor’s site had it appraised at 74,000, which is way over what it was actually worth given its condition. I called our recorder of deeds, and they do have an online record search, but it’s $20 a day or $250 a month.”

Tony:
So Julie, first, just to kind of clarify the different data sources here. So typically there are a couple ways you can get data on properties that have sold. You can get it from the MLS, like the multiple listing services, or you can get it from the actual county records. Typically, the most accurate information comes from the county records because those are based off of the paperwork that gets filed when the property is closed. In California, our title and escrow companies collect all the paperwork from the buyers and the sellers, and then they submit all of those final documents to the county. So those are typically your most accurate data sets are from the county.

Tony:
Zillow, if I’m not mistaken, and someone shoot me an angry message on Instagram if I’m wrong here, but I’m pretty sure Zillow is pulling their information from the multiple listing services. So if an agent fat fingers a number or whatever, as they’re kind of finishing things out, you could see inaccurate data on Zillow as well. So just understand that there’s two kind of different ways to pull that information first.

Ashley:
So Tony, where do you think they get it? If it’s an off-market deal and it’s not on the MLS then?

Tony:
Yeah, so there’s a couple places I like to go for data. So first you can go to the county. So Julie looks like you’ve already reached out to them. 250 bucks a month seems pretty steep, but luckily there are other ways to get that information. So there are data aggregators, basically websites, software companies that pull data from all these local counties and they put it all in one place. So Invelo is one option. BiggerPockets has a good relationship with Invelo. PropStream is another option, but both of those data software providers allow you to search pretty much every city county across the entire country and see the same data you would see as if you were paying that two 50 per month. So I think my first recommendation, Julie, would be to go to a website like Invelo or PropStream and set up an account with them. I think it’s like 99 bucks a month or something like that. So you’re only paying one subscription, but then you get access to nationwide data as opposed to just that one little county or city.

Ashley:
And I think some of them have free, I think Invelo, if you’re a BiggerPockets Pro member you get like $50 free to spend on stuff and then PropStream, I think you get seven days free too. So lots of options to just try it out, especially if you just need one thing. For myself, I’ve looked at the county records and you can still pull information a lot of times without having to pay to get the searches or if you actually go to the assessor’s office, especially if it’s a smaller town. Today, my business partner is actually going to the assessor’s office. They’re only open on Tuesdays from one to 4:00 PM And this question actually made me remember, and I just messaged him real quick on my computer and I said, “Did you go to the assessor’s office?” And he’s like, “No, I’ll go right now.”

Ashley:
Thank you. So also thank you Julie for your question so that this reminded us to make this happen or else we’d have to wait until next week. But you go to the assessor in person and you may have to pay a fee still depending on how big the assessor’s office is, but you can get the information from there too. And then also we have a newspaper, I think it’s called Business First or something, it’s in Buffalo, and it’ll actually publish all of the real estate transactions that have happened and what they were recorded at. So you can actually pay a membership to that newspaper, which is probably going to be way cheaper than the $250 a month. And you can go and search and they think they do it every week. Here’s the transactions that happened this week.

Ashley:
And usually it takes a little while. So if the newspaper comes out in January, it may have been transactions from the end of November or December or something like that, but if it was a while ago, you can go through the newspaper too and search or go to your local library and go through the big computers where you click through the pages of whole newspapers.

Tony:
I think the last thing to highlight too for Julie is the assessor’s appraised value. So the assessor’s appraised value, at least in the properties that I’ve purchased, that I’ve researched, that I’ve analyzed, I’ve never seen the assessor’s value match the actual appraised value of the home. Typically, I see that it’s lower. The assessor’s kind of trying to understand, Hey, what kind of property tax bill should you have? And luckily, it’s always lower than what the actual appraised value is. So I would never use the assessor’s website to gauge the value of a property. It’s only more so for your property tax perspective.

Ashley:
Let’s break that down real quick. I think that does get really confusing because when you get your property tax bill, okay, you have the market value and then you have the assessed value, and the assessed value is determined by the assessor along with the market value and the assessed value is usually lower than what the market value is, and that’s what they’ll take that amount and they’ll multiply it by the percentage of the property tax rate, whatever that may be for your town or county. So that is determined by the assessor themselves. This is 100% completely different than an appraisal. So for an appraisal, it is an appraiser who is going out a third party and they’re going and looking at the value of the property, which would be more comparable to the market value of the property, but still there can be a huge difference of what’s listed as the market value.

Ashley:
And also you have to look at when the property was actually assessed by the assessor too. So when was the last time the assessor went around and said, okay, you know what, I’m changing. Your property is now worth this instead of that, and they usually do a whole town reassessment for the property, and you’ll get a letter letting them know that they’re going to be doing this and that. So you want to go outside, make your house look like a dump for the days that they’re going around town, assessing property, your property tax [inaudible 00:33:35] lowered. But just so you know that there is a big difference in that, the appraised value and the assessed value of your property, because I have seen people say like, oh, they’re listing this house for sale for this, but the assessed value only says it’s worth this. There usually is a huge, huge, huge difference, and you want your assessed value to stay low, to be low.

Ashley:
So another thing, yeah, to keep in mind is that when you purchase a property, so at least in New York State, you can’t get reassessed right away. So it’s whenever there is a county or town reassessment that this will occur. And usually it’s the town that does the assessment, and so they will be like, there was maybe when you bought it, there was just an assessment done that year, so you bought it after the assessment was done. So you’re clear for a little while until they do that reassessment, and when they do that reassessment, they would look at what you had purchased the property for and what the condition of the house looks like at that time. So that’s also something to be very cautious of. If you are paying a lot more money for this property, be cautious that when there is a reassessment that your property taxes could increase.

Tony:
It’s cool that New York kind of only reassesses on a fixed cadence for one of the counties I purchased and even where my primary residence is, the reassessment happens at the time of transaction. So what happens, for example, and Joshua Tree will, we own quite a few properties whenever we purchase a property, they immediately reassess the tax value. So our property taxes go up as soon as we purchase that property, but then we also get hit with what’s called a supplemental tax bill. So I don’t know how, I don’t know the math that goes into this, but basically the county is saying, I don’t know if we’re like, hey, this is what we should have been getting on this property for the last timeframe. And it’s not a small amount. It’s like $4000 or $5,000 that’s due that first year of ownership when you buy that property.

Tony:
So I think it really is important for new investors to kind of understand those nuances because imagine you bought that short term… And we got surprised the first time that we did it. We bought that first short-term rental and we’re cashflowing like crazy. Then we get a bill for 4,000 bucks. We’re like, “Hey, we’ve already been paying our property taxes.” And they’re like, yeah, we know. You owe us this too. So then we had to start kind of budgeting for that in our new properties. So just important for rookies to kind of understand what that process looks like.

Ashley:
Yeah, there was a parcel of land that I helped an investor with. He owned the land already for a long time. So it was taxed at… The assessed value is based on it being vacant land. And then he went and did a new development on it and his property taxes for three years after that were still based off of the vacant land because they hadn’t gone and done the reassessment. So here’s a three and a half million dollars property getting taxed on a $20,000-

Tony:
Like empty plot of land.

Ashley:
… [inaudible 00:36:28] value. So there are ways that it could definitely benefit you, but then that year that it was reassessed like woo, a big shoot up. So just so you know to expect those coming. Well, thank you guys so much for submitting your questions for this week’s rookie reply. Remember, you can always leave a question, and The Real Estate Rookie Facebook group, you can send a DM to Tony or I or you can go to biggerpockets.com/reply. Thank you so much for listening. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson on Instagram and we’ll be back on Wednesday with the guest. We’ll see you guys then.

Ashley:
(Singing).