October 2023

Ashley:
This is Real Estate Rookie, episode 334.

Tony:
I guess we can just go pros and cons for allowing someone to arbitrage your unit. You ideally could potentially charge slightly higher than market rents. If you’ve got a bigger multifamily property, you could lease out multiple units at one time to one person. The third benefit, and this is counterintuitive, they’ll probably end up being your best tenants, because they’re going to handle a lot of the minor maintenance issues on their own if they’re a good host, because they’re going to want to make sure that it’s ready for that guest.

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

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today, we’re back with another rookie reply, answering questions from you, our rookie audience. And look, if you would like your question featured in one of our episodes, head over to biggerpockets.com/reply, and we just might choose your question for one of our shows. But today, we got a long list of stuff that we’re going over. We talk a little bit about rental arbitrage at the end of the show. What is it? When is it beneficial for the landlord and for the person doing arbitrage? We talk a little bit about how to structure partnerships, and if you guys haven’t yet, head over to biggerpockets.com/partnerships to pick up mine and Ashley’s book about partnerships where we cover on how to structure a partnership, what to look out for, mistakes that rookies make when they’re doing that kind of thing.

Ashley:
And if you have checked out our book and given it a read, we would love to hear from you if you could leave us a review at biggerpockets.com or if you ordered it on Amazon or Barnes and Noble, if you could leave a review there, too. Well, you guys, we have run out of reviews. That means we need you to leave a review, an honest rating and review of the podcast, so that we can feature you. And please share any lessons you’ve learned, any wins you have had from this podcast, listening to these amazing guests, and we would love to give you a shout-out. But before we get into today’s show, Tony, I need to have a little boring banter with you. So by the time this airs, you’ll be holding a little baby girl in your arms, so just fill us in real quick: what’s going on in the Robinson household to prepare for baby?

Tony:
That’s a good question. Sarah’s pretty proactive, so she’s been prepping leading up to this. We cleaned out the garage last month to make room for all the stuff that we were going to get for the baby shower. We had a closet downstairs, the closet you have underneath your stairs, it was just a junk place. Now it’s all the baby stuff. We just finished the nursery, I think last weekend, so we’re pretty much ready. I think the only thing that’s missing right now is diapers. For whatever reason, we didn’t get any diapers at the baby shower, so we got to get diapers and wipes. But everything else, we’ve got. We’ve got literally everything that we need, so we’re just waiting right now for baby girl to get here.

Ashley:
It’s funny because when I came to visit you guys in August, in the morning, I got up and made myself breakfast and I went, I don’t know where anything is in your kitchen, so I’m just going through random cupboards and I opened up this big cabinet and it’s just a piece of paper that says baby stuff, just like the whole cabinet is saved for baby stuff.

Tony:
And now it’s filled up. We got stuff in there now. We got a lot of cool little trinkets and stuff, and one of the ones that was pretty cool is that it’s like a Keurig, but for baby formula, so you just fill up the reservoir with water, and then there’s a big thing at the top for the powder, and then it’s literally wifi enabled, so say that we wake up in the middle of the night, we need to make a bottle, you hit a little button on the app, it mixes everything and gets it to the perfect temperature for the baby. We got a lot of cool little gadgets like that.

Ashley:
That is cool.

Tony:
Because I had my son, he’ll be 16 shortly, so that was almost two decades ago that we had him, and so much has changed.

Ashley:
Did they even have Keurigs then?

Tony:
They didn’t even have Keurigs. It has been cool to go on that journey, but we’re excited. We’re super excited.

Ashley:
Well, thank you for sharing that with us. Everybody I’m sure is excited for a little podcast baby to come and make an appearance sometime on the show. Okay, let’s get into our rookie reply questions on this amazing Saturday. By the time this airs, I’ll actually be spending every Saturday at peewee football games, but Tony, maybe it will be beautiful for you, and California probably be cold and windy and rainy at football games, but I hope everyone is having an amazing Saturday so far.

Tony:
Yeah, there’s also a good chance that I might be holding a brand new baby girl in my arm, so we’ll see, depending on how close. Actually, no, I’ll definitely be, because this is coming out the end of October, so baby Robinson will be here by then for sure.

Ashley:
Yes, I’m so excited. I can’t wait. Okay, so our first question is from Steven Cobb. “Hey everyone, I’m about to try to make an offer on the house, but the property is on market, so I’m talking with the agent. When I make the offer, is there any official document that I need to submit, or do I just give them the price I want to offer?” Great question, Steven. And there are differences between submitting an offer to somebody on market and off market. On market is when the property is listed on the MLS, and there is a real estate agent that is handling the transaction. Tony, you can tell me if you read it differently, but I’m thinking that he went to the agent that is listing the property?

Tony:
Mm-hmm.

Ashley:
That he doesn’t have his own agent, which is completely fine. A lot of agents who will do that, it’s considered being a dual agent where they will represent you and the seller. In this circumstance, or if you go and get your own agent, there is no official document that you actually need to present or make up. The agent will do the whole contract for you. And that is one reason I love using a real estate agent, is because they do all of the paperwork for you, and you don’t have to. Tony, you want to go through a list of things that when you’re talking to your agent, I’m talking to my agent, what are some of the things we have to tell them when we’re making an offer? It’s not just the price you want to offer, there’s other things that go into the offer that needs to be considered.
What your agent would tell you this, or any agent will say, “This is the additional information I need,” but just so you’re prepared that you can have it. The first thing is what name do you want the contract in? Are you putting in your personal name? Are you going to put the property in an LLC? You can also put an LLC or a name and do and/or assigned to. This way, you have the ability to change the contract before you actually close on the property. When I purchase a property, I always put them into the same development company.
And then I’m like, “Okay, here’s my business partners, which one’s going to be a great fit? Okay, great, it’s going to be Joe this time for this property. I’m going to put it into our LLC that we have.” And then, by the time it’s ready to close on the property, we make the change to the contract that it’s maker. But this is also how wholesalers can do it too, where they can assign the contract to somebody else. That’s the first thing. Start writing a list down you guys. The first thing is the name. The contract is going to go in. Tony, what would be your second thing?

Tony:
Yeah, I think the second thing, and the one that’s always important for me is your due diligence period. And due diligence is your opportunity as the buyer to really open up the hood of this property, go under the hood for this property, and make sure that as it appears on the outside is how it appears on the inside as well. This is when you’re doing your general property inspection, maybe you’re doing a septic inspection, maybe you’re scoping the sewer lines, you’re having electrical bids created and plumbing bids created. But basically, this is where you really get to sharpen the pencil on all of your initial expenses that you projected associated with that property. And the due diligence period is important because typically during your due diligence, if you find something of concern, say that maybe you assumed that the roof is in good condition, but after the inspection was completed and having a roofing contractor go out, turns out the entire roof needs to be replaced.
That’s a relatively big expense. So you can then go back to the cellar during your due diligence and say, “Hey, I would like to get a reduction of $5,000 to help cover the cost of getting this roof repaired or replaced.” And then you and the seller can negotiate. If the seller says no, as long as you cancel your purchase agreement during your due diligence phase, you typically can get your earnest money deposit refunded back to you. If you were to try and cancel outside of your due diligence period, and maybe there weren’t some other contingencies, you might lose that EMD. I like to typically focus on the due diligence period. A shorter due diligence, it’s typically more, I think, attractive to a seller than a longer due diligence. And I’d say for most of our properties right now, especially if it’s a flip or something we’re going up, 14 days of due diligence is pretty typical for us, but that’d be the second one for me, Ashley, is due diligence.

Ashley:
Okay, well, that was the wrong answer because we were still on the first page of the contract and you skipped to the second page of the contract. The correct answer for the second thing was the address, so the address you want to put on the contract, and this is where your property taxes would be sent to. This is the address the county will have on record as far as the mailing address for this LLC and for the property where you’ll get your property taxes. And then to tag along with that is the email address, because most agents use electronic signature, so they’ll need your email where they can send the final contract to get signed by you electronically.
Then moving to page two, definitely agree, the due diligence, super important. Are you going to have that inspection period? For how long do you need to have that due diligence? Then the next thing would be your purchase price. How much are you going to pay for the property? And then to coincide with that as to how you are paying for the property. Are you going to be paying cash? Are you going to be getting a bank loan? Is it going to be an FHA loan? The loan type you are getting is important in the offer, too, because that will definitely play into someone’s consideration for your offer.
FHA loans are harder to get in a sense, because there’s more hoops to jump through. You have to do an FHA loan inspection, which is separate from your inspection that you’re getting during your due diligence period compared to a conventional loan where the loan company, the mortgage company, isn’t doing any of their own inspection. If you’re looking at two offers, yours with the FHA loan seems a little more risky because what if we go this far and then they say, “No, sorry, FHA loan, we actually won’t cover this property. It doesn’t meet our inspection criteria.” Then the contract falls out, and now these people have to start all over. The next thing after the due diligence would be what your price is and how you’re going to pay for it, and then that ties into a contingency. You can put a contingency in there that if you do not get bank financing and you don’t get your bank commitment letter by x date, then you can actually back out of the contract.

Tony:
There’s tons of different contingencies you can add to your purchase agreement, Steven. I think the piece that’s important is that you don’t want to overdo it. You really just want to try and focus on the contingencies that are most important to you, so yeah, the due diligence, the financing contingency is a big one. We’re doing stuff, we just signed a purchase agreement on a hotel, and one of the things that we had was the environmental study. And actually I learned this from you, Ashley, like, hey, we want to make sure that this thing passes a phase one environmental. And part of our due diligence, but we called it out separately, so there’s tons of things that you can include from a contingency standpoint. But just know the more you have, the less attractive your offer gets. But we talked price, we talked owner information, we talked due diligence and contingencies. I’m trying to think if there’s anything else that I typically include in a purchase agreement. Anything that you’d add that we haven’t chatted on yet?

Ashley:
The only thing I would add is a closing date, that we’ll close in 30 days, so that would be the last thing that I would add. What I usually do is I write out an email to the agent, or I send this in a text sometimes, too, and I will literally just list out this information: name, address, email, inspection, due diligence period, price, how you’re paying, and then closing date, or how many days until closing. It’s just an itemized list I go through and I’ll fill out that out and send it right over, and that’s usually enough information to have all that filled out. And then if there’s any other contingencies you want in there, too. For example, maybe you’re selling your primary residence or another investment property, and saying you’re only going to be able to close on this property if your other property sells, too.

Tony:
The closing date is super important. I was actually trying to look at the last flip that we bought earlier this year. But yeah, typically, a shorter closing window is more attractive to a seller than a longer closing window. Like Ashley said, 30 days is a pretty common escrow period on a single family or small multifamily type residence. Longer escrow periods typically if you’re going into bigger commercial properties. But what we will do on a lot of our flips is we’ll go no financing contingency, because we’re typically raising private money or we’ve already got the money raised in a lot of scenarios, and then we’ll do a 21-day closing.
We’ll have 14 days to get our inspections and our due diligence completed. Then it’s just another seven days to finish off all the paperwork with our private moneylenders, and typically, we’re able to close within three weeks. For us, we’ve got a pretty strong offer because there’s a tighter window, no financing contingency, no other crazy contingencies as well, and it allows our offers to stand out. And I’m pretty sure on this deal, we weren’t the highest offer, but they liked our terms a little bit better than some of the other offers they got.

Ashley:
Yeah, I think that’s a great point. All these other contingencies and terms that you’re putting into your contract can actually make a difference more than price. And that’s why if you have the chance to find out why that person is selling their property can actually help you tailor your offer to that. Okay, so our next question is from Carrie Adams. “Any recommendations on how to structure a partnership for long-term buy and hold?” Cue Tony.

Tony:
I don’t have my book.

Ashley:
You don’t have your book?

Tony:
Where’s my book? I put it up here.

Ashley:
Hold on. I got one.

Tony:
All right, so Ashley’s so excited right now that she just ran into her microphone.

Ashley:
I just spun around and hit my own head.

Tony:
All right, you do the honors today, Ash. I’ll hold the book up, but you do the audience.

Ashley:
Okay, well, I wheeled over to get my book in my chair, so I got mine too. But anytime we hear the word partnership, we are your go-to people, because we wrote the book Real Estate Partnerships. You can find it on the BiggerPockets bookstore. You can go to biggerpockets.com/partnerships, and if you use the code Ashley or Tony, you can actually get a little discount, too. Now that I’m all frazzled from running to my desk, in this question it says, “I have great credit, and my potential partner has more cashflow.” So they’re both bringing value into the partnership. As in cashflow, this is meaning they have actual capital, they have cash to put into the property. They’re willing to go half on the down payment, but the mortgage would be in my name. Tony, I think this is the perfect question for you, because this sounds very similar to how you set up your joint venture agreements.

Tony:
I’s a great question, Carrie, and I think there’s a little bit more to unpack here because I would want to know outside of just how were you structuring the purchase, because what you’ve defined in your question is the purchase, is who’s going to carry the mortgage, which is an important question, and how are we going to cover the down payment and closing costs, which is another important question. But what I would ask next is, how are you going to divide the responsibilities of actually owning and managing this real estate investment? Is one of you going to be the person that’s going to handle everything, while the other person is more of a silent partner? Are you going to split responsibilities down the middle? Is one person going to do 70%, the other person going to do 80%? I think the long-term management of this investment is a critically important thing to consider as you’re putting the initial structure together.
Because assuming all things being equal, how you have it set up right now, one person’s bringing the capital, one person’s bringing the mortgage, that’s a pretty equal thing here, right? Because the ability to get approved for a loan is incredibly important. Better rates, maybe a lower down payment percentage, but you still need the capital to actually close on that deal. But say that you, Carrie, were the person that was going to manage everything, and this other person was literally just bringing the capital, it might make more sense for you to actually have more ownership in the property, because you’re getting the mortgage and you’re doing the management, or maybe you charge the property management fee. There’s a lot of different levers here, but it’s hard to really give a super concrete answer without knowing what the asset management’s going to look like. What are your thoughts, Ash?

Ashley:
Yeah, I would say one thing in here is I think that Carrie should get more equity than the other person is because she’s taking on the debt and she’s giving half the down payment. She’s giving up more for this property, she’s increasing her debt to income ratio, and she’s putting in cash. I would take that, and whatever you’re working out the percentage to be that I think Carrie has more value in this partnership, because she is taking on the debt and giving half of the down payment. Now, if that were to change and flip-flop, and maybe the one person was putting in cash and then just the whole down payment amount, and then for Carrie to get the debt in their name. There’s definitely different variables, but I also think, too, is what is the outcome of this partnership? And I think one thing to be very cautious of when you are structuring this is do what Doni does in his joint venture agreements: do a five-year exit strategy.
In five years, you’re evaluating if you want to keep the property, or if one person wants to sell, you sell it. Having those exit strategies in place, very key when setting up your structure for this. And I think a joint venture agreement is the way to go, because if you are going to… Or you could do an LLC on this, you’ll just have to go and get the financing in the LLC, which then you wouldn’t be bringing as much of a value to the partnership, because the debt would actually be in the LLCs name and not in your name, and the interest rate and the terms wouldn’t be as great, either.

Tony:
But there’s so many different ways to structure it, Carrie. I think what’s most important is that the two of you sit down and really identify, we’ve got the acquisition piece hammered out, but what does the long-term management of this buy and hold look like? Who’s going to be playing what roles? And then do your best to assign either equity, or fixed hourly payments, or percentage of the revenue as a management fee for those duties and responsibilities of actually managing the property? I think it’s a common mistake that a lot of rookies make is that they overvalue the acquisition side, and they undervalue the long-term asset management. The acquisition, it’s a one-time event, right? You’re going to buy the property one time. But the asset management, that goes on for as long as the two of you own that property together, which could be a year, could be five years, could be 30 years, could be forever. You just want to make sure that you’re keeping that in perspective as you structure this partnership.

Ashley:
Okay. The next question is about hard money loans versus construction loans by Rhett Miller. He wants to know, “What are the best ones to use for a BRRRR: a hard money loan or a construction loan? Pros, cons. I’m looking at two lenders and one suggested a construction loan. I was just wondering what your thoughts were. Thanks in advance.” Okay, so the only construction loan I’ve used is actually to build my primary residence, so that was just ground up construction. Have you used a construction loan, Tony?

Tony:
Yeah, I have. I’ve used it twice for some of the properties that I had in Louisiana, my first few long-term rentals out there. But I think it might even be beneficial just from my own understanding to at least break down some of the differences here. Hard money versus construction loan: typically a hard money lender is a company of business that specializes in funding rehab projects for real estate investors. And usually you’ll see higher interest rates than a usual investment property loan. Additionally, there’s points like additional fees you have to pay upfront to use that debt as well. But a hard money lender’s bread and butter customer is the real estate investor.
At least for the construction loans that I’ve used and the ones that I’ve seen, you can get those from a more traditional bank. I got both of mine from a local credit union in the market that I was investing in. Even big banks like Bank of America has a construction loan. Typically, those are going to be for your primary residences, but you can get a construction loan from a local bank or credit union, not just a hard money lender.
I’ll explain how my construction loan worked, and I’ve actually never used hard money because I’ve always gone the private money route, but I’ll explain how the construction loan worked. The way that this specific credit union had it set up, I had to go out and find a property. Once I found the property, they would do… Basically, I would submit my identified scope of work. Say “Hey, here’s the work that I plan to do on this property.” They would then take that scope of work along with the current condition of the property, and they would basically do a future appraisal where they would say, “Hey, based on the scope of work and the current condition of the property, here’s what we think this property will appraise for after your work is done.” And as long as I was below a certain percentage, I think it had to be like 72% of the after repair value, they would lend me all the money for the construction and the purchase.
Basically, I had a one-year construction loan with them. It was an interest only loan, it was a great loan product. I think at the time interest rates were at a little over three, maybe, and I was paying 6% on the construction loan, so it was pretty good. Cheaper than if I would’ve gone out and gotten hard money at that time. I had a 12-month interest only construction loan. And what was great about the loan was that I was only being billed on the amount that I had drawn at the time. I bought the property for whatever, 70,000 bucks. Initially, it was only 6% on that 70,000. And then as my construction bill got larger, then the loan itself, the balance that I was being charged on got larger as well.
And then at the end of that 12 months, I was able to refinance with that bank into permanent long-term fixed debt. I went from the 6% construction loan down to, I don’t know, a 4% investment loan. That was a process for the construction loan. It’s all in house. They handle both the short-term debt and the long-term refinance, pretty much all under the same roof.

Ashley:
For this one, I think my answer at least would be using hard money versus the construction loan, just because in my experience with hard money, there is a lot less oversight compared to the construction loan. The construction loan, when actually I had to have a licensed contractor who was actually approved and verified by them, by the bank, where with hard money, they didn’t ask who was doing the work or anything like that. Not that I wouldn’t use somebody who wasn’t doing a good job. I think different hoops like that, the hard money was easier than doing the construction loan as far as having those hoops, and having so much information verified, and things like that. And for the draws with the hard money, it was a lot easier process to get the draws than it was for the construction loan, too.

Tony:
I guess the inverse of that, I actually found it super helpful, Ash, because I had this construction loan on my very first investment property ever, and I found a ton of value in actually having the bank send a representative to the rehab before they released a draw, because I was getting this confirmation. I was in California, the property was in Louisiana, several thousand miles away. I had my property manager, I’d already contracted the property manager, they would go and walk the property for me. I was FaceTiming with the GC once a week, he was giving me a walk through the property. But then I also had the representative from the credit union who would walk the construction to make sure that, okay, there’s progress being made before they release the draw. It was this security blanket for me to make sure that the rehab was moving the right way.
And then even on the acquisition side, I had this bank who knew the market way better than I did give me their estimate of the ARV. And so, I was super confident moving forward with it, because not only did my initial analysis make sense, not only did my realtor’s suggestion make sense, but then the bank who knows and has lended on tons of properties in that market, they also had this ARV that made a ton of sense. I think for a first time investor for a lot of our rookies, even though there are a few more hoops to jump through, it really can be a good set of training wheels on that first big rehab that you’re doing.

Ashley:
Yeah, that’s a great point as far as the training wheels, is someone holding your hand along the process, where with hard money, there definitely wasn’t that for me, at all. But that’s a great point. The one thing that I will challenge you on, I guess, with that is I did this YouTube video years ago with a hard money lender, and I said the same thing. “Wow, you send inspectors out? That’s actually really great. It’s like that second set of eyes on the property, somebody else who maybe has more construction knowledge.” And he looks at me and he goes, he’s like, “You know you’re paying a lot of money for those inspections, right? Those are baked into your loan fees. It’s not a free service.”
And he said, “If that is really why you want to do this type of loan product is for the inspections,” he said, “it is way cheaper to actually go and hire a third party inspector to come out and to actually do inspections like that for you, too.” I always think about that and how that was interesting. And sometimes you look at some type of service or product and you think like, oh wow, I love it because of this feature. Try to think more outside of the box, and if that’s the only feature you really need and why you’re finding value in this thing, is find a way to make that work for you without having to buy the whole process or system.

Tony:
Totally agree with that. I think I was in a unique position because this was a truly small credit union that had just a few branches in and around that local area, so it wasn’t expensive debt by any means. Like I said, I think there were no points. I didn’t pay any points upfront. The interest rate I’m pretty sure was 6%, and this was back in 2019, which was pretty good, so it seemed like a good one for me. I will say that the one downside was that I couldn’t use it to flip a home. I could only use it to BRRRR. And they made that very clear to me, like, “Hey, you can’t sell this property once the construction’s done. You have to refinance into permanent debt with us.” And then I think I had to hold it for at least like a year or something like that before I could sell it, so it was only for BRRRRing.

Ashley:
That’s actually another great point as the pros and cons versus hard money and a construction loan is what their refinance terms are. Especially when you’re doing a BRRRR like the question asked, the hard money lender that I had used on two BRRRRs, you had to refinance with them, but you had to have at least three properties you were going to refinance at a time, and they would only do almost a portfolio loan to refinance. I ended up pulling my properties off, and there was a 1% fee to actually not refinance with them.
And then also when I’ve done it with the bank, it was my primary residence or whatever, but we had to refinance with them once the construction loan was done. But I think really comparing what the refinance terms are, so not only the terms of the rehab process and that initial hard money and the construction loan, but also what happens when you refinance? Are you charged fees because you’re refinancing with someone else? What is the interest rate going to be? Can you lock in a rate? All those different things, look at that end scenario to the actual refinance piece, too. Okay, our next question is from Arbin Pale: “How much notice do you give to tenants that you’re not renewing the lease?” Tony, what’s your-

Tony:
I give them 24 hours notice. “You guys are leaving tomorrow at 10:00 AM, and if you don’t, I’m calling the sheriffs.”

Ashley:
This depends on your rental landlord laws in your state. I mentioned this actually our last rookie reply, we did episode three of 31 a couple of times, avail.co, or you go to your local housing authority website, or you Google your state and then tenant landlord laws. And usually, there’s some kind of handbook or guide available to you, free or really low-cost landlord classes you can take. Highly, highly recommend taking them. In New York state, you have to give notice depending on how long the person has lived at the property. If they’ve lived there for less than a year, they’re on a year lease and they have to live there over a year, you have to give 30 days’ notice that you’re not renewing their lease, or that you are renewing their lease. And if there’s a rent increase, it has to be that amount.
If it’s two years or less they’ve lived there, then it’s 60 days. And then anything over that is 90 days’ notice. Having to juggle this if you have multiple tenants, keeping track is very important as to how long they live there, as to when you actually have to do their lease renewal. Highly recommend setting some notification five days before that 30, 60, or 90 days, giving your time to write up their new lease agreement, their lease renewal, or that notice to let them know that you’ll not be renewing their lease. Check your state laws as to what that requirement is. I think the more notice you can give, the better. You just want to make sure that if you’re not renewing their lease, that they don’t retaliate by not paying rent for the next three months.

Tony:
I was going to ask that too, Ash. Say that you do issue a non-renewal notice, and let me just take a step back. So again, that property management company that I worked at for a very brief period of time, they also had it very clearly laid out inside of the original lease agreement what would constitute a non-renewal. For example, if you got X number of documented noise complaints that could lead to a non-renewal. If you had X number of late rent payments, that could lead to a non-renewal. So some things are super clear, where it’s like, hey, when your lease is up, you already knew that you weren’t going to get renewed. But say that it’s something maybe more severe where you’re issuing that notice. Have you ever had a tenant trash the place because they were angry, or just leave in the middle of the night? Or are most understanding, and they leave peacefully?

Ashley:
I actually can only think of one tenant that I’ve done a non-renewal with. And maybe when my properties were with the third party property management company, they did and they took care of things, so I was oblivious as to if someone was given a non-renewal or not. But before that, even when I property managed, I can’t think of anyone offhand unless it was like we said, we gave them their notice to cure or quit because they weren’t paying rent, for non-payment.
But as far as anything else, we did have one resident recently where right when we took over, her lease was up, we gave proper notice that we weren’t renewing it because of all the complaints. An old property management company had emailed us every time there was the issue, so we had record of it. It was issues with her dogs. And then she also was late all the time, and so we did a non-renewal with her. And she did try to say that she wanted to stay and things like that, and we just stuck to our guns, and she ended up moving out, and she actually moved in with somebody else at the apartment complex for a little bit. We heard from the neighbors or whatever, but apparently she’s found somewhere else now. But I can’t really think of any other times that we’ve done non-renewals for somebody.
Okay. Our last question today is from Chris Latt. And Tony, it is a question for you. “Airbnb arbitrage from the landlord’s perspective: what are the major disadvantages of this? I just listed my primary residence for rent, and I’ve already gotten inquiries about potential tenants that want to short-term rental the home when they are traveling, or they want to short-term rental a portion of the house. I added a private entrance to the master bedroom of my current house.” In this scenario, we have Chris who has somebody inquiring to be his long-term rental in the property, but while they’re traveling, going on vacation, doing whatever, they want to turn part of the house into a short-term rental to supplement what they’re not paying so they can go and travel. Tony, what is your take on this?

Tony:
Yeah, as the landlord, I guess we can just go pros and cons for allowing someone to arbitrage your unit. The pros are that you ideally could potentially charge slightly higher than market rents. If market rent is whatever, 1300 bucks, maybe you could charge this person, do an arbitrage, 1500. And it’s not uncommon, I think, to see that. The second benefit, and this is more so if you’ve got multifamily, but I know you’re talking single family, Chris, but I’ll talk to our multifamily folks as well. We took on our first arbitrage units from a buddy of mine that has a 12-unit apartment complex, and we took on not one, not two, but three of his units. He had three vacant units, he only had to go to one person, and I was able to lease all three of them from him.
If you’ve got maybe a bigger multifamily property, you could lease out multiple units at one time to one person. And I only signed one lease for all three, so all three are managed under one lease, so there’s less management, less overhead, et cetera, for that landlord. The third benefit, and this is counterintuitive, but the third benefit is that they’ll probably end up being your best tenants, because they’re going to handle a lot of the minor maintenance issues on their own. Because as a short-term rental host, if I’ve got the window between 10:00 AM when one guest checks out and 4:00 PM when the next guest checks in, if there’s a leaky toilet, or a handle gets broken, or something is wrong, I’m not going to wait on the landlord to come. I’m just going to fix it myself to make sure it’s ready for that next guest. A lot of those minor maintenance issues go away when you’re allowing someone to sublease if they’re a good host, because they’re going to want to make sure that it’s ready for that guest.
Those are some of the benefits. The disadvantages are potentially, you could have short-term rental guests that maybe bug your other residents. If you’ve got a single family house, it could be your neighbors. If you’ve got a multifamily, it could be the other folks that are inside of those units. But Chris, yours is a single-family home, so maybe you’ve got a little bit of space between your neighbors and your home, so it’s not as big of an issue. But if you’ve got people upstairs and downstairs, it becomes, I think, a bit of a harder thing to manage. And the other disadvantage is that God forbid, but you could have someone that there was a rager or something, and maybe they caused some extensive damage to the property, but I’d say that’s probably more of a rare occurrence than people actually understand. Honestly, I think there’s more pros than cons. But Ash, you’re the actual long-term landlord lady here, so what are your thoughts on this piece?

Ashley:
And I also arbitrage two apartments that I rent from somebody else. I’ll say, first of all, the first thing that came to mind is my short-term rental units, one of them, I was just trying to think, it’s been 2018 or 2019 I’ve had it, and that apartment to this day is nicer than people who have lived in an apartment at that same apartment complex for only a year. One huge benefit is it’s constantly being cleaned, and it’s always maintained and nice. That was the first thing I thought of is if these people are going to be renting it out as a short-term rental, they will most likely keep the house and the property very nice and clean, because they will want those five star reviews. They’ll want to get as much money as they can. That was my first thought as to that it may actually work out in your favor, and it’s not going to be a long-term tenant that’s just going to trash the place or not clean it and not take care of it because they’re going to be renting it out.
Another thing is, too, is that you’ll be able to look up the listing, and you’ll be able to read the reviews as to if they are taking care of the place, or if people are commenting and saying that the place is disgusting and blah, blah, blah, don’t stay here. The next thing, too, is I would check with your insurance agent as to how this would work for your insurance. Tony has short-term rental insurance on his properties. I have landlord insurance on my properties for my long-term rentals, so talk to your insurance agent and see how this would come into play. Do you need to have your long-term tenants get short-term rental coverage, so that way if somebody does throw a rager and do all this damage, or things happen to the property, that it’s actually your long-term tenants that are responsible to cover through their insurance all of the damages that were done at the property, and it’s not even anything to do with you?
And that actually would give me more peace of mind knowing that the long-term tenants have the insurance in place, so it’s them paying any deductible, and it’s their insurance premium increasing because they have a claim, and not you having a claim on your own homeowner’s insurance. Everything you touched on was great. Those are the only two things that I would add.

Tony:
Yeah, for the arbitrage units that we’re doing, we also have our own insurance in place as well, just to try and protect everyone. But yeah, honestly, I think it could be a win-win for you as the landlord, and for the folks that are renting it from you.

Ashley:
Well, thank you guys so much for listening this week. I’m Ashley at Wealth from Rentals, and he’s Tony at Tony J. Robinson. If you have a question, you can submit it at biggerpockets.com/reply, and you can also check out our new book, Real Estate Partnerships, at biggerpockets.com/partnerships. Thank you, and we will see you back here on Wednesday.

Doug Bauer, Tri Pointe Homes CEO, joins ‘The Exchange’ to discuss demand in homebuilding, how the industry is positioning itself for new home builders, and more.

By Meeta Vengapally

The other day, I went to the grocery store and bought a sweet red pepper for seven dollars. Through my sticker shock, I reasoned with myself that it had to be done. Peppers are incredibly healthy, I use them in many dishes, and I wasn’t going to let my children live on French fries alone.

What kept me in the produce aisle agonizing over this decision is the same for all of us—vegetables shouldn’t cost so much, and neither should everything else. Standing there in dismay, I looked around at the other shoppers and realized that we were all in the same boat. Our world is currently pretty crazy, so I asked myself, how do we create sanity in an upside-down world? More importantly, how do we—and our businesses—prosper?

Overcoming disillusionment in our personal and professional lives

It’s no surprise that inflation, crime, and poor mental health all go hand-in-hand. We’re human. Everyone is doing their best and we’re at the point where people must go to desperate lengths just to survive. America is one of the most affluent countries in the world, but the wheels seem to have come off the tracks. People are struggling and it feels as though moral fortitude has been lost.

We live in an increasingly marginalized, politicized, hateful world, and what causes all of this is deep-seated fear—fear in both our personal and professional lives. But this disillusionment can either bring us down or lift us up together. Considering the problems we face, we can choose inaction or innovation. Many businesses are struggling through this time but those that are rising above are choosing to seek new solutions. In truth, what’s happening in the world can make us all better and stronger with the right mindset. Here’s how.

1. Understand that you’re not alone

My personal key to thriving despite disillusionment and worry is focusing on the knowledge that if I’m fearing something, countless others are as well. When mental health issues spring up, well, someone else has that to contend with, too. My terrifying grocery bill to feed my family gives me the same heart palpitations that it gives others. If I’m struggling with leadership decisions, you better believe that countless leaders are as well.

Although we can’t control our current world, we can take a moment in the produce aisle to realize that we’re not alone in this. The pandemic, protests, and serious crime on the rise—none of this is under our control. More than ever, it’s time for us to focus on what we can control: what we do for ourselves and how we relate to family, team members, and our customers or followers.

2. Lead from the heart

I’m an Instagram influencer and I’ve been questioning that term lately. How do we influence? What impact do we have? These questions are more important than ever because we can rise above the negativity through the decisions we make in life and business. “Influencing from the heart” may not be a widely discussed leadership tactic, but as business owners, content producers, and entrepreneurs, we absolutely must lead from the heart and foster our creative spirits in the face of challenges.

Our customers, team members, and even those we pass on the street want to be seen. The best way to do this is in a heartfelt way. Businesses that are thriving right now understand this key principle. The world has changed and they’ve changed with it. There’s the old adage about the customer always being right. My take on that in our modern climate is the customer is always right about needing that heartfelt, human touch. We all need it in this time of disillusionment.

More from AllBusiness.com:

3. Rise above the “I’m okay” fallacy

“I’m okay” is one of the biggest cop-outs. Even as a leader or small business owner, sometimes you’re not okay! Admitting this is an expression of your humanity and contributes to the health of everyone around you. Our society is geared toward looking the part: strong, resilient, and fashionable. I think these qualities are excellent, but we gain more strength and resiliency when we admit to the moments that we feel weak.

This is particularly important in business and most don’t realize it. If a team member is feeling unwell or suffering in some way, their resilience grows when leaders let them know that it’s okay to not be okay. When we give each other strength during difficult times, we all rise above and become more resilient. If your business or sales are “not okay,” the same principle applies. Being honest about what’s going on opens the door to what needs to be done. Ignoring it creates the opposite effect.

4. Step back from the chaos

When I step back from this maddening world, I ask myself, “What do I say to my kids?” The answer came to me with that red pepper in my hand:

Look around. Everyone is struggling. People who break into shops are struggling (but that doesn’t mean they should do it). Those suffering from depression and anxiety are struggling, and those trying to make ends meet are struggling.

Entrepreneurs and leaders often feel the need to push ahead. People depend on us and success is the main goal. However, the modern superhero needs to step back and assess. There are so many new variables in our world. Responding out of fear isn’t the right choice. In a crisis situation, of course, you need to think on your feet, but if you are dealing with circumstances where you can take more time, then do so. Giving yourself that moment will help you soar above and gain perspective.

Thriving despite disillusionment

The entrepreneurial spirit teaches us to be strong, confident, and resourceful. Our current topsy-turvy world is teaching us to be something bigger: both vulnerable and strong in our communication with one another. We see what we see. When it comes to the news, we’re fed what we’re fed. More than ever before, our interactions are complex, challenging, and immensely important.

Being disillusioned in America feels a bit like a pandemic hangover, but there’s a greater lesson that has come from it. People don’t feel okay sometimes. Perhaps you don’t feel okay. Maybe your business is hurt. But it is important to know that not being okay is okay. This greater understanding and acknowledgment is vital for your family, your entrepreneurial spirit, and yourself.

Take a break from the world and focus on what you have to give. It’s the most important life and career decision you can make.

About the Author

Meeta Vengapally, a trailblazer in the startup tech world and a social media personality, is the Founder and CEO at Garnysh and a sought-after influencer. Meeta has a portfolio of orchestrating over 1000 brand partnerships and serving as a spokesperson for top-tier companies. She balances her entrepreneurial achievements with being a dedicated momager to her two talented teen actors, Winston and Sitara Vengapally. Stay connected with Meeta on Instagram, read her Forbes profiles showcasing her expertise in the startup world and on social media, and explore her articles on AllBusiness.com.

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Dave:
Hey, everyone. Welcome to On The Market. This is Dave, your host. Today, we are going to be joined by one of the OG data and market media people in this entire industry. His name is Clayton Collins. He is the CEO of HousingWire Media. If you’re not familiar with HousingWire, they’re one of the biggest housing market media companies in the industry. They don’t focus really on investors like we do here at BiggerPockets. They focus on the broader marketplace, so mortgage lenders, real estate agents, a lot of those types of things. But Clayton and his team, they have been acquiring data companies actually over the last couple of years, and so they have some of the most cutting-edge data of any of the sources out there.
So, today, I’m having Clayton on to talk to him about some recent changes that we’ve been seeing in the market. So, inventory, as you all know, is a really big issue this year, and they have some of the most up-to-date information about that, so I’m eager to talk to him about if there’s a shift going on as we go into the winter because I’m starting to feel one or sense one, and I’m curious to see what he’s seeing. We’re also going to talk about Clayton’s predictions for mortgage rates, and I know this is something people really want to know, so I’m going to talk to Clayton and get his opinion about where mortgage rates are going to go and why.
I know we all like to prognosticate, but there are some really important macroeconomic trends and technicalities that go on behind the scenes that Clayton knows a lot about and is going to help share with us today. So that’s what we got for you today. It’s going to be an awesome show. It’s a lot of fun. Clayton is really great at explaining some really important topics in the housing market. So we’re going to bring him on in just a minute here. But first, we’re going to take a quick break.
Clayton Collins, welcome to On The Market. Thanks for being here.

Clayton:
Dave, it’s my pleasure. Thrilled to be your guest today.

Dave:
Well, yeah, this is going to be a lot of fun. For people who don’t yet listen to the HousingWire Podcast, can you tell us a little bit about yourself and your work at HousingWire?

Clayton:
Yeah, happy to. So I’m the CEO at HW Media where I have the pleasure of leading our HousingWire team. At HousingWire, we’re focused on providing housing professionals from real estate brokerage, and agents to loan originators, and mortgage capital markets leaders, loan servicers with the full picture of the housing economy. So we have a team of editors and reporters that cover everything that happens in housing from housing market and interest rate news to the movement of people, and companies, and M&A, and innovation. Everything that happens in housing.
I came into this venture, and I’ll tell you more about my background, Dave, more as a banker type, but somehow I got sucked into hosting a podcast. Now, I’m the host of the Housing News Podcast. So, each week, I interview different executives in the housing industry from mortgage bank CEOs to economists about what’s happening in their world. We keep it like a board level conversation and talk about some of the tougher topics that they don’t always get to talk about, and I try to pull out some of that juicy knowledge in this really fun format that I think you and I have both grown to love.

Dave:
Oh, for sure. Yeah, and it’s a great show. I do listen often, and you do get excellent guests, so I definitely recommend it.

Clayton:
I appreciate it.

Dave:
One of the other things you didn’t even touch on, and I’ve been following HousingWire for many years, is that recently, you acquired Altos Research, and we have had their founder, Mike Simonsen, on the show. He and I are friendly as well. Now, you guys are tracking some of the most up-to-date housing market data, honestly, there is that I see. Can you just tell us a little bit more about what you all are looking at?

Clayton:
Yeah. So, Dave, I appreciate you asking about that. Altos is an important part of that phrase I use, “The full picture.” So we believe that business news and business content is on a constant evolutionary cycle that’s leaning more and more toward data-enriched content, and research, and proprietary information, and narrative-driven journalism and storytelling is an incredibly important part of a data-rich ecosystem. It’s how professionals consume information. But we know for us to achieve what we want to achieve at HousingWire by being the full picture, we need experts like Mike and data like we get from Altos to really color that picture.
Altos tracks 100% of active listings in the country. So we like to think of Altos as the most real-time source of data for what’s happening in the active real estate market. So we’re watching every active listing, every price change, every pending, all the data that drives market intelligence, and our users, which are primarily real estate agents, title professionals, and loan originators, use that information to better inform their home buyers, and sellers, and referral partners.
So we take all this active market data, and decipher it down, and cleanse it, and make it understandable so professionals at the local level can be the expert in their market and know exactly what’s happening in their zip code, or their city, or their neighborhood. We have some really cool visualizations of data and the health of the market we call Market Action Index, and we bring all these tools directly to the professionals that are working with home buyers and sellers every day, and make it easy for them to understand what’s happening in housing.

Dave:
Yeah. Great. I mean, I totally agree with the value proposition. It’s the whole idea behind the show as well, that we need more narrative data-driven information in today’s world, and you guys are doing a great job at it. Just for anyone listening, you can check it out. A lot of it is just available on HousingWire. You can go check it out right there, but tell us, Clayton. What are you seeing right now because inventory has really been the story of the year? It’s the word of the year in real estate, I guess, but things are starting to look a little different as we’re heading into Q4. What are you seeing?

Clayton:
Yeah. I mean, it’s been an incredibly… I don’t want to use the trite term of challenging market. It’s been a complicated market, Dave. So, over the last year and a half, we’ve seen interest rates, mortgage interest rates grow at a faster pace than we’ve seen at nearly any time in history, and we’re at a point right now where interest rates are at 20-year highs, and that creates some really challenging dynamics in the market. In most environments where interest rates expand this quickly and reach multi-decade highs, you’d start to see some serious pain in the underlying asset, and you’d start to see home prices decline. But there’s this other dynamic, and it’s that word that you just mentioned, “inventory,” that’s made this challenging market more so of a complicated or complex market.
So, depending on the research you follow and the analysts that you trust, there’s a view that we’ve been underbuilding in the US for at least 13 years, and household formation has far outpaced new inventory coming to market. So we have this demographic push of first-time home buyers and people that are forming households that are creating demand in the US housing economy, and we just haven’t kept up. That undersupply has created an inventory constraint, and despite the pressure with mortgage interest rates, we’ve seen home prices hold up. In most markets, home price appreciation has continued, and it creates this really unhealthy dynamic where first-time home buyers, repeat buyers all face affordability challenges finding the home that they want, and it creates a pretty funky scenario in the residential housing ecosystem.

Dave:
Yeah. Definitely. I mean, I think we’re all getting used to this low inventory situation.

Clayton:
Yeah.

Dave:
Do you see anything in your data or just in your own opinion that would increase supply? We talk a lot on the show about demand because that seems more variable, but I’m having a hard time. I’ve been asking a lot of guests this. Do you think anything will change the supply picture through the end of this year maybe into 2024?

Clayton:
Do you want me to hunt for silver linings or-

Dave:
Sure. Do whatever you want to do.

Clayton:
No. I think the reality is I do not see a dynamic that changes the inventory or supply situation drastically in the foreseeable future. I think we’re looking forward at a multi-year, potentially multi-decade market where we operate in a lower inventory, lower supply, supply-constrained market. Now, we know coming out of COVID in a market that moved incredibly quickly to the upside in terms of volume, and then now this interest rate increase that year-over-year metrics are hard to track, and there’s going to be noise in every measure where we’re looking at month-over-month, year-over-year even normalizing for COVID. There’s a lot of noise in year-over-year metrics.
So, today, as we sit in fall of 2023, we’re watching the Altos Research data, and we’re seeing that inventory today is still 5% lower than inventory of last year despite the fact that we’ve been watching inventory increase each week for the last several months. So we start to see this trend where more inventory is coming available, and that’s coming available because days on market is extending. So homes are not moving as quickly as interest rates approach this 7.5%, 8% range. So homes are sitting longer, so inventory is building. Now, the easy headline there, the housing bear, the bubble boy persona, our analyst, Logan Mohtashami, would-

Dave:
Yeah, we’re big fans of Logan.

Clayton:
Yeah.

Dave:
I love Logan. His terminology is hilarious.

Clayton:
Yeah. He’s a genius when it comes to colorful terminology. Some of the players in this housing ecosystem that we operate in. So, the bubble boy mentality. It’d be like, “Oh gosh, we’re looking at multi-months where every single week, inventory is climbing. This is a problem brewing.” But we’re still sitting at a place with 5% fewer homes than last year, and I’m not armed with the data as we come into this conversation, Dave, but we’re significantly lower than we were at almost every point pre-COVID in terms of what normal housing inventory levels look like.

Dave:
Oh, yeah.

Clayton:
So I’m going to warn you right now. Someone is going to write a headline and saying like, “Inventory is climbing. Home prices are getting slashed. We’re heading into a bubble, a turbulent market. It’s all going to blow up.” Our data does not show that. We show that we are climbing, but we’re climbing back toward a slightly healthier place, slightly healthier, but we are still in a savagely unhealthy housing market, and that unhealthiness is fueled by low inventory and affordability challenges that are complicated by mortgage rates and home prices.

Dave:
Yeah. I think it’s super important for people to pay attention to not just the percent change, but the absolute numbers when they’re looking at some of this data because there is something… As we’ve gone over on this show a little bit is that there’s something called the base effect. When you’re comparing this year to an anomalous year like last year, then data looks a little bit crazy. But if you zoom out a little bit and look over 5 years or 10 years, you can see that historically, inventory was much higher than it was even today even though it has started to increase.
Now, this is a good segue to one of the things I wanted to ask you because in certain markets, we are starting to see inventory approach or even exceed pre-pandemic levels. These are some of the COVID boom towns like Boise and Austin, I think Vegas and Reno, or those profile, but some of those markets have actually steady… been okay over the last few months even though they were previously in a correction. Do you see any change in demand or any downward pressure on prices in those markets?

Clayton:
Yeah. So we published some research based off of data from CoreLogic on some of the markets that are most likely to see a price decline, Dave. What we’re seeing in that data is that there’s different drivers in all of those markets. So there’s markets, like in Ohio and Pennsylvania, that are being driven by lack of population growth and lack of job growth, and then there’s markets in Florida or as we think back to the phrases of the last crisis, the Sand States just saw rapid appreciation in prices, and it’s more so of a normalization than a… but a normalization that will still sit significantly higher than the base rate of pre-COVID.
So there’s different drivers on what we’re seeing in each market. I think we saw a lot of exuberance and over-ask offers in certain markets that were really popular during COVID, particularly in states that had a better lifestyle, more lax enforcement of some of the COVID restrictions, no state income taxes, the things that attracted people over the last couple years. Some of those states are going to see a slowdown in home price appreciation, and certain markets may even see some declines in prices, but I think it’s very much… It’s hard to quantify those as bubble markets or crisis areas. It’s just a volatile pricing ecosystem that saw a fast run-up and is trying to find the equilibrium point.

Dave:
Yeah. It’s weird because it feels like there was this correction, at least a modest correction on a national scale. It was more pronounced in these types of markets. About a year ago in Q4 of 2022, maybe into Q1, and then things got better at least from a price perspective if you’re someone who wants high prices. I think certain investors of our investors don’t want high prices.

Clayton:
No.

Dave:
Now, it feels like… and things got better, and I think a lot of people are starting to think, “All right. We found a bottom.” To your point, there’s this pricing exercise that’s going on like, “What is real? What was COVID exuberance or this massive change in migratory patterns?” But now, it feels like we’re going… To me at least, it feels like we’re going back into the pricing exercise because rates just won’t slow down, and now we’re accepting… I feel like in the last two or three months, there’s finally market-wide acceptance that the Fed is not bluffing and that they are going to keep rates higher for longer, and we need to all deal with this. Now, there’s going to be this second pricing exercise that goes on.

Clayton:
Let’s not even call it a pricing exercise. Let’s call it the way markets are supposed to operate.

Dave:
That’s true. Yeah. That’s literally a market.

Clayton:
When cost to capital goes up, there’s pressure on asset prices.

Dave:
Yeah.

Clayton:
So we primarily look at the housing economy through the lens of the residential homeowner, and I know the BiggerPockets audience inclines much more toward the investor category. So it’s a different lens, and there’s a little bit of different analysis that goes into the right time to buy or sell when you’re looking for a roof over your head or an asset that produces yield. But the secret on the investor side is understanding the national headlines and that over the last 12 months, on a national level, we still saw close to 4% national home price appreciation. Over the next 12 months, we expect 3% to 3.4% home price appreciation, but where are the deviations from that?
The article that you spotlighted and asked me about, where home prices are supposed to fall, that volatility, I think, is where opportunity will be found, and this interest rate environment definitely puts pressure on pricing standards. I think that does create an opportunity for home buyers and investors alike. I’m not sure we’re going to… We’re not going to preach the “marry the house, date the rate” thesis, but you do have to think about winter market environments, when it’s a good time to buy winter market environments, when it’s a good time to hold, and high cost of capital markets often create downward pressure on asset prices which is something I’m paying attention to.

Dave:
Yeah, yeah. Absolutely. That’s a very good point, and I’m curious. You said what? 3% to 4% growth over the next 12 months, is that right?

Clayton:
Yeah. I mean, we’re talking about this, the CoreLogic home price article, so I’m hinging on their estimates.

Dave:
Okay.

Clayton:
There are some pretty wide estimates. I mean, we still have investment banks that are forecasting negative home price appreciation, but most of the housing economists that are watching are looking at that 3% to 4% range on a national level.

Dave:
I’m curious. It must all be on rate declines, right? I guess I just don’t see how prices keep going up personally, unless rates fall, so they must, and there’s a good chance rates do fall next year. I’m just saying that must be why.

Clayton:
Great qualifier there, Dave. I think every housing economist that I’m following is forecasting lower rates by the end of 2024. Now, wishful thinking, optimism, fact. I don’t know.

Dave:
We don’t know.

Clayton:
I think long-term interest rate forecasting is a fool’s game, and there’s no win there.

Dave:
It’s so hard. Yeah. Yeah. Just when we were starting to settle in the mid-sixes, everyone was starting to get comfortable with it, then bond yields just started going crazy in the last month. It’s like no one even really knows. Yeah, we’ve had good jobs data, but no one really even fully understands why bonds have just run up. There’s this huge sell-off going on right now.

Clayton:
I mean, a big reason why mortgage bonds are… the spread is so wide is the Fed is not buying.

Dave:
Yeah.

Clayton:
We have a long-term… Look back at the last decade, spread between the 10-year and 30-year fixed rate mortgages was 130, 140 basis points. We’re sitting at 300 right now, and that is because of the Federal Reserve. The Federal Reserve is not just controlling interest rates, they’re also controlling the throttle on buying mortgage-backed securities, and that’s creating incredible pressure in the capital market’s ecosystem which arguably is more impactful on the price that consumers and investors are paying for debt than even some of the interest rate moves.
So the Federal Reserve is having a big impact on spreads right now, and that’s something that can be fixed. If we start to see a normalization of mortgage-backed security buy-in, the bond market starts to operate as it should, and banks and the Federal Reserve start coming back into the market and buying mortgage-backed securities, we’re going to see a massive change in the 30-year fixed rate mortgage for the better. But right now, you want to know who’s buying mortgage-backed securities? Nobody.

Dave:
Yeah. Exactly.

Clayton:
That is a dead market, and that’s creating a really big spread.

Dave:
Yeah. So just so everyone understands what we’re talking about here. If you’re not familiar, mortgage-backed security is basically when people bundle a bunch of different mortgages, and they’re sold on markets to investors. For much of the last, whatever, 15 years or so, one of the biggest buyers of mortgage-backed securities has been the Federal Reserve. As part of their effort to do “quantitative tightening” to reduce the monetary supply, they are reducing the amount of bonds that… or excuse me, of MBS, mortgage-backed securities that they are buying.
One of the major drivers of mortgage rates, as Clayton just alluded to, is the spread between the 10-year yield and mortgage rates. Normally, like you said, it’s about 1.5% or 150 basis points. Now, it’s about double that, and the spread is due to a lot of different complicated things, but one of the main things is demand for mortgage-backed securities. That is a major driver of the spread, and as demand goes down, prices for these mortgage-backed securities go down, and that sends yields and interest rates up. So hopefully that makes sense, but I totally agree with you, Clayton, that that is a very complicating factor in this entire scenario and maybe one of the reasons for optimisms that rates will come down because mortgage rates could come down without the federal funds rate falling.

Clayton:
What happens if mortgage rates start to come down? Demand on MBS will, we anticipate, will pick up. So, at the same time, as rates coming down, the spread will narrow, and rates will come down even faster. So one of the reasons the spread is so wide right now is because who wants to buy a tranche of mortgage-backed securities at a 7.5% or 8% rate? Those loans are going to get refied so fast, so investors need to get paid off quickly. So they’re demanding a really… There’s pricing pressure on the mortgage-backed security portfolio because the loans are going to get refied the second we see a change in interest rates. So the owners of those mortgage-backed securities need to get paid fast. In the first year or two, they need to make their margin on the security, and that’s one of the other reasons why there’s a lot of pressure on the spread between the 10-year and tranches of 30-year fixed rate mortgages. So there’s a potential for this market to move really fast in the other direction.

Dave:
Interesting. Yeah.

Clayton:
But we just haven’t found that precipice point where there’s willing buyers in the market. If the Fed is not buying, banks aren’t buying, and we sit at this stalwart standoff right now where nobody is buying mortgage-backed securities, consumers don’t want to buy houses at 8% rates, yet there’s still an inventory crisis, so home prices hold high. It’s interesting.

Dave:
Yeah, it definitely is interesting, and I’m glad you brought that up because I think for some people, it’s illogical that you wouldn’t want a 7% mortgage rate because as a bank, you would think higher mortgage rates equals higher profit. But as you clearly stated, Clayton, that these loans are not going to be held for a long-term. At least that’s the overwhelming belief, is that rates will come down eventually, and that everyone with a 7% or 8% mortgage is going to refi into a 5% or 6% mortgage, or whatever it comes down to.
Then, a lot of residential mortgages don’t have prepayment penalties or anything like this, and so that the only way that a bank makes money is by charging a higher interest rate upfront, which is exactly what they’re doing. So this is getting a little technical, but it really matters because everyone wants to know where mortgage rates are going, and a lot of people just look at the Fed and they’re like, “Oh, the Fed is doing this. The Fed is doing that.” That does impact things, but there is this whole other bond market, MBS market that is playing a huge, huge role in mortgage rates right now. So hopefully this helps everyone learn a little bit about it.

Clayton:
Prepayment is an important topic. So mortgages are one of the only securities out there that do not have any type of prepayment penalty. It’s a unique part of our US housing economy. So if you’re a bond trader or a fixed income investor, and you can get yield from corporate debt that has prepayment penalties and will have longer duration, that’s a much better investment right now than the 30-year fixed rate mortgage that we know is going to get refied, and MBS holders are going to get taken out. So it’s a complex factor there, but perhaps a better place to spend time than pontificating about where rates will go, it’s like what happens when rates move?
Dave, one of the things that we’re thinking about… Concerned, thinking, optimistic. It’s a weird concentric circle right now, but if rates do move downward at a significant rate, that will be the precipice for more inventory coming to market because home buyers are home sellers. So as soon as the homeowner starts to feel confident and that move-up decision or relocation decision, that repeat buyer is going to come back in the game, that will create more inventory because they’ll sell their prior home, which is a good thing. It lubricates the market and creates volume for the industry, but what it’s also likely to do is put some wind in the sails of home price appreciation again. So if we see interest rates make a significant move beneath seven into the sixes, and God forbid, back into the fives, I think we’re going to see home price appreciations shoot back to the teens, and we’re going to be back in a precarious situation where we’re talking about affordability issues again.

Dave:
Wow.

Clayton:
This time, driven by the price of the asset, not so much the cost of the capital.

Dave:
Interesting. Wow. Do you think there is an inflection point there where it would get that high in appreciation in terms of rates?

Clayton:
There is an inflection point there.

Dave:
Yeah. I mean, I’ve seen some data from a John Burns real estate or research and consulting, and Zillow say it’s about 5.5% I think is the spot.

Clayton:
I think that’s too low. I think the market is a full-on frenzy at 5.5%.

Dave:
I do, too. That makes sense.

Clayton:
I think we have a very functional housing economy at 6%. If we dip back to the fives, I think we are in frenzy land.

Dave:
We’re in trouble. Yeah.

Clayton:
We keep talking about these first-time home buyers. First-time home buyers are not anchored or hinged to 3% loans because they didn’t get them. They might’ve heard about it, but they’re not like me who has a two handle on their mortgage, and it’s never going to go anywhere.

Dave:
Yeah. They weren’t getting underwritten, and they saw what their monthly payment would have been.

Clayton:
Yeah. So they’ll be a little bit disjointed. Their nose will be a little bit out of whack, but they’ve never had access to that cost of capital. I hope they don’t ever again because we know what happens with… 3% cost of debt means that we are in a world war with a national pandemic and some really bad stuff happening in our global society.

Dave:
Right. Yes.

Clayton:
I mean, I don’t want to forecast for that or bet for that because it’s not a good thing.

Dave:
Yeah. You and be both. Yeah. It’s interesting though because… I wonder though. The big question to me is what you just brought up, and I’m glad you did, is that in traditional times, you see this scenario where when there’s softness in the housing market, inventory goes up. This is clearly not what’s going on in this market, and so your assumption, which I assume too, is that the reverse is going to be true, that when rates fall, the supply and new listings at least will start to increase. If it happens proportionately or not I think is a really big question. If we’re going to start to see maybe more demand or maybe more supply, or how much supply comes online is still just such a big question. I could see exactly what you’re talking about, or I could see, in some ways, demand just coming back online without as much proportionate supply, which would lead to this sort of frenzy you’re talking about as well.

Clayton:
Yeah.

Dave:
So I think it’s a big thing to watch if and when rates do come down.

Clayton:
If we’re going to connect the whole picture and we see this environment where inventory starts coming back and interest rates are palatable, then we start to see an environment where the interconnectivity between the ownership market and the rental market starts to get more attention. So I think we’re in a point right now where for first-time home buyers, homeownership has become inaccessible due to asset price and cost of capital. So potential first-time home buyers are choosing to continue as tenants and continue renting.

Dave:
Yeah.

Clayton:
In the last week, we’ve seen headlines in the Wall Street Journal, we’ve seen narratives from the National Association of Realtors about potential first-time home buyers extending their leases. I think there’s even some YOLO-type headlines in the Wall Street Journal about people saying, “I took that house down payment and went to Europe and just chose to travel.” So there are some people… Now, we all know how some of those article sources are developed. It’s not always representative of the whole population, but there’s a narrative that some folks who had homeownership in their sites are just backburnering that, and they continue on renting, and go on and live their happy life. But that title turned at a certain inventory level, on a certain interest rate level where those renters decide, “Hey, homeownership is now back in my option pool, and I’m going to make that jump.”
So, ultimately, it all comes back to demographics, and we have a very strong demographic wave of 20-somethings and early 30-somethings that are either forming households today or form households in the near future, and it doesn’t matter what happens in the financial markets, the interest rate markets. We do not have housing supply to meet the demand of current demographics. So those people are either going to own or they’re going to rent. There’s going to be demand on either side, and there’s going to be movement between the two, and that’s going to be driven by interest rates.

Dave:
Yeah. That’s going to be very interesting for us, for our audience in particular because I think it points to the idea that their rents could start growing again, too. We saw this crazy rent growth, and it’s really flattened out. But if this scenario that you’re describing does unfold, it would point to further demand for rentals, and I could definitely see that happening. There’s definitely a logical path where that could happen.

Clayton:
The crazy thing with the rent market is it’s a lot more feasible to change the volume of rental inventory faster than it is the volume of ownership inventory. So multifamily developers have been able to bring a lot of inventory to market really quickly at a pace that home builders cannot. So the rental market has more control of their own future than I think the homeownership market does for better and for worse.

Dave:
That’s interesting. Yeah.

Clayton:
Overbuilding can happen fast, and inventory problems can be created or solved. I would defer to you, Dave, on where you think we are in that cycle.

Dave:
Multifamily is not looking great, I mean, from an oversupply perspective like we’re seeing… I think in Q3 of 2023, we’re going to see by far the highest delivery of units ever at a point where it’s already starting to soften, and it looks like we’re going to have above-average deliveries for… I don’t have the data in front of me, but I think we have above-average deliveries, and that just means new units coming online for at least another year. So I think this is going to create a very interesting situation for multifamily where rents are already getting soft, cap rates are rising, there’s an influx of supply. It’s why I think on our show we’ve been saying that multifamily values were going to drop quite a bit, and I still think that’s true, but probably a conversation for a whole other podcast.

Clayton:
Yeah, it’s a complicated ecosystem, and multifamily capital is important. I think that some of the same banks who have been supporting multifamily developers and operators both at development and lines of credit are going to start filling some of the… They have exposure to the office market as well, and there’s going to be some pressure on access to debt and access to credit lines, and starting to see that pop up in the ecosystem already.

Dave:
Definitely. It, honestly, unfolded a little slower than I was expecting, but I think that will be a major story in 2024.

Clayton:
So we’re not going to convert all the office buildings to apartments, right? Are we doing that?

Dave:
I wish. I mean, they keep talking about it, but from everything I look at, it just says it’s not really as feasible or as easy as people want it to be. So it would be nice. But before I go, Clayton, we’re talking about stories for 2024 with your media business here. Are there any other stories in 2024 you’re looking forward to or think are going to be particularly interesting?

Clayton:
Yeah. I mean, I think housing is interesting from media perspective because it’s a sector that goes through rapid change, and our mission and vision is to provide the full picture to housing professionals. I think as a media and data business, we’re more important than ever in a period of change. So I’m excited to support our audience and support our users as we go through a volatile market. It’s sad and disappointing that we’ve seen a lot of really qualified and really successful professionals exit the industry with volume down in real estate and mortgage. We’re going through a wave right now where there’s a pretty notable reduction in force, in the number of people that are part of this industry.

Dave:
Yeah, staff.

Clayton:
It’s sad and painful to watch, but it’s also a really important inflection point in residential real estate. We’re watching volumes come down, but we’re also watching change at the national level. Some pretty headline lawsuits happening around real estate agent and broker commissions. Depending on the outcome of those, and there are some pretty varying viewpoints there, it could be a precipice for major change in the way that homes are bought and sold, and potentially could open the door to a very strong innovation wave.

Dave:
I like the sound of an innovation wave. I’m not hoping for anyone to lose their shirt, but hopefully, it’s an innovation wave that raises all ships.

Clayton:
Yeah. No. Innovation waves. There’s winners and losers, but ultimately, this industry is built to support the homeowner, and the changes that we’re seeing in market right now, as painful as they may be, do seem to point to a more efficient and economical solution toward homeownership. That’s going to come with technology. It’s going to come with faster and more free access to data, and knowledge, and information, but hopefully, it creates a faster-moving, more easily accessible housing economy that’s great for homeowners, and then ultimately, still is a very fruitful place to do business for lenders, real estate professionals, and then folks like you and I who operate in the ecosystem.

Dave:
All right. Great. Well, I trust you all will be covering this closely. If anyone wants to follow Clayton and his team’s work at HousingWire, you can find them at housingwire.com. Clayton, thank you so much for joining us. We appreciate it.

Clayton:
Dave, it’s my pleasure. Thank you.

Dave:
On The Market was created by me, Dave Meyer, and Kaylin Bennett. The show is produced by Kaylin Bennett with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Interview questions always have a purpose behind them—whether it’s “What are your strengths?”, “Where do you see yourself in five years?” or “Why are you interested in this position?” Standard questions are generally considered standard for a reason, as they’ve been tried and tested at generating the information the hiring manager needs to make their decision.

However, it’s often the nonstandard questions that can really tell you a lot about a person. Here, 13 business leaders from Young Entrepreneur Council share the questions they love to ask during interviews and why. Consider adding one or more of these options to your list to see what you can learn about your next job candidate.

1. If you could be one item in the kitchen, what would it be and why?

This question always generates the most interesting responses—often things you hadn’t even considered. It is also unexpected, but in a fun way, and is meant to make you want to answer with what comes to mind first. Candidates’ answers can tell you a lot based on both the item they select and the reason why. It can also break the ice and give you the chance to see if the potential hire has a good sense of humor! – Kristy Knichel, Knichel Logistics

2. What’s a time in your life when you overcame the odds and succeeded?

“Tell me about a time in your life when the odds were stacked against you but you overcame them and succeeded.” This question is designed to help me understand how the candidate handles adversity. It can also reveal how well they handle pressure. – Mauricio Cardenal, Roofing Marketing Pros

3. Can you explain a time when you disagreed with a supervisor?

I find this question insightful because it allows candidates to showcase their ability to handle workplace conflicts professionally. It reveals their communication skills and their capacity to navigate disagreements in a constructive manner. Moreover, it shows whether they can balance their own perspective with the need to respect authority, which is essential in a collaborative work environment. Their answers often provide insight into their problem-solving abilities and willingness to learn from experiences. It allows candidates to demonstrate how they’ve handled past conflicts and whether they can reflect on those situations to improve their approach in the future. – Sujay Pawar, CartFlows

4. What don’t you like to do?

This question serves as a valuable gauge for several qualities. It assesses the candidate’s level of self-awareness and their willingness to be open and honest. It also offers clues about whether the candidate would be a cultural fit for the role based on their preferences. Additionally, the way they manage tasks they don’t enjoy can shed light on their problem-solving capabilities and overall maturity. – Anna Anisin, DataScience.Salon

5. How did you manage your work and time while cooped up during Covid?

This question is insightful because it tells me how much discipline the candidate has, and it also tells me about their management skills. This works well for me because our company is 100% remote and we look for people who know how to work through the distractions of everyday life while working remotely. – Benjamin Rojas, All in One SEO

6. What’s something you learned recently that made you pause and think?

“Tell me something you learned recently. It doesn’t have to be work related per se, but just something that made you pause and think.” What I want to hear is: first, the level of depth when sharing something that is interesting to them; next, if they really are constantly learning or curious about information and if they have awareness of retaining knowledge and are potentially applying it too; finally, the vulnerability of showing they are not perfect. To say, “I don’t know the answer” is difficult, and we need consultants to be confident in their knowledge and even more confident that it is okay if they don’t have all the knowledge. – Marjorie Adams, Fourlane

7. What’s a professional goal you failed to achieve, and what did you learn?

One of my favorite questions to ask a potential hire in an interview is, “Tell me about a professional goal that you failed to achieve in the past. What did you learn from that experience?” The answer to that question usually reveals if the person can reflect on their past failures, whether they were able to grow professionally and how that failure in particular triggered the growth. – Andrey Shelokovskiy, 360 Painting of Dallas

8. Can you describe a challenging situation you faced at work and how you dealt with it?

This question is particularly insightful because it sheds light on the candidate’s problem-solving skills. Through their answer, I can discern whether the candidate is methodical, innovative or perhaps reactive in their approach. For instance, if the challenge revolved around team conflicts, the answer might reveal their conflict resolution abilities and communication skills. A candidate’s description of how they navigated unexpected hurdles can offer a glimpse into their adaptability quotient. Additionally, candidates who reflect on their experiences and contemplate alternate approaches exhibit a commendable degree of self-awareness and continuous improvement. – Julia Rodgers, HelloPrenup

9. Why should I hire you?

Turnover rate in the restaurant industry is high, so I’m used to interviewing lots of potential hires for various positions. One of my favorite questions is, “Why should I hire you?” Their responses tell me how confident they are with themselves and their skill sets. Sometimes, I don’t even base their hiring on their resumes. Their accomplishments and experiences matter to me just a little bit; what matters the most is who they are now and how they present themselves. Of course, this depends on which position they’re applying for. For example, if they are applying for front of house (server, bartender), then their personality and communication skills must be on point. On the contrary, if they are applying for back of house (chef, dishwasher, line cook), then it’s more based on skills. – Fritz Colcol, Simply Thalia

10. Can you describe a project or situation where you had to collaborate with a diverse team?

My favorite question to ask potential hires in an interview is, “Can you describe a challenging project or situation where you had to collaborate with a diverse team to achieve a goal?” This question provides insights into their teamwork, communication, adaptability and problem-solving skills. Their response demonstrates their ability to work effectively in a team and reveals their attitude toward diversity and challenges—essential qualities for success in today’s workplace. – Alfredo Atanacio, Uassist.ME

11. What has your experience with our product been like?

I think that it’s very important that any hire uses our products and is familiar with our business. The answer they give will tell us everything we need to know about how prepared they are and whether they know what they’re going to be working with. I would use this question or a variation depending on the role and the brand the person is going to work for. It will help decide which candidate is best and most likely to fit with the company the fastest. – Syed Balkhi, WPBeginner

12. Can you tell me your story?

Opening up the floor for candidates to paint a picture of who they are will help you understand many of their attributes. Storytelling is an important quality for any creative job or client-facing position. Being able to decide what’s important is also a quality many managers look for. This question also puts people on the spot, and how the potential hire acts under pressure might reveal some other attributes that would be beneficial to learn before hiring the individual. – Chase Williams, Market My Market

13. What has been the toughest form of feedback to swallow in your career?

How candidates handle feedback and how they interpret it is vital to organizational success. Where someone levels blame on someone else or deflects a question like this can be a red flag. On the other hand, when someone discusses how they are able to digest tough feedback and take accountability, it shows strength of character and their willingness to lean into feedback culture. We always have something to learn. Entrepreneurs should pay very close attention to how candidates describe experiences with both negative and positive feedback to look for accountability cues or lack thereof. – Matthew Capala, Alphametic

David:
This is the BiggerPockets podcast show, 836. How did you know, Lindsey, what you should listen to from other people and when you should say nope, I don’t care what they say, I’m going to move forward?

Lindsey:
Good question. I thrive a little bit on beating the odds, and if somebody tells me no, I take that as a challenge. Whether that’s you probably can’t become a doctor. Well, I’ll prove you wrong. That was a long 11-year challenge to get to that point. But similar to real estate, when I first started, the very first broker I spoke to said, I don’t have time for you. And that was a big challenge to me to keep going forward and prove them wrong too. So I like a good challenge.

David:
What’s going on everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the world every week, bringing you the stories, how-tos and the answers that you need in order to make smart real estate decisions now in today’s market. And we have got a show for you today. Rob and I will be interviewing Lindsey Duguet, who is a multifamily operator, a small multifamily operator, a little bit single family mixed in there. She’s done a lot of things, but she’s done well with the BRRRR method and long distance real estate investing, two things that we both know that I’m passionate about, and she’s proven a lot of people wrong along the way. Rob, what are some things that you think people should look out for in today’s episode?

Rob:
I think for anyone that’s at home listening to this podcast, if you have reached a plateau in your real estate investing journey and you’re trying to scale and you’re trying to figure it out and you’re struggling with it, this episode is going to be particularly impactful for you because we’re going to uncover some of the secrets that Lindsey uses to scale her own portfolio. But on that note, David, what’s one thing that’s fueled you that people have doubted you in?

David:
I’ve been hearing for years hateful messages in my DMs, shade thrown my way that I will never have a beard like Brandon’s. And I finally said, enough is enough that I’m going to prove the doubters wrong. I’m going to show them that they’re wrong about that. That in fact, just because I don’t have hair on my head does not mean I can’t grow hair. I’m going to grow twice as much underneath my chin, and that’s what I’ve gone and done.

Rob:
Well, I wouldn’t say… I mean twice as much would be like an eight-foot-long beard, I feel like.

David:
No, not twice as much as Brandon, twice as much as I would normally have on my head. You got to run your own race, Rob.

Rob:
Well, hey, it’s a marathon, not a sprint.

David:
Yeah. Before we bring in, Lindsey, today’s quick tip is simple. Do your homework before you partner. We often talk about partnerships and they’re portrayed on many podcasts as if they are this catchall magic pill that will solve all of your woes. But many partnerships can make things trickier and more problematic rather than helpful. And be sure to listen all the way to the end of today’s episode because Lindsey is going to share with you her four questions she asks every partner before committing. Rob, anything before we bring in Lindsey?

Rob:
No, no. Just that nowadays, I’m thinking about starting a little side hustle raising peacocks, and you’ll soon find out why.

David:
That’s exactly right. If you want to learn a little bit more about the buy and hold peacock method, we’re going to get into that soon.
Lindsey Duguet, welcome to the BiggerPockets podcast. How are you today?

Lindsey:
I’m excellent. How about yourself?

David:
Excellent. I can’t quite say I’m that good. I clearly am the number two in this equation, but I’m doing pretty good, Rob, how are you?

Rob:
I’m doing really good. I’m doing really good. I got 10,000 steps in and we’re only halfway through the day, so I mean, there’s many more steps to come.

David:
Oh, you’re not going to become one of those people, are you, that counts that as a workout?

Rob:
I track it a lot. I just need to know.

David:
Tracking is fine, but is it a substitute for your workout?

Rob:
Well, it’s a pillar of wealth, I’ll tell you that.

David:
There’s nothing against the Fitbit people. I just don’t like it when people don’t exercise, but they say they did by counting their steps. Steps are not bad.

Lindsey:
They got that circle check. Yeah.

Rob:
I did work out at 5:40 in the morning.

David:
Yeah, that counts, right? I don’t know. I’m not a fitness expert, obviously, but walking is a pretty efficient movement that human beings are pretty good at doing. Doing something hard, I think counts as exercise. But that is neither here nor there. Speaking of hard things, Lindsey, you’ve done a lot of hard things and you are very financially fit, much like Rob’s physical fitness, and I’m excited to get into your story today. A little background for everybody who’s listening, 476 units across 18 properties, and you’ll be crossing the 500 mark in just a few weeks. Congratulations on that. Fingers crossed.

Lindsey:
That’s right. That’s a big landmark. Yeah. Yeah, it didn’t close yet, so.

David:
Now some of these properties are partnerships, which is awesome that you disclose that because it’s very common in the world of podcasting for people to claim that they have 7,000 units, but they really are just a limited partner in other people’s investments. You’ve got a mix of single family, duplex, fourplex, tenplex, all of the plexes, including large multifamily with 212 units. You live in Pennsylvania where you also invest as well as Indiana, Chicago and South Carolina, Kansas City, and Springfield, Missouri. We’ve got a long distance investor in the house here.

Lindsey:
But not the West Coast yet. Haven’t made it over there. So it’s all the East Coast.

David:
And you’ve been doing this for the last five years, if 500 units in five years sounds unattainable, I get it. But we’re going to be focusing on the early days of Lindsey’s investing and break down how she paved the way to get from there to here so you can too. And a fun fact, Lindsey raises peacocks.

Lindsey:
Right. I’m a crazy person. That is for sure.

Rob:
Do you own them or do you raise them? Do you train them for other people?

Lindsey:
Yeah, they don’t do any tricks for me, but I grew up on a horse farm and full disclosure, now I live in a neighborhood. It’s at the end of the cul-de-sac. Thank God we don’t have any HOA fees or I 100% would’ve get kicked out. But a couple of years ago, I missed having some of my fun little animal friends and one of the other physicians that I work with said, Hey, do you want to raise or try to hatch some peacock eggs? I said, yeah, absolutely. It sounds fantastic. So five years later here we are doing it every single summer. So yeah, my neighbors, I’m sure they love hearing them and seeing them.

David:
Did you feel like Khaleesi from Game of Thrones holding your peacock eggs?

Lindsey:
Yeah, I didn’t step out of any fire, so I’m not that cool.

David:
Nothing like that?

Lindsey:
No.

David:
But did you have the moment where you felt like it, for Halloween, maybe you dressed up that way, you’ve got the blonde hair, you held the eggs?

Lindsey:
No, but I don’t have a Halloween costume yet for October, so I think that’s a good idea.

David:
Yeah, you could change your Instagram name to breaker of chains. The conqueror mother of peacocks, have that really long title.

Lindsey:
Passive peacocks, I don’t know, something real estate investing related.

David:
Before we get into your backstory, tell us in one quick sentence what’s working for you in real estate right now?

Lindsey:
Conservative underwriting is definitely a key for us right now. Times are a little bit different now than when we started five years ago. It’s a little bit easier and you had more of a buffer than you do right now.

David:
That is such a good point. And this is something that doesn’t get talked about a lot. It is not, how do I want to put this? When it comes to real estate investing, there’s always going to be some art to the science. So the last five years of multifamily investing, really any type of properties that were based on commercial lending, there’s a formula that we use and it’s basically your NOI and the cap rate combination of those two things create value. Well, nobody saw interest rates tripling or that fast, and that has a massive impact on the cap rate. And even if you did everything right as an operator, you could have doubled your NOI and you could still get stuck with these interest rates increasing.
And to be fair, I don’t know how much I blame some of these operators. They did a great job and they still ran into problems because when they have to refinance their property, that doesn’t debt service anymore at today’s rates or when they go to sell it to somebody else, there’s less people that want to buy it and those that are going to buy it, they can’t pay as much because of this cap rate problem.
So I say all that to say that conservative underwriting can be a win. And many people that did not buy in the last five years that felt like, oh man, not taking action. I know all this stuff, but I’m just nervous. What if rates go up? Some of those people are looking pretty smart, and the ones that did buy in the last five years are probably feeling really good if they paid more to get a 10-year fixed rate, not the three-year balloons that some people took out. So I appreciate you saying conservative underwriting is working for you right now because that doesn’t get glamorized. We are always like, what did you acquire? How many units did you get? Here’s a picture of me signing my documents on Instagram. Everybody gets to see it, right? But you don’t see a lot of people say, here’s a picture of me taking a haircut on this property rates skyrocketed on me.

Lindsey:
Yeah, we’re definitely not closing as much as we had been, but the ones we are, we’re very confident and their little cash cows, so that’s good.

David:
Now, one of the things I hear a lot of other multifamily operators, commercial operators talking about is that the cashflow itself is incredibly hard to find. They’re focusing on value add or rent growth. Are you finding something that you feel like is cash flowing right out the gate year one?

Lindsey:
So everything we’re buying there’s a degree of cashflow to it unless we’re getting a few of these off market ones where there are complete renovations where… We can talk about some of the ones that we bought before where there’s literally grass growing in the front living room and everything like that. But we’re really trying to get cashflow from day one with still having value add that we can go in and then refinance and still pull out the majority if not all of our money.

David:
Okay. Well that’s good news for you, Rob, because you got that grass growing on the top of your head. Apparently it grows in more places than just front lawns.

Lindsey:
Oh, I give my whole family haircuts, so yeah, I can come over. I’ll give you one too.

Rob:
Will you be at BP Con? I’ll wait to cut it.

Lindsey:
No, not, but-

David:
So not only are you a barber, but you are also a doctor, and that wasn’t the expectation that your parents had for you growing up. What did they say when you told them that you wanted to become a doctor?

Lindsey:
For all intents and purposes, I shouldn’t be a doctor. I definitely shouldn’t be a doctor who is doing real estate investing and definitely not a doctor doing real estate investing with peacocks in my garage. But I grew up in a very small town. I was the first person in my entire family to go to college. Nobody invested. My parents absolutely thought I was going to lose all my money when I first said that I was going to go into real estate investing. So my mom, she was very happy that I went to college. God bless her, I love her so much. But when I said, “Hey, I think I want to go become a physician,” she’s like, “That’s a lot of work. That’s a lot of time. That’s a lot of money. Why don’t you be a nurse? Your cousin’s an LPN. She makes a nice amount of money.”
There was definitely some dissuasion from my own family members to become a physician. I still have one of my birthday cards from my dad. He’s a man of few words, but what he speaks, you listen to him, he speaks volumes. And I have it up in my office actually, and he said, “Don’t listen to the negativity. You can do anything you want and you’ll be good at it.” So I still look at that quote to this day, so I figured I have the grit, I have the determination, I can become a physician. So I went for it.

David:
You didn’t ask where was this when I was in pre-med and you were telling me not to do it?

Lindsey:
Yeah.

David:
Yeah. I had a similar experience. My dad actually said, you’re not going to be a cop. You’ll never make it. You’re not tough enough. Which is crazy. I don’t know where that often comes from. I know that the people that are naysayers don’t often mean to be as discouraging as they can be, and it can be tricky sometimes they’re trying to protect people from delusion. There are some people who would say, I’m going to be the next Gary Vaynerchuk, and someone needs to put them in their place and say, no, you’re not. You can’t even hold a regular job. But then in other cases, there are people in our lives that mean, well, that can be discouraging. So how did you know Lindsey, what you should listen to from other people and when you should say, “Nope, I don’t care what they say, I’m going to move forward?”

Lindsey:
Yeah, good question. I thrive a little bit on beating the odds, and if somebody tells me no, I take that as a challenge, whether that’s you probably can’t become a doctor. Well, I’ll prove you wrong. That was a long 11-year challenge to get to that point. But similar to real estate, when I first started, the very first broker I spoke to said, I don’t have time for you. And that was a big challenge to me to keep going forward and prove them wrong too. So I like a good challenge.

David:
Yeah. So speaking about challenges, what was your upbringing? Did you have challenges when you were a child you had to overcome as well?

Lindsey:
Yeah, like I said, I was the first person to go to college in my whole family. It’s not like we were poor, but we certainly lived in more of a scarcity mindset instead of an abundance. Nobody taught me about investing stocks or otherwise. My mom literally has $30,000 in her entire retirement fund right now. It’s not like I grew up with a silver spoon or anything like that. I mentioned I grew up on a horse farm. There were no neighbors around me. I really was a friend to all the animals and everything like that, so I did a lot of reading. I love to learn obviously, I wouldn’t have spent 11 years becoming a physician. So yeah, I spent a lot of time reading and learning.

Rob:
Sure, sure. And so I mean, you go on to become a doctor. This is a huge feat, congratulations by the way. And tell us about what it was working as a doctor in your early days.

Lindsey:
Yeah, so it’s a long road. You go to college for four years, medical school for four years, and then depending on what specialty you want to go into, it’s another three to seven years of training and residency. So yeah, it’s a lot. It’s a long time. It’s not a small thing to want to do. So in residency, you’re working 80 hours a week. It’s an average of sixty, sixty-five thousand dollars for salary. So when you break that down, it’s like $16 an hour as a physician. And my specialty is emergency medicine and trauma. I’m surrounded by people who didn’t think they were going to end up in the ER. You never wake up thinking you’re going to be in a car accident, have a heart attack or a stroke or anything like that. So I realized, okay, if I am not going to work and putting in these hours, I’m not getting paid.
And when I was in residency, my husband and I had our first kid, he’s six and a half now, but we realized, okay, we need to do something where we are more financially secure and if God forbid, I’m not here or something, we’re still having money come in instead of just relying on my W2, which I have to physically be there for. So that’s when we started to look into, okay, what are we going to do? How are we going to make some money besides my W2 job?

Rob:
Sure. I mean, obviously there’s the perception that doctors seem to do well. Is sixty-five thousand dollars? Is there kind of a point where it’s supposed to be more than that? How does that work for doctors?

Lindsey:
When you become an attending? So once you’re done that three to seven years of residency training, then your salary does increase to varying degrees depending on what type of physician you are. So there is a light at the end of the tunnel, but most of us have hundreds of thousands of dollars in medical school debt when we come out. I had $230,000 in medical school loans. That’s not an asset. That’s a big liability. So a lot of debt to pay down too.

Rob:
Sure, sure. Okay. So at what point was it where, how, when did you know something needed to change? Because obviously you get into this groove, you’re like, all right, I’ve got this W2 job. All my time is being soaked up. I need to change something. What was that turning point for you?

Lindsey:
Yeah, my husband and I, we started to look into what can we do to invest in. All the physicians that I worked around are very stock heavy, so we started to look into the stock market. It didn’t excite us very much. And then my husband listened to the book, Rich Dad Poor Dad, gateway book for a lot of us, I’m sure. And he said, “Hey, I think you need to listen to this and see what you think.” As soon as I read it, I was like, Okay, this is it. We need to do real estate investing. And it was mindset shift and full force ahead.

Rob:
Okay. And so was that the spark for you that got you actually into real estate? Or when did real estate actually come into the picture?

Lindsey:
So as soon as I read the book, I said, okay, we’re going to do this. And I signed us up for a three-day real estate investing course. There was good and bad to that. It was almost a little bit like a time chair sell that they pump you up and then at the end there was this upsale. So we were like, okay, we’re going to join this group for $30,000, and we definitely… And that part wasn’t worth it. So it wasn’t maybe the best start to it, but it did teach us about real estate investing, leverage, and it got us… Well, first of all, I learned about BiggerPockets through that. I didn’t know what that was until five and a half years ago.
I remember standing in line for coffee and one of the other guys said, “Hey, have you heard of BiggerPockets?” I was like, “No, what’s that?” So we learned about local real estate investing groups, and I went to one of those with my husband the very next month, and that’s actually how we got our first deal. So there was good that came out of the first course we took.

Rob:
Okay. And so is it sort of like you’re all in, you want to go into buying properties, investing, is it more you want to be a realtor? What exactly did you want to get started in when you were like, all right, I know I want to be in this career?

Lindsey:
So just like in medicine, we have this saying, you don’t know what you don’t know. So I at first thought I was going to be a wholesaler. I was like, oh, okay. That sounds okay. I can find these properties and then I can sell them to somebody else. Not thinking, okay, well that’s not really actually passive income. That’s not something you’re going to hold and still get cashflow from it every month. So the first local meetup that we went to, there was a guy, his wife is a physician, and that resonated with me, obviously, and he at the time owned 20 units and he said he got 20 units in five years. To me, that sounded unattainable at that time. I’m like, wow, 20 units in five years maybe I can be like him. And the next meetup we went to, he said, “Hey, I have two single family properties,” and it was a D class area, which we didn’t know what D class was or anything at that time, but he said, “I am sick of these two properties. They’re too far away. They were an hour from where we live.”
But he said, “I’ll give them to the highest bidder in this room, basically.” So I ended up saying, “Okay, these will be our first properties.” So we got them sight unseen for $2,500 each. So we got two properties for $5,000. I was like, that’s it. I’m an investor. He came over to my house, we had this paper contract we signed. He’s like, okay, just go to the courthouse. This is going to be your deeded. Here’s the keys. And he walked out. So I remember we had a bottle of Korbel champagne. My husband and I popped and we’re like, yeah, we’re real estate investors. This is before we even went to see the properties.

David:
I’ll sell this to the highest bidder in the room.

Lindsey:
In the room in a local real estate meetup. Yep.

David:
That is a ballsy move on their part.

Lindsey:
Yeah, it created some FOMO in the room.

David:
100%. And of course, you’re targeting to people who don’t know anything about investing, so-

Lindsey:
That’s right.

David:
… you hear everyone else talk about the success stories of real estate investing. You assume being an investor is a good thing. You’re not thinking about what you’re actually buying. Can you describe what a D class neighborhood is for the listeners?

Lindsey:
Yeah. So D class is where you don’t want to buy. It’s the crime areas. That was not the property that ironically had grass growing in the front living room, but it did have squatters that we found when we finally opened up the doors. So there tends to be some drugs, high crime rate in those areas versus C class, which we have some C class areas a little bit better, more working class. You want to find the B or C property in an A class neighborhood ideally. So the A class are the very, very good education ones, the perfectly manicured front lawns and everything like that, but maybe tend to be less value add. So these were in very bad areas.

Rob:
Yeah. Okay. So you foreshadow a little bit here. You buy two properties for $2,500 each.

Lindsey:
Yep. 5,000 total for two properties.

Rob:
And then they appreciated greatly and provided insane cashflow, right?

Lindsey:
Oh yeah, we walked in. They were perfect. We didn’t have to do any rehab. No, not at all. So yeah, we walked in. First of all, we didn’t ask because again, you don’t know what you don’t know. And he neglected to give us full disclosure that he was behind on a lot of taxes. There were squatters in one of the houses which he tried to remove. So he cut all the pipes and that did not dissuade them to stop living there. So when we walked in, there were urine bottles all over the house. It was a mess, to say the least.

David:
Let me ask you a question. Looking back in hindsight, how much would he have had to pay you to take these over to make it worth it?

Lindsey:
Yeah, it would’ve been a hard pass knowing what we know now. Yeah.

David:
But I mean, was there a number, like a hundred grand would’ve been worth it or 500 grand?

Lindsey:
A hundred grand. Yeah, I would’ve taken them for a hundred grand.

David:
Yeah. And that’s just a thing that never gets talked about, right? You bought a job basically.

Lindsey:
Yeah. Oh, yeah. We bought a job. We learned a lot. We Googled local contractors and we found a guy and we paid him upfront. So that was a really wise thing to do with no contract. So yeah, lots of good things. He still has-

David:
Every mistake we all made in the very beginning. Hit you on the same deal.

Lindsey:
So many mistakes.

Rob:
Okay, so you learned some lessons here. You said you don’t know what you don’t know. What would you say some of the questions should have been? What were some of the questions that you wish you could have go back and asked to help avoid this?

Lindsey:
Yeah, I think we asked zero questions basically, other than where are the properties?

Rob:
So really just any question?

Lindsey:
So any questions to start. But yeah, I mean I definitely want to ask, do you currently have anyone in there? What are the rents, all the things that you should be underwriting for, right? What’s the property taxes? What’s the insurance you’re paying for? Are you up to date on taxes? So all the questions.

Rob:
Sure. Let me ask you this. In that exact moment, you buy these houses, what did you think was going to happen? Were you thinking, oh, I’m going to buy these houses, I’m going to rent them out and I’m going to cashflow? Or was it sort of like, yeah, let’s buy it and yeah, I know real estate is good, let’s just figure it out. What was the actual mindset there?

Lindsey:
Our mindset was knowing that this was going to be some learning properties. I mean, $5,000 isn’t nothing, but it’s not huge. It wasn’t going to break our bank account at that time. So we took them as some learning opportunities. We learned more than we thought we were going to have to, but we did buy them. We did end up getting them fixed. We did a lot of the work ourselves. My husband’s from France, he moved to the US 13 years ago, and I joke that when he moved here, he was the fancy French guy who couldn’t even change a light bulb, and now the poor guy knows how to rehab everything. He changed an entire sewer line on one of these properties. So we ended up rehabbing them. We did the BRRRR method here, if anybody’s heard of that, David Greene.
And we pulled out, oh yeah, over 100% of our money on the property. So we owned those for five years. Actually, we just sold them six months ago. So we had bought them for $2,500 each. The one unit we put $15,000 into, and the other unit we put $20,000 into because they were an absolute mess, but we ended up selling them for $60,000 and $70,000 each in the spring.

David:
As well as parts of your soul.

Lindsey:
Parts of it, yeah. But we can never get some of that back. I had a nail go through my knee when I was taking the carpet off of the stairs on the one property, trying to learn how to [inaudible 00:22:52].

Rob:
When you sold that property, certainly there must’ve been some aspect of like, wow, I’m really letting go my first set of bad memories who shaped who I am today or were you like, hell yeah, get these things out of here?

Lindsey:
Yeah, it was a combination of both because even though we had a really rough start once they were rehabbed and we ended up getting some good tenants in there, they were cash flowing $400 to $500 per unit, and we had bought a duplex in the town a month after we got the first. So we were really rehabbing four at the same time. But all of them were cash flowing very well despite being in a bad neighborhood.

Rob:
Yeah. I always like to ask this just out of curiosity, if you could go back to younger Dr. Duguet, do you wish you could have avoided these houses or are you happy that you went through that journey, because obviously you’ve gone on to do a pretty amazing thing with your portfolio?

Lindsey:
Yeah, I joke about how bad they are, but we did learn a lot and I don’t think we would have some of the same grit and determination if we hadn’t gotten through all of those landmines and troubles that we had with those first properties. And we can help guide other people as well. I mean, people, they know how bad they are. They’ve seen the pictures on my social media and everything, so they’re like, Hey, I saw your bad properties. How did you get over this? So we did learn a lot and we can teach now on what not to do.

Rob:
Okay. So you buy these properties, you’ve sold them or there’s a little bit of resolution there. How did you scale up from there?

Lindsey:
Yeah. So we had those first four that we acquired. We ended up doing the full BRRRR on those. Then I started doing some direct mail campaigns, so handwritten letters, handwritten envelopes, sending them out, and we had some people reach back out from those. We ended up getting a couple of single families in more, B plus a minus neighborhoods at a lake really close to us. We still have all those properties. We got a four unit from one of the off-market campaigns from a seller in New York, and you think we would’ve learned this lesson, but we also bought this one sight unseen, and this was the grass in the living room that we ended up walking into. We got it for $20,000, very big building. They’re just over 1,100 square feet per unit. So those were full rehabs. We ended up pulling out 126% of our capital on that property too. So another perfect infinite return BRRRR on that one.
And then we ended up getting our 10 unit that was our seventh deal, just between my husband and I. So we were doing everything ourselves. I was working extra shifts at the hospital, moonlighting to fund the properties, buying them cash or traditional 75% LTV from local banks that we were using and starting to form these good relationships with. But then each property we were buying, we were running out of capital. So instead of paying an actual contractor to do it quickly, my husband was learning along the way and doing a lot of these rehabs himself. He was also managing the tenants and the properties and everything. None of this was passive the way we thought it was going to be when we first got involved, so we really reached a cap where we’re like, okay, this is another job, we’re not scaling the way we want to, and our resources are getting tapped out here when we got to 22 units.

David:
Passive income is one of the greatest marketing statements ever in the world. Just that anything would be passive. How people have been able to fool others into thinking that you’ll buy real estate and never touch it again when nothing else in life works that way. Have you ever met a married couple who’s like, I worked really hard to get my wife and then I married her and I never had to do anything again. She just loves me every day, and it’s passive love at this point. It’s like-

Lindsey:
My husband would definitely disagree with that statement.

David:
And there’s no passive fitness. It’s just funny how we’ve done that. Now, Lindsey, you’ve clearly read the BRRRR. You understand that strategy. I’m curious if you guys guys ever read Long-Distance Real Estate Investing?

Lindsey:
Yeah, yeah. That was an audiobook at the beginning we listened to. Again, I’m a good learner. The first year that we started investing, I literally listened and read over 100 different books. Not just real estate, but mindset and everything. So yeah.

David:
So with the principles in that book, was that something that was skipped when you guys bought a house without seeing grass was in there, or had you not read it yet?

Lindsey:
We probably got through that the half year. We were already a good eight units in deep and in the rehab process at this point. But it sounded like, pun intended, a long distance concept to us too. At the beginning. We did want properties that we could feel and see and drive by at the beginning, but that got old after we got to 22 units, and that’s when we started looking for partnerships in other people.

David:
But you just didn’t get a video made that showed what the condition of the property was, right?

Lindsey:
No.

David:
Because there is a way to invest sight unseen. I do it all the time, but somebody has to see it doesn’t have to be us, right? So that’s another learning lesson.

Lindsey:
We have JV deals where we have not set foot in the properties, but we own them. We’re partners. We’re very active in the JV deals. But yeah, we haven’t physically set foot in them.

David:
Me too. I have lots of properties I’ve never been in, never seen before, but someone did, right? Somebody went through, took a video, there was still due diligence that was done.

Lindsey:
Whether that’s a boots on the ground partner or yeah, another realtor or something. Yeah. Exactly.

David:
So that’s a learning experience. You learned from that as well. And speaking of learning, I understand that there’s a method that you learned in your medical residency that has helped you improve how quickly you learned. Can you tell us about that?

Lindsey:
The see one, do one, teach one, that’s the one you’re talking about. Yeah. Yeah. So in medicine, we have that saying, so say you’re going to learn how to do an intubation. You watch somebody do it, then you do one yourself, and hey, now you’re an expert after one, so now you can teach one. I mean, we definitely do that in medicine, but it’s applicable to real estate investing too, and it’s all about learning processes and perfecting them to get a method going. So I mean, just like the single family BRRRs that we did, we initially read about it, watched some podcasts, listened to the podcasts about it, talked to some of the other investors. We did one ourselves, a couple of them, and now we are mentoring people and teaching them about it as well.

Rob:
Now I’m a little nervous to get intubated knowing that the doctor may have only done it one time.

Lindsey:
Not with every procedure, but yeah.

Rob:
So you’ve said that your seventh deal was really a big turning point for your career. Can you tell us about that deal?

Lindsey:
Yeah. Oh my God, I love this deal. We still own this property. So this had been a direct mail campaign.

Rob:
What does that mean for-

Lindsey:
Oh, yeah. We use a software, it’s called RE Property Finder. You can search for any number of units, any amount of equity in the property. And at that time, we were targeting the mom and pop type owners. My criteria at that time had been owned for 20 years. They had 100% equity, so they had no loan with a bank, and we were hoping that these people weren’t running it quite like a business like they should, and these are the properties that we ended up buying. So we bought this one, it was 10 units, eight of them were rented at the time, but they were significantly under rented. The average rent in that area at the time was about $850. He was renting them out for 500, 525. He had owned it for 25 years. It was well maintained, but it was very, very dated.
And then two of the units in the back on the bottom, they were basically just being used as storage. They were uninhabitable. So we negotiated this down to $250,000 and then the bank financed the whole construction loan for the two units in the back. We learned a lot with this property too. My husband learned in this one that cockroaches can fly and that ceiling tiles can hold 13 pairs of dirty underwear too. It fell in his head when he was doing one of the rehabs on the properties. I don’t know what that tenant had in mind, but we ended up rehabbing the units. We are now getting between 1,000 per unit and $1,200 per unit. So we over doubled the rent. It appraised for just under $800,000 when we did our refinance last August on this property, and we got 275% of our money out and after the refi, we are still getting between five and five-fifty per unit cashflow.

David:
So it’s these BRRRR principles that you’re employing. You’re just doing it in the commercial space, not residential. And I’ll clarify what that is. When you BRRRR basically the fundamentals here, are you trying to buy it below market value? You’re trying to add value to it. Once you’ve done that or combination of those two, you’re going to refinance. Now, we typically describe this from a residential framework where the way that you add value to it is by increasing its comparison to a better comp. You’re looking for a residential property that is worth more, and you’re either changing the floor plan, the square footage or the condition of the property to match a comp, because that’s how residential real estate is valued. It’s actually kind of silly how that works. It’s like, well, what the Joneses pay for their house? All right, I’ll pay that. It doesn’t make any objective sense.
Commercial real estate makes a lot more sense from a financial perspective. What does the property make? How much can I expect to earn from this property if I buy it? So what you’re doing is you’re buying properties below market value because they’re being operated inefficiently. The rents are too low, the expenses are too high, maybe there’s some deferred maintenance and so the owners are like, well, let’s not raise the rent on them because then I’d have to go fix something up. And you’re adding value to it by fixing those things, you’re improving your income and you’re decreasing expenses, which improves the NOI.
Now you’ve got a property that’s worth more and hey, sometimes you catch some tailwinds. Sometimes interest rates go down, cap rates go down, the property becomes worth more. Just like in the residential space, values have been going up as we printed a bunch of money, and so it made it easier to pull your money out of a BRRRR. The same thing has been happening in the commercial space. It’s just as simple as residential real estate. You’re just pulling on slightly different levers because commercial real estate’s value differently.

Lindsey:
That’s exactly right. Yeah. We implemented what we did with the single families and the duplex, and we took it to the commercial 10 unit, and it worked wonderfully.

Rob:
Well. That’s amazing. I want to go back a little bit because you said you got 275% of your money back. What the heck did that feel like? That’s insane.

Lindsey:
I remember the day that we got our refi check and I was sitting in my husband’s truck, which the business pays for. It’s another great thing about real estate investing, business expense. And I remember sitting there in his truck and crying because the refinance check was $301,000 and refinance checks are not taxed, and I was literally just crying in the truck thinking, oh my goodness, this is more money than I made seeing thousands of patients in the last year at my W2 physician job, and we were already very much into the real estate game, but that was when I truly realized we can do this as a career and this can completely replace my salary and what we’re doing.

Rob:
That’s so crazy. Wow. I want one of those. Give me one of those. So that deal was also a turning point in another way as I understand it. Tell us about getting stuck and how you were able to get unstuck.

Lindsey:
Yeah, so like I said, this was our seventh deal, just my husband and I, and that took us to 22 units, but it was a full-time job. I mean, I was still doing more than full-time at the hospital with the moonlighting shifts to finance these deals. My husband was doing rehabs, he was doing the property management, he was doing the tenant management, everything. And we realized we were scaling, but not as fast in the way we wanted to. And we sat down, we’re like, okay, what are we going to do? Do we want to keep doing it this way? Or what can we do different to make this easier on ourselves and continue to grow our portfolio and not get burnt out? So we decided, okay, we need to leverage more, but in this time we need to leverage other people’s money and other people’s knowledge and time as well, because my time was basically maxed out. I can’t make two of me as much as I wish I could. So we decided we need to start looking at some partnerships and working with other people.

Rob:
That’s amazing. So tell us a little bit more about, you said, at this time you’re sort of taking on more properties, you’re in scale mode, but are you trying to figure out what’s the next step from here? Well, where did you turn the corner exactly?

Lindsey:
Yeah. So we started going back to some meetups. We started looking more into partnerships, and we joined a mastermind group, and that was really a huge turning point and piece of leverage for us as well. Tons of masterminds out there. Obviously a lot of free ones, a lot of ones focused just on short-term rentals, just on commercial property. We joined, it’s called Make It Happen Mastermind, and we have weekly, sometimes monthly group calls, a lot of accountability, and we’ve formed partnerships with other people in this group, and that’s how we started to scale up into JV deals, which obviously we’re still very active in as well as being GPs on some syndication deals.

Rob:
So that’s interesting because you mentioned at the beginning of this, you bought a course or you got enrolled in a course, it was really expensive, wasn’t particularly a winner for you. Now you end up going and you joining a mastermind. Was there a difference as to why one was so much more pivotal for you the second time around? Was it the people, the connections?

Lindsey:
Yeah. We had looked into a couple and this one just felt right, the vibe of the people. We were interviewing different groups to see which one we were going to vibe with. This one in particular was focused on the people in the group, do they have good ethics as well as doing deals together. And that’s what we wanted to do. We didn’t want to focus just on the education component. We wanted to scale with some more properties.

Rob:
You wanted to do.

Lindsey:
Yes, we wanted to do not just learn, which obviously we’re still learning all the time, but yeah.

Rob:
So I’m pretty curious here because I’ve got to imagine, especially early on in your career as a doctor that you’re taking a ton of calls, you’re on call as a doctor, you’re intubating people for the first time, possibly, second time. At the same time, you’re also managing your real estate portfolio. Was there ever a moment where you’re just taking insane amount of tenant calls during the workday?

Lindsey:
Yeah, it’s really hard to do CPR and take a toilet call at the same time from a tenant. Yeah, I mean, luckily my husband dealt with a lot of that. He kind of has the pager, I should say, for the tenants, and I have the pager for the patients. But yeah, I mean it’s tough to manage because at that time when we reached our 22 unit ceiling, we also had two very small kids at home. There were two, a baby and a toddler, so I had the mom aspect and the family aspect going on as well. So it was a lot to balance. So they’re tiny.

Rob:
Yeah. You said they were three and what was the other one?

Lindsey:
I think she was a year and a half old at that time. Time is fly now because right now they’re six and a half. My daughter just turned five last Thursday, and our son is 22 months old, our second son.

Rob:
Listen, hey, I got a two and a three-year old right now. First of all, it’s a hard age gap, but second of all, to be in the throes of your real estate career is absolutely crazy. Were they coming to job sites with you? Were they your makeshift handy people? How was it juggling all that?

Lindsey:
Yeah, our six and a half year old now, he actually really likes it. He says, my houses when we will go past some of the local ones. And he picked up a quarter a couple of months ago, he said, you need money to make money. So he’s definitely listening to some of the things that we’re saying about investing.

David:
So you hit a point where you recognize, okay, we need some support. We cannot keep going at the pace we’re going, we have kids, we have jobs, these properties that we bought. You’ve done really well, now, on the other end of that is that’s because you put a lot of effort into these. You pulled 275% of your equity out because you were hyper-focused on turning these things around. It is not passive, it’s passiver. It’s less passive than having to be a doctor, but it’s still not completely passive.
Once you recognized partnership was the road you were going to take, what are the questions you came up with that you recommend people ask a potential partner to vet them out?

Lindsey:
So one question that I always ask other people, especially as we’re doing some of these bigger syndication deals, is what other full cycle deals have you done? It’s one thing to say, I closed X amount of properties, but if you closed a whole bunch of them in the last year, but you’re running them poorly, it doesn’t matter. Anybody can take a great deal and run it into the ground if you’re not managing it properly. So I like to see what the other partners have done full cycle and full cycle well to make sure they can be good operators. So that’s number one big question that I’m looking for in other partners.

David:
And why is it important to see full cycle?

Lindsey:
So just like in medicine, if you get into med school, yeah, it’s a great feat to say, okay, I am in med school to become a doctor, but that doesn’t mean you are a doctor yet. You still have four more years in med school and residency. There’s a lot of opportunities to fail until you actually can be a practicing physician on your own. It’s the same as real estate. Just because you buy the property doesn’t mean that it’s going to be successful. So full cycle means you’ve bought it, you’ve managed it well, and you’ve refied it out well, or you’ve sold it successfully and not in a sale as in a foreclosure. You didn’t operate it well if that happened.

David:
And that’s just because you don’t want your partner getting stuck on something that they don’t have experience with.

Lindsey:
Correct. Yeah. Yeah. And some of the teams that reached out to me to see if I wanted to join, they were all brand new teams. They didn’t have any experience. And syndication’s a little bit of a dirty word right now too, because there are a lot of people with bridge debt that are getting into some financial trouble right now. And of course, those are the big ones that you’re seeing about on the news, and everybody thinks multifamily is bad now.

David:
Good point. Okay. What’s the next thing that you’d ask someone to vet them out?

Lindsey:
I like to see are they vertically integrated in their own company? And that’s not something that’s a deal breaker for me, but especially some of the bigger deals that we’re doing, if they successfully have their own property management company that can save a lot of expenses. One of our properties in South Carolina, it’s 110 unit, we vertically integrated this summer, and the operating expenses have gone down significantly, which means our NOI has gone up a lot too. And-

Rob:
Can you just briefly explain yeah, what does vertically integrated mean?

Lindsey:
Yeah, so having our own property management company in the building and not using a third property management company and doing that across a couple of the properties that we own.

Rob:
Okay, carry on.

Lindsey:
So that’s something that I like to see, but it’s definitely not necessary.

Rob:
And what’s the next question you’d ask?

Lindsey:
Yeah, so another one asking for their details of underwriting. Underwriting is to me, one of the most, probably the most important thing that you need to have in a successful real estate deal. Anybody can make numbers look good on paper, but that doesn’t mean they’re accurate. I cannot tell you how many times other people have come and presented a deal to me saying, Hey, do you want to do a JV? Do you want to partner? Do you want to put some of your money into this? It’s a great deal. The equity multiplier, you’re going to double your money in five years. So I always say, okay, show me the underwriting. And my husband, he’s a mechanical engineer by background, so he’s very, very nitty-gritty on the underwriting. And he’ll start going through it and he’ll look up and see, okay, your taxes are not written down correctly.
He talks to our insurance broker and they’ve underestimated what the insurance is going to be by 10,000, $20,000 at some cases on some of the properties. There are many, many things that can go wrong that if you’re not doing your own due diligence and looking at how they’re underwriting the deal can go very poorly. Sometimes they’re not putting in property management fees. If they’re using a third company, they’re missing huge things that are really going to affect your property in a negative way, and you’re not going to be making money on it if you’re not underwriting well. So that is huge.
And one of the other things that I like to see is how are they researching the area of the property? We mentioned that some of these properties we haven’t even walked into yet that we’re doing partnerships with. So are they really doing their market research? They might give us the operating memorandum or a piece of paper saying, okay, subjectively they think that this is a great area because oh, our friends, our family’s moving in, they’re building a new gas station here. It is a really growing area, but that’s just them thinking that. But then when you actually look into the numbers and the demographics, it’s losing 2% year over year for the last five years of population growth. So I don’t want to be investing in an area that is not increasing.
So mainly you need to be doing your due diligence, whether you are an active operator, whether you’re a limited partner, limited partners, that’s the most passive you can get, but you still need to be able to look at numbers and understand if the deal is good or not.

David:
Great questions there. I really like that, and that’s something practical that we can all move forward with. Really quickly, Lindsey, give us a snapshot of where your portfolio stands today in terms of the number of properties, the equity in the properties and your cashflow.

Lindsey:
Right now we have a total of 472 units. Actually next Tuesday we’re closing a 72 unit in Springfield, Missouri. So that one is going to take us over the 500 unit line, which is going to be a huge landmark for us. So this is a mix of… Yeah, it’s a big landmark for us. So that’s over some of these single family lake houses. We have a eight unit JV deal in Indianapolis. We have a 21 unit in Chicago, which is a short-term rental, hostel hotel type and bar restaurant. We have the 110 unit in South Carolina, a 212 unit in Kansas City. The 72 unit that we’re going to close, we have the 10 units in fourplexes around this area. And then across from the medical school at my hospital, we’re actually under contract to close in October, a 19 unit medical student. So obviously that’s up my alley. And then two houses down, it’s a big mansion that we’re converting into a 13 unit, also medical student building, so we have some other properties in the works here too.

Rob:
Wow. Well, let me ask you this. Is there anyone else in your life that you’ve proven wrong in reaching this point? Because I mean 500 units is a lot, but I’m curious, are there people or naysayers that may have data you at the beginning that now might say like, wow, that’s a crazy feat?

Lindsey:
Probably the first broker that I spoke to after that three-day seminar. They’re like, okay, you need to find your core team. You need to get a lawyer on your team, you need to get a broker. So I was like going down the checklist, doing my good due diligence and my action steps, and I called a local broker and he’s like, okay, well what type of properties are you looking at? What are your criteria? And I didn’t really have criteria, so honestly, to him, I probably did sound like I didn’t know what I’m doing because I didn’t, but he straight up said to me, I don’t have time for you. And that one really got to me because I was like, wow, if I can’t even get any brokers to give me time, how am I going to close any properties? So yeah, I’m sure he would be shocked to see where I’m at now.

Rob:
And to close, just curiosity, can you also give us a snapshot of what your life looks like today? I’m sure it’s very different than when you started. I’d love to hear.

Lindsey:
Yeah, the life is definitely very busy. Probably if not even busier because now we have three kids instead of just the one when we started. So I’m still working at the hospital as a physician. I actually was there this morning and I’ve actually become the regional director of my hospital system as well. So now I’m managing a whole bunch of other doctors and everything too. But I had on my vision board earlier this year that I didn’t want to do any more night shifts and I wanted to cut down at the hospital. And specifically for the night shifts, I wasn’t quite sure how that was going to happen. And since I took this role, that has happened, so that’s great. I’m a big believer in manifestation and vision boards and everything like that, so that’s very good. I’m having more time at home with the family now, some more weekends off, so more time for real estate and more time to do things like this.
I’m holding some local meetups now, so we usually get between 50 and 75 people. We’re doing quarterly. These are free, we’re giving back to the community. I love to talk about real estate investing, so it’s very fun for me to talk and help teach other people this as well. And then spending a lot of time with the three kids, obviously. They have a lot of new hobbies as they’re getting older. My husband coaches our son’s soccer team, so that’s fun for them. And real estate’s definitely helping us to give more time.
On paper now, as of the summer, we are officially financially free with our real estate investing. So it’s a good feeling to be able to work at the hospital because I want to, and not because I have to. I’ve worked very hard to become a physician. I never want to give it up completely, but it is a weight lifted off the shoulders to feel that.

Rob:
What does financially free mean for you guys?

Lindsey:
Meaning we’re having enough cashflow from our investments that if I would lose my job today, we are okay paying bills.

Rob:
Amazing. Well, congratulations.

Lindsey:
Thank you. So now we’re working on generational wealth, which is another goal. Next step.

Rob:
You’re five years in and you’ve created something that 99% of our listeners want. I’m sure in the next five years you’ll crush that one out too. Thank you so much for sharing with us. If people want to learn more about you and connect with you and do all that good stuff, where can people find you?

Lindsey:
Yeah, so I’m the only Lindsey Duguet on Facebook, so you can type me in there. I have Instagram. Cloverkeycapital.com is our website. So I’m very responsive to everybody messaging me. So again, I love to talk about real estate investing, so I’d love to talk to anybody else too.

Rob:
Cool. And David, what about you?

David:
Davidgreene24 on all social media. Go give me a follow there and check out davidgreene24.com and spartanleague.com. You can learn a lot about me. How about you, Rob?

Rob:
Cool you can find me over on YouTube @robuilt if you want long form video, and then if you want really wacky real estate reels where David makes appearances on my lists, you can go follow me on Instagram too.

David:
Go check that out. That was a very funny video that made… If you want to know what Rob looks like in lipstick, it’s a can’t miss. Lindsey, thanks for being here and thanks for sharing the story and thanks for not listening to the people that told you that you can’t do it. Keep going.

Lindsey:
Thank you guys.

David:
This is David Greene for Rob, putting the man in manifestation, Abasolo. Signing off.

Jaret Seiberg, housing policy analyst at TD Cowen Washington Research Group, joins ‘The Exchange’ to discuss Fannie Mae and Freddie Mac reform, lowering home borrowing costs, and more.

Ron Shaich built two unicorns in the food industry – Panera and Au Bon Pain. His life and new book, Know What Matters, offers 7 lessons that can help entrepreneurs develop their own lean unicorns.

1. Start with Passion.

Entrepreneurs need passion because passion fosters persistence. Shaich found his in the fast-casual food industry. His first job was in the cookie industry and his first venture was a Boston cookie shop that he started in 1981 when he was 28 years old. When he realized that few people buy cookies before noon, he pivoted and became a licensee of Au Bon Pain, a 3-store French bread chain. When he realized that he could improve the management of Au Bon Pain, he merged with the licensor, got 60% of the combined entity, and built Au Bon Pain into a national chain of 250 stores. He then acquired the St. Louis Bread Company and used its business model to create and build Panera Bread
PNRA
into a giant with annual sales exceeding $5 billion. Find your passion. Pursue your passion.

2. Get Skills.

Passion is good but not enough. You need skills. By graduating from Harvard Business School and working in the cookie industry before starting his own venture, Shaich was well prepared to start his own cookie venture. He used his business skills to license products and expand his offering, merging with the licensor who could benefit from better management, and building the merged entity, Au Bon Pain, into a national chain. He then used acquisition skills to buy and build Panera, Shaich also demonstrated the skills to find and implement the growth strategy in an emerging trend where few succeed.

3. Find your Emerging Trend.

Billion-dollar entrepreneurs, from Sam Walton to Brian Chesky and Joe Martin, mainly started in emerging industries. The fast-casual food industry started in the early 1990s and boomed in the 2000s. Shaich entered the emerging trend when Au Bon Pain bought the St. Louis Bread Company in 1993, became Panera in 1997 and expanded. As Shaich notes, “the job of leadership is to figure out where the world is going and make sure your organization is there.” Jump on the right emerging trends.

4. Finance for Control.

Shaich financed and built Panera with control. When he merged his cookie company with Au Bon Pain, he kept 60% of the combined entity. When he bought the St. Louis Bread Company, he paid $23 million and stayed in control. That is one reason he was able to mold Panera in his vision and keep the lion’s share of the wealth created.

5. Grow with Cash Flow.

Shaich notes that the managers of Au Bon Pain, when he was a licensee of the company, did not always bill him for the license fee because they were “out of control.” Shaich obviously did not make that mistake. By monitoring his growth, he built Panera and controlled it.

6. Exit at the Right Time with the Right Strategy.

Know how to exit and when. Shaich considered selling Panera to McDonald’s and Starbucks
SBUX
. Neither worked out. McDonald’s was on an acquisition spree, but many of its acquisitions did not work out or did not fit, and were divested. Shaich made the right decision in not selling to McDonald’s. Shaich also discusses the problems with going public before the venture is ready. In their search for returns, VCs push their ventures to go public as soon as possible, especially if the stock market is hot. That is one reason why many ventures that are taken public prematurely often end up failing as SPACs have proved. Managing a failing venture with public investors is not simple – but VCs are fine with it since they sell their interests as soon as they can.

7. Build the Right Team.

Shaich is always on the lookout for talented individuals whose objectives align with his own. When activist investor Noah Elbogen was on Panera’s board, disagreements arose between Shaich and Elbogen. However, when Elbogen launched his own investment venture, Shaich recognized his talent and invited him to join forces. It’s all about pairing the right talent with the perfect role.

MY TAKE: Shaich follows many of the fundamental guiding principles of billion-dollar entrepreneurs. Learn these common rules and apply them to your business to build your lean unicorn.

Home equity sharing agreements, which allow property owners to get a lump sum of cash in exchange for a portion of their home’s future appreciation or value, are moving from a niche product to a more popular option for funding a variety of needs. 

In July, DBRS Morningstar, the fourth-biggest credit ratings agency in the world, became the first to develop a methodology for assessing home equity investment securitizations. That will allow securitized notes backed by home equity sharing agreements to become more mainstream. 

About two years ago, finance company Redwood Trust announced a deal with fintech company Point, which became the first securitization solely backed by home equity sharing agreements. But the first rated securitization of notes backed by home equity investments came this fall, with $224 million in notes backed by home equity agreements originated by Unlock Technologies and issued by Saluda Grade. The transaction shows heightened confidence in the asset class as an option for investors.  

Home equity sharing agreements are a way for homeowners to access some of the equity in their home without taking on debt or making monthly payments. But are they a good option for investors looking to leverage their existing equity to expand their portfolio of properties? And do these speculative investments pose a threat to the market in the long term?

What is Home Equity Investment?

Home equity investments, often known as shared equity or shared appreciation agreements, provide homeowners with access to cash in exchange for a portion of their home’s future value or future appreciation above a starting point. These contracts aren’t loans, which means they often come with more lenient credit and income requirements, if any, and aren’t impacted by today’s high-interest rate environment. Homeowners can use the cash to make renovations, pay off high-interest debt, or even buy a second home, all without a monthly loan payment. 

However, the agreements are secured by your property and typically come with repayment terms ranging from 10 to 30 years. During that time, you’ll usually have the option to repurchase the company’s share of your home equity for more money than you received initially, or you can pay the company their share when you refinance or sell your home. 

If the term ends and you don’t have the money for repayment, some contracts may force a sale. Home equity agreements are also nonstandard contracts, unlike home loans, and may have burdensome stipulations for renovations or other terms that may be difficult to comprehend. 

Additionally, most agreements come with closing costs and an origination fee, plus a share of your home’s future appreciation or value that equates to a high APR. For example, Unlock allows you to access 10% of your home’s current value in exchange for 20% of your home’s future value. 

Some companies, including Unlock and Splitero, have a cap that protects homeowners from owing too much in the event of rapid appreciation. Splitero uses a shared appreciation model, which means the company shares your losses in the event of depreciation as well. 

“In the event your home or property value drops significantly, your investment repurchase amount to Splitero may be less than your initial investment,” says Michael Gifford, CEO and co-founder of Splitero, in a conversation with BiggerPockets. However, the company calculates appreciation from a starting point that is less than the appraised value to account for the risk. 

Is Home Equity Investment a Good Option for Real Estate Investors?

To ensure that a home equity sharing agreement is a favorable way to fund an investment property, you’ll want to ensure that the property would generate returns that exceed the cost of accessing your equity. You’d also want to compare your net revenue over the term with the expected net revenue you’d get financing the property with a traditional mortgage, home equity loan or HELOC, hard money loan, or alternative financing arrangement. 

But entering into a home equity investment agreement isn’t the same as borrowing, and it comes with other benefits, which means it’s difficult to compare apples to apples with traditional financing options.

Explains Gifford: “Because it’s not a loan, there are no additional monthly payments affected by the rising interest rates or new debt associated with a Splitero HEI. This means it won’t add to your debt obligations or affect your debt-to-income ratio. Splitero HEIs also don’t have income requirements to qualify, which means if your wealth or income is tied up in a property, you can still access it.” 

Splitero accommodates both owner-occupied and non-owner-occupied properties. 

In other words, it’s an option for investors who can’t qualify for other types of financing. And if not having a monthly payment allows you to use your cash flow to grow your rental property portfolio faster, you could potentially see earnings well above what you owe the originator of the agreement. But you’ll need to crunch the numbers and, given the complexity of these nonstandard contracts, you’ll likely want input from an attorney. 

It’s also important to understand that while most companies offer calculators you can use to estimate the price to repurchase your share, these tools are based on assumptions about the market that may not hold true.  

The Risk of Home Equity Investment Securities as a Mainstream Asset Class

Securitization of home mortgages began in the 1970s. Most mortgage-backed securities have long been considered relatively safe investments since mortgages are collateralized by real property, and government-sponsored mortgage companies like Fannie Mae and Freddie Mac guarantee payments in much of the secondary mortgage market.

However, home equity investment agreements are typically secondary liens. If the homeowner defaults on their mortgage and the home is sold in foreclosure, the home equity sharing company would only collect after the primary mortgage lender is paid. 

Therefore, shared equity securities may be a high-risk, high-reward investment. While real estate tends to appreciate in the long term, the housing boom and subsequent crash of 2007-2008 revealed how typical trends can go awry. Research suggests that housing speculation was partly to blame for the economic downturn, coupled with the packaging of low-quality mortgages, including subprime loans, into securities. 

DBRS Morningstar rated the Class A and B notes included in the Unlock HEA Trust 2023-1 as BBB (low) and BB (low), which means that analysis shows the notes to be of “adequate credit quality” and “speculative, non-investment-grade quality,” respectively. 

DBRS Morningstar’s rating system may help institutional investors view the asset class as reliable, and it’s possible that the government-backed mortgage companies could go as far as becoming players themselves. Under current regulations, Fannie Mae and Freddie Mac can’t buy mortgages constrained by private transfer fee covenants, which are used to enforce home equity investment agreements, but the Federal Housing Finance Agency (FHFA) is considering permanently removing restrictions on shared equity loans. 

The move is intended to support affordable housing by allowing shared equity loans administered by land trusts, governments, and nonprofits to be securitized. These programs typically provide down payment assistance to low-income homebuyers in exchange for a share of the home’s future appreciation or value. 

The FHFA not only provided a waiver through 2024 that allows Fannie Mae and Freddie Mac to buy shared equity loans but also removed income limits. The agency is requesting comments on whether to make the waiver permanent for the banks it regulates and whether the income limits should be reinstated. Looser standards could contribute to the rising popularity of home equity investment agreements, but that can also mean speculative danger.

But with the average homeowner in the U.S. now sitting on more than $274,000 in home equity, Gifford doesn’t foresee problems for Splitero, even in an economic downturn, adding: “It would take a never-before-seen, catastrophic event of greater than 50% declines for the average homeowner to be underwater like we saw during the GFC. After such a correction, most homeowners will still have equity in their homes and are unlikely to sell those properties at that time. It is far more likely they will hold on and ride the value of their home back to higher price levels.” 

The Bottom Line

Home equity investments may be evolving from a niche product to a mainstream financial tool for property owners. For some, the agreements may be a favorable alternative to taking on new debt. The first-rated securitization of equity-sharing agreements could increase confidence in the validity of the asset class, promoting the growth of home equity investment providers and leading to new, competitive product options for homeowners.

However, because home equity sharing agreements are often costly options for property owners looking to leverage their home equity, caution is advised. Furthermore, the economic consequences of lower-quality securities should not be overlooked. 

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