October 2023

At the start of October, share prices for Metro Bank plummeted after reports that the lender was preparing to raise up to £600 million in capital to help boost its balance and continue achieving its business goals.

To do this, Metro Bank considered various debt and equity solutions including selling shares, bonds and some assets such as a portion of its mortgage book.

Less than two weeks after the share drop, Metro Bank announced they had secured a package of £925million. That number includes a £325 million capital raise from new and existing investors and £600 million from debt refinancing. Spaldy investments Limited, owned by Colombian billionaire Jaime Gilinski Bacal, led the equity raise by contributing £102 million and will become the controlling shareholder of Metro Bank.

The challenger bank opened in 2010 and was the first bank to open in the UK in over 100 years.

What Does This Have To Do With Small Businesses?

Raising money to meet business objectives can be a necessary task for any size organization.

Crowdfunding is a good option for start-ups, as there are much lower barriers to entry compared to accessing traditional bank loans. Plus, just running a campaign helps with marketing a business.

Types Of Funding

Rewards, debt, equity and donations are the main forms of funding. For small businesses that aren’t yet established, rewards and donations are the simplest to receive.

Have 5 to 6 creative reward packages for different amounts of funds that people give. If the business is product-based, then offering some kind of limited edition product, or launch event invite are ideas for rewards. Service-based businesses could offer a consultation, discount on services or priority bookings to investors.

Donations are exactly that. Money that supporters give to your cause without the expectation of something in return.

Things To Consider

If you are raising funds to launch a business, once a campaign is in the public, your idea is not protected.

Some platforms won’t release any funds if the campaign doesn’t reach its target, so it’s wise to start with a smaller goal initially. Once that goal is close to being hit, then the amount of the total goal can be increased.

Also, you should think about:

• Why do you want to crowdfund?
• What will it do for the business?
• Why should anyone care?
• How much do you want to raise?
• How will the money be spent?

Which Platform To Use?

GoFundMe, Kickstarter and Seeder are some of the more well-known platforms. However, there are over 90 crowdfunding platforms in the UK crowdfunding market. Use this directory to help you find the most suitable one for your business.

Tips For A Successful Campaign

• Have a strong online presence for your brand. This means all social media and websites have clear messaging and are up to date.
• Before launching, create a buzz in your networks. Ask for their support in advance, so that when your campaign goes live there is already momentum.
• Create a video pitch to add to your campaign. This should be a compelling 1 to 3 minute video that includes your founder story and tells people why they should invest. This is a great sales tool and doesn’t have to be done by a videographer. Having a phone video is better than having nothing at all.
• Have a solid marketing plan. Decide where and with whom you will share your campaign. Do you know any journalists who can help get your campaign seen? Will you run ads?
• During your campaign work on it for at least one hour a day posting updates, getting more press, and talking to people about it.
• If there is one person you would love to have on board because of their connections or expertise, think about how you can get them in your corner and then take action to do just that.

As with all financial decisions, seek advice from trusted advisors and accountants.

Ashley:
This is Real Estate Rookie episode 332. How much should I charge for a security deposit? The first thing that you need to do is know what you are allowed to charge per your state laws. A really, really great resource is Avail.co. It will actually tell you what your state laws are.
Does this only cover damages for the security deposit? So, that’s what you would put into your lease agreement. And one thing I highly recommend is putting into the lease agreement what somebody will be charged. So, actually, itemizing like here is your checklist of things of how we want the apartment to come back from us. My name is Ashley Kehr and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today we’ve got a Rookie Reply, which means we’re taking questions from our Rookie audience. I say today’s episode is a little Ashley heavy because we’re talking a lot about tenants and long-term rentals. We talk a little bit about LLC structures and HELOCs, but lots of good information we’re going to get into for you guys today. Yeah.

Ashley:
Yeah. We also talk about what attorney you should use from which state when you’re dealing with deeding properties, transferring title or creating your LLC and putting your properties under the LLC. So, lots of great questions today. If you have a question that hasn’t been answered yet and you want answered, please go to biggerpockets.com/reply.

Tony:
All right. Now, I want to give a shout-out to someone by the username of Dela Rogue. This person says, “Exposure to realistic real estate. The show is great for people like me who work a full-time job, but want to learn more about investing. Real estate investing seemed overwhelming at first, but Ashley and Tony listening to them every single week helped me get comfortable with all the terms being thrown around and investing in general. I’m on the BiggerPockets forums now and learning as much as I can before I execute my first deal.
Thanks for all the tips guys.” So, for all of our Rookie’s that are listening, we’d love to hear from you. Tell us your story by leaving us a review on Apple Podcast, Spotify, wherever it is that you’re listening. But the more reviews we get, the more it helps the show grow and the more the show grows, the more we can inspire folks just like Dela Rogue. So, do us a favor, leave that review.

Ashley:
Now, let’s get in to your questions.

Tony:
All right. Guys, so today’s first question comes from Gamba Lume Jessin. Gamba Lume, I hope I got the first name right there. But Gamba Lume’s question is, “Hi, team, me again. Question, if rent is payable in advance by the first day of the month and the tenant doesn’t do so and five days later they want to move out, do you demand rent for the month along with the late fees?” So, Ash, it’s probably more of a you question. All of my “tenant’s payment” before they step foot of my property.
So, I don’t have to deal with this as much. But how do you handle folks that want to leave? My assumption is that they still got to give you 30 days’ notice. Typically, that’s what’s going to be in your lease is you can’t just say, “Hey, I’m moving tomorrow.” But yeah, I guess curious Ashley to hear how you handle those kind of situations.

Ashley:
Okay. So, for this in your lease agreement, there should be some clause that states if you don’t give 30-day notice and you just randomly decide to move out that your security deposit is completely forfeited. With this, yes, I would still, if they didn’t give proper notice according to their lease agreement, they would still owe. In lease agreements you can see clauses too where somebody will put in that if you move out before your lease ends or you don’t give proper notice, you are liable to pay the rent on that property until somebody else moves in.
And as the landlord, you have to actively try to market and get somebody into the property. The hard part is trying to collect from that person no matter what your lease agreement says about them terminating the lease early or not giving proper notice, it is very hard to collect from that person. So, yes, you can still charge them for that month’s rent unless you get somebody into the property right away. So, say maybe day 10 you get somebody in, you could charge them for the first 10 days. But then, since you already have somebody else in the property, unless it specifically says in your lease agreement that if they move out early, they have to pay a full month’s rent and you retain their security deposit or whatever that may be.
That has to be written out in your lease agreement. In this example, let’s say there is no clause about moving out early or not giving proper notice. In this one, I would try to charge the tenants for moving, vacating early and see what would happen if they would actually pay it. One thing you can do is you can… and a lot of property management software is putting this into their systems now, where you can actually send a tenant’s information out for collections. And they’ll be able to… from there, the collection agency takes it and they call and they collect and you may get the money, you may not.
But also the collections agency takes a large percentage. They also have very regiment rules as to was actually eligible for collection. So, in the circumstance they may say in your lease agreement, it doesn’t say what the rule is for somebody terminating early. And we don’t think that this is something we can actually collect on by law.

Tony:
Ash, let me ask you this question. I actually don’t know the answer to this. But if you had your tenants banking information on file checking, routing information or debit card, credit card, if they violated your lease in some way, could you just automatically bill their card? Is that like a thing that long-term landlords do?

Sonia:
The property management company that I used to use, they actually would take the tenant’s information for their auto withdrawal and they would set up on their end. So, they would have the full account information whether there’s credit card or a bank account. The software that I use, I do not see any of that that is completely in the residence control. But one issue when I let the other property management company go and took back over when we switched everyone over the property management company never turned off everybody’s online payments. So, people’s account had paid us the new property manager, but also then they got the money taken out of their bank account because the property management company never shut off those payments.
And it actually was a huge ordeal. Obviously people were really upset because they just double paid for their rent and it’s like, “Okay, how is it getting back?” And then, it was a nightmare just figuring out, okay, who already paid the property management company and who didn’t and things like that. But I don’t like the responsibility or the aspect of me actually having that person’s account information. I like it that it’s a third party software that has security in place, cybersecurity in place where that information is protected.
So, just like with tenant screening, if you are actually going to do your own tenant screening where you’re going to collect to the person’s social security number, you’re going to do all these different things. A lot of software company will actually do a check on you as in they send someone to your office to make sure you have a lock on your door, you have a filing cabinet with a lock that your computer is encrypted, all these different things just for you to collect somebody’s social security number. So, with all of the internet things that go on and all of the scams and everything today, I would suggest if you can avoid.
And this is one of those situations where you can use software and you can avoid actually collecting your tenant’s bank information or credit card information and somebody scams them, it could make you reliable because they say, “Well, you don’t have any kind of protection. Somebody could easily hack into your computer and get that information off of it,” things like that. But Tony, I did have a question for you though, which it’s more towards medium term rentals, but it’s through Airbnb. So, there’s been a couple of times where I’ve had somebody saying for a long time, like three months say for example. And so, Airbnb will collect one month at a time.
So, if somebody books longer than one month, they don’t collect the full amount. People can set up payment plans almost where they’re in the property for a month and then month two, Airbnb will pull another payment from their credit card on file. I’ve gotten the notification that the Airbnb cannot collect from this person. And it doesn’t say what it is, but it’s always been rectified within 24 hours. I get the email saying the person has paid, but have you ever had anything like that happen or not?
Because it’s mostly short-term rentals. And what would be your suggestion of what to do in that circumstance? If you do have somebody from Airbnb in the property, they’ve rented it for three months, month two comes and they don’t pay and they shut off their credit card or whatever and Airbnb can’t pull from it anymore.

Tony:
Yeah. We’ve never had that issue because all of our properties are traditional, true short-term where folks are at most during the holidays we might have someone say 7 or 10 days, but never anything beyond 30. If I were in that situation where I had an Airbnb guest whose payment failed, I mean obviously, I try and reach out to them first. But if for whatever reason I couldn’t get in contact with them, I feel like my next steps would be to try and get them to physically leave the property. So, I might try and call the sheriffs, I might try and call the local PD, whoever I can to assist in getting them to get out.
But then, it gets dicey and depending on what state you’re in on, if they’ve been there long enough, say that they’re on whatever, a 90-day medium-term rental stay, even like a six month and you’re on month four, when they stop paying, then you kind of get dicey around like, “Hey, what are your options?” So, my first move would be to try and get them to leave the property physically and then if I can, I guess you got to start an eviction process or something.

Ashley:
Yeah. Yeah. Maybe then they’ll start throwing out squatter laws.

Tony:
Yeah. And that’s why. I mean we’ve had to call the sheriffs I think once or twice to help get people out on the short-term rental side. Typically, by the time when we tell them, “Hey, we just called the sheriffs, it’s time for you to go.” Usually they just leave on their own. But we’ve never actually had to physically remove someone from one of our properties before.
So, fingers crossed I never have to. But yeah, I’d be, I guess guessing a little bit on what I’d be doing in that situation.

Ashley:
Yeah. So, with that, was that during their stay and you had them leave early because they were in a party or was it because it was past their checkout and they weren’t leaving?

Tony:
One of each, right? So, we had one guest, I think I told the stories like these two crackheads, like actual literal drug users. I don’t say crackheads in a funny way, but they were actually doing crack cocaine in our property. But we had to call them because we knew who they were, we wanted them to leave. And then, the second time was someone that just stayed exceptionally late and they weren’t super responsive.
And then, “Oh, I’m sorry, we overslept,” or something like that. So, those are the two situations. Never for a party. Most of our properties are smaller, especially the ones in Joshua Tree, so they’re not even meant for a party. And then, our cabins in Tennessee, I don’t know, it’s mostly families and grandparents and grandkids. So, we’ve never really had to deal with parties too much.

Ashley:
Okay. Our next question is from Alfonso. “If I take out a HELOC on my primary residence, but I don’t access any funds yet and just have it open, what happens if I decide to move? If I choose to access my line of credit, does the lender ask if it’s still my primary residence? Will the lender close the account?
Can someone clarify? Thanks in advance.” This is a great question. And our friend Tyler Madden, who’s been on the podcast before has actually talked about how he did this with his primary residence. He was getting ready to purchase a new house and so he went and got a HELOC on his primary residence that he was going to keep a rental property.
And he did this before he closed on his new house. And he actually used the same mortgage broker. I have a friend who’s in a situation where they have a duplex or house hacking and they are buying a new primary. And they need the cash from the duplex to put towards their down payment. I told them about what Tyler did as to he actually just got the line of credit and they could draw off the line of credit and they could use that for their down payment on the next property.
Tyler had said he used the same mortgage broker to do his line of credit and to do his new mortgage. So, this broker was fully aware that it wasn’t going to be his primary anymore, but it was right there in that time, which was completely legal to go and get a line of credit. And so, they worked out the closing. So, he closed on the line of credit before he closed on the mortgage of his new property. And having that kind of timeline is important.
And so, I have a line of credit, but they’re all on investment properties. I’ve never actually done one on my primary residence. As far as I know when you pull off a line of credit, it’s usually like a form you fill out that you just send into whoever your loan officer is and say, “I want to take $20,000 and please put it into this bank account.” And then, you sign it or you get a checkbook, you get a regular checkbook and you can literally write money or write checks from your line of credit instead of a bank account. So, you could always ask for that option too when you go and get the HELOC.
And then, there’s nobody asking you if you have a renewal term, like say your HELOC is up in three years and they go to renew it, they may ask you then if that is still your primary when they go to actually renew the line of credit.

Tony:
Yeah. And so, a HELOC is what you’ll hear is some people refer to it as a second mortgage. So, in the same way that when I look up county records for a specific property, you can see who has a lien, who has a mortgage for that property, right? Like Bank of America has a loan against 123 Main Street for Tony Robinson. When you go out and get a HELOC, and I’m almost certain that this is correct, they’ll also technically put a lien on your property as well. So, say that you do go to sell Alfonso and the same way that your title or escrow company or whatever kind of entity you’re using in the state that you’re in, they’ll go and check to see what are all of the liens against this property.
They’ll see your primary residence and then they’ll see your… I’m sorry, they’ll see your first mortgage that you used to purchase the property. Then, they’ll also see your second mortgage or your home equity line of credit. So, they’ll pay off both of those with the proceeds from the sell before they release any funds to you. So, it couldn’t be like, “Hey, I’m going to go out and get this HELOC against my primary, then I’m going to turn around and sell it.” And then, the bank that gave the HELOC wouldn’t be aware of that.
Your title escrow company will make sure that it gets paid off. So, that’s how it works in the backend. And that’s the whole reason why you use these third parties like title and escrow to make sure all the paperwork is good. Because say that you tried to do this outside of title and escrow, there’d be no paper trail of this lien against the property. So, the banks are going to want to make sure that they’re protected.
They’ll have some kind of mortgage security document that you’re signing that ties the debt they gave you to the actual property. So, to answer that first part of the question, if you sold the property, your HELOC should get paid off during that sale process and then you walk away with any proceeds there afterwards.

Ashley:
Our next question is from Graylin Herd. “Hey, Rookies, I hope everyone is doing great. I’m closing in on renting my first property. And with the current state of the world, it’s stressing me out what I should charge as my security deposit and clauses I should implement to protect me as an owner. Everything in my property will be brand new and I put a lot of hard work and money into it.
What you charge for security deposits and does this only cover damages? Are you charging your charge first and the last month’s rent at the beginning of the lease? And if so, this is separate from the security deposit, correct? What service do you use to run background and credit checks on applicants? I have heard rent prep and my rental are good.
Thoughts? Thanks for help in advance.” Okay. So, let’s go back to the beginning and let’s start there. How much should I charge for a security deposit? The first thing that you need to do is know what you are allowed to charge per your state laws.
A really, really great resource is Avail.co. Okay. They’re actually a property management software and they have, if you go to, I think it’s tools and resources, I’m trying to look right now. It will actually tell you what your state laws are for each state. So, you click on your state and then you can go through and see if there is a security deposit law, if there is you have to charge a certain amount or not.
So, in New York State, you can only charge equal to one month’s rent. So, if they’re renting the unit for 750, you can only charge 750. You can’t charge any more than that. You also in New York State cannot charge for last month’s rent. So, that’s another thing that you should look for in your landlord laws.
So, here in New York State, when somebody moves in, you can charge them the first month’s rent because they’re moving right in and then you can charge them security deposit equal to one month’s rent. You cannot charge anything more and you cannot charge last month’s rent. Okay. You can charge for pet fees, different things like that upfront that are non-refundable. So, we do a $300 non-refundable pet fee at move-in, if you are bringing in a cat or a dog to the property.

Tony:
Let me just ask a few questions on that piece. Right. So, you said that you charge a $300 pet fee. How did you land on 300?

Ashley:
When I started as a property manager, it was 200 and for the first ever building that I managed, that’s what they did. And then, it was another $10 per month. And I quickly realized that was not really enough to cover some of the wear and tear that pets did and that people were actually willing to pay more. So, over the years it’s just increased to 300. So, it’s $300 no matter how many pets you have.
So, if you have a cat and a dog, it’s $300 and then it’s $30 per month per a pet. So, if you have two dogs, it’s 60. If you have two dogs, one cat, it’s 90, but we do cap it at three pets. And then, for some properties it’s even less than that. And then, also you have to know what the town codes are too. Your town may even cap how many pets that somebody can actually have living in a household too.

Tony:
Is there any level of competitive research that you’re doing to gauge either the pet deposit or even just the general security deposits? Or are you just going based off your knowledge of your own properties?

Ashley:
Well, the security deposit, no matter what for everybody in New York State has to be one month’s rent.

Tony:
Oh, so it can’t be less or more?

Ashley:
I mean it could be less, but I’ve never ever seen anybody charging less ever. That is 100% like the going rate is one month’s rent. Yeah. And then, as far as the pet fees, I haven’t done a ton of research on that to be honest. But we’ve never had anybody say, “No, never mind, we’re not going to rent it.”
But every once in a while look at what’s listed in the area. And I mean recently it’s actually very hard to find listings in the area because apartments are just going so fast. But usually around the 200 to 300 mark is what I’ve seen in there. I mean before I’ve seen even $500, but then there’s no monthly additional fee too. So, there’s a change in what the upfront fee is and then what the monthly fee is.
And a lot of times it’s easier to have a higher monthly fee because that first upfront fee, sometimes it’s hard for somebody to come up with the first month’s rent, the security deposit, and that large chunk of money for the pet fee too.

Tony:
Got you.

Ashley:
Okay. So, let’s see. The next question was does this only cover damages for the security deposit? So, that’s what you would put into your lease agreement. And one thing I highly recommend is putting into the lease agreement what somebody will be charged. So, actually itemizing like here is your checklist of things of how we want the apartment to come back from us… come back to us when you move out.
So, it’s broom swept, it’s the fridge is cleaned out, the oven is clean, there’s no holes in the walls. And then, you start putting, if we need to pay our cleaner to clean the oven, it’s a $20 charge. If we have to have somebody clean the fridge, it’s $10. You itemize what those cleaning charges will be and do the same for any repairs that are the tenant’s responsibility. So, if there’s a hole in the drywall, what’s going to be the charge for something like that?
If the faucet is ripped off or there’s other damage that can be done, there’s tears in the rug. I once had a tenant that cut a piece of the rug out of the closet and then put it where his dog had ripped up the carpet. We wouldn’t notice that he put a patch in the carpet.

Tony:
You got to give him points of being creative though. That’s funny.

Ashley:
So, try to itemize everything specifically that they’ll be charged for. Going back to New York State. So, New York State, you actually have to offer your tenants a pre-move-out inspection two weeks before they actually are moving out of the property. So, they give their 30-day notice, you send them a letter saying, “Hey, you are entitled to a two-week pre-move-out inspection. You can opt out of it if you don’t want it, but it’s here.”
And the purpose of it is so that you can show tenants, you’ll be charged for this, you’ll be charged for this. And it gives them two weeks to go ahead and repair it themselves. And I say that with the air quotes or to hire a contractor to go ahead and do the repairs before their move-out inspection. So, one downside to that is tenants will go and try to make the repairs themselves and it just ends up being even worse than what it was. But this is something by law you have to offer to let them know.
And then, other times it turns out great, the apartment is turnkey and ready to go when they move out and you can get it rented right away. So, to wrap it up, make sure you’re itemizing what the charges for a security deposit could be as far as using it for them to cover rent that was unpaid. Be very careful with how you word that in your lease agreement because you don’t want a tenant to give a notice that they’re moving out in 30 days and they just say, “You know what? We’re not paying less rent month. Just put the security deposit towards it.” Well, now you don’t have a security deposit to cover any damage.
So, usually in our leases we put the security deposit cannot be used as last month’s rent. And then, obviously, if they don’t pay and the apartment is perfect condition, we will apply the security deposit to that last month’s rent. But you want to make sure you have that security deposit available for damages. So, try to get them to pay any rent that they are… that’s due before they move out. Okay. Next part of this question, Tony, I feel like these are all geared towards me.

Tony:
Yeah.

Ashley:
What service do you use to run background and credit checks on applicants? So, pretty much any property management software will have this integrated into their software that you can use. TenantReports.com is one that’s separate from any kind of property management software. So, you can just go in there and you could use that to screen your tenants. But then, if you use AppFolio, Buildium, Avail.co, Rent Ready, they all have background and credit screening services built right into them that you can use.
As far as the rent prep and my rental I’ve never used those ones, so I’m not sure. But I’m sure they’re all pretty similar too.

Tony:
Yeah. And that’s just one thing to add, right? I know in California. This is from the very brief period of time that I worked at a property management company here after college. There were even I think limitations on what kind of things could disqualify someone versus something else. I guess is there any information that you can use in someone’s credit report, background check, et cetera, to disqualify them from being a tenant?
Or are there certain things that are protected that you can’t use? How does it work in New York? And I’m sure it varies from state to state.

Ashley:
Yeah. It does vary from state to state. In New York State, you can’t deny someone because they have an eviction on the record. That can’t be the sole reason, which sounds ridiculous. I know. But yeah, there’s definitely different things.
And then, there’s also Fair Housing Laws across the board where you can’t deny someone that maybe they have the same exact everything, but one person has a 700 credit score and the other person has a 550 and you end up going with the person that’s 550. Okay. Then, the next time, which I don’t know why you would do that, but just say you do that person that’s 550. Then, the next time you rent as the similar unit, whatever, maybe it’s the upstairs or something, you deny someone who has the 550 or whatever. You have to be very consistent as to what your criteria is.
So, we have a checklist and it’s baked right into our software where this is our minimum credit score. This is our minimum debt to income. You have to make at least three times of what the rent is for the month. So, having that all listed out to protect you from Fair Housing Laws that you are being very fair and not discriminating when you’re screening tenants. And that would be the biggest issue.
There are so many free resources to know what your landlord laws are, the Avail.co I mentioned earlier, but also if you go to your local housing authority. So, even if you just Google Buffalo New York Housing Authority, some will come up. So, homeny.gov is one that’s in New York State. Belmonthousing.org is the actual Section 8 voucher association for Buffalo.
So, a lot of times they have free classes, they have handbooks or the classes are like $10 or very low cost. And since COVID they do a lot of them virtual. Now, you don’t even have to go to them in person, but they’re a wealth of knowledge. They’re usually an hour long and you just get like, “Here’s what you need to know to be a landlord in your state.”

Tony:
Yeah. When I worked at that property, they were an all-in-one house anyway. They were one of the largest department complex owners in this little pocket of California that I’m in. And during our initial training process, they talked about what you said about the fair housing and all this stuff, and they said that there were actually people out there. I don’t know if these people were attorneys or just professional tenants. But they would basically look for these big apartment complexes that were violating some of these Fair Housing Laws.
And literally just trying to apply, not even with the goal of getting the apartment, but just to try and catch some of these bigger apartment complexes and companies like red-handed. So, as the leasing agent, we had no discretion over approvals. We would literally just take all the information the person put into their application, key it into the whatever software that we were using, and it would spit out either a yes or a no. And once it happened, we had no control over trying to fluff the numbers or change this or make it easier. It was all automated with no human interaction outside of us just keying in the information.

Ashley:
Okay. Mantas has a question about an LLC. “Can you hire a real estate attorney in order to place your properties under an already established LLC? Does the attorney need to be located in the same state as the property? For example, if my property is in Oregon, does my real estate attorney have to be in Oregon even though I currently live in Maryland or could I do it with a Maryland real estate attorney? Much appreciated.”
So, what this question first, let’s address what it means to actually place properties under an already established LLC. So, you’ve already created your LLC, you’ve filed the documents for it and it’s an operating company and you want to put your properties in this LLC so that they are no longer owned by you personally and they’re now owned by the LLC that entity. So, in order to do that, you have to change the title, you have to change the deed of the property to state that the owner is the LLC and now they are under the LLC. So, in order to do that, usually you’d hire an attorney to go ahead and do a quick claim deed is what I’ve done and deed it from your name to your LLC. And there’s no title work or anything done because you were the previous owner and now it’s going into an LLC that you own too.
And you already had title work done when you purchased the property. And if you as the owner didn’t change anything, then there’s no reason to go ahead and do a new survey and to do the title work again. So, it’s just called a quick claim deed. As far as having that attorney do it in the state that the properties are in or the state that you live in. Another question I would ask is what state is the LLC in?
So, is the LLC the same as your properties or is the LLC the same as where you live too? So, Tony, I honestly don’t know the answer to this question as to where the attorney has to be from.

Tony:
I think the answer is that it doesn’t even necessarily have to be an attorney. Right? I’ve filed some of these changes myself just because you can just walk into the county and say, “Hey, I need to update the deed for my property. What paperwork do I need?” And I know here in California, or at least in the county that I live in, I need what’s called a PCOR form, which is like primary change of ownership form. And then, I also need to update the grant deed.
And as long as I fill out those two pieces of paperwork and I get them notarized, I can myself turn those pieces of paperwork in. I’ve had my attorney do it for me here in California. I just had my escrow company do it for me here in California. So, I’ve had three different types of folks manage that process for me and only one of them was an actual attorney. So, I think the question is does it even have to be an attorney?
Could you just go to the county yourself and fill that paperwork out? But I would think as long as the attorney is at least versed in what the correct paper trail is for your state, for your county, for your city, it doesn’t really matter where they’re at or where they’re located.

Ashley:
Yeah. And I think that right there is the key point is to maybe that the only reason you want an attorney that’s in the state where the properties are is because the actual work to put them into the LLC is to do the deed process do that little bit of title transfer. And so, just having an attorney that already knows how to do it and that state actually might be way cheaper too than hiring an attorney where you live and them just figuring out that process, maybe just an extra step that they’ll bill you for that.

Tony:
But actually, let me ask you because everything has to be done through attorneys in New York. So, do you have to hire an attorney to fill out like a change of ownership paperwork or could anyone do it?

Ashley:
I honestly don’t know because I’ve just always had my attorney do it, but there’s nothing on the paperwork that says my attorney information on it. It’s the seller’s name, the owner’s name, the property information, the description. So, if you already have the existing deed, I think you can probably just go right down to the county clerk office and file yourself to change the title.

Tony:
Yeah.

Ashley:
Last question we have here is from Carrie Molina. “I just purchased a multifamily home and one of the units is going to be available this month. How do you balance upgrading with just renting it out quickly? Should you do your upgrading in the beginning or try to recoup some of your down payment first? Trying to see if I should upgrade this kitchen and bathroom and then raise the rent or just rent it out right away to get some reserves.
If I renovate any recommendations for that ugly bathroom grout, I might be able to raise rent only $75 to a $100 after renovations. Thanks in advance.” So, I’ll tell you a little funny story about that ugly grout. I actually-

Tony:
Bathroom grout.

Ashley:
Yeah. I did a property over COVID with my son. He was I think six at the time. And so, we, me and him rehabbed the whole property and one thing that was not in the budget was in the kitchen, the backsplash to redo it. The tile was in great shape, but it just had these gross yellowish grout lines throughout the tile in the back splash. I actually ordered I’m pretty sure it was on Amazon, like a grout pen, and it was almost like a white mark.

Tony:
Like a Tide pen or something? Oh, yeah.

Ashley:
Yeah. Yeah. It was like a Tide pen, but it was white-out and we just went along and we did that along all of the tile lines to make them white. And it actually turned out so beautiful and it was way more cost-effective than actually going in and ripping out all the tile and putting it back in. But that actually worked really well.
So, it depends, I guess as to how extensive maybe it is and how you want to do where this was not an area where we were doing really nice upgrades in the property because we just couldn’t get that much rent for it. So, there was a little DIY hacks that we did in the property to still make it look really nice, but not going over budget where we couldn’t recoup what we could get in rent for it. With this one, let’s see. Should you do the upgrading first or rent it out first? Tony, what do you think? What would your answer be?

Tony:
I mean, I always want to try and get the rents, right, especially if the unit is vacant. In my mind it makes sense to go ahead and do those upgrades now. Still to Ashley’s point, you don’t want to over upgrade and invest more money into the property, then you’ll be able to get out as rent.
But if the property is vacant, use that as an opportunity to increase those rents, even if it’s only a hundred bucks, if you’re able to start doing that across, we don’t know how many units it is, but say you’ve got a small multifamily with four units, four times 100, it’s an extra 400 bucks per month, you’d be able to pull in by doing those as each unit turns. So, assuming you have the capital, I would prefer to do it now as opposed to waiting. But what’s your approach, Ash?

Ashley:
I would just say run the numbers and look at almost what your cash on cash return is based off getting $75 to a $100 more. So, if you’re going to be dumping $30,000 into renovating the, what was it, the kitchen and the bathroom, then only getting $75 to a $100 more might not be worth it for you. But if it’s only going to cost you a couple $1,000 to do these simple things that will add that a $100 value and rent, then yes, go ahead. So, I think take a look at the numbers and if they make sense or if you’re actually getting better value of keeping it at what it is now and not even doing the renovations. Okay.
Well, thank you guys so much for joining us for this week’s Rookie Reply. If you have a question that you would like answered, you can go to biggerpockets.com/reply and put your question in there. You’re always welcome to leave your questions in the Real Estate Rookie Facebook group, or you can send us a DM on Instagram at Wealth from Rentals or at Tony J. Robinson. Thank you guys so much for listening, and we will be back on Wednesday with a guest.

Most parents hope their children enter adulthood with the grit, confidence, and perseverance to become successful and happy. While it seems that certain people are born with an entrepreneurial spark, environment and guidance play huge roles as well. Recently, I’ve struggled with how to create a framework for my children to be more entrepreneurial. Not that they have to be entrepreneurs, but I at least want them to understand the value that entrepreneurial thinking can create to set them up for success in life.

Fortunately, one of the companies I’m invested with was working with a company called GravyStack. I was guided to this Lifestyle Investor podcast, which featured GravyStack founder Scott Donald. I immediately was drawn to the messaging that you have to focus on helping kids understand value and how that ties into entrepreneurial thinking.

After listening, I went to the resources from the podcast on the GravyStack site. There I found some of the framework that I was looking to create for my own kids. Here are some of the key points and takeaways I learned in regards to setting kids up for success.

Provide Money Making Opportunities

When should your child get money? What seems like a simple question can be surprisingly complex. In my household, I’ve had to consider decisions I make regarding things like allowance and how it impacts a person’s relationship with money.

Aside from the occasional birthday or Christmas present, children should generally receive money when they can contribute or be rewarded for their efforts. When children feel entitled to money just for existing, ambition can take a hit. If they get enough money to cover their wants without doing work, why would they be motivated to look for additional opportunities? If your children want money to buy things, create avenues for them to earn it.

When I downloaded the kid-focused financial literacy app from their site, I noticed an interesting feature. Through the app, kids have the option to work “gigs” to earn and save real money. The free resources can give you a ton of ideas to get started. Using that as a starting point, my wife and I sat down and built out a bigger list of possible chores.

Get 12 inches of snow in one day? Your neighbors can book your tween to shovel their driveways and transfer funds upon completion. However, it’s also about your kids understanding the value of doing it and not just you setting everything up for them. It’s more of a “teach someone how to fish rather than fishing for them” concept.

Your child probably has chores around the house that are expected to be done regularly. This can be considered your child’s contribution to the household. In Donald’s book, he describes this as an expectation. In my case, it’s whatever is expected of my kids for being a “Hall.” But if there are extra chores that your kid understands can add value then you can offer them at a set price. You could create a standing offer to pay $5 for weeding the flower bed. Alternatively, you could pay $1 per load of laundry the child washes and folds.

Whatever financial apps you introduce to your children, make sure they’re safe and interactive. Also, it’s a bonus when children can quickly view the results of their effort. After all, watching real money grow is far more motivating than being told about a number in an invisible savings account.

Teach As You Go

There are quite a few financial processes that people likely won’t need to experience in their childhood. Honestly, how many ten year olds need to take out a car loan? But if you’re taking out a car loan, you can still introduce your child to the process in real time. That way, when the time comes for them to go through it themselves, it might not be as daunting. It works the same way for starting and running a business.

If you’re an entrepreneur yourself, you can discuss some operational aspects of your business as they arise. Your child might find it unbearably tedious, but they’re likely to still absorb information. Just getting that familiarity with the business world and how basic concepts work can give them the boost they need in the future.

The above is more for older kids. You can have them follow you and show them things, and they’ll learn a thing or two. But for younger kids—like mine who are 4, 7, and 10—it’s a bit harder. You’ll want to more actively explain why you make certain decisions.

For example, in GravyStack’s downloaded material, it gives a list of skills that younger children can be taught or you can demonstrate for them. I never really thought my actions of daily affirmations, goal setting, or reflections could make sense to young kids, but why not? These are basic skills of problem solving and survival that are necessary for a child to understand.

Many who want to start a business but don’t cite inexperience or a fear of failure as a reason for hesitating. If your children never watch someone face challenges and address areas to improve, it won’t set them up for success. Getting your children comfortable with adding value for others and demonstrating a unique range of skills may empower them to take the plunge in adulthood.

Don’t Push, But Give Them The Option

If your child has no interest in going into business for themselves in adulthood, that’s not a bad thing. People can be perfectly successful and professionally fulfilled as employees. My oldest has already said that she clearly does not want to be an entrepreneur, which is fine. I just want her to live a fulfilling life. Donald’s method with GravyStack attracted me because it wasn’t just about creating future entrepreneurs. It was more about creating financially competent children.

The gamification aspect of the app takes away the burden of trying to get creative. This is especially helpful for me because sometimes I struggle with being too serious when teaching kids lessons.

Whether it be this resource or another, I strongly encourage other parents to find ways to set the next generation up for success. We live in an ever-changing world with AI and constant innovation that will make it very hard for unprepared children to adapt. However, if you can show them the importance of continually learning, taking initiative, and creating value for others, they will have a foundation that can guide them throughout life.

Dave:
Hello, everyone, and welcome to On The Market. I’m Dave Meyer. Joined today by Henry Washington. Henry, I heard a rumor about you today.

Henry:
Uh-oh. This can’t be good. Or maybe it is. I don’t know. Go for it.

Dave:
It’s good. I heard you finished your book.

Henry:
I finished the first half of my book. I’m still working on it.

Dave:
Okay.

Henry:
Still working on it.

Dave:
Show us how much attention I was paying in that meeting.

Henry:
We finished the first half of the book. We’re working on the second half of the book. We’ve got it all transcripted out, but we’ve got some more details to put in there.

Dave:
Well, the team at BiggerPockets Publishing seemed very pleased about your book and that things were coming in on time. It sounds like a great book. What’s it about?

Henry:
It is about finding and funding your real estate deals. Great book for beginners to learn how to get out there and start finding these deals. Man, with this economy, it’s crazy. You got to get good at finding deals.

Dave:
Heck. I don’t know if I’m a beginner, but I will definitely read a book if it helps me find better deals right now. I would love to know that. When’s it coming out, by the way?

Henry:
I think it’s March.

Dave:
Okay, nice. Nice. All right. Well, we’re both having Q1 books coming out.

Henry:
You have a book every Q.

Dave:
I have one book out. This is going to be the second one. I’ve just been writing this one for three years. I won’t shut up about it.
All right. Well, we have a great episode today. I think they call this one a… This is like a Dave Meyer special episode. We’re going to be getting a little bit nerdy today. We have a lot of great shows where we talk about tactical decisions in the economy/things that are going on with your business. But today, we’re going to go behind the scenes in one of the more detailed/technical economic things that does impact your business every single day. That is mortgage rates. But specifically, we’re going to talk about how mortgage rates come to be. You might know this from listening to this show a little bit, but the Fed does not set mortgage rates. It is instead set by a complex set of variables. We’re going to dive into those today with Chen Xiao from Redfin. She’s an economist. She studies just this: how mortgage rates come to be. I am so excited, if you can’t tell, to have her on the show to dive into this topic that, I think, everyone is particularly curious about.

Henry:
Yeah. I agree. I am excited as well. But not for the same nerdy reasons that you are excited. But I’m excited because everybody that you talk to has some opinion based on almost nothing about what they think interest rates are going to do. People are making decisions about their investing. They’re buying properties. They’re not buying properties based on these rando factors that they think are going to play into this. Actually, hearing from someone who is looking at this information every day and can make common sense of it for us is going to be super helpful if you are trying to figure out should you be buying property right now or should you be waiting, or how long do you think rates are going to stay where they are or go up or go down because these things are impacting the amount of money that investors are making.

Dave:
I think the thing I am so excited about this for is that we can all make projections, like you’re saying. But in this episode, we’re going to be helping everyone understand how this is actually going to play out one way or another. We don’t know which direction it’s going to go. But we can understand the ingredients that are going in. You can form your own informed opinion here and use that to make wise investing decisions.

Henry:
Dave?

Dave:
Yes.

Henry:
I’m going to have to ask you to do something. Are you going to be able to hold yourself back and not dive all the way into the deepest weeds possible? Because this is pretty much your baby here. This is what you love.

Dave:
This is my dream. I mean, three years ago/four years ago, I didn’t even know really what bonds were. Now, I spend all day talking about bonds. God! What has become of me? I will do my best to hold back and keep this at a level that is appropriate for real estate investors and not people who just like talking about financial instruments for the sake of [inaudible 00:04:24].

Henry:
We appreciate you.

Dave:
All right. Well, we’re going to take a quick break, and then we’ll be back with the show.
Chen Xiao, welcome to On the Market. Thank you so much for joining us today.

Chen:
Thanks so much for having me. I’m really happy to be here.

Dave:
Well, we’ve been very fortunate to have a bunch of different of your colleagues from Redfin joining us. You guys do such great economic research. What, in particular, are you focused on tracking and researching in your job at Redfin?

Chen:
Absolutely. Thanks for having so many of us from Redfin on. We’re all big fans of the show. In my role at Redfin, my job is to basically lead the economics team to think about how our team can help consumers and impact the housing community externally and also guide Redfin internally with our views on the housing market and economy. I’m very much involved with thought leadership on where are the topics that we should really be paying attention to and where should our research be headed towards.

Dave:
Great. Today, we’re going to dive into a little bit of a nerdy, more technical topic. We’re going to put you on the hook here. We’d like to talk about mortgage rates. This is not a very hot take. But clearly, given where things are in the market, mortgage rates and their direction are going to play a big role in the direction of the housing market next year. We’d like to unpack part of how mortgage rates are set. We all know the feds have been raising rates. But they don’t control mortgage rates. Can you tell us just a little bit more about what economic indicators are correlated to mortgage rates?

Chen:
Sure. I’m going to answer your question a little indirectly. But I promise I’ll get to what you’re asking. I think it’s helpful to take a step back and think about a framework for mortgage rates. Actually, think about a framework for interest rates more broadly because, oftentimes, we say “interest rates” in the economy, and there are various interest rates. At a very basic level, an interest rate is a price for borrowing money. It’s determined by two things: credit risk and duration risk. How risky is the person or the entity I’m lending to, and how long am I lending them this money for?
Critical to this discussion is thinking about the bond market. Bonds are just a way of lending out money to various entities for varying lengths of time. When we think about the bond market, we’re thinking about two metrics. We’re thinking about the price and the yield, which are inversely related. When there’s more demand, prices go up and then yields go down and vice versa.
Really importantly… When I’m thinking about mortgage rates, there’s two other rates that I need to be thinking about. The first is the federal funds rate. That is the rate that the Fed controls. Then, there’s the 10-year treasury rate, which I think we’ll probably spend a lot of time talking about today. Mortgage rates actually build on top of both the federal funds rate and the 10-year treasury. In that framework that I was talking about, for the federal funds rate, there is no credit risk at all. This is an overnight lending rate between banks. There’s also no duration risk.
If I’m thinking about treasuries now, the treasury market, treasuries come in a wide variety of forms. Anything from a one-month treasury bill up to a 30-year treasury bond. But the one that’s most important to mortgage rates is the 10-year treasury note. This is a reference rate in the economy. This is the most correlated on a day-to-day basis with mortgage rates.
When I’m thinking about the 10-year treasury, economists like to think about this as being decomposed into three components. The first is the real rate. That is the part that is most related to what the Fed is doing. How restrictive is the Fed trying to be with the economy, or how accommodative is the Fed trying to be? The second part is inflation expectations. This has to do with duration risk. This means if I’m thinking 10 years out, “What is inflation going to be?” Because whatever yield I am getting on the 10-year treasury inflation is going to eat into that as an investor.
Then the third is the term premium. The term premium is the squishiest. Term premium is how much excess return I’m demanding for holding this for 10 years versus a shorter duration. You asked what are the economic indicators that are most correlated with mortgage rates. Well, it’s all of these things that are going to affect the 10-year treasury note. Inflation obviously is important when we’re thinking also about economic growth. We’re looking at GDP. We’re looking at labor market conditions. All of the major economic components are going to be feeding into what the 10-year treasury yield is. Then, mortgage rates build on top of that.
I said the two are very much correlated. What that means is that mortgage rates are usually trading at a spread relative to the 10-year treasury. That spread, most of the time, is remaining pretty consistent. But one of the main stories of the past year is that that mortgage/that spread has really ballooned. We can talk about why that is and what the outlook is for that as well.

Henry:
Yeah. It’s like you know exactly what we’re going to ask ’cause I think that’s exactly where we wanted to go is to try to understand… Well, first, let me go back and say I think that was the best explanation of interest rates and how they work that we’ve ever had on the show. That was fantastic. Thank you for breaking that down. But secondly, yeah, I think we want to understand… so the 10 treasury rate yield, where it’s currently at, versus where it’s historically been, and how that’s impacting the market.

Chen:
Absolutely. Today, right now, I think the 10-year treasury is sitting just above four or five. That’s where it was yesterday at close. I think it’s actually climbing a little bit today. This is a historic high, I think, perhaps since 2007 if I have my data correct. It’s been climbing a lot. In May of this year, it was about 100 basis points lower.
The real story for mortgage markets in the past few months has really been… Why has the 10-year treasury yield gone up so much? Importantly, it’s confusing because inflation has actually fallen these last few months. I think for a lot of people who are listening to this are probably thinking, “I’ve been reading in the press, and the economists have been telling me that if inflation falls, mortgage rates won’t fall. Why hasn’t that happened?” It really has to do with this framework that I was talking about.
Like I said, since the whole debt ceiling debacle was resolved, the 10-year treasury has gone up about 100 basis points. Let’s think about why that is. About half of that is what I would call the term premium. What this is related to is mostly concerns about long-term debt for the US government and treasury issuance. As we know, the country is borrowing more and more. There’s more and more supply of treasury debt. At the same time, demand for that treasury debt has not kept up. That is causing that term premium to increase.
The other main story is the increase in real rates. This is the idea that the Fed is increasingly telling us that they are going to hold higher for longer, not necessarily they’re going higher than where they are right now, but that they’re going to hold at this high restrictive level for a longer amount of time, meaning that they’re projecting they will start cutting next year in the back half of 2024. But when they start cutting, it’s later than previously we thought, and that it’s fewer cuts. It’s slower than we thought. Oftentimes, people are debating: is the Fed going to hike again? Actually, another 25 basis points doesn’t matter so much. The real story now is how long are we going to stay in this restrictive territory.
Then, the other component of the 10-year yield that I’ve talked about before, inflation expectations, that actually hasn’t really changed very much. That’s not really playing a big story here. But if you are someone who’s following financial news, you have probably heard a lot of talk about this idea that the neutral rate has increased. That’s, I think, really important to touch on right now. It’s related to what I was talking about in terms of demand for treasury debt and this idea that we’re having higher interest rates for longer.
The neutral rate is something in the economy that is unobserved. We cannot measure it. My favorite way to think about it is that’s your metabolism. When you’re a teenager, you can eat a lot. You’re probably not going to gain weight. You have a high metabolism. Later on in life, your metabolism shifts. You can’t really measure. The doctor can’t tell you what it is. But you find that you can’t really eat the same things and maintain the same weight anymore.
The same thing happens in the economy, where, after the financial prices, it seemed like the neutral rate really fell. That’s why the Fed was holding rates really low. We could not really even get inflation above 2%. But then, something happened after the pandemic, where, all of a sudden, it felt like we had a lot more inflation. The rates had to be higher. What investors and increasing the Fed… Jerome Powell acknowledged this in the last press conference, is coming around to is this idea that the neutral rate has shifted up. That means that we basically just have to have higher rates for a longer amount of time. That view is also what is pushing the 10-year rate up. That’s pushing mortgage rates up.

Dave:
As you said, Chen, we’ve seen this steady rise in mortgage rates over the summer. It seems to have accelerated since this most recent press conference. It seems that what you just talked about is really what’s going on here is that we saw a few things. One, the summary of economic projections, which the Fed puts out with some of their meetings, shows that they still think that we’re going to have higher rates at the end of 2024. That’s a full year from now. But when you talk about the neutral rate, which I thought that was a great explanation of… Is that the indefinite balance/the ideal theoretical balance that the Fed wants to get to? Even after 2024, basically as far out as they are projecting, they think that the best rate that they can do is somewhere around 3% for the federal funds. Is that right?

Chen:
Yes, exactly. That is exactly what the neutral rate is. It is the rate that the Fed would hold the fed funds rate at. That would hold inflation and the unemployment rate in check. The Fed has this dual mandate, which is that we want low inflation and low unemployment rate. The neutral rate is basically a rate at which we are neither stimulating the economy nor are we trying to actively contract the economy.
When the Fed puts out its projection, it says, “Okay, for the long term,” basically past two or three years, “where do we project that neutral rate to be?” In their latest summary of economic projections, they actually kept that neutral rate at 2.5%, which was actually confusing for folks because if you looked at what their projection was for 2025/2026, it was showing a higher rate. But it was also showing the economy essentially in balance.
There was this discrepancy between… Well, what you’re saying for the long-term versus what you’re saying for the next two to three years. Reporters pointed this out. What Powell pointed to was this idea that, well, the neutral rate changes. There’s also this idea of a short-term neutral rate versus a long-term neutral rate. I think this is starting to get a little too deep into the rabbit hole. But what’s I think important as a takeaway from this whole discussion is that the Fed is telling us that they’re coming around to this idea that this neutral rate has increased. It could still change in the future. But if we’re thinking about a 10-year treasury rate or talking about a 30-year fixed mortgage rate, this is going to play a big role in setting a baseline expectation for what those rates should be.

Henry:
This information is extremely helpful to investors. I don’t want investors to hear how deep we’re getting and not think about, “What does this mean to you as you are buying property or as you are considering buying property?” What I think I’m hearing… I think one of the most important things I heard you say was that this could be a signal or that the Fed is signaling that the interest rates are going to stay in this realm of what we consider to be high for a longer period of time than what most originally anticipated.
For me, as an investor, as the investing landscape has changed over the past year due to these rates rising, a lot of strategies has changed. It’s hard to buy properties that cash flow because of the cost of money. That cost of money/that interest rate is eating into the money that I can make by renting out the property.
If you’re a long-term investor and you’re looking to buy properties at cashflow, what’s happening is people are jumping in right now and they’re willing to buy properties sometimes that break even or even lose a little bit of money every month because people have been betting on saying, “If I can buy these properties and hold them for the next six to 12 months, well, then boom. If rates come down, that means that I can refinance, and then my cash flow will absolutely be there. Then, I can go ahead and sell off some of these properties if I want to because when rates come down, people get off the sidelines. They go start buying again. There’s still an inventory issue. Now, prices start to go up.” It seems like a good bet right now to buy.
But as an investor, what I’m hearing is you really have to be careful about doing that. You have to have the reserves to be able to hold onto these properties longer ’cause we really don’t have a definite answer on when and if those rates are going to come down or how much they’re going to come down.

Chen:
Yes. I agree with what you’re saying. I think that it is definitely the case that as inflation got out of control and then the Fed started its hiking cycle last spring, that there was this rock-solid belief among many people that this was an aberration and not a paradigm shift. All we have to do is hold on and wait for this to pass, and then we’ll be back to normal, that what we were experiencing before was normal.
I think what people are increasingly thinking now is that… “Well, if you take a longer-term view of interest rates and you look back at whether it’s the 10-year treasury or you’re looking at mortgage rates, over the last few decades, it’s a story of rates just coming down. Post-financial crisis rates were very low. Like I was saying, with my metabolism analogy, that could have been the aberration. We might actually be looking at a return to maybe a more historical norm. That could definitely be the case.
Now, with that being said, the other thing I would caution is that there is a huge amount of uncertainty regarding the economy right now. If you had had me on last year, what I would’ve told you was there’s a lot of uncertainty about the economy right now. But I will say that this year, there is even more uncertainty. The reason is because, last year, we knew what the basic story was. We knew inflation was out of control. The Fed had this fight on its hands. It was going to hike interest rates really, really fast. We were going to watch that play out in 2023. That is what we watched play out in 2023.
Now, the Fed has done this. We’re in this position where they hiked more quickly than they have ever done so in history. We’re sitting here, and the question is, well, what happens now? There is still recession risk that’s significant. I think a lot of people have adopted this view that we got the soft landing. Recession risk is over. The economy is so resilient. I think that we still can’t forget that recession risk.
Then, on the other hand, inflation could still get out of control. Rates could still go higher. There’s actually risk on both sides. When I used to go skiing, there was this trail where you would ski. There was a cliff on both sides. This is how I think about this, in some sense, where there’s this risk on both sides. That creates a huge amount of uncertainty.
If you look at futures markets right now for what the futures markets are predicting about the 10-year treasury one year from today, they’re basically predicting that yields will be the same as they are today. That’s this idea that interest rates are basically going to stay here. That is assuming, for mortgage rates, that mortgage spreads also stay pretty consistent to where they are right now, which is not necessarily going to be the case.

Dave:
Let’s dig into spreads there because we talk about that a bit on this show. Just as a reminder to everyone, there is a historic correlation between 10-year treasuries and mortgage rates. I think it’s like 170/190 basis points, something like that. Now, it’s what? 300 basis points. Significantly higher than it used to be. You talked about the spread. Maybe we should just jump back a little bit. Can you explain why the spread is usually so consistent/how it has changed over the course of the last few years?

Chen:
Sure. Absolutely. Like I was saying, mortgage rates are, on a day-to-day basis, very much tightly correlated with 10-year treasuries. If the 10-year treasury is going up today, mortgage rates are probably going to go up today. Over a longer period of time, that relationship is less certain. Like you said, historically, just depending on how you measure… It’s about 170-ish basis points.
But, conceptually, why would that spread change? I think there’s two important things to think about. One is rate volatility and expected prepayment risk. The thing that really differentiates mortgage bonds or government bonds like treasuries is that mortgage bonds have this built-in prepayment risk, so someone who has a 30-year fixed mortgage and refinance or pay off their mortgage with no cost at any point. Investors can have their income stream cut off at any point. They have to think about that when they’re investing in the security.
When interest rates are very volatile or when interest rates are really high, and investors expect that that is an aberration and then interest rates will come down in the future, all this talk of, “Oh, buy now, refinance later,” then they’re going to demand a much higher premium for buying mortgage bonds. That is a big part of the story about why mortgage spreads have ballooned over this past year.
The other part of the story is just simply demand for MBS. There’s two parts of this. One is the Fed. The Fed owns about 25% of outstanding MBS. During the pandemic, they bought something like $3 trillion of MBS. Because in order to stimulate the economy during that very deep recession, the Fed brought out the QE playbook again and said, “We will commit to buying an unlimited amount of MBS in order to hold this ship together.” They kept buying, even when it seemed like actually the housing market was doing fine. But then they stopped. When they stopped, that was a big buyer, all of a sudden, just exited that market.
Then, the second part of the demand story is banks. Banks have a lot of MBS already on their balance sheet. Because of what’s going on with interest rates, there’s a lot of unrealized losses because of that. They can mark that as something that’s to be held to maturity. Therefore, they don’t have to mark to market the losses on that. But that also means that they have less appetite to buy more MBS now.
Ever since SVB happened in March, I think the view on deposits for banks has changed. That means that if banks feel like deposits are less sticky, meaning that there’s a greater chance that deposits could leave, they have less demand for long-duration assets like MBS. That will also lead to less demand for banks for MBS. If you want to talk about, “Well, what does that mean in a forward-looking way? Is this a new normal for spreads now, or could they come back down?” I think that just depends on a few things.
Going back to the two main reasons why they have gotten bigger to begin with, if great volatility comes down and prepayment risk is coming down, then, yes, you could see that spread come down. That higher for longer idea, that rates are going to be higher for longer, does mean that I think prepayment risk does come down a little bit. Therefore, there is a little room for spreads to come down.
Then, if you think about demand for MBS… The Fed is out. Banks are out. But there’s still money managers. There’s hedge funds. At some point, there’s a ceiling on how big these spreads can get because some investors will start to say, “Well, actually, if I can get this huge payoff for investing in MBS, I should do that relative to other fixed-income securities.” There’s a ceiling to how big the spreads can get as well.

Dave:
Just to clarify for everyone listening, MBS is mortgage-backed securities. It’s basically when investors or banks or originators basically pool together mortgages and sell them as securities on the market, too. All of the different parties that Chen just listed… For a while now, the Fed has been buying them. Normally, it’s banks or pension funds or different people who can basically invest in them.
Chen, this demand side of MBS thing is something that I’ve been trying to learn a little bit more about. The other thing that I was curious about… And this is going to be maybe a little too nerdy, so we shouldn’t go too deep into it. But how do bond rates and yields across the world in other countries impact demand? Because I’ve seen that investors are maybe fleeing to… or at least hedging their bats and putting their money in either securities or stock markets in other countries. That is also impacting the 10-year yield. Is that right?

Chen:
Oh, yes. Absolutely. I think the way an economist would think about this is just the opportunity cost of your money. If you are an investor, you can invest in stocks. You can invest in fixed-income securities. You can invest in foreign exchange currencies. There’s all these different vehicles that you can put your money in. If you’re thinking about fixed-income securities. You can invest in these asset-backed securities like MBS, or you can invest in government bonds. If you’re thinking about government bonds, you can think about US government bonds versus government bonds for other countries as well as all these other things that I’m not talking about.
Yes, as the rate of return on these other assets are changing, that is also going to influence the demand for both US government bonds and also MBS. That, in turn, is going to influence the price and, therefore, the interest rates that are associated with these bonds.

Henry:
I want to shift a little bit and get some… There’ll be some speculation and opinion here. But there’s one factor that we haven’t hit on yet that could have an impact or that some people feel may have an impact on mortgage rates in the future. That’s the next presidential election. Can you talk to us a little bit about how a political change in power might positively or negatively affect mortgage rates? Or has that happened historically, so speaking, specifically, if the Republican Party wins the election, then we have a shift from a Democratic Party to a Republican, and how that might impact rates?

Chen:
Absolutely. I think the most direct path that economists would think about when they’re thinking about something like an election is similar to other geopolitical events, which is thinking about it through the lens of what is the threat to economic growth. What does this mean for the strength of the economy? That would be similar to how we would think about all the ongoing strikes that are happening, the resumption of student loans, the government shutdown that seems like it’s looming. All of these things are… We can use a similar framework.
Historically, if you think about, well, are the Democrats going to be in power, or will it be the Republicans? There’s this perception that Republicans are more friendly to economic growth and maybe to the business community. Maybe that would be good. On the other hand, it depends on specific candidates. Is there just tail risk associated with any specific candidates who might be in power? I think people would take that into consideration in thinking about, “Is that more likely to lead to a recession?”
Then, you might also think about having these candidates in power mean for who is nominated to lead the Fed, for example, and what policies their administration is going to pursue. All of these things will come into play, which all goes to say that I don’t think there’s a really simple cut and dry, “If this person comes into power, that means stock markets and bond markets will do this and vice versa.” But that’s the framework that I would use.

Dave:
I don’t want to put you in the hot seat and ask you what rates will be next year. But if you had to pick two or three indicators to watch going into next year to get a sense of where mortgage rates start to go, what would you recommend people look at?

Chen:
Absolutely. I’m glad you’re not asking me to make a forecast because-

Dave:
That’s coming later. Don’t worry.

Chen:
I think a lot of economists are feeling like maybe we need to change the batteries on our crystal ball or something. But I think if you are trying to think in a forward way about where the economy is headed/where rates are headed, looking at a consensus expectation is going to be your best bet. That’s what the futures markets and that thing imply. That’s what really that is.
That being said, we are living at a time of, I think, unprecedented uncertainty. We have to really take that with a grain of salt. What are we looking at when we’re trying to take a forward-looking view? I think it’s all the standard stuff that we have been looking at, which is really just the main economic data releases. Even though I said, “Inflation’s gone down,” why did rates go up? Well, inflation is still an important part of the story. If inflation goes back up again… Right now, just in this past month or two, oil prices have shot back up again. That could have really profound implications for interest rates again. Continuing to keep an eye on inflation is very, very important.
Then, the most important economic indicator for the economy in general is not actually GDP. It’s actually the labor market. It is the jobs report. It’s thinking about the unemployment rate/looking at how many jobs are being added every month to the economy. Then, there’s also associated labor market reports such as JOLTS. The Job Openings and Labor Turnover Survey has been getting a lot of attention this past year. Then, also the private sector numbers like ADP and all of that. It’s really all of the same standard economic data.
What’s really different about economics today versus when I started my career is that there is so much more private sector data now. On the housing side, obviously, Redfin, we provide a lot of private sector data about the housing market that we think is more forward-looking than what you get from public data sources.
Similarly, I think it’s important to pay attention to data, for example, that the JP Morgan Chase Institute and the Bank of America Institute puts out about the state of the US consumer in terms of how much more savings is there left. We know that there was a ton of savings. People had a lot of excess savings after the pandemic. Has that really dried up? If it has dried up, for whom? Who still has savings? That’s important for when we’re thinking about issues. People are going to start paying student loans again in just a few days. Who is on the hook to make those student loan payments? Who has the money to make those payments? What will it imply for their spending going forward? There’s a lot of private sector data sources that I think are also really important to pay attention to.

Dave:
Great. Thank you so much, Jen. This has been incredibly helpful. Obviously, people can find you at Redfin. Is there anywhere in particular that you put out your work or where people should follow you?

Chen:
Yeah. The Redfin news site is where we publish all of our reports. We also just recently added from our economist corner of that to that website where you can see quick takes about events that happen or economic developments. That’s a really great place to find all of our thoughts.

Dave:
All right. Great. Well, thank you so much, Chen. We appreciate you joining us.

Chen:
Thanks so much for having me.

Dave:
What did you think?

Henry:
Well, first and foremost, that was an incredible job at taking a super complex topic and making it understandable even for people who don’t have an economics background or understand how all of these factors play into each other because I don’t. I was able to follow that better than any other economic conversation that we’ve had. I think that’s hugely valuable to our audience. There’s just a ton of speculation out there. Everybody’s like a street economist. They’re all like, “Yeah, interest rates will come down in six months. Then, it’ll be crazy out there.” No one really knows. It’s good to hear somebody that is actively looking at these numbers consistently and looking at these indicators consistently say that… “Well, my crystal ball still needs some battery.” Just a good word of caution that you got to be careful with your strategy out there.

Dave:
Totally. The more I learn about economics, the less, I think, I try to make predictions, and the more I just try to understand the variables and the things that go into what’s going to happen. No one knows what’s going to happen with mortgage rates. But if I can understand how the spread works, if I can understand why tenure treasuries move in the way that they do, then you’ll at least be able to monitor things in real-time and make an informed guess instead of just making these reactions based on fear, which is what I think all these armchair economists are doing.

Henry:
Give me a scale of one to 10. How hard was it for you not to just completely nerd out and go all the way into the weeds on everything she was talking about?

Dave:
I wanted to ask about how the Bank of Japan’s recent decision… This is not a joke. I literally was like, “Should I ask about Bank of Japan policy and what they’re doing with their buying yields?” I just knew no one would give a (beep) about what I was talking about. But I wanted to ask.

Henry:
I could see it on your face that you were just wanting to. You were like, “This is my people.”

Dave:
I know. I was like, “I need to keep Chen around after, so we could just have a side conversation about just totally in the weeds nonsense.” But hopefully, Henry was here to keep us in the realm of what normal investors and normal people want to talk about.
But all in all, I thought it was great. It was plenty wonky for me. There was tons of good information. Again, she made it super digestible. Hopefully, everyone walks away knowing a little bit more about why things go the way they do. I think, honestly, the most surprised people are is when you explain to them that mortgage rates aren’t dictated by the Fed. We talk about that all the time. I feel like people who listen to the show have gotten to that. But I didn’t know that five or six years ago. I didn’t really understand it. I think the more you can understand how these abstract things influence your business… Literally, your everyday existence are influenced by tenure treasuries. Who knew? I think it’s just very interesting and super important to pay attention to.

Henry:
How she explained it in a framework made it so much easier to understand. I just kept envisioning her. I’m like, “Man, I wish we had her in front of a whiteboard writing all this out.”

Dave:
That would be cool. Don’t give me ideas. We’re going to have a Mad Money, Jim Cramer joke, where we’re running around slapping buttons and throwing things around. Caleb will kill us. All right. Well, thanks, man. This was a lot of fun. Hope you also learned a lot. Let’s just do a social check-in for you. If people want to follow Henry, where should they do that?

Henry:
Instagram’s the best place. I’m @thehenrywashington on Instagram. Or you can check me out at my website at seeyouattheclosingtable.com.

Dave:
All right. I am @thedatadeli on Instagram. You can find me there as well. Thank you all so much for listening. We will see you next time for On The Market. 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. We want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Moving overseas is often a daunting decision — especially when you have children.

Living abroad can be incredibly enriching and open new possibilities by introducing kids to new languages and cultures.

But uprooting not just your own, but also your kids’ lives, means even more thought needs to be put into making these big life changes.

There might also be additional factors you need to consider when kids are involved, such as the cost of childcare, whether there are plenty of outdoor areas for them to play in and various health and safety concerns.

So especially if you are free to choose a destination rather than being sent abroad by work or moving for family reasons, there is a lot to think about as some countries and cities will be much more suitable than others.

The most suitable one, in Europe at least, is Vienna in Austria, according to a new report by life insurance firm Reassured that was published earlier this month. Childcare costs just £223.14, around $270, a month on average in the central European city, while the overall average monthly cost for a family to live there is £2,794.

Rent makes up a significant portion of this, with the average cost of a home with at least three bedrooms being £1,356.69. Relatively low pollution and crime rates also boost the attractiveness of raising kids in the city.

However, it has just 44 parks, the analysis found, which is far lower than second-placed Prague with 106, and third placed Rome with 148. Rome also offers the highest number of kid-friendly activities in the cities on the list with 687 opportunities to play and learn dotted around the historical city.

Both Prague and Rome also have a lower overall monthly cost of living for families, with £2,682 and £2,677.70 respectively. But monthly childcare costs are far higher at £787.43 in Prague and £407.36 in Rome.

Pollution levels in the Czech Republic’s Prague are also over double those of Vienna, while Rome’s are close to four times as high. The Italian city also has a significantly higher crime rate, making safety a concern for families.

Austria also performed well as a country overall in the ranking, with three of the top 10 cities being located there. Salzburg, famous for its culture and opera festivities, comes in fifth place, while winter spots destination Innsbruck comes seventh.

Italy is also represented in the top 10 by multiple cities, with Trieste in the north of the country, close to its border to Slovenia, placing tenth.

But it is Germany that has the most cities in the top twenty family friendly cities: Nuremberg in sixth, Munich in thirteenth, Hamburg in fifteenth and Hanover in twentieth place.

Despite Vienna and Rome scoring highly, many other major European hubs fall short of slightly smaller, less well-known cities on the continent. Finland’s Helsinki in fourth place is the only other capital city to place in the top 10.

Paris is the next closest capital in eleventh place. The monthly cost of family life there is £3,184.80 on average, just a few hundred pounds higher than Vienna. But the average cost to rent there is over £1,000 higher at £2,434.56, and childcare costs are more than triple those of Vienna’s with roughly £694.84 a month.

Paris also has a very high crime rate — but also the highest number of parks on the entire list, with a whopping 306!

London does not even make it into the top twenty most family friendly cities in Europe, instead placing a distant sixty-ninth. The report notes that the average cost for childcare alone is £1,599.49 in England’s capital.

The total cost for a family to live there is around £3,712.10 a month. One perk are the 651 different kid-friendly activities you can pick from in the city and 187 different parks, even though this might not make up for the immense costs.

With the preponderance of research on employee ownership demonstrating it generates superior performance and growth, improved culture and engagement, and distinctive wealth building for workers, why aren’t more companies embracing employee ownership? In my 30-plus years advising on ESOPs – and structuring and closing over 300 of them – I’ve continually asked that question. Still, while the number of new formations hasn’t grown meaningfully, recent momentum on several fronts signal that this extraordinary wealth and jobs opportunity awaits millions more workers.

Indeed, the mystery about employee ownership was a topic my colleague Jake Cravens and I discussed recently on the Conscious Capitalists’ podcast with co-hosts Raj Sisodia and Timothy Henry. Given ESOPs’ well-documented benefits for companies that have established them and for their employees, it’s a question well worth exploring. Our discussion centered on why embrace employee ownership – and it offered the chance to accentuate the positive initiatives.

First, it’s striking that of the estimated 1.56 million U.S. companies with 10 employees or more that the North American Industry Classification System (NAICS) counts, companies with ESOPs numbered just 6,232 in 2020 (by the National Center for Employee Ownership’s count.) Or compare the estimated 400 ESOPs created last year and this year with the 4,300 U.S. private equity deals completed in 2022 and the 5,200 in 2021.

So, why so few ESOPs? Groundbreaking research that our firm Verit Advisors initiated provides insights into that and other critical questions. We surveyed leaders from 200 companies across various industries, including 90 that had completed a full or partial ESOP, 80 that are considering one, and 30 that aren’t.

These business leaders identified key factors that hinder and also heighten interest in ESOPs:

1. Operating rules and the complexities of reporting to regulators as well as the time involved to comply with regulations are key deterrents . Other potential challenges – the cost of repurchasing shares, company capitalization and employees’ understanding of the ESOP structure – proved less severe than leaders initially had expected.

2. Tax savings are a key consideration for establishing an ESOP with company founders tending to prioritize personal tax benefits while non-founder ESOP leaders find corporate tax benefits more persuasive.

3. More so, over time, the workplace culture and employee benefits of an ESOP play a larger role in CEOs’ appreciation of employee ownership. Research bears this out: Rutgers University and Employee Ownership Foundation-funded surveys find that nearly three-fourths of employees would prefer to work for an employee-owned company, where turnover is three times lower than at conventionally owned businesses. During the pandemic, employee-owned companies dramatically outperformed firms key metrics including maintaining employees’ jobs and work hours, salary, and workplace health and safety.

4. CEOs of prospective ESOPs shared that they gained significant information and insights about employee ownership from networking with their peers and talking with advisors on employee ownership.

5. Business leaders suggested that employee-ownership advisors do more to talk up the advantages of employee ownership and dispel common myths about ESOPs.

As for the future, many encouraging factors are appearing. There continues to be support from Republicans and Democrats in both houses of Congress for preserving and expanding S-ESOPs founder and company tax benefits. In 2022, the Biden administration and Congress took steps to promote employee ownership companies. The Worker Ownership, Readiness, and Knowledge (WORK) Act of 2022 requires the Department of Labor to establish an Employee Ownership Initiative. Its goal: to support employee ownership and employee participation in business decision-making. The funds appropriated by Congress can be used to finance existing state programs or to create new ones.

State legislatures are taking similar steps. California, Colorado, Massachusetts, Missouri, and Washington have set up centers to encourage employee ownership and adopted tax and other financial incentives. Other states, including Iowa, Nebraska, New York, Pennsylvania and Tennessee, are considering comparable proposals.

Prominent business leaders also are promoting employee ownership. In June, the Aspen Institute and Rutger’s Institute for the Study of Employee Ownership and Profit Sharing co-hosted the Employee Ownership Ideas Forum that focused on how to grow employee ownership. The Institute’s Adria Scharf is conducting a research study on it.

KKR partner Peter Stavros is playing an invaluable role as well. Stavros, co-head of global private equity, founded the nonprofit Ownership Works that has made employee ownership a mainstream topic among business owners and advisors. He and his wife contributed $10 million to establish the Center for Shared Ownership, and an impressive number of private equity, other major financial institutions and individuals have joined them to help reimagine equity to build wealth for all.

These and other positive developments contribute to my previously stated view that the 2020s will be the Decade of the ESOP. As these tailwinds continue, I believe the experts of tomorrow will pinpoint the present moment as when employee ownership attained the tipping point and became mainstream.

David:
This is the BiggerPockets Podcast, show 833.

Luke:
For me, it was like, “Dude, all I need to do is focus on 300 bucks at a time, 300 bucks at a time. Slow down.” And now fast forward to today, 15 years later, all those 200, $300 chunks from 15 years ago, I mean, I’ve got debt pay down on top of that. You know what I mean? And rent raises, and equity, and whatever else goes along with exactly why we’re here and what BiggerPockets teaches. So no brainer.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the world. Every week, we are bringing you stories, how-to’s and the answers that you need to make smart decisions now in today’s current real estate market. Today’s show, Rob and I are going to be interviewing Luke Carl, the husband of Avery Carl. Both of them are no strangers to the BiggerPockets ecosystem. They teach bootcamps, they write books, they own short-term rentals, and they help other people to do the same. Rob, first off, good morning.

Rob:
Good morning. Top of the morning to you.

David:
Second off, let’s get into it. What should listeners look for in today’s show?

Rob:
So I think there’s this whole thing where you do real estate, you become very good at it, and you feel like that’s the thing that you have to stick to because that’s what you’re good at. But today we’re going to talk to Luke and we’re going to find out when is the right moment to depart from the successful niches that you’re in, and when it’s okay to break into other asset classes. He really gives us a masterclass on diversification. We even are going to talk to him a little bit about the banking side and the financial organization of owning over 300 doors.

David:
That’s exactly right. A lot of stuff you don’t get into very often, we also dispel quite a few myths that many of our listeners may have in their minds, and we’re going to set some of that straight. So there’s some good stuff today you don’t want to miss it. Before we bring in, Luke, today’s quick tip, ask yourself, are you built for the type of asset class that you’re pursuing? A lot of people get into a certain asset class or type of investing because they think it’s “the best”. Oh, this is the least work for the most money.
I don’t know that that’s always wise. I think different personalities, strengths, and skillsets are better geared towards certain asset classes. Rob has an eye for design, he pays attention to detail, and he likes to make people happy. He is engineered in a lab to be a great short-term rental host. That’s what’s worked for him, and it’s not a surprise to me that he’s elevated to where he has in that space.
My friend, Andrew Cushman is the most analytical person that I know never makes a mistake on anything, incredibly cautious and smart. He’s a great multifamily investor. He’s wired for that. You got to ask yourself the same question. Rather than saying, what’s the best, ask yourself, what are you the best at? Where would you be the most successful? Where would you find the most passion and then become the best in that space? Rob, anything you want to add?

Rob:
Yeah, basically just know when to pump your jets.

David:
And if you want to know why Rob just said something that sounds silly, listen to the end of today’s show and you’ll know exactly why.
Luke Carl, welcome to the BiggerPockets Podcast. Nice to have you on today. A little about Luke’s background. He’s a short-term rental expert, but he does more than that. His portfolio includes single family homes and a mix of small and large multifamily buildings, and we’re going to talk about that later in today’s show. He’s been investing for 12 years and is married to Avery Carl, who is featured on the BiggerPockets Podcast episode 364, snowballing six figures, short-term rental profits into passive investments. Luke, welcome to the show.

Luke:
My pleasure, my pleasure. It’s a huge honor. I’ve been a big fan for a very long time of both of you gentlemen, of course, as well, and it is great to be here.

David:
All right. Let’s let the listeners get to know you a little bit. Tell us about the time that you went out to help your tenants during a storm.

Luke:
Well, actually, I mean, that’s a long story. That’s a good one, man. So that was back in the day when I was first starting cutting my teeth. I was self-managing back then on my long-term rentals, and I was doing that from three hours from where I lived, which was in middle East Tennessee area. I still do had some duplexes in Chattanooga, and one of them got hit by tornado in the middle of the night actually like 1:30 in the morning. There was seven people sleeping in it at the time. And luckily everybody was just fine, and it was a terrible tragedy, really.
It got worse. I loaded up my truck the next day with a couple of chainsaws and I called a couple of knucklehead friends of mine and we were to meet down there. I was like, “Listen, I’ll pick up a case of PBR and we’re going knock out these trees and get this thing done.” I didn’t make it. I did not make it. I put my car in a ditch on the way down there. So that story got worse and worse. But I mean, honestly, looking back on it, it was a good perspective. It was a good lesson to learn in my self-managing early days, at least with the long terms and cutting my teeth on rental real estate and… Yeah. Fond memories there of earning my stripes, if you will.

David:
So, question for you, Luke. Which disaster do you think in hindsight was worse, putting your car in a ditch or combining P R with chainsaws in a storm?

Luke:
Well, now listen for legal reasons I never said we were going to combine them, but probably some crazy decisions going on back in those days.

David:
It may have been an angel that pushed your car off the road that day into the ditch and narrowly avoided a larger catastrophe.

Luke:
Yeah. It’s a very good point.

Rob:
So what would you say that big lesson was from that experience?

Luke:
Man, honestly, I was too wrapped up in everything at the time, and I didn’t know that because I was hungry and young, and I couldn’t afford a property manager. At least I didn’t think I could. I think at this point we built it up to maybe 15, 20 doors or so. That was a good eyeopener for me. I guarantee you it was David Greene that said one of the very best things I ever did in real estate was hiring a property manager. And I did shortly thereafter. It just got to the point where I’m like, “I can’t do this anymore. It’s getting crazy.” So I put a property manager on those properties. So that was the lesson learned.

David:
Someone told me today it was National Bald is Beautiful Day. I got a text message and I replied with a bad day with a bald head is better than a good day with a man bun. And I was just thinking as Luke was talking there, that a bad property manager is much better than a good effort that you make at managing your own property.

Luke:
Yeah, it cost me a car

Rob:
On that note while a tenant is okay. Did they know that you went out there to help them? Did they ever even know the kind-hearted gesture that you were trying to do?

Luke:
Oh man, excellent question. And be honest, at the time I was self-managing. This was years ago, and maybe 18 doors, 20 doors or something like that. None of them knew I owned the place. So I would just tell them I’ve worked for the property manager is all it was, and I was placing tenants and doing leases and the whole nine yards. But they all just knew me as Luke. I called myself Mr. Furley like Three’s Company, and they just knew me as a guy that “worked” for the property manager.
So I think they appreciated how hard I was working and how often I was around and that I actually cared, but nobody had any idea that I actually owned it. They wouldn’t even believe that I owned the place. I mean, look at me. I’m covered in tattoos and the whole nine yards. So even if I told them, they’d be like, “No, you don’t.”

David:
This is more common than you think. One of my friends, she property manages for the owner of this large commercial portfolio, and he always tells her he doesn’t own it. He doesn’t want her to know that she owns it, but she’s like, “I run all your errands. I get all the mail, I pay your bills. I know you own this.” And to this day won’t ever admit that he’s the owner. So I think that’s probably more common than you think, man. With that said, I know that you have such a rich history in the rental world, but before we get into that, can you tell us a little bit about how you grew up in life before the rich history into rentals?

Luke:
Yeah. Proud of my upbringing. So I come from a little tiny town in the Midwest, in Nebraska to be exact. It’s a state that most people have never heard of. 1,100 people in the town I grew up in and real, hardworking, awesome family. My dad was a mailman. He is a Vietnam vet. Great dude. But I learned early on the value of a dollar and working hard. He had me underneath his truck when I was five or six years old, learning how to change the brakes and stuff. And that’s probably where that managing when I had no business business to be managing came from.
I almost was too stubborn to give up on it, really. But yeah, it was awesome upbringing. I knew it wasn’t for me though. I actually moved away to the big city when I was 20 years old to go take over the world. But it was Midwestern. Just blue collar, humble beginnings, something I’m very proud of carrying through to this day.
Now, my folks don’t have any idea, quite frankly, that I own a bunch of real estate. It wasn’t something that they could handle, which I think is pretty common. The family can’t really understand having mortgages and things like that.

Rob:
Sure.

Luke:
But they were wonderful people. Absolutely wonderful people, hardworking. I was one of the, I think maybe the second kid in the entire family to go to college. So that was the American dream.

Rob:
Sure. So it sounds like you were working hard. Were you able to ever put any of those character building skills, I suppose, to work once you actually got into real estate?

Luke:
Yeah. I mean, to me, I was building a career. I looked at it at one house at a time, $1 at a time, one piece of freedom at a time. Always been a rock and roller and just living my life that way, not listening to the man kind of thing. Owned my own business at the age of 25, a bar in New York City, believe it or not. I’ve always just had just a whole lot of get-go and been able to really make a lot of crazy stuff happened.
When I got into real estate, I actually had my dream job at the time. I was working in radio full-time, a series X satellite radio nationwide, huge radio company. So I was looking at it more basically like a 401k alternative. I didn’t even know what that was to be honest, but just I knew that at some point I was not in control of my own destiny, and at some point somebody could take things away from me. And that’s where real estate really clicked for me and it’s exactly why I was drawn to it.
Also, the fact that I was looking at it, this is going to be my new second career, basically. I never really thought that I was going to get out of radio, but to me it was just $1 at a time. Each house, if I can get a hundred bucks out of this damn thing, that’s enough for me to be happy with moving a little bit forward. Because where I come from 100 bucks is a lot of money. So two, 300 bucks on a house or of course then the short term thing happened years ago and we’re like, “Man, we’re looking at a thousand bucks a month on this thing. This is really cool back then.”
But that’s the way I always looked at it. There’s a lot of TikTok and all this stuff going on with these folks are preaching that you can quit your job quickly with real estate. I never looked at it like that. Because I’m like, “Okay, if I quit my job, where the hell am I going to get these down payments?”

Rob:
Yeah, man. That’s very true. I think that’s the thing. I mean, I guess if you really hustle for it and you really work hard, I guess theoretically you could replace your job, but the idea is not get rich quick, but get wealthy very slow. And if you can do that, it’ll be worth it. So you’re obviously developing a lot of skills at a young age. You own a bar or you own a business and then you go on to become a DJ, your dream job. At some point you’re doing this and you’re like, “I think I want to do the real estate game.” What actually was that first big jump for you?

Luke:
Yeah. Really what it was, was I had a huge shift in my life. I met a girl. It happens to all of us. We were living in New York City, biggest city in the world. I was a kid. I mean, I moved there when I was 20 years old. But anyway, fast forward several years, I met a girl and she was from the south. And I said, “I never even heard of the south.” You know what I mean? But she wanted to move closer to family. So we moved from New York to Middle Tennessee and all of a sudden… I mean, it was really as simple as that. All of a sudden we went from a place where it was $2 million for a tiny little box to somewhere where you could buy a house, and we both instantly got hooked. It was really just as simple as that.
It was almost like it wasn’t… It just kind of happened. Lightning came out of the sky and said, “You guys are going to do this.” Well, actually we bought a house to move into, which ended up being a live-in flip house act, if you will. That house ended up being a huge deal in our history. We did everything with that house. We rehabbed it live-in flip. I ended up moving it, tenant into it. When we moved out, HELOC. It used that HELOC for a down payment and then ended up paying that off quickly, of course, because that’s what you want to do with HELOCs.
And then I ended up selling it to the tenant and I did the two out of the last five-year, lived in it thing on that one. I mean, that was like every deal rolled into one and it was a dream come true. But in that process, we got hooked. My wife and I got hooked on buying real estate, which is easy to do. And we just said, “You know what? Let’s save up some dough and buy a rental house.” And we did that. We sat down and scratched down on a piece of paper, how long is it going to take me to come up with this down payment for $150,000 house?
Back then you could do that where we were living and we lived on $25 a day, $30 a day for 18 months, and then we had enough money to go out and put our first down payment on our first rental house, and the rest was history. It was really just a shift in our environment that opened up a whole new world to us. And then we discovered you guys, quite frankly. I discovered Rich Dad. I discovered BiggerPockets, I think somewhere around podcast number 70.

Rob:
Wow.

Luke:
It was absolutely life-changing for me. I mean, I remember vividly riding around on… I had a little broken down old lawnmower that we were… It was a wedding gift and I remember you guys… It was a huge… I mean, I remember Dave Greene’s first podcast coming on and the whole nine yards and just got obsessed. All of my education for sure to what we’re doing right now, which is BiggerPockets. And I’m very grateful.

David:
Well, I vote that we change the terminology of W2 job, which everyone thinks is negative to down payment generator, which sounds much cooler.

Rob:
Nice.

David:
I’m going to start referring to that like, what’s your down payment generator?

Rob:
Love it.

David:
So that everyone doesn’t have this obsession with quitting their job and trying to jump into real estate. Also, I want to highlight what you’re describing, Luke, is what I tend to see the pattern of all the people that we’ve interviewed that have built really big portfolios. There’s a combination of I kept working and making money and I lived beneath my means. We were saving money. That’s what you were describing. We weren’t just bawling and taking on huge debt and buying properties with it. You were saving money, you respected money, you valued money. And so you’re very careful about the way that you invested and what you invested in.
And that grew a portfolio, which eventually allowed you to have the lifestyle you want. But I don’t want that to get glossed over because a lot of people have big aspirations to build huge portfolios, but they want to skip that whole step of having to live beneath their means and be disciplined with their cash, which I think is why it doesn’t happen or when it does, it’s very short-lived. So speaking of that, what does your portfolio look like now? Can you give us an overall snapshot of what it looks like?

Luke:
Yeah. So we bought that very first rental, and then… Quite frankly, we were living in Nashville at the time, which blew up, so we couldn’t really repeat that one. It was literally overnight the house next door was twice as much as what we paid. So the next closest market was the Smokey’s. And back in the day, Avery, my wife, she grew up in the south and she said, “They got cabins out there that they rent out in the mountains. We could try that.” And I was like, “What are you talking about? We’ve been sleeping in a tent. We go to the mountains of sleep in a tent. Let’s rent a cabin and see what that looks like.”
She’s like, “We can’t afford it.” So that was our next play. We went to the Smokey’s and bought a cabin, and that cabin still to this day is the longest running Airbnb in the Smoky Mountains, which is Airbnb’s biggest market in the world. And we had no clue what was going to happen with that. I mean, at the time we were shouting from the rooftops, “This is real. We did this, you can do this,” and everybody thought we were nuts. So we ended up getting into the vacation homes.
Again, for me, it wasn’t anything to do with short-term, it was just my next vehicle, my next cash flowing property, basically. How do I get to the next property? Quite frankly, at the time, this way before your book, David, which I wish your book was out because I would’ve been so much more comfortable. We were going to go do this thing from a distance. And it wasn’t that far. A couple hours. But fantastic book by the way. Thank you for that. Thank you for making people realize-

David:
Thank you for that.

Luke:
… for making people realize. You know what I mean? It’s like, “Dude, it’s life changing.” But at the same time, it’s like, I mean, this can be done. And that’s why that book is so brilliant. But anyway, so we went into the vacation home thing and didn’t realize what it was back then. There was no such thing. Nobody else was doing this whole Airbnb thing. Of course, tons of people on VRBO. VRBO has been around for a million years, since ’99 they started. But at the time, the whole thing… The way it is today, not even close. There was literally two other people out there doing it at the time on Airbnb. And so we scooped up as many of those as we could. Got a partner involved.
It was a close friend of mine. I was having a conversation with him one time and turned out he owned some beach rentals in Florida. It just happened. We were at a bar talking about deadbolts. This is way back in the day. And I’m like, “How the heck do you know all this stuff about these digital [inaudible 00:18:51]?” He’s like, “I own a couple of vacation rentals.” So we ended up partnering on a couple houses. We grew that to five short terms in a year, which was… I don’t even know how we did it, to be honest.

Rob:
Wow. That’s a lot.

Luke:
Yeah, it was a lot. We were broke at the time and we were just regular people. And then at that point, my partner, we only did two with him. And he’s still one of my best friends today. Great dude. Really good at real estate. I said, “I had a day job and I was married. We were thinking about maybe starting a family at some point.” I couldn’t do it anymore. This was way before, Rob, as you know today with all the technology. I mean, you got-

Rob:
All the automations.

Luke:
So much easier today. Back then you got a booking on Airbnb, you had to go run to VRBO and block off the calendar and all this stuff. I had a day job, so I kind of pumped the brakes there, and we got back into long-terms. Started buying that stuff in Chattanooga, ended up… Let me just fast because I tend to talk a lot. I ended up with 20 something in Chattanooga and then it went on from there. Then we actually went back to [inaudible 00:19:52]

Rob:
Wait, 20 something units?

Luke:
Doors, yeah. Over time.

Rob:
Oh, wow. Okay.

Luke:
Several years at this point.

Rob:
Okay.

Luke:
Definitely didn’t happen overnight.

Rob:
And were they all short-term rentals at that point, or were you starting to rebuild the long-term side of it?

Luke:
Yep. After those five in the mountains, we went back to long-term because I was in charge of the management of things and I said, “I can’t deal with these reviews anymore.” This was back before there was automation.

Rob:
Sure.

Luke:
So we started getting back into long-terms and I bought about 20 doors again over many years. I don’t want it to sound like it was… We were regular people with regular jobs.

Rob:
But it goes to show that you were consistent with it and you were always putting whatever you had, whatever nest egg you had towards your portfolio. So now 2023 where are we sitting at? Door count, short-term, rental count, unit count. Give us a quick snapshot there.

Luke:
So after that we did get back into short term. I have eight of those now. I have eight, what I would call vacation homes and beach and mountain markets. I mean I’ve got multifamily. I’m somewhere around 300 units, no partners. Just my wife and I, and a lot of hard work and sweat. So I’ve got apartments in Omaha, which is where I’m from. So big roots there and several apartment buildings in Omaha.
I still buy a single family home, long-term rentals to this day. So I’m a little bit of everything really. I got single family long-term, duplex, long-term, multifamily, small multifamily, medium multifamily, and of course, and of the vacation homes, which have always been our flagship.

Rob:
Sure. Well, I think what’s really interesting about your story is you started in the long-term side of things. You then get short-term rentals. And I’m sure you quickly realize like, “Oh man, I’m making 100 or 200 bucks a month on long-terms. On these short-term rentals, I’m making 1,000 or $2,000.” And then you start rebuilding the long-term portfolio, the multifamily stuff. So you’re in this unique position where you’ve built up the short-term rental portfolio. You’ve come to the dark side, as we say. You’ve made a lot of money in the short-term rental space. So at what point does one start to decide, “Hey, I want to cool my brakes a little bit, if you will, and go back into long-”

David:
I think you mean pump your brakes or cool your jets. You said a combination of the two.

Luke:
Pump your jets.

Rob:
Pump your jets. I just wanted you to come back and look like a hero, David. That’s all. Hey, can you pump your jets please? So anyways, you’re cooling your brakes here and you’re like, “I’m going to get back into multifamily.” What was that thought process? Why have a departure from short-term rentals?

Luke:
Yeah. Well, for one thing, if you’re doing vacation rentals, the way we do vacation rentals, they’re big purchases. Even back then when we first started, they weren’t. I mean, they weren’t giant something that you’re going to put on TikTok and impress people, but it was still way more than it would be to buy a long-term. So that’s a pretty good way to run out of money quicker is to buy some vacation homes as far as down payments are concerned.
But the cool thing about the vacation homes is that, man, they’re really the… To me, they’re the gateway drug. I love them. I still do to this day. I love every minute of it, and I enjoy all aspects of it. And showing these folks a good vacation and growing up where I come from, going on vacation was a huge deal and we couldn’t afford to fly. And you get in that car and it’s like, “Man, your whole two years of your family’s money goes into that.” So I do enjoy that aspect of showing my guests a good time, which doesn’t get talked about enough, quite frankly.
And then also it’s a 30-year fix on generally what can… An average vacation home’s going to be somewhere around like $800,000 in an actual real beach town or whatever.

Rob:
Sure. Nowadays for sure.

Luke:
You know what I mean? So that’s a great way to deploy some funds on a better loan that when you can get in a lot of cases, because it’s a single family home, you can get a 30-year fixed. Talking about better loans in 2023 is not really all that good of a topic, but you know what I’m saying.

Rob:
Absolutely.

Luke:
What was the question?

Rob:
Well, at this point, I guess I’ll make it even more clear. You’re starting to move back into the multifamily. How do you choose what to buy next? Are you still looking at making your short-term rental portfolio larger, or do you want to just keep going dead on into the multifamily space?

Luke:
So yeah, I mean, multifamily at that point in my career was probably a pipe dream because again, that’s a lot of money. But I knew that I wanted to keep buying rental real estate. And again, back when I first started buying short terms, it was harder back then. Today, I don’t want to say it’s easy. Nothing in real estate’s easy, but it’s definitely a lot simpler, more simple than it used to be.
So I was like, “Man, I can’t handle the management of these guests and the reviews, and the platforms and everything, and my day job, and my family.” So I went back into long-term. Had it been today, had I done this exact same thing today, I probably would’ve stuck with short-term a little longer. But that being said, I’m happy with the eight. I really think there’s a threshold there. If you get to eight, 10 real deal vacation properties, that’s probably as high as you really want to go because you’re talking about building out your own management company. Which is awesome. That’s what I have. And I enjoy that very much, but it’s not something I want to scale.
Because the whole point in having a management company, I mean to me, would be to build it up big enough to sell it for a percentage of EBITDA. And you can’t really do that. You could do that with your own properties, but you’d have to have a lot of them. So yeah, I mean, for a couple of reasons. I do the management. So my management stress load, or I did, was getting too high for me, and also down payments on vacation homes, it’s a big burden. So we pivoted back to long-term, some duplexes, and then eventually everything just steamrolled and it was just a natural evolution into commercial real estate or the multifamily in my case. Everybody stays in real estate. It’s going to head down the commercial real estate road guaranteed. And it just wasn’t-

Rob:
Natural progression.

Luke:
Absolutely.

Rob:
So I guess if I’m understanding it correctly, it’s like you built a really great short-term rental portfolio. You’re at this sort of inflection point where the management starts to get a lot crazier past eight to 10. And then your money goes a lot further really being invested into commercial real estate multifamily buildings. Is that about right?

Luke:
Yeah. Pretty much. I mean, it was more the single family long terms at that time because I could buy one for a hundred grand, 150 grand and just keep picking them off. For me, it was like, “Dude, all I need to do is focus on 300 bucks at a time, 300 bucks at a time.” Slow down, take it easy.” And now fast forward to today, 15 years later, all those 200, $300 chunks from 15 years ago, I mean, I’ve got debt pay down on top of that. You know what I mean? And rent raises and equity, and whatever else goes along with exactly why we’re here and what BiggerPockets teaches. So no brainer.

Rob:
That’s pretty impressive. I think that’s the interesting thing about short-term rentals that one feels… Once you’re making 2,000 or $3,000 a month on one or two, you’re like, “Man, why wouldn’t I do a hundred of these?” And it really is tough to scale the short-term rental. So I see people doing what I’m trying to do oftentimes, which is you do the short-term rentals, and then you go into boutique hotels or renovating hotels basically it’s like the evil side, or the dark side of short-term rentals go in the hotel route. Or what I’m really trying to crack right now, and I’m not sure if you’ve gone down this rabbit hole, is buying multifamily, but really splitting up those units into three types of rentals, short-term rentals, midterm rentals, and long-term rentals that I can at least stay true to it because I feel like that’s a really great way to diversify and make your multifamily building a little bit more dynamic. It’s kind of doing a hybrid of everything. Have you messed around or kind of ventured into that side of things with any of your multifamily units?

Luke:
I know, but I love where your head is at. And again, for me, I never really… It wasn’t like I’m going to do short term. And I’m not saying it was for you, but to me it was just like they’re two different animals and I kind of keep them separated, but I love it for you, man, because, dude, you’re right. The next step for somebody who’s got six, eight Airbnbs, if you will, vacation rentals, short-term rentals is going to be a hotel. And it’s just a natural progression. You’re going to go that direction and you’re going to start bringing in other people’s money because you’re going to run out of money, guaranteed.
So you bring in other people’s money. Again, it goes back to the very early principles of BiggerPockets. Somebody’s got to be the sweat equity because the dude with all the money, you know what I mean? So it’s just a natural progression, and we’re seeing that a lot of… And Rob, I’m super excited for you, man. It’s an awesome situation to be in, and I can’t wait for what’s next for you. Get me in on it, man. Let’s do a hotel. You know what I mean?

Rob:
Yeah. Totally, man. I’m at those growing pains now. I’ve got 20 Airbnbs or so, and then a 20-unit motel. And really that came from David because David was like, “Well, every time you buy a short-term rental, you’re buying another job.” And I was like, “Yeah, that’s true.” So it does feel like the natural way to scale is not necessarily increasing doors, but how far can you make your time go? So for anyone that’s in the short-term rental world, the short-term rental market that wants to follow in your footsteps, what would you recommend to those investors who want to venture out into multifamily from short-term rentals?

Luke:
Keep an eye on your money, a hundred percent. You got to know where your money is at. You know what I mean? So take your time, go slow. I build a bank account system, and basically I just formed all these buckets in my… And I use a virtual bank. There’s several decent ones out there to pick from today. You don’t want a bank that you have to walk in there and fill out paperwork with somebody. There’s all these people in line. They’re overdrawn and it takes forever and all this stuff.
There’s a bunch of virtual banks out there and that’s what did it for me. It really just changing my mindset, the way I look at money and creating buckets to pay myself first. It all comes from Mike Michalowicz, quite frankly. He’s got a book called Profit First.

Rob:
Sure. Yeah.

Luke:
And so that’s where I stole most of that stuff from and that fantastic book.

Rob:
Can you just quickly, what do you mean by buckets just for anyone at home that’s not familiar with the Profit First concept?

Luke:
Yeah. So in other words, you create buckets on your bank account, on your virtual dashboard, and each dollar that comes in from your rental properties is allocated to its specific purpose. Because I see it all the time where people come to me and this and that, and then come to find out they’re commingling their money that they were making on this property with the Amazon account where they buy their kids soccer shoes. And you can’t do that. You’re going to go broke. You’re not even going to know you’re broke until you’re broke.
And the way you’re going to find out is because that mortgage is going to hit and you don’t have enough money in there to cover it because you were not paying attention. I create all these buckets and there’s percentages that go into each one based on how important they are like CapEx buckets. Now, of course, that probably should come from your day job if that’s possible for you, but it wasn’t for me and a lot of times, so I had to make sure I build that up so I have enough money for a roof sitting around.
I just created a system around that. I thought of it as a career. Man, this is going to be my new career. I’m going to really do this. I’m going to knock it out of the park. I’m going to learn my trade. I’m not going to just buy three houses and rent an Audi and put it on TikTok, which sounds awesome too. I’m not saying that’s… You know what I mean? Go ahead, do that. That sounds like a lot of fun.
So a certain percentage goes towards CapEx. A certain percentage goes towards regular old daily expenditures like your OpEx account for your mortgage and your electric bill. If it’s a short term, you got to pay your electric and your cable and all that. And then you have really, the most important bucket would be your investment account, and that’s where all your funds got to be thrown into because that’s where you go buy your next property.
If you’re separating all those funds and that account becomes the most important thing in your life other than your family. And because that gets you to the next deal. I mean, I was selling stuff in the early days. We sold a guitar too, because we got all kinds of crazy rock and roll stuff. I sold a car back in the day. I always had a really cool like, crazy hot rods. When we first started doing this, I had a ’66 El Camino, believe it or not, and threw that in the investment pile. You know what I mean? And then years later, my 40th birthday, wifey said, “You know what? Let’s get you another car.” And it was because all that hard work and busting our ass, and paying attention. So make sure the money is allocated where it needs to go.

Rob:
It kind of is dawning on me that you said you own 300 doors, and then I just heard you talk about this intricate banking system. Do you have 300 bank accounts?

Luke:
Excellent question. Now, that’s where it does get complicated, and it has… Actually be honest, it’s gotten more simple over the years because in the early days when it was like 15, 20, 30 doors each… Maybe not each property, but each type of property had its own system. And I still do that today, and I don’t have as many buckets as I used to. For instance, there’ll be one giant bucket for all of these entities that becomes the investment account as opposed to each. Back in the day, each one of these entities may have had its own investment account.
So I separate things. Well, everything’s done… I mean, you’re going to need to get a lawyer involved. That’s way over my head with all this corporate structure and disregarded entities, et cetera.

Rob:
No worries.

Luke:
But yeah, so each entity holds X amount of properties, and each entity, of course, has its own bank account because you can’t co-mingle funds from entity to entity anyway. Right? So excellent question. I do have a lot of bank accounts, but it’s more streamlined than it used to be.

Rob:
Sure, sure. So going back to the short-term rental side of things, it sounds like you’ve done everything. You’re pretty much across the spectrum just nailing every single thing that you do. The short-term rental market has changed a lot in the last two years really from the past five years before that. But really in the last year, I feel like we’re seeing a decent amount of changes. It looks very different, the entire market. Do you have any recommendations or any tips for people that want to just break into short-term rentals in general?

Luke:
Yes, Rob. And I love you for asking that question. And again, it’s an honor to be here. But so it is a completely different thing. It’s completely different. When we first started. And again, I didn’t even know I was getting into short-term rental. I didn’t even know that that was a term. I just was buying a house to rent out and we were renting it at a different… We weren’t renting it on Zillow, we were renting it on VRBO. And then of course, Avery, my wife, let’s not forget, I am married to probably one of the most successful real estate agents in history. Let’s throw that out there. She’s amazing, of course.

Rob:
Yeah, she’s awesome.

Luke:
Thank you. She did write the BiggerPockets book on short-term rental, Short-Term Rental, Long-Term Wealth. Huge fan of hers. Don’t worry, Rob. I got you. I got you. Here it is. You got it? Nice. And everybody loves Avery. She’s my secret weapon. She’s amazing. Everything she touches in real estate, she’s just got this uncanny natural ability to pick deals. So let’s not forget about that. My ace in the hole. She’s fantastic. But when we first started and she started getting bigger in her career with the sales and all that, man, it was literally like we were standing on the top of buildings like, “Hey, you can buy a house and ran it on VRBO, and you don’t need to pay a property manager because VRBO and Airbnb do all the dirty work for you and this and that, and nobody believed us.” I mean, maybe it’s also because I’m slightly more immersed in it, and Rob, I’d love to hear your take on that. But man, for one thing, it’s way more common than it used to be.

Rob:
I think back in the day, especially in the Smokies, you could look at all your competition and still find pretty janky furniture and cell phone photos. Then we saw this adjustment where everyone’s got nice design, nice furniture, professional photos, and now I think the people that are really winning right now are the people offering really unique or very experiential amenities like the indoor pools or hot tubs or outdoor environments, game rooms, arcades. Those are the people that I typically see being the top performers, really in most of the markets that I’m in.

Luke:
And you hear a lot of this Airbnb bust and saturation and things like that, and vacation rentals. I mean, all I can do, man, is say is my properties are booked. They’re doing just as well as they ever have. And it’s like with any business, you get more people involved. Really, quite frankly, what you’re doing is getting more people involved that probably aren’t going to be all that great at it. So I do see a lot of that. I mean, in my opinion, if you’re going to get into renting a vacation home, you’re really only competing with 3% of the market that’s any good at it, quite frankly, because most people… First of all, most people that can afford a million dollar house are going to put it with a third-party property manager, and there’s nothing wrong with that.
Let it break even, maybe even lose a couple of bucks and you get debt paid down and you enjoy it with your family. There’s nothing wrong with that. That is the best reason, honestly, to get into vacation rentals is because you can use it. There’s no lease on it. It’s empty whenever you block off those dates and you want to go there with your family, man, that is so cool. And honestly, when I first started, I didn’t even care about that. I never even thought about that. But now, again, 15 years in, all those memories I’ve created with taking my family to these properties is priceless.
So anyway, long story short, you’re absolutely right. The market share that is actually any good at doing what you do, Rob, it’s very slim, in my opinion.

Rob:
Yeah. I mean, I’ve seen the bar get raced so much in the Smokies, and so that’s what I’ve been combating. I don’t know if you saw it, but I built a tree house deck in my backyard in the Smoky Mountains. I’m building a little tiny house village down there too. That’s still kind of happening and everything, but I’m really just trying to figure out like, “Okay, I’m a little bit farther, so I have to make up for it.” And I’m overcompensating with amenities at this point because I do feel like that’s the only real competitive edge I can offer over someone that’s dead into the location. So I think it’s a little bit more… Hosts have to be a little bit more defensive with keeping their revenue these days.

Luke:
Oh, absolutely. Things have changed, a hundred percent. I think you’re going to see a lot more sellers too though, Rob and I think you’re going to see some folks that weren’t really cut out for rental real estate in general. I mean, there’s a lot of real estate sold in ’21 and ’22. I think the market is going to shake out, man. I think you and I are going to come out the other side of this with a little bit more market share to be honest, because we’ve got what it takes.

Rob:
Yeah, man. Let’s talk about that because I think I recently saw you post that you’re seeing a lot of price cuts, and I haven’t really looked at the Gatlinburg market on Redfin because it was just so competitive for so long. Every offer, couldn’t get it. I’ve noticed I’m getting now all my favorites from the past couple years showing up on Redfin, getting price cuts. Are you seeing that happen regularly in that market, or is this just anecdotal for me?

Luke:
It’s honestly a lot of markets and you’re a watch guy, right? So it’s exactly like what you’re talking about. I’ve set up back… You set up an in-stock notice on a watch you like, right? Like three years ago?

Rob:
Yeah,

Luke:
No way you’re getting that watch. No way. But now I’m getting those in stock notices. So the market is changing. The world is changing. The economy is changing. Is it going to happen overnight? Again, no. Real estate is a patience game, a hundred percent. And I learned that. I learned, again, everything I know from you guys, so it’s difficult for me to even give advice in front of you guys because you’re such rock stars.
So to me, as time goes by, we’re going to see some folks that just decided they weren’t cut out for… I mean, even ownership. I’m not even talking about just rental real estate. Same thing is going on in motor homes. Same thing is going on in jewelry. A lot of different types of… Where people are just… The whole world is changing. I’m not here to talk about the economy or politics or anything like that, but-

David:
I will. Things are changing really bad. Toughest market I’ve ever seen. A lot of it is because the expectations that were delivered through, not this podcast, but other podcasts are frankly not accurate. Real estate is often tied to passive income. They almost become synonymous. When you hear the word real estate, you hear passive income. It creates this idea that you’re going to buy it, own it, and someone else is going to take care of all the stuff you don’t like.
Imagine if we talked about raising children like that like, “Hey, have a kid. It’s passive fun.” The nanny is going to do this, the chef is going to do that. All these other people are going to change diapers and you’re just going to end up with a fully adjusted, well-mannered adult that loves you dearly and takes care of you in your old age. It’s not like that.
Nobody has a kid expecting passive results. Right? Well, real estate is not exactly a kid, but it sure feels like it when you own it. It’s like this is your baby. You get emotionally attached to the things in your portfolio sometimes. If you want to own, especially short-term rentals like we’re talking about, I love what you said earlier, Luke. You got to be good at it. There is a skill to managing these properties, and if you choose to delegate that to other people, you could get lucky and happen to come across an amazing property manager that does a great job with your property. However, just like when you find an amazing contractor, they don’t stay available for long.
They start raising their rates. They start becoming harder and harder to get ahold of because the cream rises to the top. And what I’ve seen is when you find that great property manager, they grow so fast, they can’t take care of your property. They got to scale. They got to go hire people that are less than amazing, that end up doing the job. Your performance goes down, you blame real estate. What each of you do is you’ve got your own in-house solution where you know the asset class, but like you said, it limits your growth.
You have to think smarter when you realize… I recently had this epiphany in a sense that I hire a bookkeeper, I love the bookkeeper. Then the bookkeeper gets busy. They hire a W2 worker, and then that person does not do a good job. My books start to suck. I hire a property manager, they do great. They delegate it to a worker. My performance goes down. Every time someone grows, it becomes incredibly hard to keep the standard that’s needed, and then that affects my wealth, and then I got to jump in and I got to take it over losing money and things are going wrong and the books are a mess.
It’s like that with CPAs. It’s like that with real estate teams. It is like this in life. It is so hard to grow. So what I realized is I can only grow to manage so much, which means when you get to a hundred doors, you’re going to have to sell a bunch of them and reinvest into a bigger asset. Exactly like you said, Luke, because one person can manage a hundred unit apartment complex. Roughly the same is trying to manage one short-term rental. Right? So what the solution is we just go bigger.
You sell 10 $100,000 properties for 1 million property, your workload goes down by 90%, but you own the same amount of real estate. You’re getting the same amount of revenue, hopefully a little bit more, and then you can scale to 10 of those. Then you do the same thing again. This is the pattern of what successful real estate investing looks like, and I’m only bringing this up because so many people have heard these stories of, “Oh yeah, I’ve got 700 doors, or I’ve got all these properties,” and it’s a mess.
We see what happens behind the scenes when we talk to these people that have got all these properties and they’re not doing well. So, Luke, I wanted to ask you, I understand you’ve recently sold a lot of short-term rentals. Is that why? Were you trying to get into less overall work when you got into multifamily, or is it the market itself got saturated and you just saw it’s harder and harder to get these things to perform?

Luke:
No, I actually never did sell any. I did sell two years ago and traded them exactly what you just mentioned. And it was those two that I had with a partner and I traded them for bigger vacation homes. I had two little ones.

Rob:
Cool.

Luke:
Actually one. I traded two little ones for one big one and got the partner out of it at the time. And of course, we had it long enough that we were able to… I mean, I definitely came out pocket. It wasn’t an even-steven because I had a partner in the whole nine yards.

Rob:
Sure.

Luke:
But no, not selling any short terms currently. I have ones that I’ve had since the beginning and never even refinanced. Now, maybe I should look into that. Maybe not today’s climate.

Rob:
No. You probably don’t want to do that. Hold on.

Luke:
Yeah. I’m happy with where my equity’s at versus leverage. But no, you’re absolutely right. David, I did do one time I traded a long-term rental. This is actually a story that’s dangerous to tell because it’s too good to be true. That very first one that I bought, the long-term rental, I ended up trading that thing with some cash out of pocket, of course, for a 26-unit apartment building. Again, I got so lucky on that. It’s not repeatable. Get it? Not repeatable. But now that 26-unit is rocking. It was a piece of junk and I fixed it up and it’s exactly what you’re talking about, David. It has a lot to do with the fact that I did not just leave my kids at the park by themselves.

David:
Yeah, you fixed it up. You didn’t buy it and hand it off to someone else and say, “Fix this up for me.”

Luke:
Yeah, no, I was in the weeds. I mean, I was doing the hiring and firing and making sure that people showed up and all that stuff, and project managing, if you will. I never really showed up on property all that much. I mean, that property was in a different state.

Rob:
I just want to say, far too humble. I think it is repeatable. I mean, if you got to 300 units, if that’s where your portfolio stands today, you’ve proven that conceptually it is repeatable. You’ve done it over and over again. Maybe you won’t find that exact deal again. But I think for people that are in the game, as long as you have, you’re always going to find opportunities. You’re always going to find things that seem like too good to be true because it’s not just luck. It’s like you are present when the luck occurs, and I think that’s half the battle is the consistency of always relating in it. So honestly, I think it’s a great deal, but I’m sure you’ll find even crazier deals than that the rest of your career.

Luke:
Send that juju my way. Thank you.

Rob:
Well, awesome. David, any final questions from you, man, before we wrap up?

David:
Yeah. Luke, I want to ask for someone who wants to do what you’ve done. They want to buy a bunch of short-term rentals. Maybe they want to get into multifamily. We didn’t talk about portfolio architecture and my theory on that, but that’s exactly what you’re describing. You’ve got different asset classes within a portfolio that do different jobs that sort of round the whole thing out just like an NBA team needs a center, they need a point guard, they need a shooting guard. You don’t want five of the same thing in your portfolio.
You want different asset classes with different strengths and weaknesses that kind of compliment each other. For someone that wants to grow a portfolio like you, and they’re starting with short-term rentals, that’s obviously what you’re known for, what advice do you have when it comes to the management of them? I would wonder if we’re going to tell someone, “Hey, invest in the Smokies or buy a short-term rental somewhere,” should they go into that knowing they need to learn how to operate that asset and maybe in three to five years when it’s performing well, they’ve earned the right to hire it out to property management? Or should people be thinking when they buy it to hand it over to a property manager right away and it’ll still make a profit?

Luke:
You could go either way. It depends on the type of person you are. Again, if you’re rolling hard and you just want a house to share with your family, go ahead and throw it with a PM, but you’re probably not going to… That’s the beauty of short-term and also the downfall. There’s no leases. There’s no evictions, but you’re probably pretty much have to do it yourself. I’d love to hear Rob’s thoughts on that, but I mean, again, Airbnb and VRBO, they’ve put millions, and millions, and millions of dollars into helping us be successful.
In my opinion, again, maybe because that guy or whatever, I do think that if you’re going to do a vacation home, do it upright. It needs to be something that you or somebody in your family takes an interest in. Now, the good thing is it’s fun. It’s sexy. You can put it on your Insta and it looks cool. And you put $100,000 long-term on your Insta, and people are like, “Okay. They don’t care.” So Rob, what do you think about that, man, about whether it has to be self-managed or not?

Rob:
I think that you should self-manage. I mean, I don’t know. I just think it’s so expensive to hire a property manager in the short-term rental space. It’s like 20 to 30%. I think it’s pretty significant, especially if you’ve got a high earning property that makes $100,000 a year, $20,000 that’s a lot. That’s to be paying to someone that I think… Until you have five, I think you can handle it. I mean, I managed 10 to 14, somewhere in there when I had a full-time job.
Granted, I was an awful employee. I was always leaving meetings to go handle my short-term rental portfolio. But I certainly think that three to five is something that most people can do before really opening up that conversation. Think you got to master it before you can hand it over to a manager so you know that if they’re good or not. A lot of people buy rentals, give it to a property manager. Property manager is not good. Property fails. And then they say, “Oh, short-term rentals don’t work and this has all been a scam. I hate it.” And it’s like, “Well, you didn’t really do the work.”

Luke:
And that’s again why I call it the gateway drug because if you get to the point where you’re at Rob’s level, where you’ve got 14 of these things, there’s a pretty good chance you can put the next one with a property manager. And if it breaks even, you’ve got the tax advantages and the debt pay down and you’re cool with that. So it just all evolves.

Rob:
That’s exactly where I’m at. Yeah, my cashflow goals are nil now. I don’t care. If it breaks even and I get an amazing tax deduction, debt pay down, I’m good with it. I’ve making the cashflow in the first 40 units. Everything else can break even.

David:
That’s portfolio architecture. Because cashflow is necessary, you need it. If you don’t have it, you’ll lose your properties. But I still in my life have not met the person that built wealth off of cashflow. I bet you both of you guys would agree. I don’t know the person who, like you said, Luke, get the next 300, get the next 300 a month on these long-term rentals. You need to have so many stinking properties at $300 a month to build up big wealth.
You could not manage them all. It’s like you can’t hold them all in your arms. They’ll be spilling out. It doesn’t work. What builds wealth over time is buying in the right locations, building up the equity, watching the rents go up, watching the value go up, but you need cashflow in order to get there. So they work together in this harmony where cashflow keeps you alive. But equity builds long-term wealth. And as you’re constructing a portfolio, what we’ve all sort of done is been like, “All right,” like Rob said, “Here’s my baseline, these properties, cashflow. The next ones I’m going to build on top of that don’t need to, but I need to have a big value add component. They need to be in the best location. They need to be something like…”
The property he and I bought in Scottsdale, that’s a 20-year property, right? That’s going to make millions and millions and millions of dollars over a long period of time. It’s not a property that’s just going to crush it, coming right out the gates, which we couldn’t have earned the right to do if we didn’t spend all the years grinding to build up a baseline. And I just love, Luke, your story here. And then the other part I want to add on is you didn’t get a little bit of cashflow and just quit. Say, “Ha, ha, [inaudible 00:50:55] here I come. I’m heading to the beach and I’m not going to work and I’m going to Insta all of my beach photos.”
You went and built a business. Avery is still selling houses. You guys are still working, creating additional streams of income that protect you on the downside that everyone worries about.

Rob:
Well, he doesn’t have to go to the beach. He lives at the beach.

Luke:
We do live at the beach. But you’re right. And hey, listen, you make an excellent point, David. If you get obsessed with real estate to the point where you want it to be your whole life, there are other ways to make money in real estate besides cashflow and holding rental real estate. Like my wife, perfect example, own a mortgage company.
And again, back to your Phoenix property, you guys can use that thing. That’s the beauty of vacation homes, man. You guys can go there, have a retreat with your family, your friends, your church, whatever the case may be, and use it whenever you want. Create memories. Man, that’s priceless. And you’re doing the right thing there with that long-term play. That’s a big house. I mean, that’s a big play. And quite frankly, who cares if it cashflows, man? Think of how much equity you’re going to have paid off by the…

Rob:
Oh dude, the tax savings on that are-

Luke:
Boom.

Rob:
I texted David the tax savings on that and I was like-

David:
Not bad, right? And that’s what you see when you get into the higher levels.

Rob:
Not bad.

David:
That cashflow is a very simplistic way of looking at real estate. Please don’t go screaming and come after me with pitchforks like Shrek in the swamp. I’m not saying it doesn’t matter. The purpose it serves, I’ve always said, is defensive. It keeps you alive. Thank you, Luke. If people want to reach out and find out more about you, where can they go?

Luke:
Yeah, the shorttermshop.com. I’m not really all that active on socials, but the shorttermshop.com and of course Avery’s book, BiggerPockets. And by the way, guys, I am one of the instructors on the BiggerPockets Short-Term Rental Bootcamp, so you can-

Rob:
Nice.

Luke:
… come party with me on the bootcamp, which is a lot of fun. We would love to have you over there. Guys, I can’t thank you enough. I’m such a huge fan and BiggerPockets 100% completely changed the landscape of my life. So thank you so much.

David:
Rob, you said so many insightful things today. I’m sure that everybody is going to want to follow up with you to learn more about what goes on in that brain. Where’s the best place for them to go?

Rob:
Find me on YouTube. That’s going to be the number one place. Robuilt, R-O-B-U-I-L-T. I talk about short-term rentals, life, liberty, the pursuit of real estate and everything in between. What about you?

David:
You can find me by looking up @davidgreene24 on all your favorite social medias or on YouTube as well, or davidgreene24.com. Luke, thanks for being here, man. Great to get to meet you, and super cool to hear that you’ve been a fan with BiggerPockets this whole time that you even remember hearing me the first time that I showed up on the show, little of us knowing that we would end up where we are today. So if you’re listening to this now and you’re wondering if it’s ever going to happen for you, trust me, I had no idea this was going to happen to me. Luke had no idea this was going to happen to him. We’re still trying to figure out how Rob ended up with the microphone on this show, but I’m sure he would say the same thing.

Rob:
I had no idea.

David:
Keep on dreaming even if it breaks your heart. This is David Greene for Rob, the no idea wonder, Abasolo signing off.

Conventional approaches to sales are full of frustration. The sales team sends out thousands – or hundreds of thousands – of messages to potential customers, hoping that at least some of them will turn into sales leads and, eventually, paying customers. The spray and pray approach, as it’s known, is highly inefficient and delivers increasingly miserable conversion rates. It may even alienate customers – in a world where personalised marketing is becoming the norm, people often feel hostile to sales messaging that is so obviously randomised and untargeted.

It is this problem that former Salesforce executive Peda Pola hopes to confront with OneShot.ai, the Californian-based start-up that he launched two years ago with co-founder Gautam Rishi. It thinks artificial intelligence technology can do a far better job of identifying prospects for enterprises selling products and services to other businesses. “The outbound sales model is broken, but companies are still spending a fortune on the same old practices,” Pola says. “We think a more scientific, data-driven approach will have much better results.”

OneShot.ai’s technology focuses initially on the company’s customer relationship management (CRM) systems, mining this resource to identify what an ideal customer looks like for the business, as well as the typical reasons that customers sign up for its service – their “intent signals”. The data held in CRM systems contains huge insight, Pola argues, but sales teams completely overlook it.

Next, OneShot.ai’s technology searches a wide range of data providers and directories, including LinkedIn profiles, company websites, search engine results, financial reports, and platforms such as G2, Glassdoor and Twitter. The goal is to identify targets that closely resemble the ideal customer profile identified – including those that exhibit similar intent signals to the signals that prompted existing customers to buy.

The end result is intended to be a far more curated list of potential sales targets for the company – to identify likely customers where the sales team will effectively be pushing at an open door. OneShot.ai’s technology can also help businesses create the content these leads then receive; its platform can be used to generate personalised content that can be sent through multiple channels – including email, LinkedIn contact, WhatsApp messages and even voice and video – with advice on what is likely to work best.

“We are helping reps get better results by delegating manual work to automated, intelligent systems,” adds Pola. “Simultaneously, we are enabling and promoting the creative strategies required for successful outreach that only humans can do.”

The question, naturally, is whether the technology works. Pola says the results seen by early adopters of its platform – the company has signed up 35 or so customers so far – are encouraging. Some clients report that the number of meetings their sales teams have been able to secure with potential customers has doubled, OneShot.ai says. There are also speed and efficiency gains for marketing teams, Pola adds.

Gautam Rishi believes new technology can restore sales and marketing’s faith in methods that used to work but which have become unproductive in recent years. “Over reliance on automation and the predictable revenue model ruined the effectiveness of outbound sales”, he argues. “High costs and poor results caused sales teams to give up on what is still a great strategy for revenue growth.

Still, the business will need to overcome stiff competition if it is to grow revenues substantially and rapidly – building on the $1 million of annual revenues it has reached to date. Rivals such as Outreach and Salesloft also make bold claims for what their technology can do for sales teams, and are more established.

Funding support from strong backers will help OneShot.ai accelerate, with the company boasting backing from venture capital fund 42CAP, the UK investor Seedcamp and Addvia Ventures. In total, the business has raised around $2.9 million over the past two years.

“OneShot.ai isn’t just focused on addressing a narrow problem, they’re creating a salesperson’s personal AI-powered prospecting assistant,” argues Moritz Zimmermann, general partner at 42CAP. “The way we do outbound sales is due for disruption, and OneShot.ai, led by founders with both deep technical know-how and extensive enterprise sales experience, is well positioned to provide the solution.”