October 2023

Ashley:
This is Real Estate Rookie episode 331.

Lyrva:
I’ve learned a little bit about how to screen tenants, how to write up an agreement, how to enforce my own rules, how to do renovations even though they were small renovations, but that’s a big part of being an investor, getting bids, all of that. So it’s just changed my life and to where I’m confident now that if I venture out and do another deal or another project, I have confidence in myself. I do know something.

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

Tony:
And welcome to the Real Estate Rookie podcast, where every week, twice a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And in today’s episode, you’re going to get a healthy dose of all of that. You’re going to get a little bit of inspiration, a little bit of motivation, and a little bit of kick in the butt to really make something happen. Today’s guest is Lyrva Sanchez. And when you hear Lyrva’s story, you’re going to hear something that a lot of you’re probably struggling with, which is there’s so much information out there, there’s so many different strategies.
How do I choose one that makes the most sense for me? And you’ll get to hear Lyrva’s story of how she went on this journey of identifying the right next step for her.

Ashley:
And the way that she talks about choosing her strategy, you’ll be able to relate to it as to like, “I read this book, I listened to this podcast,” things like that. But she breaks down as to some of the reasons she ended up going with the strategy that suited her. She talks about her lifestyle, her why, just the kind of person that she is. She actually started out trying to wholesale and she will tell you one thing that happened to her that was actually going well.
If you’re a wholesaler, you’re like, “Yes, I want this to happen.” And she didn’t take action on it because it was not her and go through that explanation. But I think she makes a very valid point that if you are uncomfortable and don’t feel that this is something that really suits you and fulfills you that you may not be that successful with it. So she talks about trying to tie in what are things that are going to suit you to picking your strategy. But also we learn about sourcing deals, how she was able to find off-market properties.

Tony:
Now, before we jump into the conversation with Lyrva, I want to give a quick shout at someone by the username of DeLauro who left to a five star review on Apple podcast. This person says, “This 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 listening to Ashley and Tony every week helped me get more 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. Thanks for all the tips, guys.”
So if you’re part of the rookie audience and you haven’t yet left a review, please do. It only takes a few minutes. And the more reviews we get, the more folks we can reach. And no, the more folks we can reach, hopefully we inspire more people to take that next step or get that first deal. So do us a favor, do someone else a favor, leave that review.
Lyrva Sanchez is a registered nurse, single mother of two boys living in Southern California. Actually not too far for where I live in SoCal. And after her separation, she spent two years chasing down the shiny object syndrome of wholesaling and a little bit of out-of-state investing. But then she doubled down on a real estate strategy that really worked for her, for her kids and learned that one property could really change her life. So Lyrva, welcome to the show.

Lyrva:
Hi. Thank you, Tony.

Tony:
Super excited to have you.

Lyrva:
Thank you. Thank you so much. Thank you.

Tony:
Excited to have you here on the show with us, but I want to get right into the nitty-gritty, Lyrva. So what would you say drove you into the world of real estate investing?

Lyrva:
So as you mentioned, I was newly separated. We have two young boys and that was a really difficult time. Actually, there were a lot of good things going on and not so great things going on. I had just paid off all of my debt. I had school debt, I had car loan. Just paid off everything.

Ashley:
That is amazing. Congratulations on that. That’s not typically an easy thing to do.

Lyrva:
Thank you. Thank you. So I was on a Dave Ramsey trip and it was just full on saving and saving, and putting everything towards the debt. So when we made this choice, this decision to separate, it was a really, really obviously difficult and difficult challenging time in my life, and it just made me shift towards working on myself. So I dove into personal development, self-help books, all of that. But part of that process, I also came across real estate investing, building wealth.
How do I still carry on with my dreams and the life that I want for my kids now that I’ve pretty much lost half of my income overnight basically. So that’s how it just came to be. It was part of that whole process of going inward and just trying to do better, be better, and have the same or better life for my kids regardless of my status.

Ashley:
So after your separation, how long was it before you actually got started into real estate and maybe give us a little bit of what your life looked like. Did you go and rent an apartment? Did you stay in your house? Were you working somewhere? Fill us in what your financial picture looked like.

Lyrva:
Financially, I was doing well because we had paid off and we had started saving, but I didn’t feel good because obviously I didn’t have access to… Previously, we had dual income. I did stay in an apartment. I moved out of the apartment that we had together and I moved to an area that I wanted to be closer to, so better schools, all of that. So I was already working at the company that I’m still at now. I’m a registered nurse, but it’s not really a traditional role, so I work from home for a health plan, and that was something that I consciously made an effort to do because I had my second child and working in a hospital, it just wasn’t going to work out for me.
So it helped out that I was working from home and living in an apartment and I really tried to minimize any expenses. Just still stay in that very savor mentality at the time. So that’s where I was at.

Ashley:
Okay. So then you started learning about real estate. I’m very curious as to in your role where you were able to work at home, do you think that played a large part in being able to become a real estate investor? What are some of the advantages if there is someone listening right now who maybe has an opportunity to work from home, what are some of the things they should be thinking about to get started in real estate and how this can actually benefit them?

Lyrva:
So I think it played a huge part because… Well, now, I have a short-term rental, and so it’s actually on the same property. And so just being on the property itself helps. I have a cleaner, so I’m not actively doing a whole lot, but just to check on things to be present there, that’s helped a lot. Also, at the time of learning and going through the process of learning what was going to work for me, I was driving neighborhoods and seeing what areas I could possibly get into.
So I would drop off my kids from school and drive neighborhoods on the way home. And driving for dollars, seeing if there was… Everything that I learned on the podcast, I was trying to implement it like, “Oh, is that a vacant home? Is that a potential property that I can pick up?” Just trying to implement the things that I heard on the podcast.

Ashley:
So you looked for vacant homes. What were some, and you said there was things you learned. What are some of the other things you learned as to houses that could be a potential property for you?

Lyrva:
So I never acted on those, but I think it was just something that I was going through the motions. I would look up property values and I would see, “Okay, this is a vacant house, really how much could it be worth?” And without seeing inside, could I even take that on. I guess I was just playing investor at the time. I don’t know if it really has to do with working from home, but just that you have a little bit more flexibility in your time too. I drop off my kids and I picked them up. And so during those times, during my breaks and stuff, I would be able to drive areas and see properties, new listings that would come up. I would go see them just drive by them as soon as they came on the market.

Tony:
Lyrva, you said something that kind of stood out to me is that you listened to a lot of the podcasts and you try to implement everything you learned. I think that’s a path that a lot of new investors go down is where they hear all these different strategies, they try and go after everything. So I do want to touch on how you were able to take all of the information you learned and implement it all at one time. But before I do, just one other question. What would your advice be to someone that is maybe in a similar situation where they’re going through this big life change?
A separation, divorce is something that’s unfortunately kind of common today, and there are a lot of folks that have these aspirations of becoming a real estate investor, but they might use this life event of a separation or a divorce as an excuse as to why they can’t invest in real estate. So just what is your advice to someone who’s in a similar situation that’s looking to get started?

Lyrva:
I think my advice is to keep hope. Somehow you can figure out a way. It’s not that you can’t, it’s just that haven’t figured out how yet. And finding a way to make it work for you and your lifestyle. I would say going through the motions, it took me a long time not giving up, trying to find information, like reading things, you’ll come across random articles, things that help you. That’s kind of how I found it play out for me. I was really tight on cash to purchase a property. Not for my expenses.
And these little clues would come up or opportunities. There was an opportunity at work for me to get a promotion and I took it I was thinking in the back of my head, real estate that’ll help me. So just try to stay motivated and don’t lose sight. The shiny object syndrome is a really big thing and it really did impact me for a good two years.

Tony:
One thing that I think is incredibly important to point out, and I love that you said hope, Lyrva, because I think that’s something a lot of people lose when they go through difficult times in their lives. But when something challenging happens to you, you can never control what life throws at you, but you can always control how you respond in those situations. And someone could take something. It could be divorce. It could be a death in the family. It could be the loss of a job, and they could take that moment and let it break them down.
Or they could take that moment and use it as motivation to become a better version of themselves. And it seems like, Lyrva, you took the second approach of using it to catapult you towards something better. So on that note, let’s talk about what you did next. So like I said, I want to go back because you said you tried to implement everything that you learned on the podcast. That sounds overwhelming almost. So I guess walk us through that process of trying to implement everything and what worked and what didn’t work from there.

Lyrva:
I started going to meetups. It was like the topic of the week. I’d get super excited about that and then look into that and try to see if that was something I wanted to get into. So I started thinking, “Well, what does everyone else do?” So I started looking at what does everyone else do where I could potentially start wholesaling?
So I looked into it, I thought, “Well, I don’t know, it doesn’t seem very genuine for me or something that I would do, but that’s kind of where it seems like everyone gets their start.” So I met one of the organizers at one of the meetups that I was at, and everyone socializes afterward. I told him what I was interested or what I thought I was interested. Everyone is really helpful at those meetups. What do you need? What are you looking for?
Everyone’s just really just sharing and everything. He was a flipper now, but he started out as a wholesaler and he had this program that he purchased that helped him wholesale. He’s like, “I can burn you a copy of the CDs if you want them, and that can get you started.” I was like, “Sure, great.” So took that home, implemented it to a tee, everything. And then I quickly realized it was just not for me. I was getting phone calls and I could not answer the phone. So it was like this feeling I can’t explain. It was just not for me.

Ashley:
What did you do to get those phone calls, I guess? Why were people even calling you? What were the steps you took before that?

Lyrva:
So the whole steps of the program, so they teach you, you get a list and they tell you about the different types of lists that you can get. And then I decided to go with letters. So I was like, “Well, I can just shoestring this together and create the letters, print them at home.” I got a case of envelopes. I did the whole stamps and everything with everything that they say, the tips about how to get your letter opened, make it a color so that it pops in the mail and just all that stuff that… I mean, there’s so many different tips.
So I just wanted to get it perfect and it took me forever to even get the letters out because I was like, “I’m going to make a mistake and no one is going to open my letter.” Well, people actually started calling and then I couldn’t even answer the phone. I was so scared to answer the phone, so these calls were going to my voicemail. I had to set up a Google number, so I knew they were calling from that specific number. And so I was like, “This feels so fake. This is not who I am.”
The letter, I’m pretty sure said something like, “I buy houses for cash,” and I did not have a buyer, and it just felt so sleazy. So it just didn’t work for me. So there were a couple other things that I can think off the top of my head. Someone did a talk on mobile homes and how they invest in mobile homes and do that. And so I bought a book and that’s as far as I got with that.
So it was just like whatever the topic was, I’d dive into it and then I’d be frustrated because I was like, “Well, that doesn’t work for me either.” And then the next thing was out-of-state investing because it was maybe the more of the price point that I thought I could actually invest in. And the one thing was that I was very torn between should I buy a home and I’ll be house poor, or should I rent and invest out of state?” It was so hard for me to decide and it felt like I can’t have the two.
So I started, “Well, let me just see what’s out there.” I looked at turnkey properties, which I didn’t feel comfortable because I felt like a lot of the numbers were being inflated at the time because I was actually doing my own analysis. I also just looked at Zillow and was trying to find on market properties. The thing is I was trying so hard to find the perfect market out of state, and now I realize there is no such thing.
So that was another thing. I probably analyzed hundreds of deals in different pockets of states, and I probably could have bought a property at that time because I had done so much analysis. So then when I was like, “Okay, I just need to maybe go for it.” A friend of mine had moved to Kansas a few years before and another girlfriend from college said, “Why don’t we go visit her?” And I said, “Okay.” And maybe I can make this also a trip where I actually go see properties out of state. Kansas is probably a good area. I looked at the area and what the job market and all of that was doing. So I was like, “Okay.” And it works because maybe I can go visit my friend while I’m out there or I have a place to stay if I ever need to go out there.
So we worked on that trip. We set it up and then I mentioned it to my friend like, “Hey, I’m going to spend a day while I’m out there. I’m going to be looking at property.” And she said, “Well, do you need a realtor?” And I said, “Well, yeah, I don’t have one yet.” And she said, “Oh, I know someone who might know someone.” So she got me the number. I reached out, got in touch. She sent me properties beforehand. This is what you might see while you’re out here. I can’t promise you that any of them will still be available when you’re here, but this is just to get an idea.
He was working only with investors at the time. It was like a hot market. It seemed like his broker had just started this investor only department. And so he was only working with investors. So I felt pretty good like, “Okay, I’m working with someone who should know what the market is and what I am looking for.” Flew out there. We saw eight to 10 properties, I think, and one day my friends were so tired. It started off with, we were all happy and excited and everything.
I was the only one that was like, “No, we have to finish the list.” Got through the whole thing. But I was starting to feel like, “Okay, these properties are…” Because of my price point, we were looking at C and maybe B minus areas and I was just feeling a little uncomfortable. It looked like the systems were probably… Maybe the major systems had to be replaced yesterday or it was just on the verge of breakdown or there was just something funky about them. There was nothing where I was like, “Oh, this is in my price point and everything is great about it.”
And just being out a state and being new, it made me really uncomfortable. But I said, “Well, it’s about the numbers.” So I just went home and I picked the top three that I could potentially go for and the numbers didn’t work for me. It was just clear. And I think the property values were from 110 to 215 between the three. I don’t remember where the one in the middle landed.

Tony:
But the numbers didn’t work.

Lyrva:
Cash on cash was less than 3%. It was just [inaudible 00:20:30]

Tony:
That’s such an important thing for you to call out, Lyrva, because I think a lot of rookies, when they invest all of this time and energy looking into a market, you fly out there, you walk a bunch of deals, you start to get this kind of emotional reaction where it’s like, “Hey, I’ve already invested so much time, energy, and effort into this. Let me maybe pat the numbers a little bit so I can feel better about it.”
But you made the decision to not do that. So it sounds like you were dipping your toes a little bit in wholesaling. You sent the mailers that didn’t work out. You went to this out-of-state market and met with agents and analyze deals, and that didn’t work out. So how did you actually land on the strategy that was right for you?

Lyrva:
Okay. Yeah, this is… Exactly. I came back from Kansas, saw the numbers. I was like, “This is still…” I’m so frustrated at this point because I feel like nothing is working for me. It’s working for everyone else but me. I was like, “Okay.” Back to, “I want a house. I don’t want to be house poor in California. It’s just doesn’t seem feasible for me, but I really, really want an investment property, an income generating property. How do I have that? How do I have the two?” And it just came to me. I have to have a property with an ADU on it.
That’s the only way I can get the two, the best of both of what I want. And it was just like, “Yeah, yeah.” I was talking like, “Yes, that’s exactly… That’s it.” And once I made that decision, it was like nothing could stop me. I was honed in like, “That’s it.” So however long it would take me, I don’t think… It actually only took a couple months after I made that decision that that was going to work for my lifestyle for my family and it took a couple months, but if it would’ve taken me even longer, I think that’s kind of what my strategy was going to be. I knew that was going to work for me.

Ashley:
Can you explain to us real quick what an ADU is?

Lyrva:
So it’s another unit, like an accessory dwelling unit that’s on a property. I mean, there are other terms for them or like guest houses, a converted garage. So I was looking at any of those types, but it had to be a separate unit like a back house where I could live separate with my children because if I had been single, I could buy a house and rent out the rooms, but it was just not an option for what I wanted. So that’s very popular now and it was already gaining some traction in ’20 that… By then it was 2019 or late 2018, beginning of 2019. But not as popular as it is today. Now, it’s like ADU booming in California, but at that time it was still gaining traction.

Tony:
The ADU strategy I think is something that, especially if your house acting can be exceptionally powerful, and I think hopefully we’ll get into a little bit later how that ADU has worked out for you, Lyrva. But I want to point something out really quickly. Your journey of finding the right strategy for yourself, it started with the educational phase of, “Hey, let me just learn as much as I can about all the different options that are out there,” which is the right thing to do. And then you kind of dipped your toes in these different strategies to understand like, “Hey, what’s the one that works for me?” You said wholesaling doesn’t quite mesh with who I am as a person. Out of state investing, I’m not quite comfortable with the idea of doing that in these other marks. I don’t understand.
But this strategy of house hacking with an ADU, that lines up perfectly with who I am and what I want out of my investments. And I point that out because if you’re a rookie that’s listening that hasn’t identified your strategy yet, I think you can follow what Lyrva did of tons of education and then testing in a small way the different strategies that are available to you. But I guess, Ash, when you think about choosing your first strategy, do you remember what steps did you take to say, “Hey, I want to focus on BRRRs in my backyard?” Did you try anything before you did that first deal?

Ashley:
I just didn’t know there was other strategies. I worked for one investor and he did long-term rentals, and that’s all I knew there was like this is real estate investing. So I was just a limited mindset and naive that that’s why I did mine. But I think too, when you’re looking at different strategies to start with is where’s your opportunity? Where do you have… And so, Lyrva, you looked at which one best suits my lifestyle and what I want to accomplish and achieve what your why is for going into real estate investing.
Some of them didn’t fit what you want to do like wholesaling. You didn’t want to be answering the phone. That would defeat the whole purpose of you becoming having some kind of time freedom and getting to that financial freedom because you were doing something you did not like to do and dreaded it. So there’s so many different things you should look at when you are choosing that strategy. So Lyrva, what were some of the things that were important to you that this is why this strategy, if for anyone listening, if they’re kind of stuck deciding, what would be your advice?

Lyrva:
Yeah. Definitely evaluating your lifestyle. My why was my kids. I didn’t want to let this separation and then eventually the divorce that was part of this whole process of that was going on in the background to really define our future and for us to have a different lifestyle. I still wanted to give them the same lifestyle. I still wanted them to live in a good area with good schools and to have that feeling of being in a home. I grew up in a home that my single mom lived in and owned. And so it was really important to me.
I just didn’t feel like I knew how, but once I figured it out, that was so important to me. It’s just something that I couldn’t give up. Once I figured out how to do that. So just figuring out your lifestyle and where your strengths are. If it’s not going to be answering a phone because you’re so scared to answer sellers, calls. Don’t do that. Just try to see what works out. What’s your zone of genius? Where you’re going to shine? And I get creative on things. And so that’s how I figured out when I finally got my property. I got creative. So that’s one of my areas. I can come up with a solution for how to make something happen. So that’s my advice. I could figure out where your talent is and kind of go with it.

Ashley:
Once you identified that you wanted to find a property within ADU, was that because you just saw a property within ADU or you learned about it and then you started searching? How did you find that first property?

Lyrva:
How did I find it? Well, I learned about them at the meetups. And like I said, this was 2018, 2019. There was already a buzz about ADUs and they were hard to come by at the time. So they come up once in a while. Usually maybe an investor is the one to buy it. So there wasn’t a whole lot on the market. And so how I found it is… Well, that’s part of my journey. So I was looking online. There wasn’t very many that would come up. I think maybe every few months maybe one would pop up.
So I knew about how much they added value to a property like if it was a two bedroom, one bath and there was an ADU on it like, “Well, how much more it would be than just a two bedroom, one bath.” So I had an idea of how much it would add to the property. But I was like, “Well, I don’t want to wait. I want to take action. I know what I want now, so I need to flush it out somehow.” I reached out to my friend who’s a big sister and she’s a realtor, and I told her my plan. I said, “Okay. And I know you’ve followed me on this journey and I’ve been talking about all these things that I’m doing, but I know what I want now.”
I said, “I want a property with an ADU like a Backhouse or a guest house and I want you to show me the property. If it comes on the market, I want you to be my realtor.” I said, “But I also want to be honest with you.” I’m going to look for properties off market. I had already a little… That my experience from wholesaling, so I knew how to get a list from ListSource, how to pull a list and what to look for. But I also asked her, because we were friends and we had that relationship, “Would you be able to get me a list from the MLS? Can you scrub a list for me with some keywords and some timeframes that I gave you?” And she agreed. She was a supporter.

Ashley:
Yeah. What were some of those you used?

Lyrva:
So I think on the MLS, you could look for backhouse. You can just free type in something [inaudible 00:30:10]

Ashley:
Mother-in-law suite or something.

Lyrva:
Mother-in-law suite was one of them. Yeah, converted garage. Any word that could potentially mean like there’s another unit on there. And then there were some timeframes I think if they had bought in the last two years then it was like remove those from the list. So I gave her some parameters and she gave me the list and I had gotten my list from ListSource and I combined that. And then I went and I searched these properties online. I was on Google Maps. Again, I drop off my kids. I’d go look at the list, I’d drive by them. I was trying to check off the ones that wouldn’t work for me and just condense it to like, “Okay. Well, I’m not going to buy up in the hills and have a four or five bedroom house. It’s just not feasible, so let’s just keep it real.”
So I brought it down to about a dozen properties. And around that time, I also came across something that was super important for me to actually be able to buy a property. I found information that you can pull $10,000 from an IRA to use it for the purchase of a new home. So if you’re a new home buyer. And so that put me in a slightly different price point because I was like, “Oh, that’s more money for closing costs.” I was so tight on the budget at that time and it made a huge difference, which I wouldn’t have been able to use out of state.
So I was like, “Oh, this is just another sign that I’m on the right path.” Actually, I’m not saying this out of order. Before I had asked my friend for the list, I found this article from a designer like a decorator and she had put out a blog post that said how to buy a property that’s not on the market. And that was really helpful because I knew about wholesaling, but it was from a different fresh perspective. It was just a regular person that wasn’t an investor and she wanted to live in a specific historic neighborhood, and they didn’t come up very often.
So she wrote a very genuine letter about why she would want to purchase in that area and she reached out to that specific area. And I was thinking, “Oh, I can do that. It’s not like that sleazy I buy houses for cash. It felt just so much more me.” And so I thought, “Oh, I can definitely do that and I think I can answer those phone calls.” So putting that together with that list, and I brought it down to a dozen and I got the letter, used her template because she put it all out there and I finessed it to my story.
So it was just about me and my kids and that we lived in that area. And the reason why I would want to purchase a home, their specific type of home. And those letters wrote in my car for about two to three weeks. I could not get them out. It was this fear of like, “Well, what if… My name is unique. What if they’re like people that go to my kids’ school, their parents, and they’re like, ‘Oh, you’re sending us this. Why do you want to buy our house?’” And I just thought what are people going to think about me? And then it just came to the point where I was like, “I don’t care what people think about me. I did this. I am going to make this work somehow.” I sent them out and I was like, “I’m done. I don’t care what people think about me. This is what I want and I’m going to go for it.”

Tony:
That’s super inspiring, Lyrva, but I just want to pause you on that because I think that fear of judgment is something that a lot of new investors struggle with is even just the idea of, “Hey, I want to own property.” And especially if you come from a background or a community where that isn’t something that’s done often to own investment properties, people might think that you’re dreaming too big or like, “Oh, it’s Lyrva and crazy dreams.” But you have to have, I think, the confidence in yourself that, “Hey, if I’ve set this goal, I’ve spent the time educating myself. I’ve built up the resources that I need to do this. Why not take that next step?”
And obviously, it turned out really well for you. So I’m assuming you finally get the courage to drop those letters in the mail. Does your phone start immediately ringing? Do you wait months on end before you hear response from someone? And then how do you actually go about negotiating with the sellers once they reach back out.

Lyrva:
I didn’t expect anything. I was like, “Well, you know what, now I’m just doing it and I’m going to move on.” But it was part of like my, “I’m doing this.” So I contacted my friend and I said, “Hey, I sent those letters out. Thanks for sending me the list, but I’m still… This is what I really want.” So there’s two that came out on the market, two properties that had ADUs about a week or so within that timeframe. And I said, “Can we make an appointment to go see them? Like I told you on market or off market, I’m going for it.” So she said, “Sure.”
We went to go see them that weekend. I think maybe a week, a week and a half had passed. When I had sent the letters out, I kind of forgot it, put it out of my mind. We went to see the properties and while I was at one of the properties, one of the owners reached out to me via email. It’s like, “Oh my God. This is actually happening.” And my friend was with me, the realtor, and I was like, “Help me formulate an answer.” And I was like, “Something is happening.” I don’t know. Whatever it is, something is happening.
I formulated a response. We went back and forth a couple times and they invited me to see the property that evening. My friend couldn’t go with me, so I got someone else to go with me. I don’t know these people. I’m going to go meet them at their house. But I was like, “But I’m going.” Because when I got the email, I recognized the name. I had stocked these properties. I knew where they were. I was like, “It’s the greenhouse on the corner. It’s so cute. I wanted to go see it.”
So I went to go that evening to meet them and super nice couple, super nice family. They took me around to their property inside, outside. They showed me the ADU. It was a little funky, and I didn’t let that scare me. I was like, “I could work with this. I could totally work with this especially if I get this at a deal. If their price isn’t out of my range, I will totally work with this.”
So of course I didn’t say that to them. We had said, “Let’s both think about this. You take your time and we’ll take our time to decide if we’re going to move forward.” They said, “Take a couple of days and reach out to us and you’ll know so that we know either way.” They did tell me a little bit about their story and why they even reached out to me. So it was a family that was trying to get into the area. Again, the schools, the whole thing, it was difficult to get into a property at that time.
So they had been there for three years. They bought it off market from friends of theirs, and they tried to make it work like a property that really wasn’t a good fit for them, but they really wanted to get into the area. So they were a family of six. They had four kids. And so it’s a small home. It’s a two bedroom, one bath. So their two older kids were living in the ADU, and it just wasn’t a good fit to have your teenagers and the ADU. So they thought, “Well, it’s a really large property. Maybe we can renovate it and extend it.”
And they went through the whole process of the planning and doing all that, but it got really expensive for them. So then they said, “Let’s just scrap this, buy a bigger house and we’ll keep this as a rental.” And so they were fixing it up at the time to fix it as a rental, and they were an escrow for another house. At the time that I reached out to them, they said they were maybe thinking that they were biting off more than they can chew. So they were thinking, “Maybe we can’t be landlords. Maybe this is too much for us. Maybe we’re making our lives difficult and we should just move on.” And there’s this person that’s reaching out to us.

Ashley:
When you were looking at this property, did you know the rehab that this was something you could take on? You were able to finish it?

Lyrva:
Yeah. So the primary residence was turnkey for me to move in with my kids. For the guest house, it was, I think small enough to where I was like, “I could work with that. I could have a small budget and it was drywall. I think that really was the major part that would need to be.” There was a funky closet in the kitchenette instead of in the bedroom. And I was like, “Well, the bedroom is right next to the kitchen, I could just flip it and leave a space and make a functional cabinet like pantry in the kitchen.” I just was like, “I could do this. I could work with this. What’s drywall cost?”

Ashley:
Can you us the numbers of this whole thing? I’ll kind of do it rapid fire at you. What was the price that they wanted or did you just offer a price?

Lyrva:
So they started out with a price, 605. They gave two prices, actually. One with a kitchen renovated and one without, and I took without because I was like, this.

Ashley:
Okay. And then is that what you ended up paying for it, the 605.

Lyrva:
I did because I knew what an ADU, a property with… So it was under market.

Ashley:
Then how did you end up funding this deal?

Lyrva:
So it was a conventional loan. I put 10% down just to make my payment doable, and I used that IRA that I had from a previous job, and I used that for the $10,000 for closing costs.

Ashley:
So you borrowed money from your IRA or did you pull it out?

Lyrva:
It’s pulled out penalty free, so I pulled it out.

Ashley:
And then how much was the rehab that you had to do in the ADU?

Lyrva:
I think I spent… I think it was maybe 35, 4,500. It was like the bare minimum, paint and do that little switchover of the closet, and I needed to do it fast.

Ashley:
Then what did you decide for rent on this property and are you long-term or short-term, or even midterm renting it?

Lyrva:
So I started off, I did that for two years. The first year it was 1375. So it’s a one bedroom, one bath. It’s a little guest house unit.

Ashley:
What was your mortgage payment on that? A month. So how much did that cover of your mortgage payment?

Lyrva:
So at the time, because I’ve refinanced a couple of times since then, it was, I want to say, it was about 3,000.

Ashley:
So a little more than a third of your mortgage payment? It covered.

Lyrva:
Yeah.

Ashley:
Okay. So then what happened? You said for a year you rented it long-term. Then what happened?

Lyrva:
So for a year, it was 1375 and then the pandemic happened, so I waited to bump up the rent and then I got it to 1425.

Ashley:
Oh, awesome.

Lyrva:
So she stayed, the tenant stayed for two years, and when she moved, I was like, “I think I want to do short-term rental.” I think I want to dabble at that. And so I had seen in the area, there were a few at the time and they had been doing it for a really long time and it was kind of like that. Maybe they just put regular furniture in there or old stuff that they had found and guest house, back house units. I’m talking about not houses.
So I thought I could do it and I could do it better. I could actually get all the new furnishing and make it match. I could tell that these were seasoned hosts that were kind of doing it, I want to say the old school way where it was just like a hobby and they just put their maybe used furniture in there. And it was working for them. But I was thinking like, “I want to do it and do it like a real business. I want to just furnish it, make it nice, and do the whole thing.”
So by then I had a budget. I had two years, been a landlord and been in this property and was a little bit more comfortable. So I did a little bit more renovation. I was like, “Well, I have to do a little bit more work in the bathroom.” I redid the flooring and added some light fixtures.

Ashley:
With doing these renovations, were you able to get a lot more as a short-term rental than you were a long-term rental?

Lyrva:
I doubled my revenue.

Tony:
Wow.

Lyrva:
It’s been pretty [inaudible 00:43:12].

Ashley:
It was worth it.

Tony:
Almost covering your entire mortgage then, it sounds like, right, with ADU?

Lyrva:
Yeah, almost.

Tony:
Yeah. That’s fantastic. I mean, to be able to live in Southern California and spend almost nothing on your mortgage is insane. It’s a very difficult thing to do. So kudos to you for figuring out a way to do that. Lyrva, I love everything about your story. I love the fact that these different elements of the strategies you tried, you were able to roll up into this one deal that made the most sense for you, right? You were so confident by sending those 12 letters because you had already dabbled in sending all the mails for the wholesaling. And the work you did of analyzing deals out of state, it helps you be more confident when it came time to analyze the property in your own backyard.
So everything you learned culminated in this one deal, and it seems like it’s turned out incredibly, incredibly well for you. So are you ready for today’s question, Lyrva?

Lyrva:
Sure.

Tony:
As you’re listening and you want to get your question featured on one of our episodes, head over to biggerpockets.com/reply, and we just might use your question. So today’s question comes from Judy Underwood and Judy says, “For those of you who have borrowed against your 401(k) to purchase a property, did you refinance your home afterwards to pay yourself back? How did you use your 401(k) funds for real estate investing? I really don’t want to withdraw other than getting a loan.” So what’s your recommendation, Lyrva, I’m sorry for Judy.

Lyrva:
So that wasn’t exactly my situation. So I had an IRA that was not with my current employer. And I feel like everyone has those because you’ve worked somewhere else before. So I would say before going to your current, your 401(k) or 403(b), whatever your current retirement is, go to see if you have a pension or some kind of retirement fund with a previous employer, and then you can roll it over into an IRA. And then those are the $10,000 penalty free that you can use towards the purchase of a home.
So I don’t know if I necessarily would borrow from my current retirement plan. I guess it just depends, but I would do that first before I would use those other funds.

Ashley:
Awesome. Thank you. Okay, we’re going to move on to our rookie exam. And the first question is, “What is one actionable thing rookies should do after listening to this episode?”

Lyrva:
I’m going to go back to evaluate your lifestyle. What is important to you? What do you want your future to look like? What’s your family life like? And use that as the stepping stone to decide what your strategy is going to be.

Tony:
All right. Question number two. What’s one tool, software app or system that you use in your business?

Lyrva:
Well, now that I have the short-term rental, I use Airbnb obviously is one of the big ones. But like I said, I’m doing it as a business, and so I’m trying to be a little bit more sophisticated. And even though I only have one, I use pricing software, which a lot of people don’t do because they think, “Well, it’s costing them money, but it’s actually making me money if I use it the right way.” So ever since I transitioned into that, I’ve surprised myself at how much more I can get for certain nights where there’s events going on and things that I wouldn’t even have thought of.

Ashley:
Okay. And our last question, I want to tailor a little bit different to you today, but how has real estate investing changed your life?

Lyrva:
Wow. It changed everything for me. I feel like this experience, this whole thing, it’s helped me teach my kids like, “This is what you can do. You make things up as you go and you figure things out.” But also just my lifestyle, I feel like it’s been able to help me have the lifestyle that I want to live in southern California in an area that I want, making really good money on the property that I live on right next door. It’s in my back versus a state or few away and just to have eyes on that and just the learning that I have made through this entire process.
I’ve learned a little bit about how to screen tenants, how to write up an agreement, how to enforce my own own rules, how to do renovations even though they were small renovations. But that’s a big part of being an investor, getting bids, all of that. So it’s just changed my life to where I’m confident now that if I venture out and do another deal or another project, I have confidence in myself. I do know something. I do know a little bit about real estate.

Tony:
Isn’t it crazy what one deal will do for your confidence? And that’s why a big purpose of the rookie show is just to give everyone that’s listening that confidence to get that first deal. Because once you get the first one, the second one is exponentially easier. There’s so much more momentum and confidence behind you. So I appreciate you sharing that, Lyrva. Before we wrap up here, I want to give a shout-out to this week’s rookie rockstar. Today’s rockstar is Aaron Nygaard. And I can’t say the last name, Nygaard without thinking about the TV show Fargo. So if you know Fargo, anyway, I love that show.
But Aaron says, “Closed on property number two through a mutual friend. I let everyone know my goal of doing real estate investing full time. My first property I acquired through handwritten direct mail.” And he gave the numbers. It’s a 105 purchase price. $20,000 for renovation, and then it appraised for 225,000. Aaron says, “Now, out for a cigar to celebrate closing on this unit.” So Aaron, congratulations brother.

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

Lyrva:
Thank you. I am on lyrvasanchez.com and on Facebook also Lyrva Sanchez. And then you can check Rustic & Chic B&B on Instagram.

Ashley:
Awesome. Thank you so much. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson on Instagram. Don’t forget to check out our new book at biggerpockets.com/partnerships to get a copy. We will be back on Saturday with a rookie reply.

Speaker 4:
(singing)

Why an e-bike company is suddenly betting on Detroit.

A couple of years ago, Justin Kosmides was working in investment banking and (in his words) hating life. The one bright spot was his daily commute: an e-bike ride from Brooklyn to midtown that evolved into a coffee-hunting expedition. “I wanted to be cool and European and stop at different espresso shops,” he says with a laugh. But a chance meeting with an e-bike entrepreneur from Brazil turned Kosmides’s hobby into a side hustle and then something more: a leap of faith. In late 2021, Kosmides quit his cushy banking job to become co-founder and CEO of Vela, which makes handsome, high-end e-bikes that start at $1,800.

The pandemic was in some ways great for business. (Remember how hard it was to get any bike?) But then came a speed bump: Vela’s Chinese producer dropped them in favor of Walmart. In some ways it was a good sign. If Walmart was getting into e-bikes, the category probably wasn’t a fad. (An estimated one million e-bikes were sold in the U.S. last year; the market is expected to reach $46 billion dollars by 2026.) But Kosmides and his business partner, Victor Hugo Cruz, now had to find a new supplier—which they did, much closer to home. In the fall of 2022, the company moved its production line to Detroit, a few miles from Ford’s River Rouge plant.

Making a small-run, luxury product in the U.S. seems counterintuitive. But as Kosmides explains in the new Forbes series “Cereal Entrepreneur,” the move has given Vela’s team better control over quality. Over breakfast, Kosmides talks big banking, bigger mistakes, and what women really think when he rolls up on an e-bike.

MICKEY RAPKIN: What are we eating today?

JUSTIN KOSMIDES: I brought a mug full of granola—a personal favorite. And sure, you can eat cereal out of a bowl. But something about eating out a mug just kind of brings me back to the college days.

RAPKIN: Eric’s got Fruit Loops. I brought Honey Nut Cheerios—because it reminds me of childhood and riding a bike. Justin, you met your business partner at a wedding in Italy. Couldn’t you just relax and just enjoy an Aperol spritz?

KOSMIDES: There were definitely some Aperol spritzes involved in our conversations—and some boats and some music. But there was way too much bike talk.

ERIC RYAN: That’s always a sign that you’re onto something. When did you make the leap to Vela full-time? People take different approaches to crossing that chasm. Some really need the security net of a salary while chasing a dream. Others subscribe to the belief that the hungriest wolf hunts best.

KOSMIDES: (laughs) Is this a circle of trust?

RYAN: Absolutely. It’s just us. And the readers of Forbes.

KOSMIDES: I have no shame in letting this be known. I was working for the bank and launching this brand and becoming CEO. But my investors let it be known that if we’re going all-in, we need to go all-in together. It was a scary jump. It brings up a lot of insecurities. I didn’t grow up with any means. Both my parents were entrepreneurs.

RAPKIN: How tight was money when you were a kid?

KOSMIDES: My mother was a yoga teacher. She started her own practice. My father had a number of computer companies. I like to say 90% of them failed, one did OK. Then one went really, really bad. My sister is only a couple of years older than me but she had a very different experience growing up—because of the timing of when his companies were successful or not. I supported myself through most of college with student loans. I was also buying, selling and trading sneakers.

RAPKIN: Where were you getting shoes? You went to school in Vermont at the dawn of e-commerce.

KOSMIDES: I built a mini network from Japan and from Brazil and South America and Europe. There’s still kids who come up to me and comment on the days when I had 160 pairs of sneakers piled up in the dorm room.

RAPKIN: Is there anything you miss about your investment banking days?

KOSMIDES: The expense account. (laughs) First class for flights over four hours. I miss structure and knowing how my day’s roughly going to go.

Vela Vs. China

RAPKIN: OK, so you go all-in. But then the Chinese factory producing Vela’s bikes basically fires you to work with Walmart.

KOSMIDES: We got kicked out of the factory because Walmart came in and bought up the entire supply chain for two years or whatever. I’ll preface this with: I didn’t see it coming. But literally from day one we had issues getting inventory into the United States. We had quality issues. It was everything from brake pads being turned around to the wrong componentry being installed. We would bring the bikes to Brooklyn, rework the bikes, then send them out from here. It was a very costly endeavor.

RAPKIN: Making a small-run luxury product in Detroit can’t be cheap though. I read that it costs you something like $300 dollars more per bike. Did you pass that cost along to customers?

KOSMIDES: We split it. We took a hit and we passed half of it onto the customer. It’s definitely more expensive to produce in Detroit. But that’s such a small piece of the puzzle when you look at the life cycle of a bike. Or you look at inventory management and shipping and tariffs. More and more industries are starting to realize that maybe globalization—relying totally on the outside source—is just not a good idea. Onshoring, nearshoring, all of these terms are becoming more popular in the manufacturing world. As we scale, that cost will come down naturally.

RAPKIN: Is “Made in the USA” a selling point for Gen Z and Millennials the way it is for Boomers? Or do young people see that as some kind of jingoistic thing?

KOSMIDES: Great question. Look at Gen Z and their approach to fashion—where thrift and vintage is so popular. They’re so in tune with this idea of the quality. It’s something we [as a country] used to do really well. With moving production to the United States comes higher quality. It’s really just making sure that that message is present.

RYAN: What’s keeping more Americans from adopting e-bikes? Is it the price?

KOSMIDES: We always trail Europe in our biking stats. Obviously there’s price point. But you look at Europe and you have some markets like Switzerland and Germany—50, 60, 70% of the bikes being purchased there are e-bikes. In the United States we’re still in the low teens. Yet 94% of the country knows how to ride a bike. You have this huge growth opportunity. In my trips to Detroit, I’ve been reading a lot of the early automobile industry. There’s a lot of similarities. People are looking at their bikes from a consumption standpoint instead of from an asset standpoint.

RAPKIN: Meaning we should be thinking about the resale market?

KOSMIDES: These are incredible devices that should stay on the road. We have a unique opportunity because we have production here 1697579925 to keep those bikes on the road. It’s both sustainable small-S but sustainable big-S from an economic and environmental standpoint.

RYAN: I was a really early adopter of e-bikes. I bought an electric mountain bike. It was amazing how many of my purist friends on analog mountain bikes scoffed at it. They’ve now all switched over. It’s so much more fun.

RAPKIN: Yeah, but you’re in Marin County. I’m in L.A. Everyone here drives a giant SUV while staring at their phones. I’d love an e-bike. But I would also like to not die.

KOSMIDES: It’s a shame that’s even a factor. When I was in the banking days, I had an e-bike in L.A.—

RAPKIN: When you were here on business?

KOSMIDES: I would bike from Venice to Century City. And I would beat my co-workers to the office—in a suit. It blew people’s minds. I would go out on dates and show up with a bike. Girls would be like, “Wait a second, I thought you worked in banking?” I’d be like, “It’s the most efficient way to get around the city.”

RAPKIN: Were women into this?

KOSMIDES: Jury’s out. It’s a good reason why I moved back to the East Coast. But back to the point: Cities like L.A. are absolutely incredible biking cities. Bike lanes and safety is only increasing. It’ll continue to get better and better.

Learning Curve

RAPKIN: Would you tell us about a mistake you made? And what you learned?

KOSMIDES: Starting a new company takes a toll on your relationships—both friendships but also your closest relationship with your partner. And I would say not giving more attention and more care to that fragile relationship— It’s a tough toll with everyone around you. You don’t realize it. But it’s like the splash zone at SeaWorld. Everyone feels it.

RYAN: Thank you for sharing that. It’s so true. I think as an entrepreneur, you’re always so influenced by place. What has Detroit taught you?

KOSMIDES: Resilience, staying in the fight no matter what. Moving to Detroit was a little bit of a Hail Mary. The brand was not doing well relying on China. But it doesn’t feel like a coincidence.

RYAN: There’s that old cliché that a failed entrepreneur is just one who gave up too soon.

KOSMIDES: Henry Ford built bikes before he built cars. There’s no reason why the U.S. can’t be an absolute leader in electric mobility. For an industry that’s projected to be over $94 billion by the end of the decade, there’s a real opportunity for Detroit.

RYAN: When we were building Method, Adam Lowry and I were trying to do it in Detroit. I grew up in Grosse Pointe, I still have strong roots there. The city was going through bankruptcy, they were showing us the wrong sites. They just couldn’t get their act together. We went with the inner city of Chicago instead. But it sounds like Detroit now understands how to really invite businesses in.

RAPKIN: What’s Vela’s end game? Do you sell to Schwinn? What’s the offramp?

KOSMIDES: The offramp is to have a beautiful brand that scales slowly—stable, solid, profitable. That is really all I can ask for.

RAPKIN: OK. If I’m in Detroit, on a Friday night, where is Team Vela getting a beer?

KOSMIDES: (laughs) UFO Bar. Funky, awesome records, dollar beers. I will say, the Anthony Bourdain episode on Detroit is a must-watch. It still gives me chills. I’ll rerun it on the flight—when I’m tired of reading about the early automobile industry.

RAPKIN: Coming back to cereal, what’s your morning routine? Do you meditate ?

KOSMIDES: As the son of a yoga teacher, getting a good stretch is definitely important. My combination is a nice stretch, coffee as soon as possible, and then take the dog out. You don’t want to talk to me before coffee.

This conversation has been edited and condensed for clarity. In episode three, Blank Street founders Issam Freiha and Vinay Menda talk cold brew, the surprising reason they’re not opening in Los Angeles, and—yes—the trolls.

David:
This is the BiggerPockets Podcast, show 832.

Dave:
My motivation now is twofold. One is I’m looking more at retirement soon for my day job, so to have that passive income. And then two is to provide a legacy for my two boys.

Keith:
I’m an older guy. I’m 47. I’ve got a wife. I’ve got a kid. My goals were basically like, hey, I want to set something up. Cashflow wasn’t the number one thing for me because I’m looking 10, 15 years down the line when we want to retire. So getting into this deal was basically like, hey, let me see that I can do this, let me see that I can make this happen, and then let me repeat it.

David:
What’s going on, everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast. The biggest, the best, the baddest real estate podcast in the world. Every week, bringing you the stories, how-tos, and the answers that you need to be successful and make smart decisions in this current ever-changing real estate market. Today’s show, my co-host, Rob Abasolo, and I will be interviewing agents and their clients who have found deals that work in today’s market.
Both of these investors live in markets different than where they’re investing, so they’re using long distance real estate investing principles to help put these deals together. We’re going to be explaining what they found, how they found them, and how they put it together. Rob, what should investors be on the lookout for in today’s shows to help them with their business?

Rob:
Honestly, they should be looking at their relationship with their realtor and being honest and asking themselves, is my realtor this good? Is my realtor asking these types of questions? And is my realtor well versed in FSM? If you don’t know what that means, then you’re going to want to stick around until the very end because we get into it with one of our realtors on the show.

David:
That’s a great point. And if you’re interested in seeing what a good realtor looks like, check out episode 826 where we did a show where we took a realtor and a loan officer that both work with me and interviewed them to say, “How do you two work together to get clients into contract in a very difficult market?” Now, before we bring in today’s guests, I just want to remind everyone that both investors were starting later in life. These are not 21 year olds that already have a portfolio of 40 properties like you typically see in the thumbnails.
These were people that have just lived their life, saved some money, and they’re getting started investing at a later stage, yet they were able to use their experience, their knowledge, their networking, and the resources that they had to find really good deals and I’d love to see more of you do the same.
Just a reminder, before today’s show, today’s quick tip, remember that BiggerPockets has an agent finder that you can use to take your first step into a new market. Find your real estate agent who can help you calculate cashflow and find the best neighborhoods for your strategy, instead of talking about granite countertops and cute backyards. Go to biggerpockets.com/agentfinder to match with an investor friendly agent now. It’s fast, it’s free, and it’s easy. That’s biggerpockets.com/agentfinder. You can even find me there. All right. Let’s get to our first guest.
Keith and Peter, welcome to the show. Dave and Dahlia, nice to have you as well.

Dave:
Excellent. Thank you.

Keith:
Hey, thanks for having us.

Peter:
Thanks, everyone. Glad to be here.

Dahlia:
Doing great. Excited to be here.

David:
All right, Keith, let’s kick things off with you. Tell us what were your goals with this deal and how long have you been investing for?

Keith:
I was looking for just a long-term rental property. My goals for this deal was basically I was looking for a long-term rental. That was basically it. I had been investing … Honestly, I didn’t buy my first deal until February of this year, but I’d been looking at real estate and meeting with people for about a year and a half total now. But yeah, I live in Los Angeles, so I wanted to get into a market that was a little more affordable for me. And I had met through a real estate meetup, some guys who were investing in Indianapolis and that one of the partners lived there and so I got to know them. They started talking to me about what you can do in Indianapolis versus Los Angeles, and it was all very interesting. So when-

Rob:
Very cool man.

Keith:
Yeah. When I-

Rob:
And what do you do for a living now?

Keith:
I own a medical transportation company. I’ve done that for about the last decade. It’s given me an opportunity. I built it to a point where I now have enough free time and capital that I wanted to do something else with my money than just put it in the stock market.

Rob:
Okay. And so you were saving money, you have a pretty good business under your belt. You start going to real estate meetups and getting involved with the community. So you buy your first deal this last February. Congratulations on actually getting into your first deal. What were your goals? Did you set goals getting into real estate or were you sort of like, I’m just going to figure it out?

Keith:
No. I mean my goals were … I’m an older guy. I’m 47. I’ve got a wife, I’ve got a kid. My goals were basically like, hey, I want to set something up for us for our future. Something that’s going to appreciate in value. Something where we could possibly cashflow. Cashflow wasn’t the number one thing for me because I’m looking 10, 15 years down the line when we want to retire. So getting into this deal was basically like, hey, let me see that I can do this, let me see that I can make this happen, and then let me repeat it.

Rob:
Tell me, now that you’ve been in this real estate side of things and actually getting your feet wet, what do you think is more important for your personal situation? Is it cashflow? Is it appreciation? Is it a beautiful balance of both?

Keith:
It depends. If you ask my wife, she wants the cashflow so she can retire. For me, look, right now, especially because I BRRRR’d this deal, if you can cashflow $100 or $200 a month, I think you’re doing great as long as you’re in an area where you know the appreciation’s going to be there. So for me, I’m looking 10, 15 years down the line. I’m looking at appreciation more than I am cashflow right now.

Rob:
Very cool. And so for everyone at home that doesn’t know, just a refresher, a BRRRR is basically a buy, rehab, rent, refinance. And if you do that all well enough, you’re able to in theory, pull out most if not all of your cash. Our friend David here is the king Of that. So very, very cool that you were able to pull this off. Can you tell us a little bit about what your buy box was when you started looking into this deal?

Keith:
Yeah. My buy box started out as a 3/2. I want at least 1200 square feet, 5,000 square foot lot, something along those lines. But what Peter had to inform me about was in Indianapolis, 2/1’s, 3/1’s, 4/1’s are what you’re going to find a lot of. A 3/2 or a 2/2 or a 4/1, they’re less common than having a one bath, which coming from California, it’s just really different. It’s very rare that you find houses out here that only have one bath with four bedrooms, but out there it’s common. So I adjusted down to a 2/1 after having a conversation with Peter.

Rob:
Sure. Yeah. That’s always the bummer thing is when I feel like I find a really, really good deal, there’s always just one bathroom. David, I know that you’re a big proponent of if there’s extra square footage and you can convert it into a bedroom, let’s get that bedroom in there. Did you have a philosophy on ever adding bathrooms to your BRRRRs?

David:
Always. I think you should always look at real estate from … I call them real estate goggles. When you put these lenses on and you see what a property should be, not what it is. And it’s hard to describe. It’s kind of a philosophy. People like things explained in a framework, and I don’t know that I can give them a blueprint. But it’s like why is this bedroom so huge? I could put four beds in here. This should be two smaller bedrooms. Or why is there one bathroom and that’s it? We could put another bathroom over there. So I thought it was funny, Rob, I caught your subtlety when you said, “Every time I find a great deal, there always ironically happens to be something missing from it.” Right?

Rob:
Yeah.

David:
That’s why it’s there if anybody missed that. So looking at real estate in today’s market where we say you’ve got to make a deal, not just find a deal, is about seeing a property and saying, this is what it could be, this is what it should be. This is the highest and best use of this property. And then asking yourself how cheaply and how productively could I add a bedroom, add a bathroom, add a space, add square footage, manipulate the square footage, move the walls around, do something to make this property perform better.

Peter:
Yeah, but add on that too. So you’re right, the addition part of it’s big, but there’s also a reverse strategy to go down, especially in the bedroom count. Not in bath count of course, but in Indy especially, we see a lot of four bed, one bath homes like Keith mentioned, but they’re small. You’re talking these little closet style bedroom, eight by eight, and so it actually makes more sense to take that 1500 hundred square foot house and turn it into a 3/2. Create a master bath or a master suite with an en suite bath walk-in closet, kind of modernize it. So that can be a value add play. Where it seems like you’re taking it down a notch, you’re actually adding value by dropping down and making rooms more spacious.

Rob:
Yeah. That’s a really interesting technique. Keith, when you were looking at this deal, you’re obviously looking at the configurations of it. Were there any other particular criteria that you were evaluating?

Keith:
I mean, in terms of the house itself, again, I went down to a 3/1. The square footage of it, oddly enough, it’s a 960 square feet, but that is the same size as the four bedroom, one bath that I bought as my first deal.

Rob:
Wait. Sorry. You went down to a 3/1 or a 2/1?

Keith:
A 2/1. This deal is a 2/1.

Rob:
Okay. Cool, cool, cool.

Keith:
But as far as what I was looking for in terms of the deal was would it pencil as a long-term rental?

Peter:
Well, the ability to always lean back on that LTR strategy just in case it covered the bases and then appreciation was a big part of it because in 10 years, even if I’m breaking even, I’m going to have that equity that I can borrow against, use, whatever you might do with it down the road.

Keith:
Yeah. That’s exactly right, Peter. Peter was instrumental in giving me the direction of where I should be looking to buy these properties for appreciation. So that was the other caveat that I wanted with this property. Even if it didn’t cashflow now that it would appreciate.

Rob:
So obviously having an investor friendly agent is super pivotal in your first deal. How else was Peter able to help shift your mindset or your POV on this deal?

Keith:
Again, he got me thinking more about getting down into a 2/1 house instead of a 3/2 that I was looking at. Instrumental in helping me look at the areas that I needed to be looking at to get that kind of deal and also run the comps and ARVs in these areas to make sure that we were investing. Right.

David:
And we’re going to move on to the individual details of this deal, but I want to ask before we do, just to clarify, the reason that you went from looking at four bedroom houses to two is because even though the four bedrooms look good in theory, in practice, it’s hard to find a tenant for them or they appraise for less because of functional obsolescence. The bedrooms are too small. Is that right?

Keith:
Yes. That was one of the things I was saying earlier was that my four bedroom, one bath house that I bought is the exact same square footage as the two bedroom, one bathhouse I bought. So yeah, it’s really hard to make those work.

David:
So the tenants just go look at the house and say, “Nope. I don’t want it. It looks like a prison cell. That’s not going to work.”

Keith:
Yeah.

David:
But on the MLS, it shows as four bedrooms. The reason I’m bringing this up is that’s an example, but there are so many examples of things that agents know about a specific market that your buyer, especially long distance, cannot understand. The individual dynamics, the things that don’t show up on a spreadsheet. And I notice a lot of people show up and they’re told to tell their agent, “Here’s what I want. Go find it.” Versus asking, “What is working in this market? What strategies work here? What do tenants look for? Which neighborhoods are appreciating? What do you see other people having success with?” And then asking, “Can I adopt that strategy within …” You’ll have a much smoother ride if you take that approach.

Rob:
Okay. So first and foremost, what kind of property is it?

Keith:
This is a single family house. Two bedroom, one bath, 960 square feet.

Rob:
And Peter, I’m going to toss this one over to you. How were you guys able to find this deal?

Peter:
Rob, this was an MLS deal. Nothing glamorous about it, but the interesting thing was it had been on the market for a really long time. 211 days if I remember correctly. And so it got overlooked. Actually been under contract once before as well. So yeah, once Keith and I honed in the criteria, and we settled on a few neighborhoods to focus on, this one came up. Actually, sorry. We saw it because it had been sitting there for a while, but I set up the search for him, so of course emailed him all the available properties in that neighborhood and that one caught his eye so we did some digging on it. Do you want me to get into the specifics of what we did in terms of numbers there?

Rob:
Yeah, sure. Why don’t you tell us how much it was?

Peter:
Listed for 149,900 originally, so 150,000. They dropped the price over time to 145. We got it under contract for Keith at 130.

Rob:
Nice.

Peter:
Ended up negotiating a $9,000 price reduction during inspection. So ultimately he closed for 121,000 in April this year.

Rob:
Very cool. Okay. So that’s a relatively big drop in price there. Keith, were there any special tricks of the trades that you did to negotiate the price?

Keith:
That was all Peter. I mean obviously, you have to have your inspections done and all of that. But yeah, I think we lucked out with the person that was selling the place to not really knowing what they were doing. But yeah, no, I left that all up to Peter as far as negotiating the prices and what would work and what wouldn’t.

Rob:
Yeah, so tell us about that, Peter. What did you do? How were you … Seller and get effectively $30,000 off the price tag?

Peter:
Yeah, close. Yeah. What I really did here was dig into the listing itself and get all the information I could on the property so we could leverage it and strengthen our position. What I mean by that, number one, been on the market forever. It had fallen out of contract before and it had fallen out because it had a foundation, a couple issues going on, and the buyer was spooked and they bailed. There was a contractor estimate on it, so we got that in advance. It was also agent owned, so the agent was also the seller of this property. So I knew I was going to be dealing directly with the person who could make those decisions. And as Keith mentioned, it didn’t quite seem like they maybe knew what they were doing too well. Responses were slow. They didn’t have utilities on for inspection. Just some easy blunders that they made.
But nonetheless, just took all that information knowing they’d been holding it forever, they couldn’t sell it, they were running into foundation problems, and we leveraged that to get the price down as much as possible. And they made a crucial error here in the fact that that agent owner did not pre-negotiate the foundation problem. So they already knew it was there. They had a bid, they gave it to us, told us about it, but then they failed to get that negotiated upfront. They allowed us to just keep the normal inspection contingency in place, go in there, do our inspections, and then renegotiate it even though this was a previously disclosed item. And so that was their error.

David:
That is a big error and what you’re getting at there, Peter, for those that are not real estate agents and might not catch this, when there’s an issue with the house, you’re better off as a seller to negotiate it when you have the leverage, which is before you go into contract. There are no ways out of a contract for a seller. There are many ways out for a buyer. So the general rule to understand is when it’s your listing, you have all the power until you go into escrow because you can sell to other people. When you’re in escrow, the situation can never get better for you, but it can get worse. They can lower the price, they can ask for repairs, they can delay the process. There’s a lot of things that can happen. So when you know have issues, before you go into contract, say, “Hey, we have these foundation issues. Here they are.”
Don’t just hope that they’re not going to find them. They’re absolutely going to come up, especially if you know it. And try to negotiate what credit they’re going to get for that rather than waiting until you’re in escrow and now you’re two to three weeks in and they’re coming back. They’re going to get more than if you did it the other way. Great point there, Peter. And I think Keith, you mentioned that the listing agent wasn’t very good. That’s another thing to look for. I purposely target properties that have agents that are not very good because it’s a great way that you can save money. And the funny thing is a lot of the people that hire these agents brag to their friends that they only paid 1% or only paid 2% on the listing commission, and then they proceed to lose 10% on the negotiation side. That’s a frequent error. Have you seen that too, Rob?

Rob:
Oh yeah. Got to love it. Got to love it. Well, awesome. Okay. Well, congrats on the price reduction. Keith, tell us a little bit about how you funded the deal.

Keith:
This deal, I came in cash and then I ended up refinancing out into a … I refinanced out on a non-conventional loan with a local credit union on a 5/5 ARM. So five years, it doesn’t reset. It’s not like a 5/1 where it resets every year. The interest rate adjusts. The only thing that they will do since they are a small credit union is that if the rates drop more than half a percent, they will bring your rate down for a nominal fee. It was like a couple months worth of interest or something to bring the rate down. But on a 5/5 ARM, it won’t readjust up for five years.

David:
So a 5/5 ARM means the first five years you’re locked in. After that it can only adjust every five years as opposed to what we normally hear is a 5/1, which means you’re locked in for five years, then every year it can adjust.

Rob:
Oh, interesting. Okay. Yeah. That’s interesting. So why’d you choose that route, Keith? Was it just because it was a lower interest rate?

Keith:
It was a lower interest rate. Also based on where interest rates are now, five years being locked in, if it penciled as a long-term now, I knew that hopefully over five years rents would go up, my cashflow would go up. And then if rates come down enough and I want to refi out into a 30 year, the penalty for refi out of that 5/5 ARM was really, really low so for me, it didn’t make any sense to take a hire rate now if I didn’t need to.

Rob:
Totally. Yeah, that makes sense. And what did you end up doing with this property?

Keith:
I actually turned it into a midterm rental. It would break even as a long-term rental. I put it up on Furnish Finder and Zillow and even Airbnb at 30 days. And now I’m actually cash flowing pretty good on this property. So I’m keeping it right now as a midterm. If anything ever changed or I needed to, I could turn it back into a long-term rental and make it work. It would still work, but right now it’s working just fine as a midterm.

Rob:
Okay. So yeah, we usually call that … Well the term that I coined was the burster, and then we actually just came up with the barometer last week on the pod, which is a BRRRR into a midterm rental. Can you tell us the cashflow difference between the long-term rental and the midterm rental? What would you make on a long-term rental versus what’s you’re cash flowing on the midterm rental?

Keith:
I would basically break even on a long-term rental, and right now I’m cash flowing about $700 a month as a midterm. So great for me, especially where I thought I was going to be breaking even. But yeah, I’m coming out about $700 a month.

Peter:
Rob, you want me to break down the numbers for you?

Rob:
Yeah. I was going to ask. Yeah, can you tell us a little bit about the actual budget and everything on the BRRRR?

Peter:
So Keith bought this for 121,000. He had about 35,000 in renovations on it, so all in about 155. And it was appraised for 203. So after the refi he left about $2,500 in the deal and he spent about $12,000 furnishing the property. So round up a little bit, about 15K in the deal. Total PITI was a little over 1400 and obviously you got some utility expenses, some landscaping, et cetera. So $2,200 on the medium term rental. So as he said, about $700 a month cashflow. So I got to do the math exactly in my head about 50, 55% or so cash on cash return right there. And had he long-term rentaled it, as he said, it was just about breaking even. We estimated the long-term rent to be in the $1,500 to $1,600 range, so a difference of $600, $700 when he switched over to the medium term per month.

Rob:
And some people, they get caught up on leaving money in the deal, but if you would think about it, if you were going to buy this property conventionally with an investor loan for example, you would have to put 20% down. So even at the … What was it? $150,000, let’s say.

Peter:
121.

Rob:
121. Okay, great. 20% of that is going to be 20,000.

Peter:
25. Yeah.

Rob:
So you’d have to pay more.

Peter:
More money in the deal.

Rob:
Exactly. So you put it a little bit more sweat equity in this deal to make it happen, but you effectively have a much higher return as a result, so very, very cool. Did you feel pretty good about the ARV walking into this? Were you able to comp it out pretty closely to that ARV?

Peter:
Yeah, absolutely. We had estimated about 200 grand, so it nearly hit the nail on the head with the 203 valuation.

Rob:
Very cool. Okay. And just for anyone at home, ARV is the after repair value, so that is what the house is worth after you fixed it up. Now, Keith, I know you mentioned that you put it on Furnish Finder and you turned it into a midterm rental. Did Furnish Finder actually turn out to work out and get you your leads and get your place booked or are you using other platforms as well?

Keith:
No, it actually … I mean, when I put it on Furnish Finder, I also put it on Airbnb and I put it on Zillow, and Zillow was the first place I got my renter, who’s in there now, who’s been in there the whole time. He’s actually a guy doing construction work in Indianapolis and so he needed a place to stay, and he’s been there for the last couple of months and it’s been great, but it was from Zillow actually.

David:
That’s great. All right, so what lessons did you learn from this deal? Keith, we’ll start with you and then Peter, I’ll ask you.

Keith:
Especially if you’re investing out of your own market, you really need to find somebody who knows the market well, who can guide you to where to buy, how to buy, what’s going to work, what’s not going to work. Also, with this deal, people usually run when they hear foundation issues because it scares them, right? They don’t know. They can get pretty costly. But if you know can factor that into the deal that you’re going to make, then don’t be scared of things that sound that scary because sometimes they’re not. Sometimes you can get a great deal.

David:
Peter?

Peter:
I have four main takeaways from this deal. Number one, and I think the most important one, is that there’s still deals to be had in today’s market. I mean, Keith bought this in April this year, and he just refinanced out a few months ago. So this is a very recent deal in today’s market with today’s rates. He made it work. And I think it’s a big takeaway because all I hear is, “Oh, there’s no cashflow. There’s no money being made. The market’s dead.” I know you guys hear that every single day as well, and it’s just not true. He’s a real world example of it actually working out. And number two, use all information available to leverage your position. Don’t be afraid to dig into the details a bit more and use whatever you find to your advantage. Three. Keith already mentioned, take advantage of factors that may scare off other buyers.
Buyers hate the F word, they hate the S word and they hate the M word. So foundation, structural, mold. Those three things just you see panic go into people’s faces when they hear that when in reality, most of these situations are fixable and not always as costly as people anticipate. Now, with foundations, yes, I’ve seen $100,000 bids on repair and there are some ones that you need to run from, but this was under $10,000. And again, Keith factored those numbers into the deal from the get go. So there was nothing to be afraid of, and it’s fixed. Everything’s just fine. So all those other buyers missed out on this deal because they couldn’t look past that F word. And then four, don’t be able to be afraid to pivot on your strategy. Keith originally went into it, number one, looking for a three bed, two bath and a long-term rental, and he ended up with a 2/1 medium-term rental. Go figure. But as he got into it, he kept his mind open. We looked at the opportunities as they presented themselves, and again, he pivoted accordingly and it ended up really working out for him in the end.

David:
Awesome. Rob, what about you? What are some takeaways you took from this one?

Rob:
Yeah. I was just reflecting, Peter, it is really nice that you know your stuff. The F, the S, the M word. I believe those were the three. And it’s funny because when I was getting into real estate, I remember I had to sign an addendum that was the lead paint addendum, the one that’s standard with all houses, and I was like, “Oh my gosh. Am I going to die if I step inside the house?” And I called my realtor and she explained it to me and talked me down the ledge because I was ready to walk away. I was like, “Wait a minute. There’s lead paint in here?” And I think most of the time it’s right. Having a realtor that has been through that journey has been very helpful. Especially when it comes to foundations, I agree, that’s a very scary thing. For me, luckily, in most of the cases, I would say in the last five foundation issues I’ve had, they’ve all cost between $1,500 to $3,500 to fix. So it always, most of the time ends up being a lot less stressful, but it does pay to have a realtor that has experience doing it. So yeah, it’s nice. You guys both did good work. Congratulations on this deal. This is awesome.

Keith:
Thank you.

Peter:
Thank you.

David:
Absolutely. I would second it. Whenever you hear something that scares you, turn your fear into a number because math is not scary. I remember that’s advice I gave on the first ever podcast I did when I hosted with Brandon. And I said the same thing. We were talking about lead-based paint. I was like, “I don’t care if it’s lead-based paint. Don’t think poison. Think well, what would it cost to fix that?” Same thing happens with asbestos. People hear that word. They freak out. Termites, they freak out. Foundation, they freak out. Cloud on title, turn it into a dollar, work the dollar number into the deal. See if the SAT works for the seller. You can take something very scary and turn it into something very approachable. Thank you guys. That’s a-

Rob:
I’ve always found with asbestos, its bests is not ask questions. That’s always been my-

Peter:
It’s best to leave it alone.

David:
Rob, do you know how they name Worcestershire sauce?

Rob:
Worchester shire, shishashin sauce. Yeah. How?

David:
Some guy that took his dentures out was asking, “Worcestershire sauce?” All right. Peter, Keith, congrats on the deal. Thanks for being back on the show. We will see you soon.
All right, Dave, let’s start with you.

Dave:
Yep.

David:
What’s your background in real estate investing?

Dave:
I initially started real estate investing back in the early 2000s. I had purchased about six out-of-state properties. Two in Texas, two in Kansas City, Missouri, and two in Vancouver, Washington. And had bad timing, a little bit of some bad experience with a couple property management companies and I got out around the housing crash in 2008. I was able to salvage some deals to get out. And so that’s where I started and then I’ve just been sitting on the sidelines the last few years needing, I guess, another push to get back in and finally got it last year and then ended up purchasing a couple properties this year.

Rob:
What was that push?

Dave:
Honestly, it was you. I found the BiggerPockets podcast on YouTube. Watched a couple videos, joined the website, became a member, and then quickly purchased your book, Long Distance Real Estate Investing, and spent a lot of Saturday and Sunday mornings reading that out in the porch. And a lot of things you had to say resonated with me and got me off my butt and the rest was history I guess.

Rob:
Was there a specific moment in that? Was it like you finished the book and you’re like, I’m ready to do this? Was it just being part of the BiggerPockets forums and getting back into the community? What was that shift? Was it a conversation you had? I’m always curious to hear how our members are able to get to that point where they take action and get back in the game or get into the game at all.

Dave:
Well, I knew I wanted to get back in, but I did have a lot of reservations because of some of the issues I had with my prior experiences investing out of state. And back then it was a lot different than it is now. And David mentions it a lot in his book with technology is such a plus right now. Being able to keep up to date … Or actually a lot of it was really just being able to do the initial research with finding properties. Being able to look in different areas around the country, not just in my area. So using the BiggerPockets rental calculator was a big tool for me. But then throughout the book, I guess the little things here and there with push, letting us know there’s technology here to help us how to build a team. And so I just decided to take a chance and sent an email to Dahlia through the BiggerPockets website and-

Rob:
Very cool man. Well thank you for that. So tell us, you end up getting back into it, you find your fire again. What were your goals getting back into real estate? Did they differ too much from when you got into real estate to begin with?

Dave:
Quite a bit different now. I’m a few years older now. I have two sons that are 15 and 16. So I think my motivation now is twofold. One is I’m looking more at retirement soon for my day job, so to have that passive income. And then two was to provide a legacy for my two boys.

Rob:
I love that, man. So, all right, let’s hear about this property a little bit. Tell us about the property. What kind of property is it?

Dave:
It’s a single family home, three bedroom, two bath. It’s built in 1983. It’s in the outskirts of Tulsa, Oklahoma. One story. Needed some work. I think the seller had been in there a while and it definitely needed some updates. So I went in there and did some updates, but pretty simple.

Rob:
Yeah. Cool. And so this property showed up and did you take it to Dahlia? How did you even come across it to begin with?

Dave:
Actually it was the opposite. Through Zillow, I had been looking at properties in that area and when I contacted Dahlia through BiggerPockets’ website, I actually had came to her with a property and she had told me no. I think it had some structural damage I think or some problems initially.

Dahlia:
Yeah. There was something going on with it and I remember I was like, “I can get you a better property in that same price point in a better location.”

Dave:
And she did.

David:
That supports the point we just made with the previous guests where we talked about going to your agent and saying, “This is what I want. Go get it.”, is not as beneficial as saying, “Tell me about your market. Where are there opportunities?” Because Dave, there’s no way you could have known that there was a better neighborhood where you’d get better tenants and better rent and have a better experience for the same price without having that boots on the ground expertise that your agent brought.

Dave:
You’re absolutely right.

David:
So Dahlia, from your position, you’re a real estate agent and people come to you and they say, “Tell me about this house.” I get the screenshot, what about this one? That’s our favorite as an agent because we don’t know what you’re asking. What about it? Right?

Rob:
Or they just send you the link. They don’t even ask.

David:
Yeah, just here. That’s funny. That’s exactly right. When you get that kind of information, what goes through your head that many clients would never know a realtor’s thinking?

Dahlia:
Well, I mean I’m always very transparent with my clients, so when they send me a property, I’m going to tell them exactly what I think, just like what I told Dave. So if somebody sends me a property, I’m going to quickly pull disclosures, let them know anything that’s going on with the property. I’m going to tell you if I think it’s worth what they’re asking. I’m going to tell you I think this one’s going to go quick. All those things that are going to affect me telling you, yes, I think this is a property to pursue. And that’s going to be a question for the buyer as well. If there’s any repairs, for instance, that come up on the disclosures, that may be something that’s a deal breaker for them.

David:
And the property that you found him, where’d you find that one?

Dahlia:
That one was in Broken Arrow. I found it on MLS. I think it was maybe a week after he had first reached out to me about that other property and I told him, “You know what, I can find you something better.” I think a week later this one came up and I told him, “Hey, I think this could be a good one. It’s priced well. It’s going to go quick.” I knew he was a cash buyer, which is always … If you can use cash, it’s always to your advantage. So I was like, “Let’s get in there and make an offer.”

David:
All right. And then how much did you make the offer for on this house?

Dahlia:
I believe they were asking … Do you remember, Dave, exactly how much they were asking?

David:
I think it was 155.

Dahlia:
We came in maybe 6K over. It was 149 and we offered, yeah, 155 I believe.

David:
Why did you choose to go over asking on this one?

Dahlia:
Because I knew it was going to go over. The tough thing is how much can we go over? It’s always like the lottery, I feel like. How much can I get over and get this property? But I don’t want to go over too much. I want to spend the least amount of money possible, but-

David:
What you’re describing is the dilemma that everyone has in a hot market. In California, this is a common issue. So the house is listed for 800,000, it’s got 20 different offers. You know it’s going over the 800, but nobody wants to pay 900 if they could have paid 875.

Dahlia:
Exactly.

David:
You always end up in this odd, well, I don’t want to lose it, but I don’t want to go too much. And it creates this paralysis that will probably knock out 75% of buyers. And that’s where having an agent that’s experienced … Sometimes I can just get the listing agent to say, “If you write this offer, we’ll accept it right now.” And at least then the buyer knows I could choose yes or no. It removes that throw your name in a hat and hope type of a thing. Was it a situation similar to that for you?

Dahlia:
What I always do is I always feel the agent out. And technically we’re not supposed to disclose price, correct? But I like to do a few little fun tricks and I like to put a number out there and say, “Hey, is this number competitive?” And a lot of times I’ll get a yes or no.

David:
Is that a Tulsa thing that you’re not supposed to disclose price, what your buyer would pay?

Dahlia:
It could be an Oklahoma real estate thing. I don’t know about the other state laws, but we are not supposed to disclose price of offers unless the seller tells us that we can and that just really never happens.

Rob:
Yeah. I always just go with the blink twice if this is a competitive offer that would be accepted.

David:
Yeah, it could get tricky when you’re going that route. And every state has their own laws, so I can’t speak to all of it, but I know in general-

Dahlia:
Sure.

David:
Agents can have a discussion about would this work without saying my buyer would pay this. That’s the way I always try to frame it. I usually say, “Hey, my client’s going to listen to whatever I tell him. So let’s see if you and I can make this thing work and then we’ll go back to our clients and we’ll propose what we came up with.” That alone, if you get an agent that will do that, it puts you in the top 1%, 2% of chances of getting that house. Because most agents just email off an offer and say, “I hope we get it.” Literally, like you said, the lottery. Just pick numbers. So it sounds like your experience recognizing I think six grand over asking would make it so that the seller would jump on our offer without having to pay 30 grand over asking and that was just a result of you knowing the market, right?

Dahlia:
Yes.

David:
Dave, how did you feel when that first got brought up? Hey, I think we should go six grand over when most investors are asking the question of, well, how much under can I get it for?

Dave:
At that point, I had a lot of confidence in Dahlia. She had been really transparent with me in how the market in that area is performing. And the crazy thing is she told me this is what I think we should offer and this is what I think they’ll come back at. And she was spot on. So I think to answer your question, I had a lot of confidence with Dahlia before she made the offer. And two, I was hungry enough where I didn’t want to lose a deal over $5,000 or $6,000.

David:
I commend you, man. And I’m not here as an agent telling everyone just pay a million dollars for every house, okay? But let me just bring up the other side of this. In 2015, 2016, I saw a lot of people walk away from $500,000 homes because they needed to pay 510 and they all bragged they didn’t want to overpay. And now these houses are worth $800,000, $900,000. We see this a lot when you’re in real estate for the long-term that you can step over dollars to pinch pennies and I’m just asking people to have a mature view, not getting sucked into the details and the ego of feeling like you won. Because sometimes paying less than asking price is a viable option like with our last guest. Sometimes you win paying over. It’s what the property’s worth and what it produces, not what it’s listed for. So Dahlia, you then had to go in and negotiate this. In addition to having to pay a little bit over asking, was there anything else that you recognized when you felt out the agent that made you think this was a good opportunity?

Dahlia:
I just knew that price point and that location was very hard to come by. And that was earlier this year. And now at this time of year, it’s really non-existent. So I’m sure he’s already gained some equity on that property. But as far as being able to secure the deal, I think we did as is and I think we did quick close because I know those are always the things that these type of sellers are looking for.

Rob:
Yeah. Just really quick, out curiosity, Dave, you brought a property to Dahlia. Dahlia’s like, “Eh-eh. I’m going to find you a better deal.” Obviously for you, I’m sure you were ready to take action. You probably were a little impatient because you’re like, “Dang-it. It’s going to take so long to get it.” So how long did it actually take to get this new property under contract?

Dave:
I looked at that number this morning and we were under a week.

Rob:
Oh, nice. Okay. Wow. Superfast. Okay. How did you fund it?

Dave:
Paid cash for that property.

Rob:
Okay. And what did you end up doing with it?

Dave:
I’ve got a long-term renter in there now. Actually, before I got a renter in there, we did some rehab work, roughly about $17,000 worth of rehab work.

Rob:
Okay. So was it a total BRRRR or was it just a remodel that you paid for out of pocket?

Dave:
A remodel I paid for out of pocket.

Rob:
Okay. Did $17,000 of repair get you a lot? What did you actually do with that budget?

Dave:
Living in California and seeing prices for materials in Oklahoma and labor in Oklahoma, I felt like I didn’t pay a lot at all, but-

David:
I know that feeling. Every time I travel and I get to get gas and it’s in the threes, you’re like, it’s like free.

Dave:
Yeah, it’s a crazy feeling. So we tore out all the flooring, put in new flooring, new appliances, new windows, paint, water heater, did some work in the garage.

Rob:
So not a full-on remodel, but definitely sprucing it up and getting it market ready basically.

Dave:
Exactly.

Rob:
And what was the outcome with it? Once you got it all ready to go, you rent it out long-term basis. Give us some numbers.

Dave:
The crazy thing was I ended up using a property management company that Dahlia had referred to me, and so we went in on a Friday, I think, and listed it on the MLS for rent. I heard back from the property manager on Monday that we had 75 interested parties and 25 physical applications in her hand. So we had a renter in there within then 10 days or so. Less than that actually.

Rob:
That’s crazy, man. That’s a lot.

David:
Dave, it sounds like having cash actually put you in the driver’s seat for this deal. Gave you a big advantage. Do you mind sharing where that cash came from and what gave you that advantage?

Dave:
About seven or eight years ago, my wife and I decided to purchase some land in northern Idaho. We had purchased 44 acres in a spot that we had felt we wanted to retire at, build a home on that property. And fortunately the price of real estate and especially land in that area just has skyrocketed. So got contacted by a realtor early last year wanting that land and he didn’t give up until he got it. So we ended up selling that land. And then just about that time I was reading Robert Kiyosaki again and the liability versus asset, and I thought, “Wow. We need more assets and real estate’s the perfect asset.”

David:
Would you say that the choice to delay the gratification of having a dream house or a dream car or a dream yacht or all the things that you tend to see on social media actually led to you being in a position where you could invest that money, make it grow, and then maybe someday this property could buy some of those things for you?

Dave:
Yeah, exactly. That’s exactly what happened.

David:
Yeah. That is a principle that we believe here at BiggerPockets and I love to see that highlighted. It’s that delayed gratification. If you set yourself up right, it’s not this or that. You could have this and that. It’s all about timing. So Dahlia, any takeaways from this deal that you’d like to share with our audience that maybe they should consider when they’re reaching out to talk to a new agent?

Dahlia:
I feel like the biggest things are first, making sure that you’re ready financially. So if that’s going to be you using financing, get pre-qualified right away. If it’s cash, we need proof of funds. All those things are important. I can’t submit offers without it. And sometimes these deals come up and there’s a sense of urgency and you can potentially miss out if you’re not ready and don’t have your ducks lined up, I guess you could say. That’s one of the biggest things. Just knowing the market that you want to be in, researching it a little bit and then really finding a great agent that has the resources that are going to be imperative for investing out of state. Boots on the ground is the most important thing really when you’re investing out of state.

David:
Now, it can be very frustrating to find those people. To find the agent, to find a contractor, to find the property manager into a smaller degree to find your loan officer or your lending source. But once you find them, you can scale a lot faster. Dave, I understand you bought more than one property with Dahlia. Is that correct?

Dave:
That’s correct. I ended up buying a second property about two and a half months after purchasing that first property.

Rob:
Cool. That’s fast.

David:
It’s not always a linear process. It’s kind of like you walk around trying to find the well and you keep digging and digging and digging and there’s no water, but then when you finally find it, you have all this water and your wealth grows exponentially.

Dave:
Definitely. And I think having Dahlia … In your book, you mentioned a lot about setting up your network and it’s hard to do when you’re investing out of state, but luckily I found Dahlia and she had a network already in place and she brought me into that network and that’s made all the difference. That’s why that second property went so smooth as well.

David:
Awesome. Well Dave, if people want to reach out and talk to you more, where can they find you?

Dave:
I’ll give you my company website. It’s DRD Insurance Agency. I’ve got my email on there. Yeah, if anyone has any questions or anything, please reach out to me.

David:
All right. And Dahlia, how about you?

Dahlia:
You can always find me on BiggerPockets on the Agent Finder. You can also find me on Facebook at ASN Realty Group. You can also email me at [email protected].

Rob:
If people want to find you on there, how do they find you on the Agent Finder?

Dahlia:
Yeah, just go to the Tulsa market and look for Dahlia Califf. And I’m going to pop up on there.

David:
Before you go, where can people find out more about you, Keith?

Keith:
I’m on Facebook. Just Keith Lall. Or on Instagram. KLaller1, L-A-L-L-E-R one. But that’s basically it.

David:
All right. Go give Keith a follow. And Peter, how about you?

Peter:
Oh, you can find me right on the BiggerPockets Agent Finder. And if you have any troubles with that, I’m right at peterstewartrealty.com. And Stewart is S-T-E-W-A-R-T.

Rob:
Great. So the Agent Finder, if they type in Peter Stewart, they’ll be able to find you?

Peter:
Peter Stewart, Indianapolis, I should pop right up.

Rob:
Perfect.

Keith:
That’s how I found him.

Rob:
Okay, awesome.

David:
Rob, how about you? Where can people find you?

Rob:
You can find me over on YouTube. Topical, I just released a video called How I Self-manage my Properties without living in the same city and I talk about, not the core four, David, but the Airbnb Avengers, which is my version of the core four for short-term rentals. So go check that out. That’s the only thing I’m going to plug. What about you?

David:
If people want to see your chiseled new body, which platform is the best to find it?

Rob:
Instagram. Instagram where I do silly dances and silly reels.

David:
That’s where they’ll get the body shot, not just the face.

Rob:
I do want to clarify, I don’t want people to get to peek on and be expecting me to be ripped. I’m just slimming down, but we still have some padding that we’re working on.

David:
That might be why I’m doing this subconsciously. I’m like, look, if I can create such a high expectation for Rob, they’ll be disappointed. And then when they see me when they’re not disappointed, that by proxy looks like-

Rob:
Equals it out.

David:
I overwhelmed their expectations and exceeded them. This is psychological warfare, folks. You’re learning more than just real estate here at BiggerPockets.

Rob:
Lovable and huggable. That’s all that really matters for me. That’s what I’m going for.

David:
There you go. You can find me at DavidGreene24 on your favorite social media. Instagram is where I’m most active. Or davidgreene24.com to see all that I have going on and how I can help people.
Well, thanks you two. Love hearing about these deals. Love hearing that people are still finding ways to buy real estate that makes sense, even in an impossible market. So we hope to see you here again. I hope you keep buying property, Dave. And Dahlia, keep crushing it. Dahlia, also, if you haven’t checked on my real estate agent books, I’d love if you would, and then let me know what you think.

Dahlia:
Oh, I have checked out your books. I love all the BiggerPockets books.

David:
Oh, all of them. We got a real true fan here. Well, that’s great to hear. Thanks for that, Dahlia.
All right. I’ll let you guys get out of here. This is David Greene for Rob Lovable and Huggable Abasolo, signing off.

A study by 2 Harvard grads of Harvard graduates turned entrepreneurs suggests that most venture failures are caused by poor execution.

Is this a brilliant breakthrough or blindingly basic?

Yes. And yes. This insight is both basic and a breakthrough.

Why Basic?

In the early stages of the VC industry, a common saying was “Management. Management. Management” to remind everyone that good ideas lose out to poor management, aka bad execution. But in the last few decades, the Entrepreneurial Ecosystem (EE) has focused on the idea, the pivot, and on VC instead of on skills – even though most ideas can be imitated and improved, and VC only helps ~20/ 100,000 ventures. Among 85 billion-dollar entrepreneurs, only 1% succeeded because of the idea (Truth About VC).

The role of execution was obvious, but the hype and glamor of VC beat out the not-so-glamorous learning of skills in order to grow without VC. To understand the importance of skills, ask yourself whether you would have financed startup entrepreneurs with ideas such as imitating a big store for retail or a big store to sell consumer electronics, or starting a venture to sell personal computers, or to sell coffee, or to start a new search engine, or to sell furniture on the Internet, or to help landlords rent rooms and houses. Few, if any, will say yes to all. The above entrepreneurs, in order, are the founders of Walmart, Best Buy, Dell and Apple, Starbucks, Google, Wayfair, and Airbnb. All of them grew with skills and avoided VC or delayed getting it, often because they were rejected for VC before Aha! All built real unicorns.

Problems with the VC Entrepreneurial Ecosystem (EE).

#1. VCs wait for Aha, i.e., for proof of potential. Although shark tanks, and pitch competitions have cemented the myth that experts can identify successful ventures from a pitch before proof, VCs are smarter. VCs wait for evidence of potential in proven strategies and leaders. Perhaps this is why many VCs, including the highly respected Tom Perkins of Kleiner Perkins, rejected Steve Jobs and nearly 12, including the eminent VC fund Bessemer, rejected Airbnb, Apple, and Google. Entrepreneurs need skills to get to Aha. But the VC Entrepreneurial Ecosystem offers skills to ideate, plan, pitch and pivot – not to sell and build.

#2. Lost Growth Opportunities with the VC Entrepreneurial Ecosystem. The assumption that the idea and capital are key has encouraged the growth of incubators and angel funds. One highly successful VC suggests that angels should get into financing ventures for love, not for money. And only about 2% of VCs are said to do well because, as noted by Marc Andreessen, about 15 ventures are said to account for ~97% of VC returns. Should the focus switch to the development of skills?

The Brilliant Breakthrough

This new insight from the Harvard graduates that execution is key is a brilliant breakthrough because it shatters the VC-focused clutter in EEs and suggests new directions based on what really works in unicorn development – skills. Perhaps because of VC hype, business schools have sought the glamor and gamble of VC, instead of the hard work of skills.

What should Business Schools do?

The focus on the idea and capital has encouraged business schools to teach innovation and ideation to generate ideas, and sponsor shark tanks and pitch contests to develop pitches. But they do not teach how to find unicorn opportunities without VC, which is what about 99% of billion-dollar entrepreneurs (BDEs) did, how to takeoff without VC that 94% of BDEs did, and how to build a billion-dollar company without VC that 76% of BDEs did (see Nothing Ventured Everything Gained and Finance Secrets of Billion-Dollar Entrepreneurs). They focus on spectacle instead of on skills.

MY TAKE: After spreading the gospel of VC for decades, it is good to see Harvard, one of the leading beneficiaries of the VC EE, highlighting the key role of execution in venture development. Perhaps they will influence others to pivot from VC-based EE to Skills-based EE and develop more unicorns for the 99,900/ 100,000 ventures who do not get VC, for the 80/100 that fail after getting VC, and for the 19/ 20 that are heavily diluted by the VCs.

NytimesVenture Capital Firms, Once Discreet, Learn the Promotional Game (Published 2012)
TechCrunchWhy Angel Investors Don’t Make Money … And Advice For People Who Are Going To Become Angels Anyway | TechCrunch
Bessemer Venture PartnersAnti Portfolio

Dave:
Hey, everyone. This is Dave Meyer, your host for On the Market. Joined today by Kathy Fettke. Kathy, we have a bit of a double whammy today. We have an economist who it turns out is also a new investor and I think this is going to be a really fun conversation.

Kathy:
I thought when you said double whammy, you were talking about the surfboard that hit my nose.

Dave:
I didn’t want to bring that up. That was a double whammy or just one big whammy? What happened?

Kathy:
A double whammy for the show. My nose is double the size. It may be broken. I’m not sure. We’ll find out when I go get it checked, but maybe I’ll come back with a new nose. Who knows?

Dave:
What happened?

Kathy:
Well, I learned to wake surf and I got it and it’s called an endless wave and it was like a dream come true and I was just surfing forever and I was in another state of mind. Whenever you fall, you should always cover your face. I didn’t do a bad fall, but then the next thing you know there was a board in my face.

Dave:
No, no.

Kathy:
It was worth every bit of pain.

Dave:
I’m sorry. Well, if it’s that great, I’m sure you’ll be up to it again.

Kathy:
Oh, yes, I will.

Dave:
You know something? I think I’ve technically had two nose jobs. Because similarly, I got hit in the face with a baseball and shattered my entire face when I was a kid.

Kathy:
Oh, my. That sounds terrible.

Dave:
I had to get my whole nose reconstructed. Only recently my mom was like, “I’m so glad that worked.” I was like, “What do you mean so glad it worked?” She was like, “The doctor said there was a 30% chance it wouldn’t work and your face would just be all Messed up until you were 18.” Which was 10 years later. I’m glad it worked. Hopefully, that doesn’t happen to you.

Kathy:
A free nose job, who wouldn’t want that? We’ll see.

Dave:
We do have a double whammy today in terms of our guest. We have Orphe Divounguy, who is a senior economist at Zillow. He’s the former chief economist at the Illinois Policy Institute, and he is going to drop some interesting knowledge on us. He writes a lot about the economy in general, macroeconomics. He knows a lot about construction and new construction and that’s obviously playing a big role in the market right now. We’re going to talk to him about that. We just found out that he also recently became a landlord. I know we’re going to have some questions for him because it’s always interesting to see someone who studies the housing market and also, invests in it.

Kathy:
I cannot wait for this interview. I just think it’s going to be so robust. Can’t wait.

Dave:
Absolutely. I can tell you ahead of time that this is going to be a five-star interview. Appropriately, maybe give us a five-star review on either Apple or Spotify. We greatly appreciate when you take a couple of minutes and help out the show like that. With no further delay, let’s bring on Orphe. Orphe Divounguy, thank you so much for joining us for this episode of On the Market. It’s a pleasure to have you here.

Orphe:
Thanks for having me, Dave. I’m a big fan. Big fan of the show, big fan of yours.

Dave:
I am completely shocked to hear that, but I’ll take the compliment where I can get it.

Kathy:
I’m so glad that got recorded.

Dave:
Thank you. I know, I’m going to be bragging to Kathy about this later. Orphe, can you just tell us a little bit about yourself and what you do at Zillow?

Orphe:
I’m a senior economist at Zillow and Zillow Home Loans. I work at looking at the impact of the macroeconomic environment on housing market participants, so buyers, sellers, landlords, renters, and even developers, to try to understand what’s going on and where the market is headed.

Dave:
What data points, what pieces of the economy are you tracking most closely right now in that effort?

Orphe:
Honestly, just about everything that’s related to housing. Anything related to housing, Zillow wants to know about it, Zillow tracks it. Right now, really, it’s mortgage rates. Just like everybody else, we want to know where mortgage rates are and where they’re headed, why they are, where they’re at and where they’re headed. Because mortgages have a huge impact on housing demand and housing supply. By the way, very few people expected that we would’ve seen a big decline in the number of existing homeowners coming on the market to sell their homes like we had in the past year and a half or so. Mortgage rates have had a disproportionate impact on supply more than demand I would say in the last year or so. I keep track of all that. I look at inflation, expected inflation and expected economic growth because they’re leading indicators, they tell us where mortgage rates are headed.

Kathy:
I, for the record, have been completely wrong on my forecast of mortgage rates where I thought they would come down this summer with inflation coming down. I think we even have it on record of me thinking we’re going to get down to below 6% by the end of the year, which I’m wrong. I will say that publicly.

Dave:
It’s the worst part of being on a podcast by the way, is that everything we think and sometimes we’re just rambling off the cuff is all recorded. It’s terrible.

Orphe:
That’s right.

Kathy:
I don’t have the graphs and charts and data in front of me, although I guess I should because you’ve made that very public and you have so much information for us to be able to go through. It’s been confusing. Where is Zillow? Where are you at this point on where rates are headed at least till the end of the year?

Orphe:
Look, the yield on the 10-year US Treasury, which of course, mortgage rates tend to follow, depends on expected economic growth, but also, where investors expect future inflation is going to be. If you look at inflation expectations, they’ve remained fairly stable, slightly above the fed’s target. Economic growth on the other hand seems to be accelerating and recession risk is receding. What does that do? Well, it causes desired investment to exceed, to grow faster than desired savings. That pushes real rates and nominal rates higher. I expect that we’re going to continue to see, as long as economic growth remains pretty strong. If you look at GDPNow, the Atlanta Fed GDPNow estimates around 4.9%. Goldman Sachs forecast GDP to be around 3.2% right now in the third quarter. I think as long as economic growth remains pretty strong, then nominal rates are going to continue to increase and so will mortgage rates.

Kathy:
What’s keeping the economy so strong in this high-rate environment? I would say most people were shocked. Most economists were expecting a recession by now. I think at least that’s what I read. If we go back to last year, they’re like, “It’s going to be middle of next year.” Then you quote GDP rates like that, that’s high. That’s incredible. What’s causing it? Is it all the money printing or is it something else?

Orphe:
I think the first thing is most economists, not all. It usually takes a shock to bring us into a recession and no one can predict a shock. It’s a shock, by definition. It’s a shock. It’s unexpected. I think most people expected the US economy to start to slow down because the fed funds rate increasing by five and a quarter basis points in such a short period of time hasn’t been seen since the 1970s. Every single time that’s happened that we had a large increase in the fed funds rate, the economy ended up falling into recession. The consumer slowed down substantially. Again, I’m saying we are looking at what are some factors? I think some factors.
The labor market has been very strong. Wage growth has slowed less than price growth, so real wages have increased. The stock market has been resilient. Year to date, the S&P 500 is up in double-digit territory. Wealth, non-housing wealth has increased. Housing wealth has also rebounded. The fact that supply has decreased more than demand means that house prices have been increasing again. Home equity is at a near all-time high. When people feel wealthy, they spend more. You have rising housing wealth, you have a very strong, somewhat still strong labor market. Those factors contribute to helping, supporting the consumer and pushing growth higher. There are headwinds though. As every good economist, you got to look at the other side of the coin.
The headwinds are the student loan repayment coming up. You have the surge in oil prices, which are likely going to slow the consumer. You have another looming government shutdown. You also have tightening financial conditions that are likely to cause small and medium businesses to pull back on hiring. Because look, maybe they can’t expand, they can’t get a loan to expand and maybe in some cases, they might have to fire or lay off some workers. You have these headwinds. I suspect the headwinds will not be large enough to push us into a recession given where we are currently. That’s why I don’t think we’re going to see a big drop in mortgage rates like we saw every time, basically the US economy hits a wall.

Dave:
Well, here we are planning a show to talk to you about some new construction stuff, but now I have so many questions about this macro stuff. We’ll get to it everyone, I promise. I just have a couple of questions. Orphe, I agree with you about those headwinds. I’m also curious your thought on the UAW strike and if that could also add to some of the headwinds.

Orphe:
Totally.

Dave:
Does that mean you think that this will indefinitely postpone a recession or do you think it’s just pushing it out into 2024?

Orphe:
Again, impossible to predict. I think the consumer, if you talk to a lot of people, I mean look at the fed’s summary of economic projections. The revision is up, they revise everything up. I think what we’re seeing is basically, we have a strong consumer, we have a lot of headwinds, but with growth at 4.9%. By the way, Atlanta Fed GDPNow is rarely very wrong. With growth at 4.9%, there’s a big buffer.

Dave:
Huge.

Orphe:
By the way, you look at job openings, they still vastly exceed the number of available workers out there. Big buffer. They’ll have to come down a lot before we start to see a big jump in the unemployment rate. Layoffs would have to increase. You look at unemployment claims, which are a good leading indicator of what we’re going to see in the jobs report. They’re coming down.

Kathy:
They dropped huge last week. It’s crazy.

Orphe:
Exactly. I would say to the listeners out there, I think the risk is more on the upside than the downside. I talked to our forecasting team at Zillow and I say, “Look, I think we should think about mortgage rates increasing maybe 30 to 60 basis points, maybe.” No one can predict where mortgage rates are going. I’m just thinking out there, how much of all of this activity is already priced in to mortgage rates? I don’t know. I’d rather be on the cautious side and say, mortgages are going to be a little bit higher, and that’s okay. That’s okay. I think we should be okay with that. 7% is the norm, not the exception.
If we get productivity increases like we saw in the second quarter, you saw the improvement in productivity. You have AI coming. If you see all these improvements in productivity, what we’re likely to see is income growth, real income growth, real wealth increasing sufficiently so that people will become indifferent or accustomed to that 7%. Affordability will improve. Remember affordability, if you measure it as cost, housing cost as a share of income, if income is rising, then affordability improves. I think we should get used to this new normal the sooner we get there when we make that shift, the better.

Kathy:
Oh, my gosh. I love this. I love this because so often in real estate we’re like, “We just want rates to come down.” For them to come down, we have to see that recession, and people have been hoping for that. There is the other side of what if we just grow our way out of it and things become more affordable because we’re all making more money?

Orphe:
Look, one thing I tell people, I was doing a panel recently on this. I say, “Look, when have mortgages fallen drastically?” The bursting of the dotcom bubble, the start of the great recession. I don’t want to go back to September 2008. In March 2020, I really don’t want to go back to March 2020.

Dave:
Please, no.

Kathy:
Let’s not do that.

Orphe:
We forget that with recessions come, job losses. Job losses are a big negative for housing demand. I think I’d rather see a strong US consumer, because a strong US consumer is a big positive for housing demand.

Kathy:
Which is why it seems Zillow has been coming out with projections that actually home prices are going to go up. That was a recent report.

Orphe:
Absolutely. If you look at the impact of mortgage rates so far, mortgage rates have had a bigger negative impact on supply than on demand. If you could buy or refi when rates were at record lows, you did. It was the leverage of a lifetime. A recent Zillow survey shows that 80% of homeowners have a mortgage rate under 5%. The server also found that owners are twice as likely to sell if their rate is above 5%. We’re seeing new listings very, very low when compared to normal. You’re not seeing a lot of existing homeowners wanting to sell their homes. They’re enjoying that. They’re keeping that low monthly mortgage payment. I think as long as we continue to see that, you’re likely going to see that upward price pressure.

Dave:
It’s so interesting talking about supply, because we touched a little bit on demand, and I can see it going a couple of different ways because there are a lot of unanswered questions about the economy. With supply, I just can’t figure out what would move it. I actually saw Zillow release a survey recently saying that they thought somewhere around 5%, five and a half percent is where people might list their homes again. I don’t think that’s coming anytime soon. It sounds like you don’t think it’s coming anytime soon. Do you see anything that could move supply upward in the coming year or so?

Orphe:
I told another group I talked to last week in DC, I think we really need new construction. It’s all about new con. We got to support new construction as much as possible. Look, before the pandemic, we came into the pandemic with massive under-building. I saw a paper by the Chicago Fed President, Austan Goolsbee, that basically said, “Construction productivity growth has lagged the rest of the US economy over the last 40 years. Why is productivity so sluggish in the construction sector?” There are many reasons. You have geographic constraints to building. Climate change could be another one, especially going forward.
You also have these land use rules that prevent building, prevent supply from responding quickly enough to increases in demand. I think that provides an opportunity. That’s where there’s an opportunity for us to make some major changes in order to allow supply to catch up. My hope is in new construction. Unfortunately though, with mortgages increasing, builders are pulling back a little bit. If you look at starts and building permits, we’re about at the same pace that we were at in 2019, and yet we’re short almost 900,000, almost a million existing homes. All that new building is probably not going to fill the gap that’s missing. Whatever we can do to support builders in this high-cost environment is what I’m basically preaching right now.

Kathy:
Yes, support the builders. I can tell you why builders are terrified. Because unless you’re a national home builder, the smaller builders, we syndicate a lot of new construction, and it’s been brutal. It’s been absolutely brutal. Lot prices are high, construction materials are still really high. Just a year ago, we couldn’t even get them. We would’ve paid anything just to get them. Couldn’t, because we weren’t the national builder that could buy all your materials in advance. It’s been brutal to bring on new construction. Not to mention then the cities want to put the affordable housing on us. In order to even get approvals, we need to provide 30% affordable housing in a time where that’s impossible. How are we supposed to build something affordable when all the costs are so high? I couldn’t agree with you more. Support the builder. We’re struggling out there.

Orphe:
Land costs are rising.

Kathy:
Yes.

Orphe:
That’s a big, big issue. We need to find more build-able land. How do we do that? By reforming zoning rules. At least that would be the first step. One thing that we saw though builders do really, really well when cost increased in 2022 is builders pivoted into higher density. They really leaned into higher density. Construction starts, fell 12% for detached single-family homes and increased 3% for attached homes. Town homes and condos. Builders are pivoting, builders are trying to make the math work. They’re creating beautiful spaces, but they’re also really trying to work with buyers in terms of meeting them where they’re at when it comes to their budget constraint. You’re also seeing builders offering all types of incentives right now. Rate buy downs, offering to pay some of the closing costs. That’s helping, but unfortunately, maybe not enough to heal this housing market completely.

Kathy:
Then not to mention that the cost to borrow is getting harder and more expensive too.

Orphe:
That’s right.

Kathy:
That’s really going to be the solution, is bringing on new construction. We just saw the most recent report with actually permits seemed to be higher, but new starts were down. That seemed to be mostly in the multifamily. Because once again, to build a multifamily building and have the high cost of construction plus the high cost of debt, the numbers just aren’t really working out. All that new supply, it’s slowing down, it appears. What are your thoughts on that? Do you think builders are going to be able to get up and running?

Orphe:
No. I think we’re going to continue to see multifamily slow down. By 2022, we had the most multifamily construction in almost 40 years in terms of starts and permits. Now with rent growth cooling, apartment rent growth has cooled substantially, I think multifamily starts are going to continue to pull back. Now, the good news is there’s still some units, some projects under construction right now that are going to come on the market. Good news for renters. Maybe not as good for landlords. Landlords are still sitting in a very comfortable position. It’s just that they’re probably not going to be able to raise the rent as much as they had in the past couple of years.

Dave:
Well, that brings up a good point, Orphe. Do you think rent is at any risk of going down or just slowing growth?

Orphe:
It really depends on the units. If you look at the single-family units, rent growth is back to normal. If you look at apartments, rent growth has slowed, close to zero. It really depends on what kind of unit you have out there. I think a lot of families don’t have the down payment, have been priced out of the housing market or going to want to live in a town home or a single-family house. You’re not going to have as many people going into these apartments. I think that if you’re a landlord and you have some town homes and a bunch of town homes, condos, maybe spaces, places with a little bit of space, you’re probably going to do better than someone with an apartment.

Dave:
What regional differences are you seeing in the market in general? Are there areas where you think there is sufficient construction or new supply coming on board versus others that are particularly constrained?

Orphe:
I think new con, when you think about the Northeast, I think the Northeast just doesn’t build enough. You look at all of the Northeast region, historically just hasn’t built enough. The South on the other, the Midwest has been affordable for a while. Now, it’s actually getting pricier because everybody’s moving into the Midwest because it’s still relatively more affordable than other places. I love the South. I love the South because the South is building rapidly. I look at units in Nashville, for example. Nashville, population growth is there. I was recently there. I look around and there’s construction everywhere.
The South, I think is going to continue to carry the, I should say, carry the US economy. Why do I say that? I’m a firm believer that housing is the heartbeat of the US economy. If you look at everything that’s going on right now, the fact that the rent components of inflation are basically 40% of core inflation. The reason why policy is as restrictive as it is right now. The fact that affordability challenges prevent workers from moving to where the jobs are, the most productive jobs are. All of that, to me, it’s one of the reasons why I love studying housing. I really think that housing is the key to the health and growth of the US economy.

Kathy:
I love the South and Southeast too. Would you say from a demographic perspective, that’s still where people are moving or are they just moving everywhere? Midwest, Northeast?

Orphe:
Totally. You look at population growth, I don’t have the latest numbers, but the South is where people are moving. I think we’re going to continue to see that going forward. Now, of course, climate change is playing a little bit of a role. You have the Florida hurricanes and the issues with insurance costs rising in some parts of the country, or even insurers refusing to insure people anymore. I think that’s going to be a big headwind going forward for housing, for the US economy as a whole. Recent research shows that basically people now take climate risk into account, into consideration when they think about their moving decisions. I think that’s going to grow in importance for the housing market and the US economy.

Dave:
I’d love to dig in a little bit on what you said about the Midwest. Because you said people are moving there as well, and it’s relatively affordable. What is your read on the housing market in the Midwest in general?

Orphe:
I love a place like Columbus, Ohio, for example. You’ve got some big businesses in the Columbus region. I heard Intel is moving to Columbus. You’ve got healthcare industry, you’ve got Ohio State University, you have big government employer in Columbus. There are places like that and it’s still so much more affordable than everywhere else. I look at places like that and I think, “Oh, my gosh.” I think you have these places that, and maybe it’s not necessarily people moving there, but even because it’s still so affordable, the locals are just going to buy up or having an easier time keeping the housing market moving in those areas. That’s why I think the Midwest could use some more new con. Because unless it builds more, it’s going to become the rest of the country where things are just not going to be as affordable anymore. You look at our rent measures year over year, price increases. Price increases in the Midwest are maybe not as hot as they were during the pandemic boom, but pretty hot still compared to everywhere else.

Kathy:
Builders maybe aren’t as attracted to building in the Midwest where it’s needed because where’s the profit when it’s still pretty affordable there?

Orphe:
That’s right.

Dave:
Because Kathy, it’s not proportionally cheaper to build in the Midwest than it would be in the South.

Kathy:
Builders are in it for the profit. They’re going to go where they can get more money. That does leave an opportunity for those buying existing homes in the Midwest. Certainly, there’s going to be demand.

Orphe:
When we talk about barriers to building, you look at laws that prevent homeowners from building ADUs, for example. I like ADUs. I feel like ADU are a boost for both renters and homeowners. It raises your home value and at the same time, you’re providing a unit most of the time below market rent for potentially a low-income renter. I think the ability to build ADUs everywhere in the country should be the norm. In so many places, ADUs are still illegal or too difficult to build.

Kathy:
Often economists look at numbers and they analyze and rarely actually jump into the game. Before this call, you said, “Hey, I’m so excited. First of all, I’m a big fan of Dave.” I loved that, that you said that. Also, that you are a big fan of investing and buying rental property. With all the information you have, tell us what you’re doing. How are you getting into the game?

Orphe:
First of all, I think you need a good agent, an investor-friendly agent. That’s number one. You’ve got to find somebody who’s familiar with the area that you’re looking at. You have to have somebody, a good network, which is what I love about the BiggerPockets community. Good, strong network, builders, agents, mortgage professionals who understand investing in real estate. Some of the things that I’ve been doing lately is just going around. I used a couple of work trips. After my work trips, I get together with an agent and I go around the town that I’m interested in. I connect with people to try to find out where are the best deals, where are the areas that are up and coming where you could potentially own a place? Also, another piece of advice, and that’s for me, and maybe I got that from the BiggerPockets podcast, is because rates are so high right now, some people focus on cashflow.
I think shifting the focus on where are these appreciation markets? You may not be able to cashflow on day one, but you’re going to raise the rent 2 to 3% every year. Your home equity is going to continue to increase over time. Looking at these appreciation markets, I tell a lot of people, one thing I’ve said recently at another talk I gave is like, “Look, homeownership is how most Americans got to make and keep their wealth.” That’s just the way things have been done in this country. There’s huge tax advantages to being a homeowner or an investor, a real estate investor. There are so many ways to make the math work. Just getting in the game I think is really, really important. Again, best advice is find that community, find those people in the industry that can help you open the door for you.

Kathy:
I love that, boots on the street. Here’s an analyst who you’ve got access to data, but you still need that boots on the street information.

Orphe:
Absolutely. That’s what we tell everybody at Zillow. Zillow wants to support the agent community. We work with agents. I tell people, the first thing you need to do is get people on your side. You want an agent who knows the market really well, the market you’re interested in very well. Especially, in an environment where inventory is 40% below what it was in 2019. You don’t have a lot of homes on the market. You want a strong agent on your side. You want a strong loan officer on your side. You want somebody to help you figure out the math, figure out what it is that you can afford. You need those two people on your site.
Great tool that Zillow put out recently is a search by monthly cost calculator. What we do is we are allowing people to go ahead and search, put in what it is that they can afford on a monthly basis, and it will show them all of the available inventory that will fit within their budget. You put in a couple of assumptions here and there, like the current prevailing mortgage rates, et cetera, et cetera. Then you can start your search there rather than flying blind. Again, you cannot replace, you cannot replace. Even with all this technology, you cannot replace the agent, the community to help you understand the environment better.

Dave:
That’s great advice. Are you officially a landlord now? Are you a property owner?

Orphe:
Yeah. I have somebody I work with to help me with finding properties, buying properties. She’s also a property manager and she’s also built units in the Nashville area. I love the Nashville area. It’s a beautiful place and still growing tremendously.

Dave:
Well, congratulations. We’re going to maybe have to get you on the other podcast as a success story in a few years as your portfolio grows.

Orphe:
I’m a beginner and I’m learning from BiggerPockets, of course. Again, great resources. I’m a big fan.

Kathy:
I love that so much. I’m just curious, I still see so many people just in fear, but it comes across as hate on Threads and on social media and so forth. I posted an article that Warren Buffett was investing in new home builders. Because clearly, he thinks new supplies needed and that there’s not a lot of supply that’s going to come on just from foreclosures or whatever people think is going to happen. What do you say to people who are still just thinking that there’s a housing crash around the corner?

Orphe:
I’ve seen a big shock. I’ve seen a big slowdown in the labor market coming from something completely unexpected. I just don’t see it. I guess what I would say is, demand still exceeds supply. Demand fell, but supply fell even more. As long as demand exceeds supply, builders will not leave money on the table. They will build more efficiently. That’s what we saw in 2022. We saw builders actually more units being started offsite as opposed to onsite. We saw builders building fewer bedrooms, smaller units with fewer bedrooms. They built taller units. Leaning into higher density. Doing with what they have in order to build beautiful spaces that are not just what buyers want, but what buyers can afford. I think builders have the ability to make the math work for home buyers. Builders are really where this is going. We saw that. Existing home sales down, new home sales up.
Why are new home sales up? Because more units are coming on the market and builders are making the math work for home buyers. I have a lot of hope here that as long as demand exceeds supply, builders won’t leave money on the table, they will continue to build and we’re going to continue to see new home sales increasing. Again, lately, we saw the shock. Investors had to come to the realization that the US economy was more resilient than they had expected. That shock pushed mortgages higher, and that’s what slowing down housing starts a little bit. I think that as things adjust, so long as the demand is so resilient, which it is, mortgages are increasing because the consumer is still so strong. Then I think builders will continue to build, especially in the single-family space. I think that’s what, I hope at least, that’s fueling the enthusiasm for builders when you look at what Warren Buffets is doing.

Kathy:
Do you want a strong economy or low rates? I guess that’s the big question. Let’s go with strong economy.

Orphe:
Absolutely. A strong economy all day long. You want strong income growth, real income growth. You want strong stock market performance. Because those are the things that drive housing demand, propel housing demand forward. I

Dave:
I totally agree. If we can get back to a point where housing growth is more predictable, housing is more affordable without a huge crash in housing prices, that just seems like the ideal situation at this point, given where we are.

Orphe:
Totally.

Dave:
Well, Orphe, thank you so much for being here. This was very enlightening and also, a lot of fun. We appreciate it. If people want to follow your work at Zillow, where should they do that?

Orphe:
Zillow research. zillow.com/research is where all of our research is online. They can also find me on LinkedIn. I usually answer questions from people. I post quite a bit on my LinkedIn platform. I’m happy to talk to people, answer questions and discuss and learn really, from others where I may have blind spots about the future of the housing market and the US economy. I love engaging with people. It was a pleasure to be on the podcast. Thank you for having me.

Dave:
Thanks again. Well, that was just a good time.

Kathy:
Oh, my gosh.

Dave:
I had a lot of fun with that interview.

Kathy:
I just love that this senior economist at Zillow is a big fan of BiggerPockets and a huge fan of Dave Meyer.

Dave:
I still can’t believe anyone is a fan of me, which is very surprising. Clearly, you haven’t met me in person. That was awesome. I just love that he is so wise about the economy, knows everything there is to know, and is still is someone who is eager to get into investing right now and had such good advice. Maybe he watches the show, but he clearly understands what it takes to be an investor even in this type of environment.

Kathy:
I love it. I’ve interviewed so many economists and I’m always just shocked with the data that they have that they’re not just avid investors.

Dave:
That is so true. There’s so many of them who, I don’t know, maybe you don’t want to put all your eggs in one basket kind of thing. You study the housing market, you don’t want to be invested in it. On this show, we always talk about the opposite. Kathy, you told me you had less than half percent of your net worth in the stock market.

Kathy:
It’s bad.

Dave:
Or something like that.

Kathy:
It’s so bad.

Dave:
Clearly, you don’t subscribe for that belief.

Kathy:
I have diversification in markets. Property type.

Dave:
It’s good. One of my favorite things that Orphe said was that you need a great team, as you obviously know, Kathy. If you need to find a great investor-friendly agent or an investor-friendly loan officer, you can find either on BiggerPockets for free. Just go to biggerpockets.com/agent, if you need to meet an agent. Biggerpockets.com/lender, if you need to meet a lender. Just enter a little bit of information about yourself and for free, you’ll get matched with someone who knows how to work with investors. If that describes you, go check it out. Well, thank you so much. I appreciate your time and this was a lot of fun. Thank you all so much for listening. We hope you learned a lot and had much fun as Kathy and I did. We’ll see you for the next episode. On the Market was created by me, Dave Meyer and Kailyn Bennett. The show is produced by Kailyn 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.

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I’d like to tell you a couple of stories about some things that happened to me while travelling to speak at an event in Munich recently and why I think they are important, particularly when it comes to customer service and experience.

The first incident happened when it came time for me to check in for my return flight from Munich.

Now, my flight tickets were booked for me by my host. All the details used to book the flights were correct. I checked and made sure of that. But, when I tried to check in on the airline’s website, their mobile site and their app, I couldn’t.

Every attempt, regardless of the channel, was greeted with different variations of the same response……my passport number was either invalid or incorrect.

It isn’t and wasn’t.

Therefore, I wasn’t able to check in remotely and, so had to go to the airport early and try and check in using the self-service kiosks.

I did. And, hey presto, I was able to check in with no problems whatsoever.

This made no sense to me, particularly because I was able to check in just fine on the way out to Munich using the airline’s website, but I wasn’t able to do the same thing on the way back. Moreover, why did the self-service kiosk work, but the website and app didn’t?

The second incident happened while I was on the plane flying back.

I was scheduled to fly back to Edinburgh via Frankfurt on Thursday evening, and everything on the flight from Munich to Frankfurt was going well til the pilot came on the tannoy and told us that Frankfurt airport was temporarily closed due to some enlightened individual flying their drone in the vicinity of the airport.

Unfortunately, we didn’t have enough fuel on board to circle and wait til the airport reopened, so we diverted to Nuremberg airport to land, take on more fuel and await instructions. That all went relatively smoothly, and we were shortly down, refuelled and back in the air heading back to Frankfurt. But, our drone-imposed delay meant that I missed my connecting flight.

This was the same situation for many other passengers, and given that it was now late in the day, we were notified by the plane’s crew that those passengers who had missed their connecting flights would be met by airline staff at the gate when we had landed, and they would help us make arrangements regarding staying over and booking new flights the following day.

Despite the inconvenience, that all sounded good.

However, when we landed in Frankfurt, I switched on my phone and almost immediately received a number of SMS messages informing me that I had been automatically booked onto a new flight to Edinburgh the following morning and also offering me three options of hotels close to the airport that I could choose to stay in. I clicked on the link in one of the messages and picked a hotel. I was then sent a confirmation message, including details of where to catch the shuttle bus that would take me directly to the hotel.

That was a unexpected but very welcome surprise. It made the end of my night much easier and smoother than it could have been.

The problem was that the couple that were sitting next to me had also missed their connection. But, they received no electronic messages, SMS or otherwise, telling them what to do or what their options were. Instead, they faced the very unattractive option of having to go and queue with countless others to arrange new flights and accommodation at the airline’s service desk.

I should point out that I was just an ordinary customer returning from a work trip. My flights were all booked for me; they were standard economy flights, and were not attached to any airline loyalty programme. So, I was not entitled to any special treatment.

The couple sat next to me were in exactly the same situation as I was in. They had booked their flights directly through the same airline. And yet, they ended up having a very different experience to the one I was having.

That troubled me and made me wonder why that would be the case.

Unfortunately, there was nothing that I could do so I apologised for my good fortune and wished them well.

Reflecting on those two events in the following days, it struck me that they shared a common theme: lack of consistency.

In the first instance, there was no consistency across channels in my check-in experience.

Secondly, there was no consistency of messaging or treatment of customers who, on the face of it, were all the same, had missed their connection and were facing an enforced layover.

Now, I get that travel is complicated, and there are a lot of moving parts and many things that can go wrong.

But consistency is the bedrock of a positive customer experience. As human beings, we value and crave it because it promotes comfort, ease, familiarity, peace of mind, and trust.

Not only that, but it delivers business results, too. A piece of research by McKinsey found that removing inconsistencies across a customer’s journey and maximising satisfaction could help boost revenue by up to 15 percent while, at the same time, lowering the cost of serving customers by as much as 20 percent. They went on to say, “It may not seem sexy, but consistency is the secret ingredient to making customers happy.”

Therefore, while inconsistencies in the service and experience that brands deliver to customers may not be immediately obvious, it is in their interests to seek them out and remove them.

David:
This is the BiggerPockets Podcast show, 831. The question would be, are those three triplexes going to appreciate at the same level or better than the one in Toronto? Are you able to add value to those three triplexes? Are you going to be able to buy fixer-uppers, put some elbow grease into them, make them worth more? Are you going to be able to buy them below market value and buy some equity? What you need to do is look at your potential opportunities and say, “All right, if we have $500,000 in the US, where would we put it and how would we grow it?”

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Greene episode. And yes, I remembered to turn the light on green behind me. I love it whenever I remember. If you haven’t heard one of these shows, they’re very cool. We take questions from you, our listener base, and answer them directly for everyone to hear. One of the only real estate shows where the host, me, takes your questions directly, does my best to answer them, lets everybody else hear. Today’s show is pretty cool. We’ve got questions about how to compare properties in an apples-to-apples way. This will eliminate a lot of the confusion people have when it comes to making moves within their portfolio. When to hold them, when to fold them, and when to walk away.

David:
We talk about how to pay off loans that you took out to buy your last property. This is a question that comes up a lot when people are trying to figure out how to scale. Tackling insurance woes. I don’t know if that’s you, but odds are, if you’re a real estate investor, you’re having some issues with ensuring your properties as well. And how to figure out the return on investment when you are adding in depreciation. All that and more on today’s show.

David:
If you listen to today’s show and you love it, which you’re going to, there’s a chance for you to be a part of it. Head over to biggerpockets.com/david, where you can submit your question in video format or if you’re shy, in written format. And hopefully, we feature it on the show. And I’m going to be at the BiggerPockets Conference this weekend. It’ll be great to see you there. If you’re attending, make sure you come say hi. Give me some knuckles. Just like you show up to listen and learn here, you get to go the extra step and meet people just like you. If you’re not going to be there, I hope to see you next year.

David:
All right, before we get to our first question, a quick tip for all of you. In the past, you’ve heard a lot of us influencers, including myself, giving you strategies for how to leverage properties or take out loans to buy the next property. Though while there’s always been a component of risk involved in that strategy, the risk was significantly lower than it is today because rents and values were going up very fast. It was easier to get equity out of properties to pay off the notes that you took to get the next property. It became very common to use a loan to put the down payment on your second, third, fourth, fifth, whatever step you are in your portfolio. And I just want to say be careful with that right now.

David:
I’m not saying don’t do it, but I am saying that the risk is significantly higher in taking out loans to buy properties than it was in the past, and the reason is they’re not appreciating as fast as they were. Though real estate is still a very strong market and probably the best investment vehicle that I’m aware of, it just isn’t as good as it was in the past. So, maybe rethink taking out loans to buy properties and look into the good old-fashioned technique of making more money, working harder, being disciplined and saving up the down payment to put on future properties.

David:
All right, let’s get to our first question.

Karine:
Hi, David. My name is Karin Leung. I’m from Daytona Beach, Florida. And my question to you is how would you recommend that I convince my husband to sell our triplex in Canada and reinvest those funds in real estate in the US? So, I’m originally from Toronto and we bought a triplex, which has appreciated tremendously. I have no regrets about it. It’s done really, really great things for our net worth, but at this point, I’m kind of tired of doing taxes on both sides of the border. And I really want to work on building a real estate portfolio here in the US, especially now that I’ve already quit my W2 job. I’m just having trouble understanding how to do an apples-to-apples comparison of the opportunity cost of keeping the triplex, versus selling it and reinvesting the funds here, especially given the currency conversion with capital gains tax, but also, the strong appreciation in Toronto. So, any advice is appreciated. Thank you.

David:
Thank you, Karin. This is a pretty nuanced question, so let’s see what we can do to help you here. If I’m hearing you right, it sounds like the biggest motivation for wanting to do this is the work that it’s taking to do taxes in both countries, since you live here and you own the property there. I will admit, I don’t know all the nuances between Canadian real estate and taxes and American real estate and taxes. So, forgive me if I miss something that could play into the algorithm of this decision because of that fact. But I am working on a book that’s going to be coming out after Pillars of Wealth that will hopefully shine some light on situations like these. The book highlights the 10 ways that we make money in real estate. And I wrote it because I see so many people that only focus on one way, which is what I call natural cashflow.

David:
They just look at, “Well, what’s a property going to cashflow right when I buy it?” And that’s all they know how to analyze for. That’s the only way they even look at real estate making money. But once you’ve done this for a while, you would start to see that there’s ways it can make you or save you a lot of money in taxes. Like you said, you’ve grown huge equity buying this triplex in Toronto. There’s ways you can add value to properties or add cashflow to properties. There’s a lot of ways that we make money in real estate. And when you understand all 10, it really opens up your perspective on if I sell the triplex in Toronto, in what ways am I losing money? So, one would be you are losing the future equity of that property going up in value.

David:
So, according to the framework of the book, you’re probably going to lose some natural equity, which is what I call it when property values go up along with inflation, and some market appreciation equity, which is the type of equity that we gain when we buy in the right area, that goes up more than other areas around it. Toronto is notorious for having really, really strong equity growth, and cashflow won’t keep up with it. But if you’re adding value to the properties that you buy here, now you have an apples-to-apples comparison. So, let’s say you sell that triplex. I don’t think you mentioned how much equity you actually have, but let’s say you could buy three more triplexes with the equity that you take from the Toronto one. The question would be are those three triplexes going to appreciate at the same level or better than the one in Toronto? If they’re not going to appreciate at all or they’re not going to appreciate as quickly, that leads towards keeping the Toronto property. Or maybe they’re going to go up the same.

David:
Are you able to add value to those three triplexes? That’s forced equity. Are you going to be able to buy fixer-uppers, put some elbow grease into them, make them worth more? Now, there’s some money that you just made. Are you going to be able to increase the cashflow of those properties? Are you going to be able to buy them below market value and buy some equity? Or is it going to be the opposite? Are you have to pay more than the appraised value for those triplexes? What you need to do is look at your potential opportunities that you could take, say, the 500,000 of equity that you have and say, “All right, if we have $500,000 in the US, where would we put it and how would we grow it?” And this framework of the 10 different ways is really a way of our brains to understand what options we have.

David:
Part of it is cashflow. Yes, like, okay, well, I’m getting this much cashflow in Toronto. How much would I get if I bought in America? But another part of it would be, am I buying equity? Can I force equity? Can I buy a place where you live, in Daytona Beach, and buy it a little under market value and then add some square footage to it and add a unit to it? So, now you forced equity and you forced cashflow. You’re making more cashflow, maybe, than if you had kept a place in Toronto, and the area that you live in right now is growing as well. What if that’s growing at the same level as Toronto? You really want to try to turn as many of these decisions into apples-to-apples comparisons as you can because then it becomes clear what you’re doing. And the last piece would be if you sell in Toronto, you’re going to have some inefficiencies. You’re going to have closing costs, you’re going to have realtor commissions.

David:
So, you want to look at, all right, if we sell this property, how much is it going to cost me to sell it and can I make that money back or more of that money back buying into a new market? And the last piece of advice that I’ll give you is try to analyze for 10 or 20 years down the road. If you keep that triplex for another 10 years, are rents going to keep pace or is rent control in that area going to stop you from increasing cashflow? Is equity going to go nuts or is it kind of tapped out? You don’t see that prices could go much higher in that area? And then, compare it to wherever else you might invest. I just like South Florida, I think that’s a solid market right now. A lot of investors are scared of it because the prices are high, but my opinion is that they’re high for a reason. You have a lot of money moving into that area. I think it’s going to keep growing.

David:
So, keep an eye out for that book on the 10 ways that you make money in real estate. It’s a framework that will help you make these decisions, and then do a little bit of research and go back to your husband and say, “Hey, if we keep the property, here’s where we’re likely to be in 10 years. If we sell it and reinvest that money into three or four other properties, here’s where we’re likely to be in 10 years,” and that decision will become a little more clear.

David:
All right, so to recap, you want to make decisions like these apples-to-apples, not apples-to-oranges. Confusion happens when we are mixing up fruit. Look at potential opportunities before you make the decision on if you should sell what you have. You could buy or you can force equity as well as adding cashflow to the units. Look for opportunities like that before you make the decision on should I sell? First be looking at, well, what would I buy? Look at the cost to sell and how you can make back the inefficiencies when you exchange real estate. And then, take a long-term view. In 10 years, where will I be and which is the better path?

David:
All right, our next question comes from Luis. Luis asks, “Hi, David. I love the show and I love that you answer all our questions and your awesome analogies. My question is about midterm rentals. How do you form a contract for your midterm rentals? I don’t have an idea where to start or what I should write on the contract to sound professional to big corporations. Would you just hire a lawyer to form it or find an experienced property management company to handle the paperwork? I hope you get this and wish you the best. Also, can you say hi to Rob’s quaff for me?”

David:
I would love to. In fact, I started telling Rob that he needs to shake his head feather instead of shake his tail feather because that’s exactly what that quaff looks like. So, if you guys are hearing this, make sure you go to @robuilt on Instagram and tell him to shake that head feather. Maybe put a little Nelly song clip in there from YouTube.

David:
All right, this is advice. Good question. I can answer it pretty quickly here. I would use a property management company. I would use their form, since they’ve done this before. And then, they’re going to have you sign those forms and I would just keep them. And then, if you decide, “I don’t want to use property management after the first year,” whatever your agreement is, you’ve got a template that can answer the questions you’re asking me now, is how do I put that together? And you just adjust that template to make it say what you want it to say. I think this is a great business principle in general. You want to do something yourself? Great, that doesn’t mean that you need to be the one to go figure it all out. You want to learn how to snowboard? Great, hire an instructor, spend a little bit of money, learn how to snowboard a lot faster, and then you don’t need an instructor every single time.

David:
This works with buying real estate, using a real estate agent. This works with construction, hire a contractor or a handyman and watch what they’re doing. This works with property management. Use one, see what their system is, get all the forms that they’re using and then decide if you want to do it yourself. It will shorten your learning curve a ton. And if you are a BP Pro member, remember that there are landlord forms available for all 50 states that Pro members get access to for free. Now, they’re not going to be midterm rental specific forms, but they do work for traditional rentals. And if you want more information about how to manage a midterm rental check out BiggerPockets Podcast episode 728, where I interview Jesse Vazquez, who actually manages some of mine, and he shares his system for making connections with big corporations.

David:
Our next video comes from Kapono [inaudible 00:11:58].

Kapono:
Hello, David. This is Kapono from Honolulu, Hawaii, and I got a question for you. We used a HELOC loan and a 401(k) loan as a down payment, 25% down on investment property, SDR in Monument, Oregon. The value of the property is about 10K more than last year, so there’s not a lot of equity in the deal. We’d like to refinance, so that we can pull out the 25% down payment and pay off the 401(k) and HELOC loan. That way, it’ll cashflow better. Because right now, the 410(k) loan is about 700 a month and the HELOC loan is about 150 a month. How can we pay off the HELOC and 401(k) loan, get that money out of the deal so we can fund future deals, maybe a business loan, or got any input for us? Take care. Aloha.

David:
All right, thanks, Kapono. Well, congratulations on the midterm rental. I’m assuming that it’s performing well, so good on you there. If I understand your question correctly, you’re saying, “I took out loans as the down payment to buy the property and I want to pay those loans off so that it will cashflow better, but the property itself doesn’t have enough equity to do that because it’s only gone up $10,000 or so.” You probably don’t have options to use equity from the property that doesn’t exist to pay off these loans. And this is one of the reasons that on Seeing Greene, when people say, “Hey, should I take out a HELOC on X property to buy Y?” That I’ve cautioned people against doing that.

David:
And I’m not saying don’t do it, but I’m not recommending it as liberally as I did in the past when values of real estate were going up incredibly fast because of all the money that we were printing. That coupled with low rates and a craze in the market made it so that the risk was much lower to put yourself in debt to buy real estate. It’s not the same anymore. The risk to take on additional debt is much higher. Now, I don’t think you’ve got a quick answer. So, the way that I’m going to advise you is to check out Pillars of Wealth: How to Make, Save, and Invest Your Money to Achieve Financial Freedom, and look for some ways that you can create additional income and save additional income to pay that debt off.

David:
In the book I refer to different ways of paying off debt. One of them is the snowball method. So, you start by paying off that 401(k) loan. Then you take the money from the 401(k), I believe you said it was $700 a month. You put that towards paying off the HELOC. Once you get that one paid off, now you’re cashflowing more. That’s additional money that you could put towards saving for the next property or paying down debt. This becomes tricky when we want to scale fast and we want to scale fast because we’ve been listening to podcasts for years of people that said, “Just keep leveraging and leveraging and leveraging, and buying more.” That works great when equity growing in properties like fruit on trees, but when that stops, we have to go back into a much more realistic way of trying to build income. That’s why I wrote this book.

David:
There’s a lot of people that look for creative ways to buy real estate rather than blue collar ways that work no matter what. And that involves saving your money, living on a budget and looking for ways to make more. So, Kapono. There is a benefit to this in that you are now going to have an incentive to ask yourself, not just how do I create income and make money investing, but how do I do it in the other two pillars? Are there ways that you can start saving more so you have more money to put towards paying down this 401(k) loan? And are there ways that you can step out of your comfort zone and start making more money? I don’t know what you do for a living. I don’t know what skills you have, but now might be the time to start working on building more of those and becoming more productive and efficient because now you’ve got a carrot to chase, paying down these loans, so that you can make more money on your real estate, so that you can live a safer financial life overall.

David:
So, check out Pillars of Wealth. You can find it at biggerpockets.com/pillars, and then let me know what your thoughts are after reading that and re-analyzing your situation.

David:
All right, at this segment of the show, we’d like to go over comments that were left on YouTube from previous Seeing Greene episodes. So, if you’re listening to this, go check it out on YouTube and leave your comment there, and maybe I’ll read one of your comments on a future show. All right, the first comment comes from MJ9496. “Are there banks that won’t recall the HELOC after you find permanent financing for your real estate investment? When I used a HELOC to buy a property, the bank that put it into permanent financing made me close my HELOC.” Okay, I think I understand what you’re saying here. When you put a HELOC on a property, what you’re actually doing is you’re putting a second-position mortgage on the property. That’s what a HELOC is.

David:
Okay, so let’s say you’ve got a million-dollar property. I know that’s expensive, but the math will be easier for me. And you owe $500,000 on your mortgage. That’s your first position lien. Then, you take out a HELOC for $300,000 on that property. We tend to look at this like it’s just a loan, but it’s a loan against the equity in the property, because as a second position lien, they don’t get paid back until the first position is paid off, which means if there’s not a lot of equity, they won’t get paid back. That’s why they base the loan on the equity in the home, and that’s why we call it a home equity line of credit.

David:
Now, when you refinance that property, you pulled money out of it. So, you owed $500,000 on this million-dollar property, and you refinanced on a new note that was $800,000, which meant you paid off the first loan for 500, you received $800,000 on your new cash-out refi, and you are left with $300,000 yourself. Well, that 300,000 had to go to pay off the HELOC that you had on the property. So, now you’re left with no money theoretically. And I think that’s what you’re asking is, “Well, how could I have kept the HELOC on the property itself, so I didn’t have to pay it back, so I could have that $300,000 of money in the bank?”

David:
The problem is if the bank had let you keep the HELOC, you would’ve received $800,000 on the refi. You would’ve paid off $500,000. So, now there’s a note for $800,000 on the house and there’s a note for $300,000 on the HELOC. That’s a total of $1.1 million of debt on the house, but the property’s only worth a million. No bank’s ever going to let you borrow more than a property is worth, at least no responsible bank would, and that’s why you can’t keep the money. You’ve actually traded the HELOC money in for a new first position note, you got the money then, right? And I know that this may sound complicated as I’m trying to describe it with words. If it was written out on paper, it would make a lot more sense. But no, you can’t keep the HELOC when you go to refinance. You have to pay off the debt that that property is collateral for.

David:
Now, if you don’t refinance all the money, let’s say that you only borrowed 500,000, not the full 800,000 on this million-dollar property, then the new lender might let you keep the HELOC loan. They might say, “Okay, you can keep that 300,000 because you only borrowed 500.” It’s still at 80% total loan-to-value. Hope that helps you make sense. But if you want to get money out of a property, you’re going to have to pay off the notes that are attached to it.

David:
All right. On episode 819, we talked about the state of multifamily insurance where Andrew Cushman and I interviewed Robert Hamilton. And MG.1680 left a very insightful comment. They say, “I’m from California, insurance is so hard to get now. I built ADUs from detached garages. I didn’t expect that ADUs require a totally different policy from the main house.” Yeah, this is something a lot of people wouldn’t have heard until they did it, and it might’ve even been a time where they didn’t require a different policy for all we know. But insurance companies have looked harder at how they’re insuring homes, and they’ve made a lot of adjustments to the way that policies are issued. There is a big insurance problem going on in a lot of states. California is one of them, Florida’s another one. But really, across the country insurance premiums are skyrocketing, and I don’t know why more people aren’t talking about it.

David:
In fact, I hardly ever hear anyone talk about it other than me here on BiggerPockets. But when you are underwriting for your properties, insurance was almost an afterthought. For years, I’d be buying $150,000 property. My insurance was 30 bucks a month. If I could reduce it down to two thirds, it was still 20 bucks a month. I saved $10. It wasn’t really worth diving into the insurance element that much, but now it is. Some premiums are doubling, tripling or more in areas. If any of you know why this is happening, please leave me a comment on YouTube and let me know what your theories are as to why insurance is going so high, but it’s a problem. I started an insurance company, Full Guard Insurance, and we haven’t been able to underwrite policies because carriers are literally fleeing certain states. They will not underwrite insurance there. So, MG.1680, I’m sorry to hear this is going on, but no, you’re not alone. Investors everywhere are experiencing similar problems.

David:
All right, our next comment came from the Late Starters Guide, episode 820, which was a show all about how you can get started investing in real estate, even if you’re getting a late start. From MartinBeha9999. “Great episode. I really like that there is an expiration date on a milk carton, but we are not like that. If you spin that analogy on, we could also be exactly like that as indirectly, it is mentioned right afterwards.” Martin goes on to say that, “There might be an expiration date on the carton itself, but the milk inside is different. Milk may expire, but it turns into yogurt and then it turns into cheese. And boy, don’t we all love the cheese way more than the milk, even though it’s technically already expired twice?”

David:
Great perspective here. The strategies that work when you’re young may expire, but there are strategies that work better and approaches that work better when you are older that could be even more delicious than the young. And from TyJameson7404 says, “Epic panel and investment education,” with a whole bunch of happy emojis. Thanks for that. And our last comment comes from F-I-O-F, Fiof, who said, “You stay in a hotel with a box fan. Well, I guess that’s how you stay rich.” This was because I’ve recorded an episode from my hotel room, and I left the box fan on the counter. I’ll be the first to say I was shocked by the comments about this, how many people notice things like a fan, like that’s a bad thing. But people really didn’t like it that you could see the box fan.

David:
So, here’s my commitment to you, Seeing Greene and BiggerPockets listeners. The next time I record from a hotel, I will put much more effort and energy into the background of the show, which I thought had very little to do with the actual content that’s going to make you wealthy, but apparently means a whole lot more to people than what I thought. Thank you for being a fan. My only fans will be you, not the box fans in the background.

David:
If you would like to have your question read on Seeing Greene, just head over to biggerpockets.com/david where you can submit a video question or a written question, just like the one we’re about to hear. This comes from Shannon Lynch in St. Augustine, Florida.

Shannon:
Hi, David. I have a house hacking insurance liability issue I’m hoping you can help me with. I recently started renting my primary residence on Airbnb and Vrbo on weekends and holidays for extra income. I have not been able to find any umbrella policy, CPL coverage, or any type of rental-related liability coverage to help protect me and my home during the times that the house is being rented. It seems that part of the problem is because I vacate the property when it’s being rented, so I’m not physically present. I actually stay with family while renters are here. That seems to be causing issues with regards to my eligibility for any type of renter liability coverage. I gave much more detail in my email to you, as I’m trying to keep this video under 60 seconds. So, any guidance help you could provide, I would really appreciate it. And I’m in St. Augustine, Florida, insured by Citizens, oldest city in the nation. Thanks, David.

David:
All right. Thank you, Shannon. Now, I called in the insurance experts on this one, and I got a little bit of detailed feedback to share with everybody. So, first off, like I mentioned earlier, insurance is very difficult right now, especially where you live in Florida. In fact, it was referred to as a hellscape for insurance in general. It’s very possible that there is not a carrier that would ensure this risk in Florida, and if that’s the case, your only option is to start setting money aside to cover yourself in case something does go wrong. So, one piece of advice that I was giving is that you get an investment property insurance policy and then add personal property coverage and increase the liability with possibly a rider that you would occupy the home for a period of time in the year. But that will primarily be a renter’s policy.

David:
Once again, it’s a situation that insurance is really not built for and it will require either a combination of coverages or a super specialized insurance policy in a state where 90% of carriers do not offer quotes right now. Shannon, this might be something where you’re going to literally have to go uninsured for a period of time until we find carriers that will work in the state of Florida. We’re having the same thing happen in California within the real estate agent community where we have to serve our clients. It’s becoming a big thing where agents are asking everyone else, “Hey, I need this type of property insured. It’s in a high fire area,” or a high hurricane area where a lot of insurance providers have just thrown up their hands and said, “Hey, we don’t want to deal with this anymore.”

David:
I don’t know exactly why this is happening. Some of my research has revealed that there’s a lot of fraud that goes on in the state of Florida. I’ve heard that there’s a policy that if a homeowner makes a claim about a problem with their roof, that the insurance company has to replace the entire roof, not just fix the problem there was. So, people are frequently making claims just to get all new brand new roofs, which ultimately ends up creating higher premiums and higher costs for everyone. And if the premiums get too high, the carriers just back out completely and say, “I don’t want any part of this.” I wish I could give you a better answer. It turns out that this is a very difficult problem for a reason, so don’t feel bad about yourself because you didn’t have a solution. If I hear anything more, I will make sure to report it in the BiggerPockets Podcast.

David:
All right, our next question comes from Aaron Sardina in Maine. Aaron says, “What is the math behind basic depreciation and how it can be factored into tax savings and return on investment when analyzing a property in your portfolio? You don’t have to pay taxes on 3.6% of the purchase price each year, but maybe you only put 20% down.” Okay, that 3.6% is coming from, if you take 100% of the value of the property and you divide it by 27 and a half years, that’s 3.6% a year. But just to be clear here, you’re not getting 100% of the value of the property. You’re getting 100% of the value of the improvements on the land. The land is not calculated into this, Aaron.

David:
“But maybe you only put 20% down. So, are you getting to avoid taxes on 18% of your down payment, which would be 5 times 3.6? But then if you’re in the 20% tax bracket, you are saving 20% of the 18%, and so is that your annual dollar amount That can be added to your ROI? I feel like there could be a whole show on calculating the benefits of depreciation, and that’s a big piece that I’m struggling to understand when analyzing how our portfolio is performing. I’m wondering now that our portfolio has grown, if it would make sense to start buying some more expensive properties that don’t cashflow very well in order to offset our future tax liabilities. And I’m wondering what the ROI would be on a property that doesn’t cashflow and is only purchased for depreciation purposes. Is that a good use of money?”

David:
Well, Aaron, you’re asking a good question, even though it was a little bit confusing how it was worded there. And I can’t tell you what a good use of money is, I can just explain the benefits and the risks. The benefit is that, yes, if you’re a high-income earner, you could buy a property that breaks even, or even God forbid, loses $100 a month, so you lost $1,200 a year, but what if you save $20,000 in taxes? That actually is a good financial position. The risk is that you saved the money when you first did it, but now you’re bleeding money every month going into the future. So, the way that I think you should analyze this is if I saved the $20,000 I would’ve spent in taxes and I set it in a reserve account, how long would that last to offset how much I’d be losing every month if it was negative cashflow?

David:
You don’t want to buy a property that’s going to be negative cashflow forever. The only time I’d advise doing this is if it’s going to be negative cashflow for a period of time, but the rents are going to go up and the property’s going to stabilize to where, in the future, it does make you money. And the reason that we don’t have a calculator to help you analyze this is that not everybody makes the same amount of money. So, if you yourself, Aaron, get $50,000 of depreciation, but you make $500,000 a year, that’s a bigger savings to you than somebody who makes $50,000 a year. It’s tough to be able to put all this together.

David:
It also depends if you’re a full-time real estate professional. So, if you’re sheltering income that you made from real estate related activities or your W2, you get a much bigger tax benefit than if you’re just sheltering the money that you made from the income of the property. In general, what you’re describing here is talking about sheltering the rents from the property itself, and the down payment, the money that you put into it is a piece of your ROI, but there’s a lot more than that. There’s also going to be money that you put into improving the property. There’s going to be closing costs. It sounds like you’re trying to fit everything into a spreadsheet, and that’s where people get mixed up. Not everything in life, not everything in investing will actually fit into the spreadsheet.

David:
A better way to look at it would be to say, “Okay, if the property’s going to cashflow $5,000 a year and 3,000 of that is going to be covered by the depreciation of the property, I’m going to be taxed on $2,000. How much is my tax?” Then, you take that tax and you say, “All right, I only pay this much tax on $5,000,” and you compare that to how much tax you would’ve paid on $5,000 made any other way. Most of the time, real estate comes out on top because of this depreciation. Hope that helps.

David:
All right, that was our last question of the day, and I’m so glad that you joined me for Seeing Greene. I’d like to know what type of shows would you want to see in the future? What type of content would you like to see in the future? What type of questions do you want to see asked, and do you want to be the one asking that question? Head over to biggerpockets.com/david, where you can submit your video question or your written question. And hopefully, you get featured on one of these shows.

David:
Remember, if you like the podcast to go pull it up and leave me a review wherever you listen to your podcast. Those really help out a ton. And if you’re watching on YouTube, make sure you leave some comments for us to read on future shows. I’m David Greene. You can find me at DavidGreene24.com, spartanleague.com, or DavidGreene24 on wherever your favorite social media is. Go give me a follow and send me a DM. Let me know what you thought about today’s show. Thanks, everybody. If you’ve got a minute, check out another BiggerPockets video. And if not, I will see you next week.