November 2023

Dave:
Hey, everyone. Welcome to On the Market. I’m joined today by James Dainard for the start of short-term rental week. I feel like we need echoey music for that, or some sort of big announcement for our first ever short-term rental week. I’ve talked about this with Henry, James. Are you a short-term rental guy? Staying in one, not investing in them. Do you like staying in short-term rentals? Do you prefer hotels?

James:
I have no problem staying in them. I’m definitely good staying with them, but I go with whatever’s cheapest is what I go with, especially when I’m traveling for work. Now, if I’m with my wife and kids, they like hotels, the amenities trump it all, and so we do hotels on vacation. But I will do them. If I can find them and they’re cheaper in hotels, I will definitely rent them.

Dave:
That is something that we’ll get into throughout this week, but it’s interesting to see how Airbnb and hotel prices compare to one another. Because I think Airbnb started as sort of this cheaper option, but both have gotten so expensive that you never know, depending on what market you’re in, which is actually a better deal.

James:
Yeah, I feel like for me, I look on both and they seem like they’re about the same. But one thing I have learned, if you plan ahead, it’s way cheaper than hotels. If you’re doing it last minute, it ends up being flush. So, whatever I can do to save a dollar is what I’m chasing.

Dave:
Yes, of course. Well, this week we have two excellent episodes for you to talk about short-term rentals. Today, James and I are going to be interviewing Jesse Stein, who is the global head of real estate for Airbnb. So, we’re going to be talking about what’s going on in the short-term rental market. And Jesse’s also going to share with us a couple of strategies, new developments, new products at Airbnb that I think are really interesting, particularly for investors and particularly for people who are just trying to get into short-term rental investing right now. They have a new product line that we’re going to get into.
So, that’s what we got for you today. Interview with Jesse Stein. And then, on Friday for our second episode this week we are bringing on Vacasa, which if you don’t know, is one of the largest property management firms for short-term rental industry. And they’re going to be sharing with us some research about the best markets to invest in for short-term rentals. So, we’ll be diving into market data on Friday. So, hopefully these two shows combined will help you understand the state of the short-term rental industry and where the market is going in 2024, and what opportunities might exist. James, are you ready?

James:
I’m ready. I really do love this concept we’re jumping into. It’s save money, reinvest it. It’s a great way to do it.

Dave:
All right. Well, with no further ado then let’s bring on Jesse Stein, Airbnb’s global head of real estate.
Jesse, welcome to On the Market. Thank you for being here.

Jesse:
Thank you guys for having me. I look forward to the conversation.

Dave:
Well, we’re excited about it. So, Jesse, you have a very cool title. You are the global head of real estate for Airbnb. Can you tell us what that means?

Jesse:
Yeah, it’s a great question. I mean, what does the global head of real estate for an asset-like company actually do? Because we don’t own any real estate.

Dave:
I didn’t want to say that, but yes, that’s true.

Jesse:
But I joined Airbnb from the private equity community. I used to lead investments for a private equity company, investing in hotels. I did that for roughly a decade. I was really brought on to be the conduit between the institutional real estate community and Airbnb. Airbnb has grown from zero to 7 million listings without ever partnering or creating opportunities to partner with large institutional real estate investors. So, I was really brought on to create a team, to come up with new verticals, to bring the institutional real estate community to partner with Airbnb. And that’s kind of been my role for the last couple of years. And my team consists of software engineers, policy individuals, marketing individuals, as well as a go-to-market team. So, across all assets, I’m basically a general manager within Airbnb in the real estate area.

Dave:
Very cool.

James:
That’s pretty vast. That’s the bigger money in the Airbnb space. Hey Jesse, real quick. So, you came from the hotel business. How similar is the hotel business to the Airbnb or is it a totally different game when you’re looking at operating those?

Jesse:
I would say I have different roles in each different organization. And when I was in the hotel space, I was in charge of investments, so I was really running around the country, looking for opportunities to buy real estate, renovate real estate, stabilize real estate, and sell real estate. So, it was very detail-oriented on a micro market. So, for your consumers, if they’re looking to buy a single family home or they’re looking to buy a duplex, I was basically doing that on behalf of institutional investors, mostly college endowments. So, at Airbnb it’s a little bit different. Airbnb, the overall offering, we are a travel company at this point in time. We are starting to blend into more of a living company, but the majority of our business is travel, which is akin to hotels. But over 50% of our nights booked offer for stays over seven nights at a time across Airbnb.
In our hotels, the hotels we owned, I don’t think we ever had a stay over seven nights in any of our hotels. We were an urban hotel company. The name was Kimpton Hotels. And it was mostly corporate consumers staying for two or three nights, and then we got the leisure consumer on the weekends. At Airbnb, it’s really a different use case for travel and that’s kind of accelerated with COVID. So, similar dynamics and also different, because now I’m overseeing a team which is growing supply, where previously I was leading a team to actually make investments and dispose of real estate, and make returns for our investors.

Dave:
Jesse, I do want to jump into what you and your team are doing, but given the name of the show and the focus of the show, I want to just take a step back before we talk about what’s next, and just talk about what’s going on in the short-term rental industry. Is there anything Airbnb and you and your team have uncovered that you think our audience, a lot of whom are short-term rental investors, should know about market trends?

Jesse:
From a macro perspective, the marketplace has never been stronger. In Q2 of 2023, yes, that’s the year we’re in, I lose track of time sometimes Q2 of 2023, we grew our host base more than we’ve ever grown our host base from a nominal perspective and consumers booked more nights and experiences than ever before. So, the marketplace is strong and we are continuing to grow. So, I would say that the consumer now may have less disposable income than they did historically, but they’re choosing to spend that income on travel and experiences, where during COVID it was more on Home Depot, renovating a house, so on and so forth. Today, the consumer’s strong. The consumer is traveling on Airbnb. And our hosts are looking at the opportunity to host to keep up with the cost of living and the cost of inflation, and it’s really a healthy marketplace at this point in time.

James:
And I think that’s fairly interesting right now because I think a lot of people’s perception is that it’s not right, because the transactions have slowed down, travel’s slowed down a little bit. And a lot of that’s sometimes just all mental where people are like, “Okay, this is going bad. I’m going to shift out,” and it kind of becomes this trend or in the headlines. They put the rainy day out on all these investments. Have you seen many hosts pull out recently because of changes? Even though it’s strong, I feel like we’ve been seeing some operators selling off their properties over the last six, 12 months, wanting to get out of the space, which really contradicts… If it’s strong, you’d almost want to keep your money there with the inflation and the other economic factors going on.

Jesse:
Yeah, when I speak to it, I speak more on a global perspective. And at the end of the day, more hosts were added in Q2 2023 than ever before from a global perspective. Now, consumer trends are shifting. So, consumers are starting to travel to different places. So, what may have been a good investment a couple of years ago may not look like a good investment today because consumers are looking to go to different places. So, I would say from a macro perspective, the marketplace is really strong, consumers are doing really well, hosts are doing really well. From a micro perspective, it just depends on where your investment may be. And the old rule of real estate, location, location, location, it really, really matters. So, some individuals may have bought homes in X, Y, Z market, and that specific market may be down a little bit year over year, but other markets are up year over year. So, from a macro perspective, the marketplace is strong. And obviously, there’s pockets that are doing better than others.

James:
Do you feel like right now since travel’s increased a lot globally that the US local market is slowing down compared to… You’re seeing some markets are doing better than others. Is it more of an international presence that’s still growing, or is it also locally still staying strong? I’ve definitely noticed when I travel overseas, the planes are packed and everything’s packed, but then when I travel throughout the US, it’s actually a little bit less busy in a lot of cities.

Jesse:
Oh, really? That’s interesting because every time I fly, James, there’s never a seat left on the plane. I don’t know about you. Domestic or international, I always somehow end up in 42B on Southwest because I’m in section C, to be honest. So, we are seeing it strong across the board. And as we announced in our last earnings call, the US is still growing. So, it may be growing in different pockets than it was during COVID, but from a macro perspective in the US, it is still growing. And obviously, some other places were later to open up after COVID, international, for example. People feeling more comfortable going cross border. So, that is doing really well. But I would say domestic is also doing well.

Dave:
Jesse, there are some pundits, me, who loudly believed this year that there is going to be risk of oversupply in the short-term rental market just because we saw it, like you said, really rapid acceleration of owners. And I get that total revenue is probably up, but on a per property basis, are there declines in occupancy rates?

Jesse:
What I really would like to speak about is more so Airbnb-friendly apartments and where we’re seeing occupancy in adoption of that space. So, when it comes to broader Airbnb, I think we’ve kind of disclosed in our earnings call how we’re doing, and I’ll stick to that data and I would say it’s strong. Obviously, some markets may be oversupplied. But where there’s supply, usually demand follows. So, that’s the greatest thing about the marketplace, supply and demand are kind of in balance to a certain degree. And obviously, during times of compression, things are more occupied than not.
But when it comes to Airbnb-friendly marketplaces, and maybe we can shift to that conversation, it’s really providing an opportunity for renters that haven’t historically had the opportunity to host to get their feet wet. I was looking at BiggerPockets today, actually, and one of the questions I kept on seeing is, “How do I get started? How do I get started? How do I get started? How do I get started?” And Airbnb’s never made it easier to get started in your journey and Airbnb-friendly apartments is really part of that opportunity to grow because you can now host your primary home part-time on Airbnb.

Dave:
Okay, cool. Well, so that is something we did want to talk about. So, can you just explain this to us? This is Airbnb-friendly apartments, and this is for primary residences exclusively? Is it a different product offering?

Jesse:
It’s a totally different product offering to a certain degree. It’s really getting back to our roots of Airbnb. When Brian Chesky started Airbnb in 2008, he started it to really pay his rent. Airbnb has been so successful, Airbnb has now basically been banned in 45 million rentals across the US. That’s the overall rental stock in the US. So, we wanted to create a product that allowed consumers, like Brian, when he was 28, to get started in their journey to keep up with the cost of living. So, we partnered with some of the largest landlords in the country, Greystar, Equity Residential, UDR, household names, Starwood Capital, Brookfield, so on and so forth. And we now market their buildings to our consumers for 12 month unfurnished rentals.
So, now consumers can go to Airbnb, find their next 12-month unfurnished rental that embraces and encourages them to host part-time. And once they move in, then they can start their hosting journey. And we’ve built all the tools to ensure it’s actually a primary residence, not an individual looking to rent a place and run a dedicated Airbnb in there. It’s really meant for the individual trying to keep up with the cost of living and get their feet wet in their investment journey. When I was 28 years old, when I was 35 years old, I lived in an apartment and I was struggling to pay my bills. If I had the opportunity to Airbnb it when I was traveling, or when there was a event in town, I could have paid the majority of my rent for that month by hosting one weekend. So, it’s a really new opportunity and it’s really catered to primary home individuals that want to host part-time.

Dave:
Okay. So, I just want to make sure I understand this. So, normal Airbnb people can and still do rent out their primary residence, but this new product is basically if you’re signing a new lease, you can sign a lease with a landlord who has maybe pre-approved you or is inclined to allow you to sublet or allow short-term rentals within your unit right from the get-go. Is that correct?

Jesse:
Yeah, exactly. So, it’s really creating a quality across asset classes. Most homeowners have the ability to Airbnb or sublet their home if they own it. If you rent it, most leases have a do-not-sublet clause in them. And there’s 45 million rentals in the US, which is 35% of the overall housing stock. So, if you’re a renter today, for the most part, you don’t have the same opportunity to capitalize on the benefits of Airbnb that a homeowner would. And so, this product is really catered toward the renter that wants the ability to make some extra income when they travel, which is the same as a homeowner today that has that opportunity. So, it’s really opening up and democratizing the idea of Airbnb and rentals that exist today in owned assets.

James:
When people are looking at this and they’re looking at this kind of product, have you seen any developers or just specific buildings really marketing for this to that they’re friendly… I kind of hear this as it’s for owner-occupieds, so a lot of owner-occupied are people living there as their primary, as a renter, they don’t want tenants coming in and out around them, but I guess if it’s one big community that’s all doing it, they’re way more open to it. Is this entire buildings or is this just more located throughout specific cities?

Jesse:
So, high level, all of our partners are starting to market the ability to Airbnb your home part-time on their websites. So, if you go to Airbnbfriendly.com, and you were to look at one of our partners’ buildings, there’s a link to their website. So, if you look at an Equity Residential building in Denver called the Theo, they are actively marketing the ability to Airbnb it part-time. With that being said, not everybody in the building does it. It only works for a certain percentage of the building. So, what we’re really, really focused on is ensuring that the people that are not doing it are having just as good of as an experience in the community as the people that are doing it.
And in a certain building, maybe 5% or 10% or 15% of the residents host on Airbnb. We need to make sure it’s a great experience for the other 95%, 90% or 85% of residents that do not do it. So, there are no dedicated buildings per se that 100% of the people are doing it. It’s just providing an amenity to the residents that live there that they’re now allowed to do it if they so choose.

Dave:
Jesse, this is a very interesting concept, very clever. And I want to ask you more about it, but I did want to ask you about if and how you ensure that it’s actually the person’s primary residence. Because you’ve probably heard of this concept of short-term rental arbitrage, where people sign leases and then are subletting out, and are doing this all over the place. Is there any controls against that?

Jesse:
Yeah, 100%. So, our partners enforce night limits. So, let’s take San Francisco at the moment. Currently, you’re allowed to host your primary home 90 nights a year in San Francisco. So, our landlords enforce those night limits on the residence, and it’s virtually impossible to have a rental arbitrage business if you’re only occupied 90 nights a year. It can help really offset the cost of living by hosting 90 nights a year, but the opportunity is really for the landlords to enforce these night limits on the residents to ensure individuals are not doing the rental arbitrage game that you mentioned, Dave.

Dave:
Smart.

Jesse:
The economics just don’t prove out.

Dave:
Yeah. Awesome. So, who should consider doing this? Obviously, people who want to supplement their income, to offset some of their rent payments to, like you said, begin your journey. If you’re interested in becoming a short-term rental investor, this sounds like a good first step. But what makes a successful host? If people are not currently short-term rental hosts, who should consider this line of business?

Jesse:
It’s interesting. I always thought it was for the 28-year-old that was traveling a lot and living a flexible lifestyle. We have a single mother of three in one of our buildings that is hosting on the weekends every so often to help fund her vacations with her kids. So, the use cases are up and down the spectrum. From the consumers of Bigger podcast, you’re thinking about getting into the real estate investing game in the STR space, there’s no better way to test it than doing it on your primary home. So, that’s obviously one use case. Another use case is somebody that travels for work a lot, or if you live in a market like Denver and there’s a big convention in town, you can go up to the mountains and pay for the entire trip. So, it’s across the board the use cases of individuals that do this. From the single mother of three, we have a active duty military in San Diego, she’s hosting to pay off her student loans and actually use the money to create a new business. She created a fitness studio for herself and she’s now doing it.
So, it’s up and down the spectrum. And to get started, it’s actually really, really easy. Airbnb has launched a bunch of new features and tools called Airbnb Setup and other things. And you can easily get started in these buildings. And our partners in these buildings help the residents get started with hosting. And you kind of learn what works and doesn’t work because not every market is the same. Consumers want different things for different markets. So, getting started is number one and using Airbnb Setup to do that. And then, you learn, you iterate, and things come up over time depending on the demand use of your unit.

James:
This is a very interesting concept and I’ve heard this touched on over the years, but it’s kind of like the pre-house hack. What a lot of people do, especially with the short-term rental, was they were optimizing these first-time home buyer loans. They can get into a property with 3%, 3.5% down, or sometimes even zero down State Farm programs. So, that allowed a lot of access for investors or new people to become investors over the last four years. But then, as rates have gone up, the mortgage payment won’t work, and I know the cost of rent’s a lot lower in major metro cities than the cost of purchase.
And so, are you seeing more of a trend right now because A, traditional short-term rentals just don’t mathematically work out? And B, I mean if you think about the average condo, let’s say, in Seattle is going to be like 600 grand, your down payment on that even with a low down is going to be $18,000 to $25,000, whereas you can probably rent that with first last and deposit and get into the deal for 6,000, which will increase the cash on cash return. Is that where you’re seeing some demand for this jump up because you just can’t traditionally do it with the FHA loan in a lot of metro markets right now?

Jesse:
I would say demand is coming from a lot of sources. Right now, it is basically cheaper to rent in almost every market in the US than it is to buy because of where interest rates are and down payments. And so, this is an opportunity for renters that aren’t able to buy yet to try to save some incremental money to get them into their home in the future. We’ve had a few of our hosts that started this way, and then they use the extra money they earned to actually buy a home, that they also host by the way.
The house hack, it’s 100%. I wish this was around in 2010 when I was struggling to save money for a down payment on a home. It was so hard. And I was blessed with low interest rate environment when I bought a home in 2015. It’s so hard to save money for a down payment, and this is a great way to kind of house hack that. And you can use the money to potentially get into that ownership, but that is definitely helping adoption of the program is the imbalances right now in the cost to own versus the cost to rent across the US.

Dave:
All right. Jesse, I only have one short-term rental, but the way I can mentally deal with it is that it’s not my stuff in the house. So, how do people deal with this? If it’s their primary residence and they’re living there, how do people protect themselves or rent out something that they’re also living in?

Jesse:
Yeah, that’s always a question we get. So, from a host perspective, a lot of our hosts store their special belongings, whatever that may be. And our partners have storage lockers, so our partners do offer storage lockers in a lot of buildings to the hosts, or our hosts lock a closet. So, small simple things can really enhance your security. And if something were to go wrong, which by the way, UDR is a large partner of ours [inaudible 00:23:36]. They’ve had over 10,000 nights in their portfolio so far it with zero issues. So, it’s kind of like the boogeyman in the closet kind of concern. We do have protections if for, on some forsaken reasons, something happens, like AirCover, where we protect our hosts in situations like that.

Dave:
Jesse, I mean it sounds like a very interesting strategy and hopefully it creates mutual benefit between guests and hosts. How much of this is a reaction to some of the regulations around short-term rentals that are mostly focusing on allowing primary residence rentals and in many places, not everywhere, obviously, disallowing or discouraging the investor driven short-term rental, taking up all the supply, I guess?

Jesse:
I wouldn’t say it’s reactive. I would say it’s proactive. Where regulation seems to be going with some of this primary home thing that is beneficial to the program to a certain degree, because that’s the nuance of the program, but really the integrity of it with or without regulation because our partners still have enforced night limits in markets that do not have night limits, they still do that, is really to create affordability for renters in today’s market. Because even though it’s cheaper to rent than it is to buy, it’s still really expensive to rent and that really has to do with just the lack of overall housing and we just need to build more housing. But it is really helping these renters afford their homes, and we’re really focused on that at Airbnb.

James:
And Dave, sometimes you just got to use the cashflow to buy new things. You’re saving a ton of money-

Dave:
That’s honestly what I do. I’m just like, “This is not my house. This is purely an investment. I’m just going to take the cashflow and I’m going to buy a new shovel because someone decided they wanted my snow shovel.” I don’t know.

James:
Jesse, as you guys are expanding this out, what regions are you guys really focusing on, or is there certain areas where this doesn’t really make sense? Every asset class, it can work in every market, but sometimes you avoid different markets. Like flipping, for me, I avoid different types of markets just because of certain things that impact the deal, and I could do it there, but it’s just not worth it. Do you feel this is going to be more affordable housing areas or more mostly focused on those metro expensive areas where that $100,000 a year to $150,000 a year renter is trying to subsidize it, right? Because back in the day, if you were making 100 grand a year in college, or at least when I was in college, I thought I was rich. Now you need four roommates. And so, do you see this more growing in the metro areas or every type of region?

Jesse:
You know what’s really interesting about that is it is totally different than house flipping? And I want to make that clear because house flipping is so localized. Here, it really does work everywhere. I think the question is what is success? And so, we have buildings in Addison, Texas, which is suburban Dallas, and there’s roughly 30 hosts in one of these buildings, and they’re making pretty good money relative to their rent. We also have buildings right in the heart of the Gaslamp District in San Diego, roughly the same amount of hosts. But what’s interesting is rents also kind of ebb and flow based on urban location, city center, suburban, so on and so forth. So, the percentage of money one can make is kind of relative to the location they’re in. So, it really works everywhere. We have hosts in Addison, Texas. We have hosts in Downtown Miami. We have hosts in Downtown San Francisco and we have hosts in Cleveland. So, it’s across the board. And it’s not really a flip, if you will. It’s trying to make incremental income to go buy a shovel, like Dave’s doing for his Airbnb.

James:
Yeah, I was more talking about different asset classes. Sometimes it’s just not worth it as much. I’m a firm believer, Airbnb’s location, location, location. If you’re going to start a short-term rental business in itself, it should be in an area that has demand or a reason people are coming there, not just to do it to do it. Because we have seen that over the last four years, people just went and bought a property because they could. But this is also not just subsidizing your rental, this is an investment strategy. Build up cashflow so you can build up some extra cash to go buy your next house. I think it’s a great pre-step for house hacking, but depending on how fast you want to move and depending on what you rate as success, that’s going to tell you where to go.
Because if you want to get out of the renter pool, but you want to be in the best possible area you want to focus on… If I was a tenant right now going, “Hey, I want to subsidize this and buy in two years,” from your guys’ analytics is being in those metro, it doesn’t matter or is it more like those metro areas are more attractive because rents are a little bit lower versus purchasing power, or there’s a bigger gap between there they can cashflow a little bit better and save more money versus affordable… A lot of the affordable markets, cost of rent and cost a buyer are very similar, so there’s not as much spread. Whereas I’m looking as the rent is the spread on this.

Jesse:
What’s actually really interesting is we’ve built a custom calculator for this program. So, we’ve kind of outlined what rents are for each one of the buildings and what you could make by hosting part-time. So, a consumer can go to a market… Because a consumer might not move from Dallas to Miami to potentially make an extra 500 bucks a month or whatever it may be, just making up locations. A consumer lives where a consumer lives. So, he or she can go to Airbnb-friendly apartments and look at our custom calculator and then kind of determine which building is right for them. So, obviously if you live next to American Airlines Arena in Dallas, you’ll probably make more money than you do in Addison, Texas, but then you have to take into account the cost of the rent in that building as well, which may be higher.
So, this custom calculator really helps our consumers understand what the underlying 12-month unfurnished rent is and what they could potentially make by hosting on Airbnb. So, I would just recommend that consumers of the show go and play with it and kind of see what the data is telling them because the data doesn’t lie. The data is based on historical demand in the market and we’re pulling in the actual rents from our partners PMS feeds. So, it’s really interesting. I mean personally… It also depends on their lifestyle. Do they want to be closer to the family? Do they want to be next to the convention center, X, Y, z?

Dave:
Awesome. Jesse, well, thank you for telling us all about this. I have to ask, with your very broad job, is there anything else interesting coming down the pike that our audience should know about in addition to the Airbnb-friendly apartments?

Jesse:
There’s definitely other verticals we’re looking at. We did our first ever Airbnb-branded condominium in Miami with The Related Group, where consumers can go and buy a condo, a second home, and Airbnb it so they know upfront that this condominium or vacation rental allows Airbnb and encourages Airbnb. So, that’s something we’ve already done. We’ve done a couple of those developments in Miami. And there’s a lot more under the hood that we’re going to announce that can’t announce it right now as a public company, but we are definitely expanding the concept. And Dave, hopefully I can come back on the show and we could talk about what we announced.

Dave:
All right, fine. We’re going to drip it out slowly. And so=

Jesse:
I apologize.

Dave:
… we would love to have you back, but we won’t force you into any SEC violations.

Jesse:
Thank you. My comms team really appreciates that, Dave.

Dave:
Yes. So, Jesse, is there somewhere people should find out about it? Do you just go on Airbnb and you can look for these places like you look for a traditional apartment?

Jesse:
You can go on Airbnb and you can go to the host landing page and find Airbnb-friendly apartments. The easiest way to find it is honestly just a Google Airbnb-friendly apartments, and it pops up at the top of the page and you can learn more. If you’re a consumer, you can look for your next rental that allows you to host. Or if you’re a building owner, you can get in contact with my team through Airbnb-friendly apartments, and we can discuss how it could benefit your program.

Dave:
All right. Jesse Stein, thank you so much for joining us.

Jesse:
Thank you.

Dave:
All right. Well, big thanks to Jesse. James, I have some questions for you. But before that, I just want to clarify. I asked Jesse a question about occupancy rates because it’s something I always want to know, and he explained after we were done recording that he can’t tell us that because literally today, within a few hours of recording this, is Airbnb’s investor relations call. So, he can’t disclose that information before the investor call. It is an SEC rule, so that’s why he was not able to answer that question. We will put a link to the transcript to Airbnb’s earnings call, so you can check that out. I will just tell you that anecdotally, we do see some evidence that occupancy per unit is down, but revenue is still doing pretty well. So, it’ll be interesting to see what Airbnb records this week.
James, what do you think of this concept of Airbnb-friendly apartments?

James:
I really do like it because as we go through different phases, because we’ve been hearing for the last 12, 18 months, I think I’ve probably said it, that Airbnb is really tough to get done right now with the rates as high as they are and the pricing has not came down. Median home prices creeping up, rates are up, it’s hard to do. So, this is just a way for if you want to get going and saving on your housing costs, that traditional house hacking method is you can get in and have a lower payment. The lower payment, which is your rent, is going to allow you to actually cashflow it to make it work. So, I do like it. It’s about adjusting how you do the investment to continue for it to grow. Airbnb is not dying, it’s just being changed right now as rates are too high.

Dave:
I think it’s a great idea because a lot of the STR regulations right now are in response to really high rent and the lack of affordable housing and housing shortage. And just to be clear, even with the increase of supply in the market, Airbnbs and short-term rentals make up about 1% of housing units in the United States. So, that obviously impacts people and some markets more than other, but it’s not dominating the housing market. But this seems like a really interesting and good balance. It helps maintain supply of Airbnbs, which obviously there’s demand for. People want to stay at Airbnbs, so having them go away altogether wouldn’t be good because that would probably just sense hotel rates skyrocketing. But at the same time, you’re not taking a potential rental away from someone else. So, this just seems like a really interesting way to adapt to ongoing regulation changes.

James:
Yeah, and people want more affordability in their lives, and so giving them that option of bringing… I mean credit card debts are at all times high. Everybody’s still spending a lot and things are crunching them. So, I think this is a great concept and it’s a matter of making sure… I will be curious to see what big buildings will think of this. Is there going to be more regulation sweeping through because tenants will complain?

Dave:
That’s interesting. Yeah, so you’re in a building with 100 units. If 20 or 30 people do this, are the 70 people who aren’t doing it going to be annoyed by all the short-term rentals?

James:
Will that building have a higher vacancy rate, which then they’re going to say, “No…” But there’s always a season. It could work for 24 months and then things change, then you got to pivot again.

Dave:
I just think this would work really well, and I have very limited short-term rental experience, just one. But a big problem in a lot of vacation towns is the lack of affordable housing. For people who work in the tourism industry, for example, this could work really well for places like that. So, I bet it’ll catch on. But yeah, I guess it will be a market-by-market, building-by-building experiment.

James:
Well, you know what, Dave? I have my first short-term rental coming live. I haven’t had one in seven, eight years. Mine’s coming live in two weeks.

Dave:
I was going to say, I was going to ask you, because you own a real estate business in every strategy, in every sector of real estate investing, but I’ve never heard you talk about short-term rental.

James:
It’s a lot more work, and I believe in it… It’s kind of like when people are like, “I don’t want to flip because it’s a lot of work.” We have a lot of doors, and so we just manage it in a traditional way. But there is a purpose. I’m going to be doing it. I bought a duplex in Bellevue. I travel a lot. I’ll probably be in there 12 nights a month, and the other nights I’m renting out. I mean, hotels are all-time highs right now there, and I think I can get 200, 300 bucks a night.

Dave:
Wait, dude, you can’t do this. You can’t do it. This was the only part of real estate investing where I was more experienced than you because I had one and you had zero. Now, if you get one, we’re going to be even and I have nothing on you.

James:
But that means I still have to operate it in an effective way, so I need to be coached first.

Dave:
All right. Well, good luck with that. I mean, it sounds great. Obviously, you’re traveling back and forth. It’s a perfect way to do it.
All right. Well, thank you all so much for listening. Hopefully this was helpful. And remember to join us again for our second episode this week where we’re going to be joined by Vacasa to talk about some of the best markets to buy a short-term rental in for the following year 2024. James, thank you for joining us, and thank you all for listening. We’ll see you next time.
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. And we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Hong Kong Monetary Authority chief executive Eddie Yue says the risks rising from negative equity in Hong Kong are “manageable” despite the higher for longer interest rate environment.

David:
This is the BiggerPockets Podcast show, 840. What’s going on everyone? It is me, David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast on the planet for a long time, bringing you what you need to know about real estate to stay up to speed, current, and in the know of what’s going on in this market, which is changing now, more than ever.
In today’s episode, Rob Abasolo and I will be handling it, Seeing Greene style. Now, normally there’s a green light behind me. That’s not the case right now because I am traveling to promote Pillars of Wealth, but that doesn’t stop us from bringing you educational, powerful and free real estate content.
In today’s show, ooh, you’re going to love it. We get into sequencing the work for rehab projects. What is the order that you should do when it comes to getting pre-approved, to getting bids on construction, ratting offers, moving forward with the escrow and strategies you can use to put that in your favor. When cashflow is or isn’t appropriate, this is a really good discussion about the complicated question of, is it okay to cashflow negatively if I’m making a lot of money, and what needs to go into that question?
With the aging population, is real estate a risk long-term? I thought that was a really good discussion that we had as well. Rob, what are the factors that make real estate go up or down in value, and what will that be like in the future if the population of America stops increasing like other first world countries have? And can I own real estate while still renting where I live?
All that and more on today’s show. But before we get to our first question, today’s quick tip is simple. Get your team together, build your core four, and start your journey and BiggerPockets can help. We’ve got an agent finder, which you can find at biggerpockets.com/agents. I’m one of the people on there, so go look for me as well. You can find an agent in your area and ask them if they can help you put your core four together. If they know what that means, it means they probably read my book and you’re off to a good start. Rob, anything you want to say before we get to our first question?

Rob:
This is very fun. This is a very fun format. I can’t believe I’ve been missing out on this for two years. Thank you for allowing me to come on this. I want to do this more. Have me on.

David:
First time you’ve ever put me and fun in the same sentence.

Rob:
Hey, there’s a first time for everything and there’s a second time for everything, too. So if you hold out, maybe I’ll say it again.

David:
The only time people really talk about me being fun is when I’m talking about fundamentals, which people think are fundamentally boring.

Rob:
That’s the name of your 11th book that you’re currently writing for 2027, right? All right, let’s get into the show.

David:
Sean, welcome to the show. What’s on your mind today?

Sean:
Thanks, David. First of all, I’d like to say thank you for taking the time to have me on and answering my question. You and Rob have been instrumental in my decision to get into real estate, so it’s really quite surreal being here and talking to you both live, so thank you.

Rob:
Oh, hey, happy to do it.

Sean:
A bit of relevant background. My cousin and I have teamed up as partners. He is an investment banker living in New York City and I’m a corporate lawyer living in Boston. We have leaned into the concept of long distance real estate investing, given our expensive local markets. We own a couple of properties and want to continue building our portfolio. And we’re looking to enhance our returns on future investments by employing the BRRRR strategy and we are working with an investor focused realtor in an out-of-state market we have selected.
Our skill sets are great on the transactional and analytical sides, but we have little to no experience in renovation and construction, and any BRRRR investment would be made from afar. So we do not have the ability to see properties firsthand, which leads me to my question. Could you explain the sequencing of arriving at a renovation estimate for a BRRRR? Do we try to get contractors to the property and provide bids before we submit our offer? This would provide surety for our offer, but I can see it being hard to send contractors out for every property we want to offer on, particularly if you want to get bids from multiple contractors.
Alternatively, if we cannot get contractors to the property before making an offer, what should we do as inexperienced rehabbers to inform our renovation estimate without a bid from a contractor? We found that given the increasingly slim margins in the current market, picking the wrong end of estimate range could mean the difference between a good deal and a bad one. Any help is appreciated. Thank you.

Rob:
Sure, yeah, yeah. So David, I’m going to let you jump in on this one first. You actually answered this not too long ago because I had this question, if you recall, where I was like, “Well, do we get the offer accepted first and then get the contractor? Or are we trying to get the contractor first and then get the offer accepted?” So you provided some pretty good insight. Can you let us know what your process is?

David:
I love these questions. Why can’t everyone ask me a question that’s simple as, what’s the system or the sequencing? It’s always like, “What do I do because I don’t know what the market’s going to do?” And you’re like, “Well, great. Now I have to try to dive into that ocean of confusion.” This is really easy. Let me ask you before I answer that, Sean. Did you have chat GPT help you formulate that question?

Sean:
No, I did not. I’ve listened to your takes on AI and I agree with you. I wrote that myself.

David:
So you are AI. Dude, that was really good. Anytime someone has to ask you if AI helped you write it, that’s saying that you sound too good as a human to be believed. Are you married?

Sean:
I’m married. I think it’s the corporate lawyer in me coming out.

David:
Yeah, that’s not surprising either. Tell your wife that she married the pinnacle of masculine perfection, at least when it comes to the written word. She’s a very lucky woman. All right. So to simplify this, you’re asking here, do I get a bid from a contractor before I write my offer or do I do it after? Correct?

Sean:
Yes.

David:
Okay. You want to get a range from your contractor before you write the offer, but you’re not going to get it locked until after. And the reason being is if you try to do it what feels like perfect, which is what most people do. I want the bid before I write the offer because I got to get everything lined up before I squeeze the trigger. Someone else will buy it.
I mean, I’ve broken a lot of hearts in the real estate space by moving in and buying that thing right before somebody else had their offer written because they were taking too long. And then when you’re in contract, you get the information and if it doesn’t work out, you just back out of the contract. Really, I forget sometimes that people don’t realize how a real estate transaction works because I’m a real estate agent and so I do this all the time.
Writing an offer is an incredibly low commitment. I just want to say this again. It is like getting on a first date. It doesn’t really mean a whole lot. If the person smells like fettuccine Alfredo, if they’ve got a lot of nose hair, if there’s something weird going on, you just don’t go back for a second date and you’re out the price of an Applebee’s dinner or whatever it is, right?
People look at it like asking for a date is asking for someone’s hand in marriage and you’re going to have to pay a lot of money to reserve a wedding venue. That’s more like when you wave the contingencies. Two things to keep in mind that on execution, will make this strategy easier.
One, include a contingency so you can back out of the deal. If you can’t put a very, very low earnest money deposit in there, right? As low as you can get, because worst case scenario, if there’s no contingencies and it was a hot deal and it all falls apart, you’re [inaudible 00:07:12] out whatever your earnest money was. You’re not out the potential tens of thousands of dollars or more than it could be if the deal goes wrong and you feel like you’re compelled to close on it.
So my formula is to have a home, to get the property that I see, have someone go out there and make a video. If I like it, get my contractor to go walk it and the contractor shouldn’t need you to tell them every tiny little detail that’s done. They should look at it and say, “Yeah, it’s going to need paint. We’re going to need to frame up a bedroom right here.” What’s your plan for this thing? And I give them an overall vision and they will say, “Hey, it’s going to be somewhere between 25 and 50 grand, depending what you want done.” Okay.
That should be enough for you to make the decision on where to write the offer. You write the offer now during your inspection period, you have a home inspector go out there and a contractor go out there at the same time. This is probably the part that Rob was liking when I was talking about it before. The inspector talks to the contractor and is like, “Did you see that outlet right there is not working? Make sure you put that in your scope of work that you’re going to need to replace that electrical outlet or the panel over here isn’t working or that window is completely done. It’s going to need to be replaced.” And so that goes into the scope of work of the contractor.
At the same time that the contractor can say to the home inspector, “That’s weird. Why isn’t this faucet working?” And he can kind of look at the plumbing. The two of them work together to figure this out. Then they come back with a menu, right? This isn’t long distance real estate investing. Here’s all the work that needs to get done and here’s how much each of these things cost. Not, do the work equals 50 grand.
It needs to be itemized, which I’m sure you as a corporate lawyer, can understand because you guys are always trying to get us to just give you a retainer and waste all of our money and we’re trying to keep… I’m just kidding. It’s not really that bad. So once you’ve got that, now you can decide if you need to drop the price of the home, move forward with closing, or back out of the deal completely. What do you think?

Sean:
Yeah, that works. And so you answered one of my follow-up questions was, if you’ve estimated incorrectly, how do you fix that after the fact, where you say, “Okay. It looks like I just replaced a couple outlets,” but you get in there and you realize you need to totally rewire the place or “Hey, the floor’s going to be five grand.” “No, it’s actually going to be 20 because it’s rotted underneath and you need to rip it up.” You’re saying you’re going to use the inspection contingency that you have to say, “Hey, look. This isn’t what I thought it was. I need to pay you 20,000 less because these cost a lot more.”

David:
Here’s the magic words. Yes, you got the right idea. The execution of it, don’t say, “This isn’t what I thought it was.” Say, “Hey, this wasn’t disclosed.” That’s my favorite thing to say when I’m an agent, “Hey seller. Unfortunately, this part wasn’t disclosed when we made the offer. You didn’t tell us that the electrical’s not working and the roof is leaking and the walls are bad and it’s got rodents. You didn’t tell us. So in order for us to fix these things, we have to make these changes.”
And the listing agent will come back with a, “But why did you write the offer if you weren’t going to close?” “Well, we write the offer assuming that the only stuff wrong with the house is what you told me. You didn’t tell me about all the baggage that it’s coming with. So now, here’s what is going to be worth to us.” And it puts you in a position where they can’t question your motives, if you’re a bad person.
They can’t look at it and say, “Oh, you were never intending to pay that price in the first place.” And also, as a side note, when I’m listing a house, that’s one of the reasons that you disclose everything that you know is wrong with it ahead of time, so that the buyers can’t come back and ask for a discount because I can always, as a listing agent go back and say, “No, you knew about this. The disclosures were given to you. We even did an inspection report before you wrote your offer. You saw all of this. My seller is not going to grant any of those credits.”

Sean:
That’s very helpful. And the other follow-up question I had is, do you have any advice for getting to a sufficiently specific range of an estimate for purposes of submitting an offer? Right, so that’s an estimate that I’ll be creating and I need to go in and say, “Okay, floor is between five and 10 grand and doing the kitchen will be between 10 and 15.”
A lot of times I’ve spoken with people and they say, “Well, every job’s different. And I can’t really give you a good [inaudible 00:11:14], right? I need to see it.” Or even worse. I know you like the places that have five photographs and the [inaudible 00:11:23] MLS that look like they’re taken on a potato and those are the ones that you like to go after because they’re the value add.
Well, that’s really tough for me to estimate a rehab on those five potato pictures and I only see half of the house and I don’t see a floor plan. So can you give some advice on that as well?

David:
Have you read Long-Distance Real Estate Investing? I feel like you haven’t read it yet.

Sean:
Yeah. It’s right over my shoulder, as is BRRRR.

David:
It’s in the queue? Okay.

Sean:
No, no, I have read it and that’s the basis. So I’m trying to [inaudible 00:11:53] Long-Distance Real Estate Investing and BRRRR.

David:
You’re right. It’s impossible to judge by the pictures. The pictures are just like, we’re going to go back to online dating. Okay? I can’t get a good feel for what this person’s like based on their pictures, but I can get enough of a feel… By the way, I don’t do online dating. So if you guys out there see a profile that looks like me, it’s a catfish, don’t fall for it. It’s happened before.

Rob:
Yeah, they got me pretty good with that one.

David:
That’s how Rob and I met, actually. Funny story about that on the next episode of BiggerRomance. You can know enough from the pictures to know if you want to go on a date, but the date’s going to tell you what you need to know. Okay? Those pictures will tell you if you want to look into it deeper. You still need to send someone to the property with a phone to take a video of the house.
Now, if your contractor won’t do it, have the person get really good video and then send that to the contractor. And if they’re like, “Well, every job’s different, I need to look at it.” I’ll say, “Okay. Assume that we have to replace all of these cabinets and all of these appliances, and put a new floor in here. Give me a range from here to here of what you think it’ll cost.”
Now that helps because they’re worried you’re going to blame them if their number’s too high, but they’re also worried that if they go too low, they could have made more money off of you. That’s why they don’t want to give you the hard and fast answer, but if you could give them the video and say, “Give me a range,” they’re much more likely to say, “Okay, well, it could be anywhere from here to here.”
I’m not afraid of telling him something that I can’t actually back up. And then you still have negotiating power to go to the contractor and say, “Well, it needs to be on the lower end because you’re talking to other people.” So they got to still respect you a little bit. Does that make sense?

Sean:
Yes, that’s very helpful. Thank you.

David:
And ideally, you want your real estate agent to be the one that takes these videos for you. One of the reasons that you can use a buyer’s agent. If you just can’t find a way to do that, the listing agent usually doesn’t want to go and take video because that’s going to be helping you in the negotiations over them. So I’ve used people that are in the area from the BiggerPockets forums, if I needed a video taken. You just have to figure out some way to get in the door.

Sean:
Makes sense. Thank you.

David:
All right. Anything you want to add, Rob?

Rob:
No. I mean, there’s no room for someone like me at the top. You answered it perfectly.

David:
Rob, keeping his dollars per word really, really high right now. This is expert work.

Rob:
Awesome, Sean. Thanks for the question. If people want to connect with you on the internet, where can they do that?

Sean:
Yeah, sure. I’m on BiggerPockets. Sean Linnehan, S-E-A-N-L-I-N-N-E-H-A-N, and also on Instagram. Same name. Sean Linnehan, @seanlinnehan.

Rob:
Awesome, man. Thank you.

Sean:
Thank you.

David:
Thank you, Sean GPT.

Sean:
Thanks, David.

David:
All right. Thank you Sean for that incredibly accurate and well-worded statement [inaudible 00:14:27] that you gave there. Thanks for being on Seeing Greene. I thought that was pretty good. Rob, what’d you think about that?

Rob:
It was good, man. Honestly, I think it’s the first time we’ve ever heard sequencing on the show. So there’s a first for everything and now, the sequence of events that we move on to.

David:
That’s right.

Rob:
Favorite… Comments?

David:
Yes. We’re getting into the section of the show where we are going to share comments that you all have left on previous episodes on YouTube. If you would like to be featured on Seeing Greene, we’d love to have you. Head over to biggerpockets.com/david, where you can submit your question.
And remember, if you’re listening to this on YouTube, in addition to leaving a comment, please like the video, subscribe to the channel, and share the video with someone you love.
All right, our first comment comes from Jevon Music Group. I have grown to love my half hour drive to church every Sunday. Thanks to your videos, I learn so much each week. That’s right. Seeing Greene, making even church fun. Glad to hear that. Next one comes from a Davidovich. I love saying names like that.

Rob:
I think it’s a David Ovich.

David:
You’re probably right. I’m doing it completely wrong.

Rob:
Is it possible that you’ve read so many of these over the years that you’ve mispronounced their handle so much that they actually never knew that it was their own comment that they left?

David:
Oh, and so they were thinking that someone else left something brilliant, but it turns out it was them?

Rob:
They have no idea their question was answered. They’re like, “Oh, that guy has a name that sounds kind of like mine. That’s cool.”

David:
Yeah, because it’s much more likely that his name is David Ovich than it is Davidovich. All right, moving on here.

Rob:
[inaudible 00:15:55].

David:
Mr. David Ovich. Thanks for regularly creating great free content. I found a lot of useful information just by listening to you guys. Also, I love the tools that are made available with the pro membership. Yep, that pro membership is probably the best deal in real estate. Couple hundred bucks a year and you get unlimited use of calculators, discounts on all kinds of stuff-

Rob:
Like leases-

David:
Yep.

Rob:
To every state or something.

David:
My team uses the rent estimator tool constantly for our clients that are considering buying houses all across the country and want to know what the rent would be. So if you’re not already a pro member, definitely keep listening to the show and occasionally, you’ll get a discount. Next up from [inaudible 00:16:33]. Thank you David, for all that you do. Your podcast share immense knowledge and provide courage to take the steps necessary. I wish I knew about BiggerPockets during COVID time. I could have started early, but better than not buying ever. Thank you for your guidance. Oh, that’s sweet. That’s so sweet.

Rob:
That is really nice, isn’t it?

David:
Yeah, and look at all the exclamation points that are in there and smiley faces.

Rob:
That’s how you know that they meant it because they didn’t even do the emoticon version. They did the actual… Or they didn’t do the emoji version. They did the emoticon version. Yeah, exactly.

David:
Emoticon.

Rob:
They’re OG.

David:
Is that what happens when a transformer becomes an emoji?

Rob:
Yeah. I think an emoticon is the original emoji before it was like the yellow circles.

David:
Look at Rob with the history lesson for all of us.

Rob:
All right. That’s right.

David:
Moving on to our last comment from BigMike8981. David knows how to tell you the truth and give you the tough conversation that nobody wants to have with you. Bravo, my man. That is probably my favorite comment that we had today because that’s exactly what I strive to do.
And let me tell you, it is not fun to be the person that says, it is going to be difficult. You could get hurt and this is very tough right now when all of the competition is like, “Nah, just go in and buy it and you’ll figure it out later. Jump out of the plane and build your parachute on the way down.”
Rob, do you have any insight you want to add on any conversations we’ve had that you’re like, “That’s not what I wanted to hear?” Or any advice for me of how I can make the medicine go down a little smoother?

Rob:
Well, I invested a lot of money recently into bell bottoms, thinking that they were going to come back in and I was committed to them and you’re like, “Hey, can I sit down with you for a second? You can’t wear those to be BP Con. They’re not working. Stop trying to make them work.” And it hurt and I’ve since, donated them to Goodwill, but I’m honestly, in retrospect, I’m really happy. Thank you.

David:
I’m glad to hear that. That’s what real friends do. They tell each other what they need to hear, not what they want to hear. I recently reached out to you because you’re doing so good with your fitness and your diet and I was like, “Hey, I need to hear what diet you’re on” and your reply was, “You already know what to do. Eat more meat and workout. Leave me alone. I’m working.” So it’s not just me that gives helpful advice. Thank you, Rob, for absolutely nothing.

Rob:
It was a little nicer than that. It was a little, but see, I said that because you’ve done it before. I was like, “Look, you know, we all know. Wake up early, work out, eat healthy, repeat.” That’s the book that I’m going to write. Wake up early. It’s like-

David:
Make an acronym out of that, yeah. I’ll let you do the words while I’m reading the next part here and then you can come back and call it the [inaudible 00:19:02] method or whatever it’s going to be.

Rob:
Yeah.

David:
All right. Let’s get back to the questions from you, our audience and see what we can do to help you build wealth in your journey. Rob, I hear we have an update from you live on scene with the new method. What is it going to be?

Rob:
[inaudible 00:19:19]. Wake up early, eat healthy, and repeat. [inaudible 00:19:24].

David:
The [inaudible 00:19:24] Method. Whoop, there it is. All right. Our next question comes from Idan in LA.

Idan:
Hi, David. My name is Idan from Los Angeles and my question for you is, if I’m purchasing a rental property in a good growing area, area that should appreciate very well… For example, in North Carolina, I have a few neighborhoods that I know that they’re very good. If I’m purchasing a property that after all the expenses, I’m running the calculations through the BiggerPocket’s tools, after all the repair, CapEx, vacancies, mortgage, insurance, taxes, after everything, I’m negative cashflow 300, 400, 500 because of the interest today and the high prices. This is a very good area and I’m buying it in market prices not below too much.
Obviously, I’m trying to find a creative way to add value, but if I’m negative cashflow $300, $400 and I can afford it. I’m okay with it. I don’t need the cashflow right now and I’m counting on appreciation in the future. Does that make sense to do something like that, if I can afford it? And it’s important to me to be in a very good location. Any help about it will help. Thank you so much for everything you do for us. Thank you.

David:
All right. Idan bringing the most controversial question in all of real estate investing right to our doorstep. This is probably going to go viral as half of the country will love us and half will hate us. Welcome to the controversial firing, Rob. What do you have to say?

Rob:
Let me rephrase the question. Should I buy a property and lose money on it, if I believe that it will appreciate like crazy over the next few years? My answer is no. Because the thing is, when you are accepting of a loss… Listen, and again, I’m not going to fault anyone who does this, but given the current economic climate, I would say this. Losing two or 300 or 400 or 500, I don’t know what he said, dollars every single month, feels okay when you’re making a lot of money and that you feel like you can absorb it.
But it doesn’t feel so good when your other income sources deplete or whenever you lose your job or whatever happens in the next couple of years affects your financial situation. That two or $300 a month starts burning a hole in your pocket. I would not bet on appreciation in 2023 as your savior in this situation. Had you told me that in 2019, 2020, 2021, absolutely. But I think we got to be a little bit more conservative with that. I’m fine with breaking even, I will say that. Losing money, I’m out. What about you?

David:
All right. This is a little more nuanced than it sounds because it’s not as simple as, can I lose two or 300 a month if I might make more money somewhere else? I have lost money in real estate, especially lately with how things have gone, but it has never been from the cashflow not being enough to two or $300 a month. It’s been from city regulations, construction projects going wrong, permits not being given, work being done incorrectly that needs to be redone. There’s lots of ways you can lose money in real estate outside of just the cashflow not being there. But that doesn’t get discussed.
We typically only talk about, well, the calculator said that my cashflow would be this much and it was less than that. I’m losing money. The reason that I am not as worried about this particular gentleman losing two to $300 a month is because in general, that is the amount of money that somebody can make picking up an extra shift at a restaurant once a month or picking up a coffee shop shift twice a month. It’s not something that’s going to cause you to actually lose a property.
I’m more worried about a tenant destroying it, things going wrong with the property that you don’t have the money to fix. Getting into the short-term rental game without reserves to where you can’t keep up with what your competition is doing and slowly falling further and further behind and not having the option to rent it out, in a traditional sense. Those big things are much scarier to me than the possibility that he might lose a little bit of money.
I’d also say that if he’s banking on appreciation and there’s no reason to buy it, that’s speculation, okay? But if he’s buying it in an incredibly good area with constricted supply, increasing demand, where it is reasonable to think that rents are going to go up and you’re going to get a very good tenant, that actually makes the investment safer, even though it’s losing a little bit of money.
So we didn’t get quite enough information to give this particular gentleman a take on if he should buy the property or not. I would’ve needed to know the actual city, the ability that he could create revenue in other ways. Is there a value add to this property where he could add an [inaudible 00:23:45] to it?

Rob:
He said that there wasn’t really a value add and he said that he believed in the city itself. So I think it’s like… Assuming that those two things are correct, it’s a great appreciating city, he can’t add value, I think that’s sort of the particular situation here.

David:
Well, my take would be the X factor is, the money you’re making now isn’t necessarily the money you’re going to make in the future. Okay? So he says in the note here that he is a contractor making very good money in Los Angeles. Now, if that was going to continue, yeah, it’s okay to lose two or $300 a month for the short term because you’re going to make money later. The difficulty becomes if you lose your job and you can’t make that money. But then again, is two or $300 a month going to actually kill you, right?
You could probably cancel a couple cable subscriptions or eat out a little bit less. You could probably take that money out of the budget you have. That’s not the most dangerous thing. The most dangerous thing would be if your tenant doesn’t pay rent at all. We get focused on the numbers aren’t working in the calculator. We don’t think about what if the tenant just stops paying and it takes four or five months to evict them. That is so much more significant than $200 a month as far as how much money you’ll actually lose. Rob, does that weigh into your advice on the location of the property and the quality of the tenant?

Rob:
Kind of. I guess, what you’re saying is absolutely true. If the tenant doesn’t pay, they’re not only losing the two or 300 bucks, they’re losing the actual rent, too.

David:
Like 2000 or $3,000 a month and that, over three or four months-

Rob:
That’s significant.

David:
Yeah, that’s way more money than a couple hundred bucks.

Rob:
But I think that extra $300 on top of the payment… Sorry, the tenant not paying, is a lot more painful in that moment than the 300. And that’s why I’m like… Listen, I’m an aggressive investor, all right? I’m not the kind of person that makes very conservative purchases or investments, but I don’t… No matter how aggressive I am, rule number one is to never lose money. There are some situations where I have and there are some situations where the tax benefits make it to where I actually save a lot of money, but in general, if I could break even, that’s at least requirement number one. I think that’s always a fair way to approach it, no matter what, especially in 2023. But I could be swayed.

David:
It’s a hot topic, right? I don’t know if there isn’t a right or wrong answer here. It really does depend on the person and their financial position, right?

Rob:
No, no. There’s a right. It’s what I said. No, I’m just kidding. What if I just came in like guns blazing? Listen to me. I agree. There’s no wrong or right. There’s just what’s right for you.

David:
Yeah, because you could always just put more money down and the property cashflow is [inaudible 00:26:12], but the question becomes like, “Okay, now it’s cash flowing a hundred dollars a month instead of losing $200 a month,” but you had to put a hundred thousand dollars into the property. Is that a better use of your money than putting that same a hundred thousand dollars in reserves and you can get by if it doesn’t cash as much, right?

Rob:
Totally. Someone asked me yesterday if they were like, “Hey, can I just ask. Is it stupid for me to put half down on this house?” And I was like, “Look, maybe a year or two ago I would’ve been like, Hey, don’t do that. And right now, I’m kind of like, I mean, that’s fine. Honestly.” Could you make more money somewhere else? Yes. But could you be a lot happier if your mortgage payment was a lot lower and you didn’t have to worry about a high mortgage payment every month during whatever’s coming in 2023, 2024? I’m good with it. Honestly.

David:
So would you rather have the theoretical a hundred dollars a month of cashflow instead of $200 a month of losing money, but you had to put $75,000 down to get it? Is that 75 grand in reserve safer or is the cash flowing element safer? That’s the question that I think people need to be asking. And if you had to put 75 grand down to make it cashflow, most people would say, “Well, then I don’t want to do it.” Now you’re not buying real estate at all, and that’s kind of the circles that we’re going back and forth in right now, right?
So let us know in the comments. What do you think about this negative cashflow? What’s the right perspective to take? What would you have told Idan in this question and let us know. Should we do an entire show on the cashflow conundrum to cashflow or not to cashflow? That is the question.

Rob:
Thy question.

David:
Thank you.

Rob:
I believe.

David:
Or the question, as you would often say. Rob wants me to change my Instagram name to thedavidgreene24.

Rob:
Yeah. T-H-E-E.

David:
Yes. The dork game is strong with this one.

Rob:
Our next question comes from Josh in Baton Rouge.

David:
I always think of Gambit from X-Men whenever I hear Baton Rouge. Let me know in the comments, if any of you think of Gambit from X-Men every time you hear of Baton Rouge.

Rob:
What is that? X-men? I don’t remember that from my childhood.

David:
Oh, really? A dork like you, doesn’t remember [inaudible 00:28:01] X-Men. Not likely. The comments are going to be exploding right now with Cap. No way. All right. Josh here has a couple of short-term rentals in vacation markets in Arkansas and Florida, as well as a long-term rental in Louisiana. What are your thoughts on how the supply and demand for real estate will change in the coming decades as the baby boomer generation ages?
Some fear that this will result in a drastic enough change in population, that there’ll be an oversupply of many goods, including real estate, causing prices to fall rather than the fairly steady increase we’re all used to. I strongly believe that real estate will ultimately survive economic cycles, but I fear the effects of this on the medium term outlook for investors like myself in our 30s and 40s.
Do you think this is a legitimate concern or are the other forces at place strong enough to counter this effect? Thank you for all you do and thank you for all your resources. Wonderful question. I love this, Rob.

Rob:
Yeah, it’s good.

David:
What goes through your head? What’s your perspective here?

Rob:
Yeah, I was nervous you’d asked me first. I guess I would say that ultimately, real estate has existed since the beginning of time. People build houses and they sold them, lived in them, rented them. I don’t know when real estate truly became prevalent, but I mean, it’s been around for, in its current form, I would say at least a hundred years, right?
So it has survived many things. It has survived the Great Depression. It has survived World Wars, it has survived recessions. It has survived big booms in the economy. I would say yes, there’s a legitimate concern in some capacity, but I don’t think it’s anything that would really destroy the real estate market in any significant way.

David:
Well done. That’s a great answer for being unprepared for how you were going to… Did [inaudible 00:29:43] got that? Did you just start talking and then figure out where you wanted to go when you were halfway through it?

Rob:
Exactly. Well, I have a list of answers that are always kind of laminated by me that have just been waiting to use over the last year and a half since being on the show. So, that was it.

David:
In case of emergency, break glass and pull out laminated-

Rob:
Exactly.

David:
That was pretty good.

Rob:
Exactly.

David:
Yeah. I’ve actually thought a very similar thought, maybe six, seven years ago where I was like, you overthink things, right? I was buying in Phoenix. Are they going to run out of water? Should I not be buying in Phoenix? And then you start Googling Phoenix water supply and you get all these crazy conspiracy things about what the government’s doing to stop the water. It’s really hard to get information that you can rely on.
This is another one because while everything you said is true, Rob, it is also true. I don’t know in the last a hundred years… Please don’t quote me on this, I’m not sure. I don’t believe that population growth has ever been a concern. It’s now starting to become a concern in many developed countries, population growth is not only slowing, it’s going the wrong way. Okay?

Rob:
Definitely.

David:
So it’s one thing to consider here. If we don’t have as many babies, we’re not going to need as many houses. And I think I love his last point. Is this a legitimate concern or are other forces at play strong enough to counter this effect? Because that is the question. Okay, there’s opposing forces here, pros and cons, and you’re trying to weigh which one of them is stronger. So I think population decreasing is a legit concern and threat to real estate wealth.
Now let’s talk about the other side of that. First off, if we just stopped having babies completely right now, no babies were born. It would be like 25 years before that would act, that lag would hit us because you’ve got all the one and two year olds that still need to grow. They’re still going to need a place to live. So it’s not like if babies stop being born immediately, we’re in trouble. It’s going to be a long time before it catches up with us.
So if the population does slow, this doesn’t change tomorrow. In that much time, your property’s probably almost paid off, which is going to reduce some of the threat right there. Another thing would be, when I was looking at this, I assumed that what a dollar was worth is what a dollar would always be worth, but that is a shifting target, too. As inflation continually makes money worth less, you need more of it to buy the same thing.
So in 30 years, if we do have population problems, well, how much have properties appreciated and how much has rent appreciated? And is that threat as significant, if your property is worth five times as much? So if you had to sell it for half of what it should be worth, it’s still two and a half times more than what it is right now. It gets tricky when you start trying to work all of these things into the algorithm here. So with that information, Rob, does that change your perspective on this?

Rob:
Well, first of all, I know that the population decreasing is a real problem in other countries. I don’t know if that’s the case in the United States. I don’t know. So it is hard to really say. I think we have some time to figure that one out.

David:
Good point.

Rob:
I don’t know if that’s really a problem yet or I don’t know if it’ll really be a problem for, like you said, the next 10 to 15 years.

David:
And then there’s immigration, right? Are people going to keep coming to America from other countries, which would keep our population higher or is that going to change in 10 years and 20 years? Is America not a desirable place to come to? It is impossible to factor for all of those variables when you’re trying to make this question. So I love the question itself, because this is something that I think about all the time, coming from Josh. Overall, I think that there are enough tailwinds making real estate desirable to combat the headwinds of possible population growth or less people needing homes in the future.
I think a more realistic threat would be like 3D housing. What if they figure out a way to just build houses for $20,000 or something like that? And now we’ve got these homes that used to cost $500,000 to build or $200,000 to build, and you had to go through all this red tape and the city and the local municipalities made building incredibly hard and now people can just throw something up real quick, right? Assuming that this is something that’s actually safe. It’ll probably be a while before the technology goes there, but I’ve thought about that. That could just saturate the market with rental supply.

Rob:
That’s interesting. Man, you know what would be a really good show, is if we researched theories for real estate like 50 years from now, like what some of the thought leaders in this space think? What would be the case?

David:
Were worried about?

Rob:
Yeah, like ownership of real estate on Mars or things like this or whatever. If you own homes on a beach or whatever, and just talk about some of the bigger, [inaudible 00:33:53], I don’t know, questions that arise over, what does real estate look like in 50 to a hundred years?

David:
That would be very interesting because we get to hear why they thought green shag carpet was a good idea. Maybe that was meant to combat a threat at the time, or they’re like, one of the biggest threats to the real estate space is the open concept and we have to do everything we can to defeat that. So we’re just going to put walls everywhere inside of our houses. And to their dismay, they found out that we just tore all those homes down and blasted it on House Hunters talking about how these closed concepts are terrible?

Rob:
Yeah, well, I’ve always talked about, I would love to have Elon Musk on the show. I think that would be the perfect person for it. So hey Elon, I know you’re listening out there. Hit us up. Davidgreene24 on Instagram.

David:
Oh, I’m sure he is already following. I’m sure. Probably from one of his burner accounts.

Rob:
Probably.

David:
Yeah. All right. Our last question here comes from Alyssa Horn in Alaska. By the way, I forgot to say on our previous question, are you screaming at your computer or your car right now saying, “What are you guys talking about? You missed something.” Let us know in the comments if on this whole, will real estate become a problem in the future because of population growth? Let us know if you think we missed something and what should be brought into the conversation here.

Rob:
I love it. It’s very interesting.

David:
It’s a fun thought process.

Rob:
I’ll ask ChatGPT tonight and I’ll let you know. I’ll text you the answer.

David:
Rob knows how much I love that. All right, Alyssa says, “Hi, David. Thanks for taking the time to read this. My sister and I are looking at combined funds of the house hack a duplex in Anchorage, Alaska. However, we realize that the amount we could potentially charge for rent is greater than the amount we currently pay for rent in the place we currently live. Does it make more sense to continue renting and rent out the two sides of the property we buy? Mathematically, this seems like a no-brainer, but it also doesn’t seem normal. Are we missing something? First, for more context, we’re happy living in the place we rent, but want to work our way to financial freedom by building a real estate portfolio and obviously, people who rent don’t have a portfolio. Thanks so much for helping two Alaskan sisters find their way to vacations and warmer climates.”
All right. So here is how I understand Alyssa’s question. So she wants to buy real estate and buying real estate, if she moved into it, would increase her housing expense because her rent is low. But if she keeps paying the low rent, she never owns a property. Her alternative to this dilemma is to buy an investment property, rent out all of the units, which it looks like this is a duplex that they’re talking about. They’ll make more money that way. But now, they’re still renting out the property that they live in. They don’t live in the house they’re in. Now the downside to that is, they’re going to put 20 or 25% down if it’s an investment property versus 5% if it’s a house hack. So we factor all of these questions together. Welcome to Seeing Greene. This is what we get to do every single week. What advice do you have for Alyssa and her sister?

Rob:
I think you have to… It’s rare. Okay, it’s not rare, but it is common where rent is cheaper than mortgages. And so I had to do this, when I lived in LA, my rent was $1,850 for a 600 square foot home. I then was so tired of paying that much money to a landlord that I was like, “I’m going to buy a house. I don’t care if that makes me a little bit more house poor, at least I own it. I’m building equity.”
So I bought a house and my mortgage was $4,400, which was more than double. Now with that house, there were some house hacking opportunities. I had a studio underneath. I ended up building that tiny house. We all know the story there, but I went into that understanding I was going to pay more for the homeownership. Fast forward to today, that house has doubled in value due to the beautiful thing called appreciation and I’m very happy that I was house poor.

David:
[inaudible 00:37:31]. Rent’s gone up as well.

Rob:
Rent has gone up. Yeah. So I’m happy that I was house poor for all those years.

David:
Yes.

Rob:
It paid off in the end. It hurts now more because you’re like, “Dang, I’m not saving as much. I’m spending more every month. It hurts more.” But you are also getting principal pay down. Inversely, the landlord is getting the principal pay down in the other scenarios. So…

David:
I love how you brought this up so far. In the book I’m working on right now, it’s about all the ways you make money in real estate instead of just the cashflow. Okay? So there’s this principle, when you look at something two dimensionally, certain things make sense. Why would I buy a house when renting is cheaper? I frequently get this when I go on other people’s podcasts that are not real estate experts, right? So I’m getting ready to go on Valuetainment. We’re going to be talking with Patrick Bet-David’s crew. They say this all the time, “Renting is cheaper than owning. Why would anyone buy a house?” It makes sense when you’re looking at a snapshot, not a whole movie.
When you look at everything that real estate does to make money, it starts to change things. So her rent is less right now, but she doesn’t control the rent. The landlord does. Maybe she has a really nice landlord. What happens if they sell the house, they pass away, someone else takes it over? They realize that they could be charging more. That changes very quickly. And during that period of time, housing might’ve become more expensive. Also, in most markets, rent goes up every single year.
So though renting may be cheaper than owning right now, if you do five years of rent increases, it’s often not cheaper than owning because when you buy a house, your mortgage gets locked in place. Now, consider house hacking. Not only are you not having your rent increased on you every year, but you are charging more to your tenants every year and now becomes twice as valuable, that rent increases are working in your favor to build your wealth. And you extend this over five years, 10 years, 15 years, it starts to become way cheaper to own than rent, especially when you’re house [inaudible 00:39:18].
Now, we haven’t thrown in principal reduction. We haven’t thrown in potential tax advantages. We haven’t thrown in what you just said, Rob, which was appreciation. All of these other things end up being even more impactful than just the rent, and it becomes a no-brainer that you should own. The thing I want to highlight here is that it rarely looks wise when you’re just looking at right now. When you’re looking at 10 years down the road, 15 years down the road, I don’t know that I’ve ever seen a scenario where renting is actually cheaper, unless it’s like you’re living with your mom and she’s going to let you live for free or something like that. Does that change your take on this question?

Rob:
Yeah, definitely. I would say ultimately, almost everyone looks like a genius, like a real estate genius if they hold onto property for 30 years.

David:
Yeah.

Rob:
Like I said, it might hurt now, but if you hold onto it for 30 years, people are going to be like, “Oh, my gosh. You bought a house in Los Angeles when it was $600,000. That’s so cheap. I cannot believe that.” And people will be mad at you, that you got into real estate 30 years earlier. You know what I mean?

David:
But when you bought it at 600,000, did it feel cheap?

Rob:
No. God no. I was scared to tell everybody.

David:
And everyone was telling you that you were stupid, right?

Rob:
Yeah. I was scared to tell my parents. I was scared to tell my coworkers because my coworkers knew kind of how much I made. They were my peers and they were like, “You can’t afford that.” And they just didn’t know that I was like, “Well, I’m thinking about it. How can I afford it?”

David:
Yeah. You say, “Well, I’m going to rent out part of my house.” Oh, I don’t want to do that. That sounds like [inaudible 00:40:38]. I like my space.

Rob:
No, I don’t want that. I don’t want to know my tenant. Yeah, it’s all that whole thing.

David:
You like your space. You also like being poor forever. If you can’t afford to put money into a property, you got to put your comfortability and your convenience away, right? It’s going to cost you something. So might as well cost comfort instead, if you don’t have the money at the time. I remember you and I were heading to a real estate meetup when we were hanging out in LA to record at the Spotify Studios.
And we drove by a property that you pointed out in LA and you were like, “That house right there was… Hit the market, had been renovated.” My wife and I looked at it and it was $1.1 million. And we said, “That is insane that those people think they will ever get that much money for that property, right?” Fast forward with four or five years, is that about how long it’s been? Okay, and what do you think it’s worth now?

Rob:
Oh, like 1.8, 1.9, maybe two, somewhere in there.

David:
It was insane, but you were overpaying and then you go five years in the future and all of a sudden, if you could buy it for 1.1 right now, you’d be walking into $700,000 of equity and tons of cashflow.

Rob:
Yeah. And it was a little bit more like, “It’s so expensive. I wish I could afford that someday.” And then now, it’s like, in retrospect, it was a good deal. Everything is a good deal in the past, right?

David:
That’s a great point and that’s all we’re trying to say, is try to exist outside of just this moment. Think about your whole life and where you’re going to be in five or 10 years and factor it, that into your decision-making process. And if you got to sacrifice comfort or you got to have a little bit more housing than you wanted in order to own, but you’re in a good area where rents are going to be increasing and you’ve now taken control of your financial future and your housing expense, where you know the worst case scenario is, this is my mortgage and it can only get better from that?
I would rather see people do that than not have control and be at the mercy of a landlord or somebody else. Taking this long-term approach makes the most sense, which is why we are talking more and more about financial responsibility, playing defense, and making money in other ways outside of real estate, which is playing offense in business. Because when you have those two things going for you, you can use the delayed gratification approach with real estate and build a portfolio we’re talking about.

Rob:
Oh, one thing she said that people who rent, obviously don’t have a portfolio. False. I’m sure we’ve said this already, but honestly, the people that I’m proudest most in life of, are people who sacrifice short-term gain and continue renting and use the money they have to get into a rental property. And they sacrifice owning a house so that they can rent longer and build equity. I’m always like, “Hey, that’s actually pretty cool of you, that you did that.” So don’t feel bad if that’s where you end up netting out, Alyssa.

David:
All right. We hope you enjoyed today’s show. We sure enjoyed having it with you all. If you did, please do me a favor. Leave us a review on wherever you listen to your favorite podcast and let us know what you like about the podcast so other people can find it, and leave us a comment on YouTube, telling us what you thought of today’s show.
Hopefully we read your comment on a future episode and you will be supporting the show. Also, if you like to be featured here, we would love to have you. Head over to biggerpockets.com/david, where you can leave your question for us to answer on a future episode. Rob, for people that were absolutely blown away by your insight, intelligence, sense of humor, and dashing good looks, where can they get more Rob?

Rob:
You can find me on YouTube at Robuilt, R-O-B-U-I-L-T and Instagram @robuilt, if you want, short form real estate funnies. If you want long form real estate wackiness, go to YouTube. Up to you or do both.

David:
There you go. I’m there as well. You can find me @davidgreene24 on social media, David Greene Real Estate on YouTube or davidgreene24.com on the internet to find my webpage. Thanks again, everyone for joining us today. It’s been our pleasure to be teaching you and instructing you and encouraging you in your real estate journey. I really hope that we were able to help some of you brain souls who took action to ask us questions and I look forward to answering more of your questions this year. This is David Greene for handsome Rob Abasolo. Signing off.

Douglas Elliman CEO Scott Durkin and CNBC’s Robert Frank join ‘Power Lunch’ to discuss the real estate market.

Stoicism is an ancient Greek school of philosophy founded in Athens by Zeno of Citium in the early 3rd century BC. The philosophy has been popularized within entrepreneurship in the last ten years, and many prominent figures now use it as their personal operating system. Stoicism emphasizes personal virtue and wisdom, it teaches self-control and fortitude, it promotes rationality and restraint. These are not qualities ordinarily associated with entrepreneurs, who you probably know can be irrational, impulsive and hot-headed at times.

Channeling Stoicism could not only give an entrepreneur superpowers, it can help them navigate business challenges with grace and resilience, finding inner peace within external chaos. Use these prompts to apply Stoicism to your business. Copy, paste and edit the square brackets in ChatGPT, and keep the same chat window open so the context carries through.

Stoicism for entrepreneurs: 7 prompts for ChatGPT

View obstacles as opportunities

Notable stoic Marcus Aurelius once wrote, “The impediment to action advances action. What stands in the way becomes the way.” Challenges, therefore, are not setbacks, but opportunities for growth and learning. The obstacle is the way. What obstacles are crossing your path and how can you see them as favourable? What growth do they hold, what opportunities could overcoming them unlock? Use this prompt to get ChatGPT’s help in finding their secrets.

“Assume the role of a business coach with a deep understanding of stoic philosophy and its application to modern business. In my current entrepreneurial endeavors, I’m facing specific obstacles such as [describe the immediate challenges or situations you’re dealing with]. Can you help me reframe these current challenges as opportunities for growth and learning? How can I leverage these situations to benefit both my business and personal development?”

Hold less emotional attachment

On any given day you’ll be taken on a rollercoaster of emotions. Huge joy from a big client win or a great bit of press, followed by feeling like all is lost after some adverse news, then apathy, impatience and frustration when results don’t happen as fast as you want. Stoicism teaches emotional resilience, which every entrepreneur could use. Don’t be swayed by fleeting emotions. Maintain a calm demeanour throughout the most intense business volatility with this simple prompt.

“During my business activities, I often face situations such as [describe specific events or scenarios that trigger intense emotions]. Provide two simple exercises, based on the stoic principle of emotional detachment, that will help me cultivate emotional resilience and maintain a calm demeanor during these challenging times.”

Focus on what you can control

You can control what you put in, but not what you get out. It doesn’t matter how long you spent on that pitch, how much knowledge you have of that process, or how much effort you put into the marketing plan, you still cannot control the results of your actions. For entrepreneurs, this is frustrating. Stoicism teaches that we should focus on what we can control and accept what we can’t.

“In my business, I often find myself fixated on outcomes, especially in scenarios like [describe specific endeavors or efforts where the outcome was uncertain]. Can you provide guidance, drawing from Stoic principles, on how I can enjoy the process of doing the work rather than being fixated on the outcome? Additionally, suggest how I can change how I think about inputs to make them more enjoyable, so I become more indifferent to the results they may lead to.”

Pursue personal virtue

If you do the right thing for the right reasons, over a number of years you’ll build a reputation of integrity and fairness. People will trust you. Stoicism emphasizes personal virtue and integrity as the highest good. That means conducting business ethically and being excellent in everything you do. It sounds straightforward, but when the opportunity arises to cut some corners or score a quick buck, will your personal virtue hold out? Find ways to strengthen it with this prompt.

“Recently, I’ve been working towards achieving [specific goal], and I’ve encountered a situation where I could potentially achieve more by [action that might compromise personal virtue], even though I know the right approach would be [ethical alternative]. Drawing from Stoic principles, can you guide me on how to navigate this situation while upholding my personal virtue and integrity? How can I make decisions that align with ethical conduct and long-term excellence, even when faced with tempting shortcuts?”

Practice regular reflection

Learning from the past requires paying it some attention. We can’t carry forward its lessons without understanding what they are. Reflection, therefore, is essential for every entrepreneur. Stoics like Seneca engaged in regular reflective practices, analyzing their actions at the end of each day to become a better person tomorrow. Assess your decisions and improve future actions by following his lead. Create a reflection habit with ChatGPT, by asking it for your personal set of reflection questions.

“In my business, I’m working towards the following goals [list your goals] and it’s important that I [describe how you want to show up, and the values you want to live by]. To ensure continuous growth and learning, I want to adopt a daily reflective practice inspired by Stoic philosophy. Create a personalized set of five reflection questions based on what’s important to me, so I can assess my decisions and actions at the end of each day.”

Value simplicity

When something is too complicated it wastes energy. Complicated prospecting loses customers along the way. Complicated apps cause people to leave and never return. Complicated things to do every day cause headaches, cost motivation, and lead to inaction. Stoicism advocates for simplicity and the removal of unnecessary materialism and distraction. When entrepreneurs focus on what truly matters, processes are streamlined and complexity is eliminated, so they are free to secure results and move forward.

“In my business, one process that could be unnecessarily complex is [describe the specific business process in detail]. Given the Stoic emphasis on simplicity and removing unnecessary elements, can you provide suggestions on how to streamline and simplify this process, ensuring it’s more efficient and effective for both my team and our customers?”

Adopt a global mindset

If done right, entrepreneurship can be a great leveler. It doesn’t matter where you live, what you look like or what language you speak. Whatever your background, you can start a business and serve a customer base. You can serve people beyond those in your town. Cosmopolitanism is a big part of Stoicism. The Stoics believed in a shared brotherhood among all humans, which entrepreneurs can follow. Adopt a global mindset and view your business as a way to serve the broader community and not just local interests with this simple prompt for ChatGPT.

“Currently, my business focuses on [describe your business and its primary offerings or target market]. I want to think bigger and explore ways to serve a broader and more diverse community, inspired by the Stoic principle of cosmopolitanism. Can you provide insights and strategies on how I can expand my business’s reach and impact, ensuring it resonates with a global audience?”

Apply Stoic philosophy to your business with ChatGPT

Stoicism isn’t just a philosophy; it’s a roadmap for entrepreneurial excellence. Boost your business with these prompts from ChatGPT, inspired by Stoic thinking. Turn problems into chances to learn, keep your emotions in check, and focus on things you can change. Make tasks simpler, think about your day’s choices, and see your business as something that can help people everywhere.

Use these prompts to perform better in your business and feel closer to your goals. When you’re closer to your goals, you can do more for your customers. Simple ideas make big success.

Ashley:
This is Real Estate Rookie, Episode 336. My name is Ashley Kehr, and I’m here with my co-host, Tony J. Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kick start your investing journey. Today, we’re doing a Rookie Reply, which means we’re answering questions from you, our audience. Ashley and I love doing these episodes because we get to talk to you guys. We get to answer the questions that are most pressing in your brains and your minds. Today, we talk a lot about ARV. I’m not even going to tell you what that is yet because you guys need to listen through. We talk about the pitfalls of ARV, how to make sure you’re doing it the right way, common mistakes we see new investors make, and pretty much just give you a masterclass on all things ARV.

Ashley:
Then we’re going to talk about repairs and maintenance and capital expenditures, what the difference is, what those things are, and different ways to navigate it. Plus, we’ll tell you a couple personal stories of things that are going on with us and especially dealing with it on your short-term rentals. I want to give a shout out to Grant Warrington. That is Grant W-A-R-R-I-N-G-T-O-N. You can find him at Instagram on his name. He does a great job of teaching how to buy and fix apartments. He has some really cool Reels about different stuff, like the lights he uses for rehabs, why you should not paint the electrical outlets, and things like that. So go give him a follow and learn some stuff about doing a rehab.

Tony:
Last thing I’ll say before we jump in, I’m not going to read a review today, but I just want to encourage all of you guys, if you’re a part of the rookie audience and you want to help us spread the message of financial independence through real estate investing, please do leave an honest rating and review on whatever platform it is that you’re listening to.
Also, make sure to follow or subscribe. Those are triggers that platforms, like Apple Podcasts and Spotify, look at to gauge the popularity of a show. So if you are listening, make sure you actually subscribe within the platform that you’re listening to so that Apple and Spotify know that you actually do enjoy the show. Because, again, the more folks that know about the Rookie podcast, the more folks we’re able to help and hopefully inspire to go on this journey with us.
Not only do we want you guys to leave reviews, but we also want you to be a part of the Rookie podcast. So if you want to apply to be a guest on this show with me and Ashley, head over to biggerpockets.com/guest, put in your application, and you just might be one of the stories that we get to share.

Ashley:
And we love it when you include your wins or something you learned from the amazing guests that we have on the show. So please feel free to add that into the review. Okay, let’s get into today’s questions. The first question is from TC Cohen. “What are ways or available software that a rookie can find comps in order to estimate a potential ARV of a property?” ARV is the after-repair value, and the comps are other properties that are comparable in size, finishes to the property that you are looking for the after-repair value. So what this process is, this is where you’re going to look at a property and you want to estimate how much it’s going to cost to rehab, but you also want to estimate how much it’s going to be valued at after the rehab is done. Because you don’t want the rehab to cost $50,000, you’re buying the property for $100,000, but after it’s repaired, it’s only going to be worth 120, but you put 150 into it. That’s why it’s important to find the ARV, the after-repair value.
One of the ways to do that is to look at other properties that have sold in the area that are comparable to the one you’re going to be fixing it up. You also want to compare it to what the property will be after you do the rehab. So if you’re putting in an extra bedroom, you want to find comparables that will be three bedrooms compared to two bedrooms as the property is now.
To start us off, one of the great resources that actually BiggerPockets has is Invelo. If you are a BiggerPockets Pro member, you get like $50 free to spend on there. They also have some free resources on there for you to find comparables in the area. That would be a great starting point. There’s also similar software such as PropStream where you can get a free seven-day trial to actually look up a property that sold in your area. Tony, what are some of the resources that you’re using?

Tony:
I think a free way for a new investor who’s maybe never done this before is to ask your realtor or your agent. If you have an agent in that market, ask them, “Hey, I’m looking at buying this property and doing this kind of rehab with it. What would your opinion be of the after-repair value?” Depending on how busy the agent is, sometimes they might be able to give you an idea of, “Hey, here are some properties I’ve sold recently, that I’ve seen sell recently that are similar to your property that went for this dollar amount.” So asking your agent.
If you know other real estate investors in that market, I think potentially getting your hands on an appraisal is one of the best ways to get that idea of the ARV for a property. Because not only do you get the appraised value of a property in that neighborhood, but you also get to see the methodology that the appraiser used to come up with that value. You can also see then the comps that the appraiser used inside of that appraisal. So I think some free ways are going to a realtor or going to other investors in that market that maybe have appraisals that you can use.
Then the other thing is you can look through Zillow. Zillow is definitely not perfect, but it does show you recently sold properties. You can kind of filter Zillow to look at properties that have sold in and around that area. So you can definitely use Zillow as a free tool. You just have to know how to tweak the data. Then a third software, Ash, I actually just got a free trial of this or maybe not even a free trial, I think I’ve ended up paying for it a week ago, but it’s Privy. Have you heard of Privy?

Ashley:
I’ve heard of it, but I’ve never used it.

Tony:
I was just trying to do some comp work, and I said, “Let me try out Privy.” I haven’t tried it before. It’s similar to PropStream and I’m sure Invelo as well. But I like the user interface just a little bit more, and it has a little bit of… I don’t know if it’s AI. I feel a lot people use the term AI pretty loosely these days. Basically, it has this kind of model that says, “Hey, I’m looking for fix-and-flip properties that are at 70% of the ARV.” It’ll look at the properties in and around that subject property and estimate, where can I get to 70% of the ARV? So Privy’s actually a pretty cool one as well.

Ashley:
The only other ones I would mention are a couple free resources. Your local newspaper for your city might actually put out recent sold transactions. Here in Buffalo, it’s the Buffalo News, and I think Buffalo Business First does it, too. They go back six weeks or whatever. So when you get the newspaper, it’ll be from transactions from six weeks ago, I think. It will list all of the sold properties by town that their newspaper covers. It doesn’t tell you how many beds, how many baths, anything like that. But you could take those properties, and then you’d have to go and type in the address into Google. Especially if it was a property that was listed on the MLS, you’ll be able to find how many bed/baths, and if it’s comparable. But you can check out the newspaper for that. Also, it’s available online. Sometimes after you visit the newspaper website so many times they make you actually buy it. You can’t just get the transactions for free.

Tony:
Ash, are you telling me you have the Sunday newspaper dropped off at your doorstep every week right now?

Ashley:
No, I don’t because that’s why I try and go find it online so I don’t have to pay for it. But I do get the Business one, that one I do. Then the other one is the OARS, which is O-A-R-S. A lot of cities and towns have this software available. The town actually chooses that they have this software. I had no idea what it stood for, but I googled it, and it’s OPI Authorization and Reporting Systems. It’s a information system that is actually created by the US government, and it puts out data about properties. So if you go to your town assessor’s webpage, it may have a link to this. You can type in your property address. There will be a button there to pull comps, and it will actually give you a suggestion of what comparables are in the area based on approximate location to your property and bedroom/bathroom count, and square footage. So I think that’s a great starting point, especially for rookies who are maybe just looking for a couple of deals. They’re not trying to run comparables on 50 properties a day. You can use these free resources or free trials before actually committing and paying for a subscription.

Tony:
Ash, should we talk a little bit about common mistakes that folks make when it comes to estimating your ARV, pulling your comps? Because I think it’s easy to kind of get overly excited, I think, to start to pull comps for a property. So I think there’s a few things to kind of button down. First is that when you’re searching for comps, you want to make sure that your subject property and the comparable property… When we say comps, guys, we’re talking about comparable properties. You want to make sure that your comps are like-kind, that they’re similar to your subject property. So you want to make sure that there’s the stories. You ideally want to take a one-story to another one-story, so you don’t want to have a one-story home that’s a ranch to a two-story Victorian or something. I don’t know all my house types like that. One-story to one-story is ideal.
The years that they were built a lot of times can be a big factor. You don’t want to take a house that was built in the ’50s and compare it to new construction from 2023 because those are two totally different types of builds. Square footage, so if your subject property is 1,000 square feet, you don’t want to compare that to a house that’s 2,500 square feet or even 1,900 square feet. Lot size, if you’re sitting on an eighth of an acre, like the houses are in my neighborhood, I can’t compare that to Ashley who’s sitting on 200. Two totally different value propositions there. Then obviously, bedroom and bath count are important as well.
Now there is some ways that you can up-adjust or down-adjust the numbers a little bit to say that, as you’re looking for comps, maybe your subject property is a three-bedroom, one-bath, but there’s a comp next door that’s a three-bedroom, two-bath, so there’s a little bit of… You want to decrease your value just a little bit because you’re missing a bathroom. The amount you should decrease is hard to know. You got to guess a little bit unless you have some appraisers you can talk to or maybe real estate agents who point you in the right direction. But basically, if you’re close, you can use it, but you still have to decrease it a little bit. So like-kind is one thing. Ash, what other common mistakes do you see when it comes to estimating the ARV?

Ashley:
Yeah, those are all great points. I think another thing to add on to that is to really understand how assessors in your area are actually assessing the property value. If you’re going to refinance or you’re selling the property and somebody’s going to be buying it, they will most likely have to have an appraisal done by the bank or you will if you’re refinancing. You want to have some kind of comprehension of how they’re actually calculating it.
If you’ve seen on Instagram maybe before the memes of, “Oh, here’s how a appraiser calculates,” and it’s just like, “I’m going to guess this number. There is no try and trued method they have.” If you’ve ever looked at an appraisal, it’s almost like a chart. It will tell you what they are actually looking at as far as the appraisal. So they’ll grade the kitchen as to is it poor condition, good condition, excellent condition. They’ll also do that for the other ones. Then sometimes they’ll put dollar amounts to it. This parcel has 10 more acres than the other one. Maybe they’ll add $20,000 in value to the one with the 10 acres instead of the one acre, things like that.
But that can help you estimate and gauge what’s going through the appraiser’s mind. Obviously, you’re not going to have the same exact appraiser as if you’re looking at a appraisal report, but at least you’ll get an idea of what’s the list of things they’re actually going to be paying attention to. For example, I did an appraisal on a property and they didn’t count any of the sheds because they actually are removable. When you leave this property, you could lift those sheds up on a forklift, put them on a flatbed, and take them away with you to the next location. So since they weren’t actually fixed to the property, they weren’t counted into the appraisal and did not add any value as additional structures. So looking at those kind of things.
I recommend going onto Facebook right now or even Instagram and just, “Hey, does anybody I know in blah, blah city,” where you want to invest in, “have a copy of an appraisal?” If you have real estate agent friends, ask them, “Hey, do you know anyone that has had an appraisal done?” and you know them well enough they would give you a copy of it, whatever it is, and just go through and look at it. It’s super informational to take a look at that.
Then the last thing I would suggest is, especially with how the market is changing so much within the past couple of years with going up and down, up and down and all over the place, make sure you are looking at actual sold properties and not pending. Just because the property went pending doesn’t mean it has sold. It could fall out of contract. Also, you don’t know what the actual sales price is when it’s pending. Because even if they were asking $200,000, it doesn’t mean that it actually sold for $200,000 or it sold for more than that. The last thing you want to find out is it actually sold for $150,000. So make sure it’s a sold property, and it’s within a good window of time.
If you have to expand your reach a little bit when you’re looking at comps and go out a wider, what’s the word I’m looking… radius from where your property is, it’s better to do that than to look at a property that sold two years ago when everybody was getting top dollar before interest rates shot up. So definitely taking a look at those things and making sure it’s actually a sold property and not pending.

Tony:
Ash, you bring up two other important points about mistakes. It’s the search radius, and it’s the date range. I think you said it exactly in the same way that I view it in my mind and what my appraisers have told me as well is that the sequence is you want distance, similarity, and then date range, or, I guess, really similarity, distance, then date range. You want the similar properties and then as close you can get them within the most recent time possible. So similarity, distance, date range.
Like Ashley said, if I am buying in a suburban area where, again, each house is sitting on an eighth of an acre, I can’t go out into a five-mile radius because there’s way too many properties that are closer than that that would be good comps to mine. For me, when we had our house appraised when we refinanced a few years ago, it was in my neighborhood. All walking distance from my house was the radius that they used. Now, in a place like Joshua Tree where the majority of the properties are sitting on acreage, I think one of our closest comps or one of the comps that was included in our appraisal report was like four miles away. It’s because the parcels are so big, the number of comparable listings was significantly smaller, so they had to go a little bit wider. Ideally, you want to start as tight and small as possible with your radius and then expand out only if you can’t find good properties.
Then to Ashley’s point, you definitely want to focus on your date range. I know for me, Ash, typically when I’m looking, especially now, I try and start with the previous 90 days, and I don’t want to go anything greater than 90 days to begin with. Only if I feel like my radius is getting too big, then will I start to push it out to maybe six months. I feel like anything beyond six months is going to be tough, especially in this climate. Because the markets in a lot of places are shifting so much where if you try and go back, like you said, a year, the market’s completely different in summer of 2022 than it is in summer of 2023. So I think just those things, distance and date range, are incredibly important as well.

Ashley:
Another thing after you said that that reminded me is the time to close, too, on a property. In California, you can do a pretty quick close. You’re doing closes in 21 days, right?

Tony:
Mm-hmm, yeah.

Ashley:
In New York State, that’s almost impossible. So sometimes you are looking at 90 days to close on a property. During that time period, a lot of things can change during those 90 days. So that’s also something very important to look at, too, as to, when did the property go under contract? When did it actually go pending compared to when it actually sold? So you can see, okay, this property actually went pending, so they made that offer, weren’t going to buy it at that price six months ago, and then they went and closed on it. But the appraiser is going to still look at that closed price, like when the property actually closed, not when it went under contract.
But if something went under contract six months ago, and the interest rates were a little bit better and it was spring, everybody’s out house hunting, and they bought it for half a million, well, now they closed six months later because of different issues, whatever. But then the other comparables, their interest rates went right back up. It’s starting to become winter. People aren’t wanting to move in the winter, and the sold prices have dropped. So now you have one comp that’s really good, but then you have your two other comps that are bringing the properties down. So make sure you are taking that range of comps and not just relying on one or two. You have at least three of them, too, because there’s all these different factors that can come into play.

Tony:
Ashley, just out of curiosity, because I forget that sometimes it can take that long for you guys to close on stuff in New York. Do you have anything in your purchase agreements where it’s like, “Hey, if the market values shift by X percentage during our closing period, then we have the ability to renegotiate,” or are you at the mercy of the market?

Ashley:
Yeah, because most of our offers are all cash purchases, no contingencies. So if there was a contingency put on it, our offer probably wouldn’t.

Tony:
Gotcha, interesting.

Ashley:
I did actually just put an offer in this weekend. I was at my kids’ football game. Right before their game was starting, they’re doing their warmups, and I’m just scrolling Zillow. It’s better than Instagram.

Tony:
Yeah, [inaudible 00:19:31] what all real estate investors do.

Ashley:
So I see this property and I’m like, “I feel like that’s really close to another property we own.” I look and it’s two parcels away. Our other one is a little cabin, a little goat barn, a pond, and it’s 10 acres, and this was five acres with a little one-bedroom cottage on it. Part of the cottage had this beautiful glass room that’s off of it. It was listed for $124,000. I’m like, “Oh my god, we can rent this on Airbnb for this much money. At this price, this is great.”
So I texted it to Daryl, who was somewhere there at the game doing something before it started. I texted it to him. I’m going through, and I was like, “We need this, if we can get at this price.” So I texted my agent, and I said, “Make an offer at whatever they want. No contingencies, no expend… uh, I can’t talk, inspection, and we’ll just take it.” She texted me back, she said, “Okay, I asked the agent about verbal offers and she said they have gotten so many requests for showings they are three days booked out for showings already. So she’s not going to take any offers, and they’re now going to put a deadline on offers.”
So Daryl comes back over. He’s like, “Oh, that house sounds pretty good.” I was like, “Yeah, I already put an offer in. Sorry, I didn’t tell you.” So now the deadline is actually right now. It’s 1:02 p.m. right now on Tuesday, and the offers were due at 1:00 p.m. We just went $1,000 over asking because it’s a great deal even at that. If we don’t get it, there’s other properties, things like that. But I only want it if it’s a great deal.

Tony:
It makes me think, though, Ash, is there a time and place where maybe the ARV isn’t as important? For example, we’re working on a commercial deal right now. It’s a seller financed deal. We’re picking it up for 950, but they gave us a 30-year amortization period. For our rookies that are listening, that means that, just like a traditional mortgage, those payments are being stretched out over 30 years. It’s a 10-year term, so we either have to sell or refinance at the end of 10 years. It’s a 7% interest rate on a commercial property, which is pretty good given where we’re at. And I want to say, I think it was like 200K down, so our payment on this 13-unit motel is going to be like, I don’t know, four grand a month or something like that.

Ashley:
There’s no balloon payment or anything over [inaudible 00:22:15]?

Tony:
At year 10.

Ashley:
Year 10, okay.

Tony:
Year 10, yeah.

Ashley:
So you don’t have to refinance for 10 years.

Tony:
We don’t have to refinance for 10 years, so we got 7%-

Ashley:
[inaudible 00:22:22] years.

Tony:
… interest rate locked in for 10 years.

Ashley:
So any comp now is not going to be valid anyways.

Tony:
And it’s just like, does it even matter what the property’s going to appraise for right now? Because it’s like we have an entire decade to get this… Even if we did nothing in most markets for a decade, you’re going to see some level of appreciation. It’s just like, in that situation, we’re not necessarily super concerned about the comparables because we’ve got this really good fixed debt. I bring that up to say, if you’re a rookie and you’ve got a good deal like that, maybe there’s some creative finance involved and you don’t necessarily have to worry about going out and getting an appraisal at any point in time, then does it really matter what the property’s going to appraise for? As long as you’re cash flowing, I think that’s… Obviously, you don’t want to go too far underwater, but in the short term you can probably weather that storm.

Ashley:
When we talked to Pace Morby on here… Actually, I think we’ve talked to him a couple of times, went on BP, and then we had him on an actual episode. That’s a lot of what he talks about is that the purchase price isn’t always the most important thing. That if you can get seller financing or subject to and you don’t even have to go to a bank to refinance, who cares, to a certain extent, what your purchase price is if your payment is going to be zero percent interest and it’s going to make you cash flow on the property?
To your point, that’s exactly… One thing when I looked at that property, I didn’t sit there and actually analyze it. I have an EZ Calculator app on my phone, and I was like, okay, this is what my mortgage would payment would be if I actually put a bank loan on it or whatever. Then I looked at, this is my daily rate for Airbnb. I’m going to do conservative, do 65% occupancy, and this is how much it’d make month. I’m like, okay, I know property taxes would be about this. On my little phone calculator figuring this out in my head, and I’m like, okay, it would cash flow. So it doesn’t matter how much we’re paying for it because I know I can get terms at this price for it. So if it doesn’t refinance at a certain amount, this is what I get my… Well, we would be using private money, not bank lending on that one. Yeah, that’s a great point about the purchase price.

Tony:
Just, if you guys want to waste a bunch of time, for our rookies that are listening, just play around with a mortgage calculator and see how different the interest rates impact things. It’s like, if I were to buy a million-dollar home at a 2% interest rate, that’s about 3,700 bucks a month. At 7%, that’s 6,600 bucks a month. So just imagine the kind of leverage you can get if you are able to get some of this creative financing. Even if the purchase price is super high, your actual return is relatively low. Not to go too far off on a tangent, but just something to consider, that sometimes the ARV isn’t as important if the terms that you’ve got for that deal are incredibly strong.

Ashley:
Since part of the question was what kind of software can a rookie use to find comps, the calculator software that I use is called EZ Calculator. Where did I go? So it’s like, fncalculator.com is the actual website for it. It has one, two, three, four, five, six, seven, eight, nine, 10, 11, 16 different calculators on here. You could do a compound interest calculator, so if you want to figure out how much interest your money would make in the bank compared to investing it in real estate, you could figure that out. The currency converter, in case you’re buying something in Mexico. But all these… retirement 401(k) calculator. But the loan calculator is on there. A credit card payoff calculator. This is a calculator app that I use all the time for playing with mortgages to see what they would be based on down payment, or what the interest rate might be if I do bank financing or private money and things like that.
Oh, and actually, another couple apps that I’ll tell you, too, is a hunting app called onX Hunt. It’s actually for hunters. So if you’re tracking a deer, you know whose property you’re on, so if you need to ask permission to track the deer on their property, things like that. You can actually see the parcels. You can also see the satellite view of the land. It will actually tell you this is 80% forest, this is 10% field, this is 10% structure, whatever it may be. But that’s a super helpful app, too, for looking at a property to compare it to others. Another one is LandGlide, which is actually for real estate investors. They have a parcel view, and then they also have that satellite view, too, and give you a bunch of information about who owns it, things like that.
Let’s go on to our next question. This one is from Daniel Dow. “Curious, what mid-range repairs do you classify as CapEx versus general maintenance?” So CapEx is capital expenditures. Then he goes on to say, “For example, I would think we would all consider a clogged drain as maintenance and a new roof as CapEx. What about things, replacing a water heater, a garage door or toilet? Secondly, do you distinguish between these expenses in your books?”
So here’s one big way is if the vendor that’s actually doing this for you charges you sales tax or not, or they give you a capital improvements form. So if you are doing a capital improvement, you don’t have to pay sales tax on that expense. If you’re getting the new roof put on and you’re going to write it off as a capital expenditure, depreciate it over so many years, you don’t have to pay sales tax on it. So the vendor, the contractor will actually give you a form to fill out saying that you’re going to be using this improvement as a capital improvement, and then they will not charge you sales tax on having that service done. So if a vendor gives you that, you do fill that out and give it back to them, then you are obligated to report that in your books as a capital expenditure. You do, you do have the option to actually pay sales tax on it, though, and not do it as a capital expenditure, I suppose.

Tony:
I wasn’t aware of that, though. Actually, Ashley, you just educated me and taught me something new. I-

Ashley:
That’s at least in New York State, I would assume.

Tony:
I’ve never-

Ashley:
Yeah, maybe that’s just New York.

Tony:
I’ve never been charged sales tax for our service-related type expenses, at least not that I know of. Maybe they’re baking it in somehow.

Ashley:
Yeah, maybe that is just New York then.

Tony:
I think you do bring up a good point about the tax piece. It’s like, I know when I do a cost segregation study on my properties… For our rookies that are listening, a cost segregation study is basically you taking all the different parts of your house and separating out the depreciation schedule for each individual part of your home. So on a typical home purchase, they depreciate everything evenly over, what is it, like 27 and a half years or something like that, some really odd number, and everything’s equally depreciated over that time schedule. When you do a cost segregation study, you’re able to depreciate some things in a year or in 12 months, I’m sorry, or in five years or in some other period.
So when I think of capital expenditures, I’m thinking of replacing things that would show up on that kind of report. It’s like, hey, my roof, it’s going to have to be replaced at some point in time, major HVAC systems, things that they have a given use of time and it’s typically not something that’s super short. For example, the way that we split it up in our business, if a guest checks into one of our properties and they break the handle on the toilet, that is typically something we’re going to categorize as repairs. If we have to, like I said, replace the entire roof, that’s something…
Let me give a better example. If a single shingle comes loose from our roof, we’ll call that repairs and maintenance. If we’re replacing the entire roof, we’re calling that CapEx. So for me, it’s the size of the job. Then like I said, I don’t know if this is just the way that my brain processes it, but it’s like, what are the things that I’m going to depreciate over a long period of time is the stuff that I consider as CapEx. How does it work in your brain, Ash?

Ashley:
Here’s two dead giveaways. You’re adding value to the property, so maybe it’s something you didn’t have before that you’re adding value. You’re putting an addition on. You’re turning a bedroom into a bathroom or something like that. You’re adding something new to the physical property. The next thing would be is you are replacing something, such as the mechanics, you’re replacing the roof, things like that. Kind of the definition in accounting terms as far as for the depreciation, if it has a useful life of less than one year, it is a repair or maintenance. So if it’s something that’s going to have a longer life, you’re supposed to write it off as a capital expenditure.
But if it’s something that’s only going to be useful for less than a year, so like your HVAC filter, you have to put new filters in. They usually last three to six months, so that is not something that would be repair or maintenance on the property. I think generally looking at, is it adding value to the property? Are you replacing something that’s already in the property? Then also the gray area as far as the repairs and maintenance of how big is that repair or that maintenance. Is it going to add value for more than a year?

Tony:
In terms of setting money aside, every person listening should be setting money aside for capital expenditures, your CapEx, and your repairs and maintenance. Because our properties do tens of thousands of dollars a year and revenue sometimes over six figures, so we typically just have one bucket that we dump all of our repairs and maintenance and our CapEx into. Usually, for most of our properties, that tends to work pretty well. But we’ll take 5% of our gross revenue and put that aside for repairs and maintenance and CapEx. Honestly, that’s actually not even really true. Typically, we’ll just put aside 5% for CapEx really for the bigger expenses. Then because our properties and short-term rentals generate more revenue, we typically just handle the repairs and maintenance with whatever money was generated during that month. So that’s typically how we set things up. How do you do it on the short-term side, Ash?

Ashley:
I don’t have a ton of partners, so I know, for you, with all of your partners, you have to have that 5% for each property and saved separately because you have the different bank accounts. But for me, I just have three partners, and we each pretty much… We keep a minimum balance in our LLC accounts. We don’t go under that minimum balance. Then also, we each have our own accounts that have a good chunk of money. That’s where we each… It’s kind of our obligation to each other where, “You know what? We need to put this new roof on. Our reserves won’t cover it. We need to put in each $2,000 or whatever.” Then we go ahead and pull that money from our separate property savings. It used to be we would do 15%: 5% for vacancy, 5% for CapEx, and 5% for repairs and maintenance. Then it got to the point where you kind of grow and scale, and it’s like, wow, that’s a lot of money to be sitting-

Tony:
Sitting in reserves.

Ashley:
… in reserves. To have bad things happen at every property at once, that might not happen. Then same is true, if for some reason that did happen where something bad happened to every single property, we would just have to use the cash flow from that month to put towards taking care of it.

Tony:
That actually did happen to us where we had to just… I think it was earlier this year. We installed a bunch of hot tubs at our properties sometime in 2022. So over the course of 2022, we installed a bunch of hot tubs, and we had a less-than-stellar electrician install everything for us. You have to do electrical hookup, and it’s like a few thousand bucks to get the electrical done for a hot tub depending on where it is from the panel, and you got to run and maybe even dig, conduit, all that good stuff.
Anyway, for whatever reason, that electrician wasn’t available when we got a new hot tub, so we hired another guy. This guy was a little bit more sophisticated of an electrician. The properties just happened to be next door to each other, and he went to the wrong property first. He was looking at the electrical. He’s like, “Guys, I think something’s wrong here, the way this electrical was done.” So just by chance he ends up seeing the other guy’s work, and he was like, “I honestly would not let anyone get into these hot tubs until I fixed the electrical.” So we had to turn off the power to all the hot tubs, and we had to redo electrical on, I don’t know, I think it was eight or nine properties in the span of a month. Each one’s like a few thousand bucks per pop. Typically, that doesn’t happen-

Ashley:
And [inaudible 00:36:20] it’s like, having to do that, coordinate that around guests. Tell guests they can’t use the hot tub.

Tony:
Totally, they can’t use the hot tub. Yeah, that was a bit of a nightmare. But there are times, I guess, where, the quote/unquote, stuff can hit the fan all at the same time. It is good to have those reserves.

Ashley:
Well, with that coordinating guests, things like that, too, that’s one thing that stinks about short-term rentals is that when guests come, they’re on vacation. They don’t expect to have somebody there doing maintenance.

Tony:
Totally.

Ashley:
Where a long-term tenant, it’s like, “Yeah, come do maintenance because we live here.

Tony:
Yeah, come get it.

Ashley:
We want this space, like take care of it.” Once again, at my son’s football game this weekend, the person that manages our short-term rentals, she was on vacation. I knew she was on vacation, but she had never said like, “I’m going on vacation. Is it okay if I don’t respond? Can you watch over it, whatever and stuff?” because she was going to do that. But I still get the Airbnb messages that pop up on my phone, and I saw it. It was something about the WiFi. I was just like, “Oh, you know what? She’s on vacation.” But she actually started texting our group texts and she’s like, “Daryl, the WiFi’s not working.” So he called the service company, and they said, “We don’t have any outages, whatever.” So then she’s having them reset the modem and everything and can’t get it to work.
So Daryl calls back, and they’re like, “Okay. Well, we’ll send a service technician out,” and they end up sending a service technician out. Daryl’s like, “I’ll leave the game. I’ll go. I’ll check it out.” I’m like, “No, we have to learn to let these [inaudible 00:38:00] handle. It’s okay. Just wait.” Like, “If we get a four-star review…” I’m like, “Well, I’ll give her $75, okay? I’m going to say, ‘I’m so sorry for the inconvenience.’ I’ll send her back $75. Will that make you sit okay during this game?” So I sent her the credit. I was like, “I apologize. They’re going to send a service guy out to check it out. They shouldn’t need the interior access.” She’s like, “Okay, we won’t be here. Thank you so much.” The service technician gets there, and he is like, “Actually, I do need access.” So it was really nice. We just let the guests know he was going to go in. They were fine with it. We unlocked it from our phone, and he went in.
The breaker was off. That’s why the internet wasn’t working. This company is so amazing, and this internet provider, it definitely wasn’t some household name internet provider. The guy, he’s like, “Oh, it must’ve popped. I just turned it back on. Now everything is working, and you’re all set.” This is Saturday afternoon, and this technician is coming out to fix the WiFi. It’s like, here, we should have sent Daryl out or something to just turn the breaker on.

Tony:
Yeah, just a [inaudible 00:39:07].

Ashley:
Or, which in all the long-term properties, anytime an outlet isn’t working, whatever, we always have them check the breaker. For some reason with the internet, we just didn’t make that connection and ask them to check the breaker and stuff. Yeah, that was a-

Tony:
It’s crazy how there’s always little things that happen as you’re running your properties. But it’s kind of cool because, exactly what you said, it reinforces you… or I guess it reminds you that you need to always be optimizing your systems and processes.

Ashley:
Yeah, keep updating them.

Tony:
Totally. One of the things I do daily, or I try and do daily, but with our VA team, is I review the messages between my VAs and the guests who are checking out that day. A lot of times nothing happens. It’s just like, “Hey, cool, thanks. I’m in. Hey, I’m out.” But sometimes things happen, and I get to see how the VAs are handling those situations, and then I can give them feedback and say, “Hey, this is what we should be doing next time. Make sure you update the SOPs,” or, “Hey, we actually don’t have an SOP for this, but here’s what I want you guys to be doing moving forward.” So identifying those moments and then really updating them I think is-

Ashley:
The same with reviews. Are you looking at the reviews? Because we don’t really get a lot in the messaging of people telling us different things, but we get a lot of private feedback of different things. I’m actually surprised of how many people will still give you a five-star review and amazing things, and then they are actually really considerate and say, like this person with the internet, it’s just like, “It really was an inconvenience to us to not have the internet,” because there’s no cable or anything. That’s the only way to watch TV. Thankfully, it was a beautiful day out. They just said that was, but they did appreciate that. Then I think there was one other issue that came up, and we were like, “We just want to let you know,” and stuff like that. But I find that very helpful, too, to review those private notes that they send and use that, too, to update things that you wouldn’t even think of.

Tony:
We love looking through the messages on a more frequent basis, and then we try and look at the reviews weekly. It’s good to look at both. Because sometimes a guest, like you said, you’ll see something in the messages that doesn’t show up in the review, and then the inverse is true. Well, the guests won’t say anything at all during their stay, but then they’ll just rail on you in the review. It’s like, “Oh my gosh.” I think the absolute worse, and we see this sometimes, it’s where the messages are clean. The guests said they had a really good time, the public review is glowing, the private review is blank, and then they still give us a four-star. We’re like, “What the heck happened?”

Ashley:
Yeah.

Tony:
You have nothing to work with. But, yeah, it is good practice to review all that stuff.

Ashley:
Okay. As far as the last question, “Do you distinguish between these expenses in your books?” Your capital expenditures actually go on your balance sheet as an asset, and then your repairs and maintenance are actually an expense on your profit and loss statement. What this means is that, if you pay a roofer $10,000 and you have $50,000 in revenue and say that roof was your only expense for some reason, so you have that $50,000 revenue and then you’re subtracting that $10,000, you’re like, “Okay, I have a profit of $40,000. I’ll report it on my taxes.” But, no. Because it’s a capital expenditure, it’s not. It’s going to be depreciated, and your accountant will take a portion of that $10,000 and write it off for this year because the useful life of that roof is 27 and whatever years, and it’ll be depreciated over that amount of time, so you’re only writing off that portion of it.
That’s where cash flow comes in. When you’re actually calculating cash flow, you do take in those kind of expenses to calculate your cash flow. It’s just not taken into account for your profit and loss statement. This is why it’s so great to do tax planning so you can talk to your CPA. You’re doing all these capital improvements, but then you find out that you can only depreciate a portion of it. Now you have to pay taxes on part of that money that was actually spent in this year.

Tony:
I did just look it up and validate. Yeah, 27.5 years is the typical depreciation schedule for residential real estate.

Ashley:
Thank you guys so much for listening to this week’s Rookie Reply. If you have a question that you want answered, please go to biggerpockets.com/reply, or you can send a DM to Tony or I. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson. We will be back on Wednesday with a guest. See you guys then.