January 2024

Dave:
Welcome, everyone, to On The Market. I am Dave Meyer, your host, joined today by Henry Washington. Henry, how often do you get your news from TikTok?

Henry:
I don’t get my news from TikTok very often, but I’d be lying if I didn’t say I get my news from Instagram, which probably means I get the news late.

Dave:
Yeah. Yeah, because it goes on TikTok first and then to Instagram.

Henry:
Yes. True.

Dave:
Well, TikTok is increasingly a lot of people’s primary choice for information, news, economics, all of that stuff. And there’s a new trend emerging on TikTok about the economy. And the idea is that the US is in a, quote, unquote, “silent depression.” And this is a really interesting idea and interesting topic that is gaining traction, and we wanted to dig into it.
So, in order to do that, we’ve invited on Jessica Dickler, who is a contributing writer and editor. She covers personal finance for CNBC, and she recently wrote an article and investigated this idea of a silent depression. And Henry and I are going to chat with Jessica about this trend and learn more about it. And then stick around because at the end of the episode, Henry and I are going to talk about our feelings about this and what we think about the silent depression, if it’s real, and what’s at the core of some of the economic sentiment that is spreading across the U.S. So, stick around, we’re going to get right into our interview with Jessica Dickler.
(singing)
Jessica, welcome to On The Market. Thank you for joining us.

Jessica:
Thank you for having me.

Dave:
You wrote an article called Is the U.S. In a Silent Depression? Economists Weigh in on Viral TikTok Theory. So, there’s a lot to unpack in that headline, but let’s just start with what this trend is and when did it start?

Jessica:
Okay. So, there’s this idea that’s been gaining a lot of traction on social media, particularly TikTok, about being in a silent depression. People are basically sharing their experiences that it’s harder today to get by, things cost a lot more, just going to the grocery store or buying gas eats up more of their take-home pay, and it’s less affordable now than it’s ever been in the past.

Dave:
Just at first glance, that seems mostly to surround the idea of inflation, that things are getting more expensive, or is there something else to this idea? Because when I hear depression, generally I think of something beyond just inflation.

Jessica:
Right. Well, that is the crux of it. I mean, the U.S. economy has remained remarkably strong coming out of the pandemic, even dodging these recessionary forecasts for months and months. But at the same time, we’ve seen inflation spike in this very short amount of time. And yes, housing, food, transportation, those all cost a lot more than they did just a few years ago. And that’s what’s really driving people crazy. So, when they compare what things cost today to just in their recent memory, it’s clear that things are a lot more expensive and they feel like that’s this silent depression that they’re talking about.

Henry:
Yeah. I was looking at some of the videos from the trend, and it’s tough seeing things that compare a lifestyle from the ’20s and ’30s to now, but what does grab you is when they talk about percentages, right? Like the percentage of their income that is allocated towards a car payment or a percentage of their income that’s allocated toward the housing expense. That percentage does seem … I mean, it is a lot higher. What’s the age group of people that are typically talking about this silent depression?

Jessica:
Yeah. This is really popular among young adults, particularly those starting out. Housing especially has weighed on them because it used to be that you would graduate from college, maybe rent an apartment, or even buy a home. That is so out of reach for many people today, especially with a starting income.
And if you don’t already own a home, then you don’t have the advantage of higher home prices to leverage into a new house purchase. So, you are looking at higher home prices, smaller supply, and of course, mortgage rates, which we’ve seen really jump in the last few years. I mean, they’ve come down and are now a little over 6%, but that’s still twice what they were three years ago.

Dave:
And are these videos catching on? Is this becoming a mainstream idea that we’re in a silent depression or how popular are they?

Jessica:
Well, yes and no. This idea has become very popular and on social media, these negative sentiments seem to resonate a little bit more. But there is also the reality that many economists say the country is doing remarkably well. We’ve seen GDP grow every quarter, which is generally a measure of the health of the economy, and people have jobs, and that’s really the number one determinant of how people are doing is whether they have a job or not. And the unemployment rate has held steady at 3.7%, which is near a historic low.
So, I mean, there is all this good data out there, but at the same time, these negative ideas, once you plant the seed, they tend to grow and that’s what’s happening.

Henry:
Where would you say … Because obviously you’ve covered this and you’ve covered other stories like this, so where would you say, if there is one, the disconnect between what’s happening now and what people are feeling towards what happened in the past in a real depression?

Jessica:
Yeah. I mean, I think the disconnect really comes down to the affordability crunch that we’re in right now, which is a very true thing. Even though the economy has been trucking along and the unemployment rate is low, and people generally have jobs if they want jobs. At the same time, it does cost a lot more to go to the grocery store, to travel, to buy a car. Young adults also have student loan payments that have resumed after a very long pause, and people got used to not paying those.
So yeah, I mean, in your take-home pay, there’s just not enough left over at the end of the month to feel good about your financial standing. And that’s what we’re seeing play out on social media.

Dave:
I think it’s important to note that there is some data that supports this, as Henry cited some of the housing statistics, but also just for a lot of the pandemic year, so 2020 up until basically about a year ago, we were seeing that inflation was outpacing wage growth. And when you adjust for inflation, that means that everyone’s, on average, spending power for the average American had been declining.
Now, that has reversed since April of 2023, and it’s now about 1% better for wage growth over inflation, but there’s still a long way to go in terms of making up for the years of inflation eroding spending power. So, there is some logic and math behind what this trend is talking about, but what do economists think about this? You’ve mentioned some things about GDP, I don’t know if you’ve spoken to any economists directly, but how do you think they might respond to this concept of a silent depression?

Jessica:
The economist that I spoke to for this article really balked at that idea, just saying that the idea that we’re in a silent depression is completely divorced from reality. Of course, in many ways the country is in a lot better shape than it was nearly 100 years ago. There are social safety nets, there’s a better quality of life. People have more equal opportunities. I mean, just from an economic standpoint, the math doesn’t really math on the silent depression concept, but that doesn’t quite capture the emotion of what it’s like today.
So, technically from the economic standpoint, a depression is really defined by how the economy is doing, and we’re just not seeing that play out in the numbers. So, we’ve only had one depression in this country’s history, which was the Great Depression, which spanned a decade, and unemployment hit about 25%. Things are nothing like that today. In many ways, we’re much better off.

Henry:
Yeah, I tend to agree with you and the economists. I think what people are so caught up in is that the basic human needs of shelter and food are more expensive and it makes it feel like a depression. But I think it’s like this, we’re getting these terms mixed up or confused with each other because what we have now that wasn’t available then, and you guys hit on it before, was availability of jobs. Right? People can find a job pretty easily right now if they want to. It may not be a job they love, but finding a job is a possibility. In the depression, that wasn’t a possibility for everybody. There just wasn’t the money to go around.
But also, convenience, right? With the advancements of technology, you can make money without a job now. You can make money on social media or selling digital products or just people’s ability to reach an audience and then monetize that audience is far more available now than it wasn’t before. So, you don’t actually even have to go get a job. And so yes, you have to go make more money now to be able to afford the necessities and that is, or could be seen as a problem, but the opportunity is far greater.

Jessica:
Yeah, definitely. And so many people are taking advantage of that. Even like you said, you can pick up a side gig on your phone or sell things out of your home. It’s never been easier to do that, and it’s a great way to supplement your income. That’s the reality that a lot of people are facing that maybe they need a job and a side gig to make it work.

Dave:
I think my general feeling about this is that I do have empathy for anyone who’s struggling to afford basic necessities. Housing is more expensive. You cannot argue against that. I think the issue I have is that the term is just wrong. It has nothing to do with a depression, and it’s just a different branding of inflation. What’s being described is the detriments of inflation.
When you talk about depression, Jessica, you gave a definition of it. Yeah, is it a broad decline in economic output for several years across many industries? That is not happening by any measurement. And so, are there economic problems in the U.S.? Absolutely. But calling it a depression, I think, is a bad name for it.

Jessica:
Yeah, I agree. But except for the fact that that’s what caught people’s eye on social media, and a lot of it does come back to that. These ideas really pick up steam because they’re catchy and interesting, and we’re seeing that happen.

Dave:
That’s true. I guess, I think it’s a bad name, but for the people who created this content, they probably think it is a very good name because they probably got a lot of views for it.

Jessica:
Exactly.

Dave:
Jessica, are there any other trends about the economy you’ve noticed going around on social media?

Jessica:
I mean, there’ve been so many ideas about economic conditions on social media. It’s a hot topic these days, which makes my job a little more interesting. But I mean, we recently were all abuzz about girl math and the idea of you have to rationalize any expensive purchase by thinking about the cost per wear.
I mean, all this relates back to affordability and the economy and how people are doing and they want to buy things. And of course, consumers have been buying things, and that has really helped the momentum of the economy overall. But they’re also rationalizing and trying to justify purchases that maybe they can’t afford, and sometimes leaning a little bit too much on credit card debt. I mean, it’s just very interesting to see these ideas take hold to prop up how people are doing these days.

Dave:
Yeah, it’s super interesting. I think it just reflects some cultural shifts in how people think about the economy and spending in general. And I’m personally just very curious to see how it continues because we hear from a lot of sources that credit card debt is up and a lot of the excess savings from the pandemic has been depleted. But when you look at consumer spending and retail sales, they’re still pretty high. And so, at some point, it feels like something needs to give, but surprisingly that hasn’t happened yet.

Jessica:
Yeah, exactly. And I do think we’ll start to see that cool a little bit in 2024. I mean, the economist that I talked to also said that that level of spending just isn’t really sustainable and things will start to calm down a little bit.
I heard a new term that caught my eye, loud budgeting, where you just say no and explain why you’re not going to buy something, even though you want to buy it, but it just doesn’t fit in the budget and you’re going to talk yourself out of it.

Henry:
I can see people screaming in stores, “I will not buy this because rent is due in three days.”

Dave:
Yeah.

Jessica:
Yep.

Henry:
So, because you cover a lot of these financial trends and topics in terms of social media and what’s going on in the economy, how do you feel like both the media and social media have played into people’s concerns around the economy?

Jessica:
Well, I think some of these ideas without the real data and information behind them can be detrimental. I mean, why do people feel bad about an economy that’s doing well? I mean, you really need to look at the whole picture and not just what people are sharing on social media. And at the same time, we’re also seeing these lavish lifestyles, which also doesn’t help make people feel very good about how they’re doing, when they can’t afford those types of purchases or trips or whatever it is.
So, I think that in many ways it can be harmful, but it also is where we are today, and people get their news from social media and their information. It can be great to share your experiences and also raise the curtain if you’re feeling disheartened about your economic standing. I mean, it doesn’t have to be a secret, but at the same time, I think it needs to be balanced with some good data on what the reality is in this country and where we stand.

Henry:
Yeah, I agree. I think when I hear us talking about this, it gets me thinking back to when I was coming out of college and when I had my first job, I wasn’t making a ton of money. I think my first job paid me just under $30,000 a year, and there were plenty of trips that I couldn’t go on with my friends, that I had to say no to. There were plenty of budgeting decisions I had to make around what I was going to buy at the grocery store because of the expenses I knew that I had coming up. I missed out on what felt like a lot at the time.
And I guess the point I’m trying to make is none of this is really new. I think the new part is everyone shares all of their successes on social media and people feel like they want to be able to do that, and they can’t. No one’s on social media saying, “I’m at the grocery store and I can’t buy eggs because I need to pay my light bill.” That’s not making it on social media. And so, I think a lot of it is people’s need or want to be able to show the highlight reel and they can’t, but it doesn’t mean that they’re missing out on too much.

Jessica:
Yeah. I mean, I agree. I think that is the very common experience for young adults just starting out. It certainly was my experience too, but what I think is new is that there are these extremes that we’re also seeing exposed, where people just have access to more wealth, more opportunity, and it makes the regular rest of us feel like we’re even more deprived because maybe we can’t do all of those amazing things.

Henry:
So, that’s what it is, Dave. The Great Depression is just we are feeling depressed. It doesn’t mean there’s an actual depression.

Dave:
Yeah. Maybe I’ve been misinterpreting the language of this all along. It’s more an emotional depression than an economic depression.

Henry:
Yeah. Correct.

Dave:
Well, Jessica, thank you so much for joining us and sharing this information about this new trend with us. We really appreciate your time.

Jessica:
Thank you for having me.

Dave:
Henry, what do you make of this silent depression now that we’ve learned a little bit more about it from Jessica?

Henry:
It’s one of those things where my feelings are torn about it. Right? I understand that things are more expensive. I do. They are. I mean, housing is expensive. It is going to take the majority of your pay to pay for a housing expense if you want to live on your own. Right? There are some ways obviously, that people are supplementing that by getting roommates or house hacking or all of those other things. Yeah, I mean, groceries are expensive. They are extremely expensive, and they’re even more expensive if you actually want to eat healthy.

Dave:
Yeah, that’s the real tax, or [inaudible 00:18:37].

Henry:
Right. But, the big but is, the economy’s doing well and there are opportunities out there for people, lots of opportunities out there for people, not just for the job that they have, but to make additional money, have a side gig. It’s just the convenience is much better. It’s easier now than it’s ever been to make income.
And I think one of the things that we didn’t touch on was that, yes, the inflation is a thing, but we’re starting to see companies start to pay higher wages for jobs and roles now, so that people can combat some of those affordability issues. And so, I think even that’s starting to increase, and hopefully we’ll get to a point where we can lower the percentage of what some of these things cost.

Dave:
Can I go on a rant for three minutes? I need to talk about this with you.

Henry:
I would love that. I would love that.

Dave:
Okay.

Henry:
Nothing would make me happier.

Dave:
My wife says, I get in Larry David mode where I’m just complaining about these little inane details about things. If you watch Curb Your Enthusiasm.

Henry:
Oh, I know Larry David.

Dave:
Yeah. So anyway, I think the thing that annoys me about this trend is that it’s just mislabeled. It’s using one economic term that describes a specific thing to describe a totally different thing. A depression and inflation are totally different things. And as you said, Henry, inflation is real and it has evaporated some spending power for people. But when you look at the economy as a whole, by almost any metric you can find, it is growing at a very significant pace. Like GDP, which is the broadest measure of the US economy, it stands for gross domestic product, over the last three years has gone up somewhere around 22%. We don’t know exactly because 2023 numbers aren’t out yet. During the Great Depression, it went down 29%. So, you’re talking about growth of 20% versus decline of 29%. Not to mention all the things about convenience that Henry said.
I watched some of these videos too, and some were like, “This might be the worst U.S. economy ever.” That is just patently ridiculous and just doesn’t look at anything like at the history of the U.S. That said, there is economic challenges with the U.S. right now. And I think the reason it annoys me is because I think they’re just missing the main points about why they’re struggling. And GDP is growing. So, when you look at the big economic picture, the pie is growing. That does not mean that everyone feels the growing of that pie equally.
And so, I think that’s what people are actually frustrated about is that certain groups of people, either wealthy people, but I also want to call out older people, have absorbed a lot more of the wealth gains of the last 15 years than younger people. And I think that’s something that should be talked about, but that doesn’t mean that we’re in a depression. I think it just means that there are these big generational divides and how much wealth is being created. Just as an example, I pulled this up when we were talking. If you look at by age 35, 62% of boomers owned homes compared to millennials, 49%. About 14% of millennials right now have negative net worth. At the same age, baby boomers were 8%. So, you can see there are differences, and that is something that is worth talking about, but that doesn’t mean we’re a depression. It’s a totally different thing. It’s a totally different word. That’s the end of my rant.

Henry:
Mic dropped.

Dave:
I’m sorry. I had to say it.

Henry:
No, it needs to be said.

Dave:
Well, I don’t expect you to respond to that.

Henry:
No. My response is every time I see somebody post one of these videos, I go to their feed and I start scrolling backwards and I can always see a trip or a cool car. It’s like, there’s money’s being spent.

Dave:
Yeah. It is a trendy word. I don’t know. I guess what frustrates me is let’s talk about the real economic issues instead of just mislabeling them. But now I’m just complaining like an old man about social media.

Henry:
All right, boomer Dave, let’s move on.

Dave:
Yeah, exactly. Yeah, I’ve gone from millennial to boomer in the last five minutes. All right, well, I think that’s good thing to get out of here on.
Well, Henry, thank you for your thoughtful and good questions here. Appreciate the conversation. And thank you all for listening. We appreciate you and we’ll see you for the next episode of On The Market.
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.

Wendy Liu, chief Asia and China equity strategist at the investment bank, says the property market should show signs of stabilization in the second half of 2024.

Ashley:
This is Real Estate Rookie, episode 359-er. My name is Ashley Kehr, and I’m here with my co-host, Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey. And as always, we have a great story for you. Today, you’re going to hear from Jaryn and how he went from grandma’s couch, making 15 bucks an hour, to cash flowing over $30,000 in his first year investing in real estate.

Ashley:
We are going to understand the power of buying your first home and how it can unlock your investing journey. Jaryn, welcome to the show. Thank you so much for joining us today. Can you paint a picture for us and tell us a little bit about life before you bought your first property?

Jaryn:
Yes, I can. First thing I wanted to just clarify or get out there is I want to say thank you. I think sometimes, when we do stuff like this, whether it’s to grow our own brand or whatever, our intentions are maybe a little different than actually what comes out of it. But four years ago, maybe five, I was unpacking the timeline a little bit this morning. I was sleeping on my grandmother’s couch, not by choice, and I can’t say that I’m much of much, but literally because of listening to this podcast and buying the books, getting my hands dirty a little bit, I have some rental properties. It’s not that magic and it really is the community and people like yourselves who do this that it’s crazy, just the life that’s been given to me over the last few years. I’m not even going to cry, but it’s emotional.

Tony:
Oh, Jaryn.

Ashley:
Don’t worry, we’ll make you cry by the end of the episode, Jaryn.

Jaryn:
It’s emotional. It’s real stuff.

Ashley:
Yeah. Well, that was very heartfelt. Thank you.

Tony:
I just want to add, man, kudos to you for taking the action because across the BiggerPockets community, the podcast, the books, there are millions of people who consume the content that we put out through BiggerPockets, but only a fraction of those people actually use what they’re learning to take action, to implement, to do the things they need to do. And you’re a part of that group, man, so kudos to you. And now you get to inspire the next generation of real estate rookies to follow in your footsteps, man, so super excited to have you on the show today.

Jaryn:
Yeah. So quick backstory. Basically, like I just mentioned, I would say four or five years ago, I was living on my grandmother’s couch, sleeping on my grandmother’s couch, not by choice. I don’t need to go too deep into this, but basically I was getting sober in that process. And because I was in my mid to late 20s at that point, I was partying too much and I had no direction in my life. That pain created this positive feedback loop and I just didn’t really know where to go with life.
So started to get that foundation together, started to move forward, and this is all going to tie into my job at the bike shop because it’s been five years now, which is amazing. I just needed a job where I could go to work, leave work, at work, and focus on myself outside of work. I say that I’m a recovering restaurant industry professional. My time was up in that career and I needed to make a change and it needed to be simple. I’ve always been a bike rider, so the bike shop felt like a good fit. I was living on grandma’s couch. I didn’t need a ton of cash, so $15 an hour, a.k.a., better known as minimum wage back then, was fine. I didn’t really care.
I had been doing that, really happy, some of the best years of my life. Those first two years at the bike shop, I was riding my bike all the time. I was focusing on myself. I was learning about different things, where I wanted to go, and I didn’t think about money once for those one or two years. It just was like something that came in my bank account and then I would use it to buy a candy bar and a bike ride. That was it. I wasn’t thinking about financial education or setting myself up for the future. I was just trying to build a foundation that maybe a lot of people got in their late teens, early 20s. I was just doing it in my late 20s.
So get the girlfriend. That starts to come together. And she had moved home because of COVID, and we had known each other for a long time, but we got together in a romantic way during COVID. I would say about halfway through that, she is all excited because she had been laid off three times through that process of COVID, whatever, and finally gets a job offer and it’s a six-figure job offer. And at this point, I feel like I’m doing really well. And then she’s like, “Oh, my god. I’m moving back to New York. I just got a six-figure job.” And I’m trying to be happy for her, but I’m like, “Oh, my god. What is six figures?” I’m making 16 bucks an hour or something at this point.
So that was super painful. The pain of a tenant calling you and saying that the toilet is overflowing and you need to come get it, I promise, anybody listening, is much less than falling behind. That is way more painful. So that was the catalyst though, to, all right, dude, you’ve got a lot of other things going as a foundation in your life right now, exercise, morning routine, reading at night, whatever. But financial something, it wasn’t anything I was looking at. It was like, okay, I’m uncomfortable. There’s some growth that needs to happen.

Ashley:
Well, okay, so what happened with the girl? Did she go off to New York and now you’re home and you’re trying to figure it out? Did you break up? Did you stay together? Is it long distance? We need some more details.

Jaryn:
Great question, the girl, the girl. Still in a relationship with the girl, going on four years, basically three and a half, four years. She moved to the city. She took the job. And I, throughout this whole time at the bike shops, I had been trying to figure out how I could be of more value to the bike shop. I love the business. I wasn’t thinking about getting a new job. I was thinking about how can I learn more things to help this bike shop grow? If I fast-forward a little bit, I started as just whatever employee at the bike shop. We didn’t have roles or an org chart back then and we read books like Traction or all these books, and now we have four stores. I’m the general manager of the whole business, grew that business, added value.
So basically, girlfriend moves to New York City and we’re like, “Oh, my god. How are we going to figure this out?” And she had a few months from when she got the job offer to when she moved to New York. So I had a little bit of time or we had a little bit of time to figure it out. So I very quickly started watching Graham Stephan YouTube videos. He’s like a financial influencer YouTube guy or whatever, and he was talking about buying duplexes and investing in real estate. I needed a place to live. I wasn’t on grandma’s couch anymore, but I was renting a house. It was whatever. I wasn’t paying any equity to myself, that’s for sure.
And pretty quickly when the pressure is on, we take some action. Got pre-approved, had some money saved up from getting lucky with some Tesla stock. To be honest with you, I had no clue what I was doing. And was like, all right, I’m going to buy a duplex. Not a huge plan beyond that. It was basically like I’m going to buy a duplex, rent out one side of it, with this idea in the back of my head that maybe I’ll rent my apartment out on Airbnb if the relationship works out because I’ll probably be in the city quite a bit.

Ashley:
So that was a big influence on your part as finding housing that would maybe suit your new lifestyle of traveling back and forth to New York. You want to have a better, strong foundation for your personal finances because this girl is going off making a hundred thousand dollars and you want to provide a better life for her and yourself. So you start to realize you want to look at duplex.
So I want to get into when that moment hit, how long did it actually take for you to actually take action and to purchase that? So start to think about that because we’re going to take a short break and when we get back, I want to dive into that momentum that propelled you from learning about duplex investing until actually taking action. And we’ll be right back.
Okay. Welcome back. Jaryn here is going to tell us about that period of time where he learned about real estate investing and where he actually took action and purchased his first duplex. So Jaryn, tell us about the feelings, the emotions, what you learned and that roadmap you took during that period of time.

Jaryn:
Okay, great question. The duplex, the first house purchase for me, which was about three years ago at this point, a little less. I was reading a lot at that point. I was reading all the BiggerPockets books. I was watching the YouTube books. When I get into something, I can get pretty obsessed and pretty focused on it and it’s really easy to do the work. I also had the pressure, girlfriend was definitely surpassing me in careers, and I had the pressure to keep up and figure it out. And so I had some money saved up, not much, like 15 grand. That was my whole net worth, and it was really negative because of other stuff, but we’ll call it 15 grand in cash I had.
Googled real estate agent. Found one. Picked the first one. She ended up being amazing. We’re friends to this day, but I just got lucky basically. Got pre-approved from the bank. It was just the only reason I picked the bank is because they were the only lenders, actually a broker that had a traditional proper FHA loan. All the banks had products that were similar, but they’re the only ones that had three point a half percent down, and that’s pretty much what I needed.

Ashley:
And how did you find that out? Were you calling loan officers? Were you Googling different banks? How did you find that out that that was the bank that had that?

Jaryn:
Good question. There’s a few people in my life that are a little ahead of me on this journey and I would just be chatting with them. How did you do it? How did you do it? Local people who are in the same market.

Ashley:
Yeah. Why reinvent the wheel when you have resources?

Tony:
I just want to add too, that’s a really important lesson for rookies to understand, is that banking is almost like a commodity. It’s like any other product that’s out there. You can’t go to Wal-Mart and buy the same things you’re going to buy at Target. You can’t go to the 99 cent store and get the same things you’re going to get at Dollar Tree. So banks are the same way. Each bank has its own suite of products, and sometimes one bank might not have what you need. That doesn’t mean there aren’t 10 other banks that have it. So I see a lot of rookies that feel a little discouraged when they talk to maybe one or two lenders and can’t seem to find the right product for themselves. But there are so many loan products out there and so many different lenders and so many different institutions. Keep looking until you find the right person that matches your unique situation. And it sounds like that’s what you did, Jaryn.

Jaryn:
Yeah, a thousand percent. And if I could add a little bit there. I think a topic that’s discussed a lot on here, but I think sometimes is easily forgotten in the moment, is that the banks make money off us as a consumer or an investor. They need us. So there’s a lot of fear walking into the bank. I had a lot of fear of like, I’m going to get rejected. I’m not going to get approved for a loan. But realistically, if you actually have a little bit of money saved up and your goals or your target is realistic, the banks are going to open the door. They’re going to open the door for you.
So I went to one other bank actually. Got approved for a loan, but the down payment they wanted was a little more than I had to spend. So I went with the FHA loan even though I had to have mortgage insurance and stuff like that. And it was probably, to directly answer your question, it probably was about three months until I started actually writing offers. And we’re in the middle of the pandemic, and so a lot of the noise you can hear is like, “Oh, don’t buy real estate. Prices are really high.”

Tony:
Dude, we’ve heard that so many times. So many of our guests bought during COVID and ended up being their best deal. I can say for me, my best deal was a property I bought right in the middle of COVID, hands down. Purchase prices were lower. Interest rates were super low. It’ll be hard for me to ever match that deal again. But before we keep going, Jaryn, because I really want to get into the details of this duplex, I don’t think you’ve mentioned what city you’re in yet. What city are you buying this duplex and what city are you shopping in?

Jaryn:
So the first duplex was purchased in Pittsfield, Massachusetts. It’s my hometown. It’s where I was born. I moved away for a long time, but I know the market. I understand the market. At least for that type of purchase, I understood the market enough. I knew the neighborhoods. I knew where the multifamily houses were. I knew where the multifamily neighborhoods that I maybe didn’t want to go into and I knew where the multifamily neighborhoods where I would be okay living and investing in were. It’s not a big city, 60,000 people, post-industry type area. It’s that part of the Berkshires. When I say the Berkshires, it’s like the western part of the state is pretty rural, but Pittsfield particular is like a small metropolitan area.
In a nutshell, the Berkshires are a beautiful place to live. And what feels like is happening is that more and more people are moving here daily, especially the southern part of the Berkshires. The southern Berkshires, because it’s a little bit more affluential, high-end area, it’s a great short-term rental market. A lot of people are coming here on vacation and they’re coming here on vacation, it used to be summertime, but that seems to be more of a nine-month calendar.
From that, the other part of Pittsfield, which I’m interested in or the Berkshires that I’m interested is Pittsfield is pretty open for the taking right now. There’s a lot of old multifamily between two and four units that have been old houses that have been renovated, chopped up into four units, that kind of thing. 50 to 75,000 a unit you can get into pretty affordably, and the rents are strong, 1,200 to 1,500, depending on the bedroom. So if you do some back-of-the-napkin math there, the market checks out not only for cash flow and if you want to bet like me, I’m hoping 20 years down the road that it’s a pretty nice place to live. And people have moved here and we see that appreciation that we hope in the markets that we’re investing in.

Tony:
So I just had to look up Pittsfield on the map, the Daily segment of the Rookie podcast where Tony gets his geography lesson. You’re like right on the border of New York state, it looks like, so far West Massachusetts.
Now let me ask this question. And I tell this to a lot of new people that are looking for cities when they’re asking that question of what city should I invest in? I always say there’s really two types of data you have to look at. You have to look at the qualitative information, the qualitative data, and you have to look at the quantitative information. Since you grew up in this city, you had all of the qualitative information. You knew where things were. You knew where the better parts of town were. You had a general sense of is this a good city to invest in? But did you take it a step further, Jaryn? Did you identify any of that quantitative, those hard numbers that still validated your decision to invest in that city?

Jaryn:
Short answer is no, but I have a gut, and a lot of it was based off that for this. It’s like, all right, we’re okay as a city. I live here. I know plenty of people that live here. Things aren’t really going up or down, fairly stable. And to me, the benefits of having a network in the area, whether it’s a friend who can hold a ladder for you or a friend who’s worked with a local real estate agent, that to me for a small duplex purchase was way more important than what are the bigger economic trends in the area.

Ashley:
For your first deal, you can’t know everything anyways. So there has to be that little bit of gut check like, okay, I don’t know everything. It’s my first deal. I have to take action.

Jaryn:
Analysis paralysis, right? I needed to buy a house and really, I needed a living situation. All the other stuff was ancillary. So it’s like if I started to think about population growth and what new businesses are coming into the area, and I think a lot of people do this, there’s going to be something in that web of data that’s going to tell you this is a bad idea. So I’m just like, I’m just going to do it and see what happens.

Tony:
Yeah. I think there’s a benefit, too, that you were looking for something to house hack, something that you could live in and rent out the other side because it just almost automatically force you to circle in on a certain area. So you land on your backyard, your hometown as a city you want to invest into. How long does it actually take for you to find that first duplex?

Jaryn:
I would say three months to get my stuff in order to write offers. I would say 60 days or less to actually have an accepted offer. I probably wrote five to seven offers in that time. My criteria wasn’t anything that crazy. It was like $200,000 or less, two family, couple of different neighborhoods. And beyond that, I was writing offers on anything that fit that bill. I didn’t know enough to be picky.

Ashley:
So tell us a little bit about that deal. What was the asking price and what did you end up getting it under contract for?

Jaryn:
I think asking price was 179. I think I wrote an offer for 179. I had gone around the merry-go-round a few times of last and final on some other houses and missed out. And basically, the conversation with my real estate agent moving forward was like, “If we’re going to write offers, let’s just write our last and final offer every time.” There was no writing an offer and then writing an offer under market value. It was different times than today. It was like, this is what they’re asking for. I can make the numbers work enough at that price. I need a house. And that’s how we did it. So it was five or seven offers. Got it under contract at asking price when they asked for last and final. I didn’t change my number. They accepted it. Under contract, learned that I was going to need to have flood insurance.

Ashley:
So that had to change your numbers a lot-

Jaryn:
Yes.

Ashley:
… having to figure out flood insurance. What did that end up costing you a year?

Jaryn:
Well, when you’re stubborn and desperate and need to make something happen, sometimes as things fly in your windshield, you just put the windshield wipers on and keep moving forward. Everything was getting scarier and scarier as we were going through it, but it ended up costing me $2,300 for the first year, which is crazy, but I knew I needed to just make something happen or I wouldn’t be here right now. I knew I could afford it. I maybe wasn’t going to make any money, but I knew I could afford it, so I was like, “Whatever. Screw it.”
Now after the first year, there’s a little bit of stabilization, all this thing is happening or whatever. Not that there’s much stabilization in the two family, but it felt like it at the time. I’m paying 1,050, so 1,050 bucks a year moving forward for flood insurance, which as far as I’m concerned, it’s the cost of doing business at this point. It’s not a big deal.

Ashley:
Tony, you had a really bad experience with flood insurance, right, in Louisiana [inaudible 00:18:59].

Tony:
I was trying to avoid reliving that terrible, terrible experience. Yeah. Our very second single family home, I can’t remember what the exact numbers were, but ours, I want to say our flood insurance premium tripled from one year to the next. And we shopped around to different providers. We talked to different insurance brokers and for whatever reason, we couldn’t get it down, and we ended up having to sell that property. We end up selling it at a loss because either way, we’re going to be losing money on it.
So my lesson is just I pretty much just don’t buy anywhere that’s in a flood zone any more just because I don’t want to run that risk. But if it’s stabilized and you can project what it’s going to be, maybe it makes sense still.

Ashley:
And that’s happening in Texas and Florida right now too for hurricane insurance and also flood insurance and different things like that where insurance is just changing so drastically. In Houston, for example, there’s large multifamily apartment complexes that are having a hard time getting insurance or it’s going to be super, super expensive. And it’s like when they purchased the deal two, three years ago, the numbers worked, but then when your insurance just skyrockets like that, it’s an expense you don’t account for, and now you have to figure out as the operator or the owner of these properties as to how to make that deal work, especially when you have investors involved too.

Jaryn:
Yeah.

Ashley:
So that’s always something to be cautious of. You have your property taxes increasing and your insurance. And property taxes, you’re most likely always going to have unless you turn your property into a church or something like that. But for your insurance, you don’t always have to have insurance. I’ve bought a couple of properties where the guy tells me, “Oh, I’m self-insured. I don’t have insurance on this place.” Technically, you don’t have to have insurance on the property if you don’t have a mortgage on the property, but pretty much every single bank is going to require you to have insurance on the property. So those are two things that you really want to understand and know what your increases could be to building out your numbers going forward too.
So Jaryn, when you were analyzing this duplex, did you account for your income for a long-term rental and a short-term rental or did you just do it as one? What did your income look like that you were accounting for when you analyzed this deal?

Jaryn:
The short-term rental thing was an idea. It’s not what you would consider to be a traditional short-term rental neighborhood. It was more like, okay, the house is going to cost me roughly this much. The rent from downstairs is going to be roughly this much. Here’s my income. Can I make it all work? And I was like, yeah, I can just barely make this work. We’ll see what happens. And then from there, it snowballs. It’s like, all right, I’m going to fix the apartment up. And while you’re fixing the apartment up, because I was in the situation I was in, I’m like, how can I make a little bit more money off this apartment? I don’t need a lot in life. I don’t need a huge house to live in for my three kids. In the Berkshires at least at that point, it was just me. I was going to New York City to be with my girlfriend on the weekends. So short-term rental revenue during the pandemic was a pleasant surprise, let me tell you.

Tony:
So Jaryn, I want to get into those numbers here in a second because obviously, I’m a big short-term rental guy, and I love it when I hear smaller cities like this that maybe you wouldn’t even think would be big for short-term rentals tend to do relatively well. But before we do, we want to take a short break to hear from our show sponsors.
So Jaryn, we’re back and I want to dive into the revenue from your Airbnb, but before we do, Ash, I just got to say before we broke, you said that churches don’t have to pay property taxes. I did not know that.

Ashley:
I’m pretty sure, right? Did you Google it to confirm what I said is correct?

Tony:
I did. I Googled it. I Googled it. You’re absolutely right. Churches are exempt, at least in California, from paying property taxes. So now I’m thinking like, okay, how can I turn all of my Airbnbs into churches?

Ashley:
No, and then you just do what the Kardashians do. You have all of your friends donate to the church, but then you do like church retreats to Puerto Rico or Hawaii or whatever and all their money is a donation, but then they can send it however they want. I don’t know. You can Google Kardashians’ church and how they funnel their investing through a church.

Tony:
Yeah, that’s a crazy idea. All right. Well, enough about skirting the tax laws by creating these churches. Let’s talk about the revenue from your short-term rentals, Jaryn. I just want to paint the picture here. So you have a duplex, and are you renting out one entire side as short-term rental? Are you renting out rooms? What was your exact strategy for the Airbnb side?

Jaryn:
Well, so you mentioned the market. So basically, the Berkshires are a slice of Western Massachusetts, like way Western Massachusetts. There’s a lot of different things happening here. Pittsfield, working class city. Southern Berkshires is where a lot of people come up to go on vacation from New York City, Boston, that kind of thing, so it’s pretty high end. It’s like the Hamptons basically. It’s very bougie.
And so when I said I’m going to house hack my duplex and put my apartment on Airbnb, people did not think of my apartment in a C-plus, B-minus class neighborhood as somewhere where you could have an Airbnb. And I believed them, but I believed you guys a lot more. It was like there’s a lot of different shapes and sizes that these things can operate in. So I was like, I’m just going to go for it. Renovated the apartment myself. I have no clue what I’m doing. I’m trying to never pick up a hammer again. I’m doing pretty well at that but not perfectly.

Ashley:
So were you living in it while you were renovating it or did you wait to move in?

Jaryn:
I was working probably 50 hours a week, trying to ride my bike three times a week. I was in the Berkshires from Monday morning at 8:00 until Thursday afternoon at 6 PM, and then I was driving to New York City to be with my girlfriend Thursday night through 5:30 in the morning on Monday.

Ashley:
So nobody else has an excuse to not get started in real estate investing.

Jaryn:
There was no time, but it worked.

Ashley:
If you want it bad enough, you’ll make time for it.

Jaryn:
Yes, and I feel bad for the people who … the tenants I inherited downstairs because I was sanding the walls from 8:00 at night until 1:00 in the morning, and they were patient, and yeah, you get a little bit less sleep. Not a big deal. We will survive.

Ashley:
So you get it done. Yeah. You post it up on Airbnb, and how does it go?

Jaryn:
I post it on Airbnb. I thought I had it ready. Here comes grandma again. I go on vacation to Cape Cod actually. I post it on Airbnb but I don’t turn it on yet. I just get it listed, and I have no clue how to build an Airbnb listing at this point. I’ve built dozens of them now, I know how to do it, but back then, it’s the first one, you’re poking your way through. I’m in Cape Cod and I’m talking to my girlfriend. I’m like, “You know what? I’m just going to turn it on.” Now, mind you, it’s summertime in the Berkshires. That’s when everyone wants to be here. I turn it on and I get 10 bookings in 24 hours.

Ashley:
Oh, my god.

Jaryn:
The first one is the next day. And so I call my grandma and I’m like, “Grandma, the craziest thing happened. I did this short-term rental thing that I’ve been talking to you about. Is there any way” … My grandma and I obviously have a great relationship. I talk to her all the time. “Is there any way you can pop over to my house to just make sure it looks good and is ready to go?” She calls me back the next morning, maybe not swearing, but, “Oh, my god. I can’t believe you thought that was going to be ready to rent like that,” things I know now that I didn’t know, which is the tub has to be clean, not work at the bike shop boy clean, like clean. And so she, thank god for grandma and for a million different reasons, tuned it up real quick. First person checks in and the rest is history from there basically, but it worked out.

Tony:
Can we talk numbers, Jaryn, because I’m curious, man. You’ve got this smaller city, not a major vacation destination but something that’s good for that regional area. In that first year that you had it, ballpark, what did the numbers look like?

Jaryn:
Yeah. So this is where it was, for me, it was so life-changing because I was making so little money. I had a tenant or, to use Brian Murray’s word, resident, which I like to try and start using that lingo, downstairs, paying a thousand dollars a month in a long-term lease. I put it on Airbnb and I was trending to do maybe $15,000 in the year. But then again, BiggerPockets, forum, books, something, I learn about dynamic pricing. I load the listing on to PriceLabs and I learned that I don’t have to charge $87 a night for this short-term rental. I can charge $349 a night. I never would have known.
And so there’s a lot of stories in there of accidentally charging too much just because I could. I’m getting greedy because of the sake you can get away with it, and that caused some problems, which I fixed with some integrity, I would hope. And landed on that pricing strategy for that property that worked out really well. And I think year one of being on Airbnb, I did, let’s call it 30, 36,000. It was more than three times what I was getting from the downstairs resident and I was living in the house four days a week.

Ashley:
Wow. So breakdown, what was your cash flow for the year or average on monthly? Were you having to pay anything towards your mortgage at all or was it completely covered and you’re walking away with cash every month?

Jaryn:
Great question. So cash flow is always a little bit of an interesting, tricky word for me. I think a lot of people, not necessarily on here, but just in general, talk about cash flow of whatever they’re making but maybe not setting aside money for reserves or this, that and the other thing. So I’m trying to be more careful about that. Basically, I brought in $50,000 in revenue in that first year, and if I look at the bills on the things that I didn’t have to pay, the bills were somewhere around, mortgage is 1,400, I have a whole P&L for this, but let’s call it 25 grand. So there was 25,000 or so available that I was able to hypothetically put in my pocket. But really, me as a landlord and where I want to go with this and because I’m lucky enough to have a day job, is that I really want to keep all the money in the properties, whether it’s-

Ashley:
You’re reinvesting it.

Jaryn:
Reinvesting them to make the property nicer or leaving it in a bank account tied to the property to then use as a down payment for another property down the road. I don’t need the cash flow anymore. In the beginning, maybe, but now as long as the property is completely supporting itself, I’m okay and I’d rather push the money in to try and drive the value on an appraisal down the road because I want the big chunk of money. I want the 200 grand from a new appraisal. I don’t care as much about the $200 a door a month or whatever that number is.

Tony:
So, Jaryn, just to give some clarity to the listeners here. You have a duplex. You’re renting out one unit long term. And then when you go back to the city to see your girlfriend, you’re renting out the unit you live in short term. So on a part-time basis, between the short-term rental and then the long-term rental downstairs, you did over $50,000 in revenue. I just want to make sure I’m tracking correctly.

Jaryn:
Yeah. And the asterisk to that is that that was learning how to do Airbnb during a pandemic when demand was very strong. Now, I would say at this point, I’m fairly I would say very confident with my abilities on Airbnb or short-term rental platforms. And I think this year, I’m going to do exactly like 31 or 32,000 from the Airbnb. So the rent downstairs is a little higher, like 45 grand gross in that house. But that’s being further along with learning how things work.

Tony:
And on that note, Jaryn, you mentioned that you learned some lessons as you were pricing and other things. What were some of those lessons you learned that you feel have helped you become a better host today?

Jaryn:
I’m juggling a lot of things. We have four bike shops. I got a relationship in New York City. I got a bike I want to ride. I want a community I want to be a part of. What I don’t necessarily think is a great use of my time is cleaning the sheets and cleaning the apartment. So first thing I did is I started dropping the laundry off at a linen company. They charge me a dollar and a quarter a pound. It comes back way better than if I do it myself. That was number one. That bought me back a little time, and that’s when I was like, I’m going to start an Airbnb management business and start Googling how that works. And then it’s like I need a cleaner, got a cleaner. All of a sudden, I’ve gotten back six hours a week of my time or five hours a week of my time and I’m putting that time, I’m not watching TV, I’m Googling how to start an Airbnb management business. That’s been the evolution there.

Tony:
Yeah, there’s a great book I read recently. It’s called Buy Back Your Time by Dan Martell. And basically, what you just described, Jaryn, is the premise of that book, is that as you’re building your own business, you want to identify opportunities for you to hire someone who can take away some of those tasks that you’re doing that aren’t the highest and best use of your time so you can continue to focus on growing the business at a higher level. And it sounds like that’s what you did, man. So let’s talk a little bit about the transition to the management side of things. I guess how many properties are you currently managing?

Jaryn:
It changes a little bit because sometimes, people are like, “I want to live in the house. I don’t.” But about 10 basically.

Tony:
That’s awesome, man. And what period of time, how long did it take you to go from zero to 10 properties under management?

Jaryn:
That’s a great question. I would say 12 months, give or take. And then eight to 10 felt like enough for where I was at as far as availability to put into that business. The reason I went down that road versus trying to be a contractor or a real estate agent or something is because of my living situation, I needed to do something that I could pretty much fully operate from my phone because I’m in different places all the time. So running short-term rentals for other people felt like the best fit. Now, today, I have a handyman. I have two cleaners. There’s people that make money in this business besides myself, plus all the homeowners. But that was the best fit for me. If I wanted to go deeper into real estate, that was the best fit.
Where I want to go with that business this year is I haven’t put a lot of extra effort in systemizing or growing that business that much over the last 12 months. This year coming is really hopefully going to be a time to focus on putting some more time and effort into that business.

Ashley:
Jaryn, do you think for another rookie investor, that’s a great almost side hustle for them to get into to help them build their investment portfolio? And maybe you could give us some insight as to how lucrative this actually is for you. Is there money in it? Are you doing it for the experience?

Jaryn:
So any type of property management that you can get your hands on, whether it’s long term, short term, medium term, cleaning houses, it’s a great way for someone who wants to learn and isn’t afraid of some hard work to get into. You’re in the properties. You’re dealing with people who are either staying or living in these properties. You’re learning what to do when the, everyone’s biggest fear, when the toilet starts to leak. And the other thing is that the barrier to entry is really low, well, especially financially. You don’t need a hundred grand to go start a small mom and pop property management business.

Tony:
What was your process for finding those 10 clients? Were you networking at real estate meetups? Were you sending out direct mail? How did you find those 10 clients?

Jaryn:
How I did it in the beginning was through some luck and it’s been a question that I would love to ask some people of a better way to do it. Here’s how I did it. I made up some flyers that cost me a hundred dollars to get printed. I paid someone a hundred dollars to go where there’s a flyer delivery service in the community and she dropped them off at a hundred different locations. That was part one.

Tony:
And then, Jaryn, did you actually drop them off at the Airbnb or were you dropping them off at owners’ residences?

Ashley:
Or different businesses?

Jaryn:
Bingo. So general stores, coffee shops, liquor stores, whatever stores are in the area that had a community bulletin board, we would post them there and got a few listings from that. I also started pulling a list of six months of real estate transactions in the Berkshires and then I would organize that list so it was only houses that were $250,000 or more. And then I would delete a few cities in the Berkshires out of that based on what I like and I would just send them a direct mail, which was a piece of mail that basically linked them back to my website. That worked a little bit. There is probably a million ways to create a much higher conversion rate that I am going to put some time and effort into this coming year, but that got me to 10.

Tony:
Yeah, that’s awesome, man. So we’re really focused, 2024 is going to be the year that we really focus on growing our Airbnb management company as well. And obviously, we’re going to leverage the platform that we’ve already built, but I think a big focus for us is going to be relationships, so talking to our agents, our lenders that we already know, saying like, “Hey, if you have more clients, send them our way.” Direct mail I think is going to be a big piece for us also.
And then a sneaky trick that I learned from one of my friends that has a management company in Arizona, but we have a cleaning company, and he said that his back door into management was getting cleaning clients first because everyone wants a good cleaner. There’s less friction in changing cleaning companies than there is changing property management companies. So if we can prove that we’re really good at the cleaning process, we’ve already built that connection, that relationship with the owner, then we can approach them later and say, “Hey, look. We’ve been cleaning for you for three months, but you know we also do management.” So I’m super excited about growing both of those businesses because I feel like there’s a big need for that in this space still.

Jaryn:
The cleaning business thing is something that I’ve put some thought into of like, let’s put it this way, if I wasn’t running a few bike shops right now, I would be fully, not even working on the business but working in the business, Airbnb cleaning company and would be whispering into people’s ears of, “Oh yeah. By the way, we run these listings as well.” Because of my job, I don’t have as much time to do that, but that is part of the plan for this coming year of how to grow that business a little bit.

Ashley:
And then in five years, you sell it to an even bigger management company and you retire.

Jaryn:
I have five-year plans. That isn’t exactly it but it is a good one.

Ashley:
Well, go ahead, tell us yours real quick if you don’t mind.

Jaryn:
Well, the whole thing for the management business for me right now is to try to keep it pretty passive. My focus is on the bike shops and taking the money from the management business and to buy bigger multifamily buildings. We haven’t talked about the bigger purchase I made this past year, which is totally fine. But basically, I bought an eight-unit apartment building and I really like that size multifamily, and it’s around, it’s available in the area. So let’s say eight to 10-unit apartment building, million bucks, you need 250, $300,000 to pull the trigger on that kind of thing. I want the money from the management company to be used for down payments for those types of purchases.
The other part of the five-year plan is that I’m very much a part of these bike shops, and retail is in an interesting point right now where we need to pivot a little bit. Margins are getting squeezed in different ways and we need to think outside the box of how to bring in revenue to retail businesses. So one of my plans is I know how to run Airbnbs. Why don’t we have an outdoor themed hotel, motel, lodge, this, that and the other thing as part of our bike shop ecosystem? You know what I mean? Bring it all together. I’d love to see that at some point in the future. There’s a million directions to go, but that that’s part of it probably.

Ashley:
Quite the visionary, I have to say.

Jaryn:
Because I put a lot of work into trying to do it like all of you. It’s the same thing.

Ashley:
Oh, one thing you had mentioned in there though is an eight-unit building. When did you get that?

Jaryn:
Oh, man, I got that … It depends how much of that can of worms you want to open up.

Ashley:
Yeah, let’s just go into it brief before we wrap up.

Jaryn:
That I closed on April 1st. I had been under contract since the end of October. I’ll tell you how I got there a little bit, which is that I refinanced the duplex and I had some cash from that because I wasn’t afraid to buy a property during the pandemic, even though everybody told me not to because it had appreciated like we’ve all experienced, and I pulled some equity out of that. It was burning a hole in my pocket. I was making payments on it and I was like, “I got to buy something. I got to put this somewhere so I don’t use it to buy a car or something stupid.”
So I made a list of all the multifamily homes in the neighborhood that I already was living in and I started calling. And I hear stories about a lot of people who call thousands of people. My fourth phone call, a woman answered the phone and I said, “Hey, my name is Jaryn. I live in the neighborhood and I’m trying to buy another property in the neighborhood. Are you interested in selling your house?” And she goes, “Funny. We actually have it listed for sale.” It had made the list two months prior and then was really busy with a few things and started calling.

Ashley:
Oh, so you didn’t see it yet.

Jaryn:
I didn’t see it. And I said, “Okay, my apologies. If you don’t mind me asking, what do you have listed?” And she’s like, “We have an eight-unit apartment building listed for 550,000 I think.” And I said, “Okay, that’s amazing. Good for you.” In a real way like, “Congratulations,” whatever. I was like, “It’s a bit outside of my buy box. I’m looking for a two to four unit.” And then somewhere way back in here, a voice said ask him about seller financing. And I asked and I said, “Would you ever consider seller financing?” And she paused for about 10 seconds and she said, “We bought it with seller financing 40 years ago. We’d be open to it.” And I pretty much fainted. Because we hear this stuff and it doesn’t feel like it’s a real thing. It’s a real thing.

Ashley:
I still get excited about it, Jaryn. Just literally yesterday, I got a text from Daryl saying the neighbor wants to sell his property and want to know if we were interested. And before I could work up my list of 20 questions, he said he’s interested in doing seller finance.

Jaryn:
It’s crazy.

Ashley:
And I still got excited. I was like, “Okay, there’s a big step there. We could make this a better deal just for the fact that he’s open to doing seller financing.”

Jaryn:
It’s a win-win for both sides if the situations are right, which is why it works. This ended up being perfect for both of us.

Tony:
And just one thing I’ll mention too is that I think there’s a stronger appetite from owners to offer seller financing on these bigger commercial properties or small multifamily even. We have a hotel in our contract that we’ll be closing on hopefully in the next couple of weeks here, and it’s a 13-unit motel, fully seller financed, and we got I think a 10-year term. First two years are interest only. It was like a six and half percent interest rate, and we got it below what it appraised for, just a killer deal all the way around.
And it’s because these commercial property owners, they know that if their books aren’t super solid, if their P&Ls aren’t good, if they don’t have good tax returns, it’s going to be difficult for someone to go out there and get traditional debt on that property anyway. So there’s a little bit more flexibility from those folks as opposed to going to a single-family home owner who lived in this property themselves for 30 years and doesn’t know anything about seller financing.

Jaryn:
It’s a different world. Once you get up into five-plus hotels, at least what I’ve experienced, the transaction is a completely different world.

Tony:
So Jaryn, let’s talk numbers on this eight-unit. Walk us through, yeah, give me the rundown of what the numbers were on this one.

Jaryn:
I want to add one thing that I did that I think got me the deal and is a tip for everyone out there.

Ashley:
Yeah, yeah, please share with us.

Tony:
Yeah, please.

Jaryn:
So conversation with the woman. She basically was like, “My husband deals with the real estate. I’ll have him call you.” He calls me back 15 minutes later. He says, “What are you doing?” I said, “Looking to buy a house.” He said, “I’ll meet you there in 15 minutes.” At this point, I’m along for the ride. He shows up. He tours me through every single nook and cranny of this house. This was something that this owner was really proud of, this is where I might cry, really proud of. And it was an amazing experience for someone like myself going through an eight-unit building, being like this guy is showing me everything. It was an education. I learned so much in two hours, maybe three hours we were there.
And at the end of the conversation, it was clear that I liked him and he liked me. That part was super important. From there, we looked at each other and we were both like, “What do we do?” And he was like, “You know what? I have it listed. I owe the broker the sale at least for now. If you are interested in purchasing this, write up an offer and put it, submit it through the broker.” I say, “Okay.”
Tony, to your point, I underwrote it a million ways to Sunday. This is where I have a lot of respect for Brian Murray. I bought the Multifamily Millionaire. I read it in three days. I learned how to underwrite bigger multifamily. And no matter how hard I squinted at it, I couldn’t make it work. And I knew if the management company started doing poorly or I got laid off from my job, let’s say, god forbid, or the Airbnb and the duplex did bad, I was going to potentially be in trouble. I was going to have to carry it too much for too long.
So here’s the tip. I wrote the guy a super honest, him and his wife, a super honest letter, telling them about banks won’t underwrite it because their rent doesn’t cover the debt service, this, that and the other thing. I hope we meet again, this, that and the other thing. But currently as listed, I don’t feel comfortable writing you an offer. I didn’t want to low ball. I had started this relationship with this guy. So I just wrote him a letter and it was an honest letter. In the back of my mind, I’m like, maybe they’ll call me someday, but I didn’t think it was going to happen as quickly as it did.
He called me back three weeks later and was like, “Jaryn, I want to sell you the house. They had it listed for 550. I want to sell it to you for 400,000. We’ll seller finance the whole thing for you if you can come up with 15,000 down at 5% amortized over 20 years with a five-year balloon.” And he was carrying me through this deal He said, “I want you to think about it for 24 hours, and if you want it,” I’m almost crying, “If you want it, call me in 24 hours and we got a deal.” So I fainted again, thought about it for 24 hours, woke up the next morning, moved a little bit of money around, if you will, and made sure I was good, and I called him back and got under contract, and I own it today.

Tony:
That is amazing.

Ashley:
All three of us, doesn’t that make you feel the emotion of like, I can’t wait until that’s me one day and I get this new investor that I get to give this great deal to and walk them through and hand my baby down to somebody else?

Jaryn:
To that point, it’s a once in a lifetime opportunity. I think we all get to a purchase like this at some point, but I think at the same time, real estate investors, we have a lot of responsibility, and there’s no question that I got to hand this thing down to somebody else someday. When? I don’t know but I have to.

Tony:
I just want to add one thing because I know this is something that I always wondered as I was getting into real estate investing, but it’s like why would anyone seller finance? And one of the things that we have to remember is that (a) there’s some tax implications of selling big properties all at once that they might want to avoid. And if they don’t want to 1031 into something else, that’s something to consider. But also think when they own the property, they’re responsible for all the day-to-day. Even if you have the property manager, they have to manage a property manager and make improvements to the property. There’s work that goes into being responsible for that property on a daily basis.
If they seller finance, there’s an opportunity they could get even more cash flow from this new note that they’re giving to you with literally zero work. So it really is a win-win situation for you as a buyer because you’re getting an amazing deal. You get to come in, do all the things you need to do to improve the value of that property. They’re getting a killer deal because there’s no big tax bill and then they get that stable, reliable cash flow every single month. So it really is a win-win situation.

Jaryn:
Yeah. The other thing that I’ll add is that they wanted a certain number for this building. They wanted half a million dollars for this building. And if you start to look at principal and interest, amortization schedule over five years, if I wait five years and refinance it on the last month that that note is due to them, they’re going to end up getting pretty close to their full asking price. They just have to get it over time. So they win too. They get what they want at the end of the day.

Ashley:
So Jaryn, to bring this full circle, what is your profit every month from this property, the eight unit?

Jaryn:
So this one for me is a bit crazier. I’ll say that when I purchased it, part of the reason why no one else had bought it and why they’re having a hard time selling it and why the bank wouldn’t finance it is it was bringing in $3,400 a month, eight apartments. Now, market rate realistically in the area is about a thousand dollars an apartment, depending on the apartment bedrooms, etc., but let’s use that as a ground rule, a baseline number. It was six months of stabilization. That was really uncomfortable in a million different ways, starting with closing, getting the keys and having to knock on eight doors of people who’ve lived there for a long time and say, “Hey, my name is Jaryn. I’m the new landlord. Oh, and by the way, your rent is going to go up a little bit probably.”
There was a thousand sleepless nights of plan of how I was going to increase the revenue of the property. And I probably didn’t know the exact strategy until two minutes before I knocked on the first door. I thought about it a lot, but I didn’t have it locked down. I was under contract for six months, which is why I had so much time to think about it but it worked perfectly.

Tony:
And just to set the table here. You’re saying just over 3000 bucks, but it was like 425 in rent per unit when market rents were a thousand. It’s a massive difference. So I guess what was your process, Jaryn, for taking those rents from 425 and getting them closer to that 1,000 and what number did you eventually land on?

Jaryn:
Very low, and it was very scary. The house I had worked out was going to cost me about $5,000 a month, and that’s right about where it’s at. If I really am sucking money into reserves and I’m under banking conservatively, that house should hold on to $5,000 a month. And that’s right about where it’s been after some renovations is where it’s stabilized out to. And I was bringing in $3,400 a month. So knock on every single door. “Hi, my name is Jaryn. I’m the new landlord. Here’s the plan.” No one was on leases. What’s a lease pretty much, right? We deal when we buy buildings that we can get under market value. There’s some problems you got to fix.
So basically, the deal was I’m going to have you sign a lease. It’s going to be a month-to-month lease. It’s going to be for two months. Two months from now, I’m going to raise your rent $50. I didn’t want to kill people. I did the math and I realized that 50 bucks over seven units, because one was vacant, I would bring the rent up, what, $350, $400 a month. I thought maybe I’ll get lucky somewhere and I’ll put an Airbnb into the one vacant unit and it’ll probably do 1,500 to 2,000 and that will buy me some time to turn some units over when people choose to leave. I didn’t want to kick people out. I didn’t want to go crazy with the rent. I wanted to try to meet people where they were at.
So if there’s seven tenants in a building that are way under market value and the new landlord comes in and he seems like he has this together and he’s talking about leases and he’s talking about taking photos inside of the apartments to get a baseline of what the condition of the unit is and all this stuff. The people who aren’t going to be great residents of the building, they leave. They realize that they might be accountable for some things and they decide that this maybe isn’t a perfect place to live.
Pretty much what happened is out of the seven tenants, four were completely understanding and incredibly grateful of the situation. They were able to afford the payments. I have them all on one-year leases right now. Two people left. They left the apartments. Both of them left them in really good condition. One of them, I swept. It was generating 450 a month. I swept it. I took photos. I rented it out three days later for 1,250 a month.
Another one, it was the one resident who was giving me a hard time, and I didn’t raise my voice or get mad but I stayed on them, “Hey, I really need that lease. Hey, I really need this done. Hey, I really need this done.” He left and he left on good terms. If I saw him today, I wouldn’t walk to the other side of the street. I’d say hi to him and I feel good about that. I renovated that whole unit, cost about $10,000. That’s rented for a thousand dollars a month.
So that plus two other little things. One was a section eight thing that was way … The paperwork was really off on it. That got to get raised a bit. And then I put the one apartment on Airbnb, which has done 2,000 a month basically for the last five months. All told, full circle, if I look at my rental right now, with the Airbnb income, it’s like 8,500 bucks a month and it costs me right around 5,000.

Ashley:
Wow.

Jaryn:
The last thing I’ll add is that the $3,000 a month makes me feel good. It’s some financial cushion, but I owe $300,000 on that property, give or take, right now. I haven’t got the appraisal done yet, and I’m going to wait because I want to pull money out. I want the 300,000. I don’t care about three grand. I think it’s probably worth between 650 and 750 right now. There’s so much money tied in there for when it’s time to do the next play, I’ve already got it, and that is why I’m really focused on the bigger multifamily at this point, and I could go buy a duplex right now, but it doesn’t make sense. It makes sense to just be patient, stabilize a little bit and try to buy another big one in a year.

Ashley:
I think that’s such a valid point as too many people get caught up in the growth scale. I got to a point where I was so overwhelmed with buying duplexes that I sold one that I only owned for a year because I had taken on too much at once and I wasn’t stabilizing. I was exhausted trying to manage all these properties and acquire more as rapidly, as fast as I could. So I think that’s a great point, is you can actually end up being more successful not being in that constant growth scaling, I got to buy something, I got to buy something, and focus on stabilization.

Jaryn:
Yeah.

Ashley:
I talk about this a couple of times, but we had a guest on who talks about how for her short-term rentals, they’re just adding saunas. They’re adding hot tubs. They’re not buying new properties. They’re stabilizing and increasing the value of what they already have.

Jaryn:
Yeah.

Ashley:
Jaryn, thank you so much for joining us. You definitely have come a long way from grandma’s couch. You took that first down payment. That’s $7,000 for a three and a half percent loan to buy your first house, and you have come all the way to having $300,000 in equity for an eight-unit property and all just ties back to taking action on that first property. So congratulations.
If you’re listening and want to learn more about Jaryn, we are going to put more information about him in the show description. You can find that on YouTube or on your favorite podcast platform. Don’t forget to join us in the Real Estate Rookie Facebook Group.
Get prepared to be successful in 2024. This is going to be a four-day summit that is exclusive for pro members with some access for free members. So make sure you upgrade to that pro membership before January 29th. It’s at biggerpockets.com/virtualsummit to get all the details on Dave Meyer and the real estate experts on how to access this exclusive event and to register.
Jaryn, thank you so much. I’m Ashley, and he’s Tony, and we’ll see you guys on the next Real Estate Rookie podcast.

David:
This is the BiggerPockets Podcast show.
What’s going on, everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, the number one real estate podcast where we arm you with the information that you need to start building long-term wealth through real estate today. As always, on Seeing Greene, we are answering questions from you, our listeners.

Rob:
Yeah, today we’re going to get into questions like, when is house hacking no longer a smart strategy? How should property taxes factor into your market analysis? And how do you know to sell a property even if it’s cash flowing? And even if you love it, David?

David:
And most importantly, if you want a chance to ask your question, please go to biggerpockets.com/David. The link is in the description. And if you have a burning real estate question, pause this podcast, send me your question and then jump right back in.

Rob:
And before we jump into this episode, a quick tip. Are you doing something you haven’t heard on this podcast before? Well, we want to hear your tips and tricks. Apply to be a guest on our show over at biggerpockets.com/guest. People ask me this all the time, it’s very easy to remember, biggerpockets.com/guest. Fill out a form. And if you’re a fit for the show, you will get to share the mic with me and David Greene.

David:
We hope to see you there. All right, let’s get into this thing. Our first question comes from Gabriel in Greenville, South Carolina.

Gabriel:
Hey David, my name is Gabe. I’m located in the Greenville, South Carolina market, and I’m a beginner investor. I’m looking for my first deal, really want to do a house hack, but I have a question about when you draw the line as to say house hacking is no longer a good strategy. I know you mentioned all the time that house hacking is mainly a savings strategy where you try to get your largest expense, your mortgage payment covered by rent from tenants. But in my area, it seems like most of the properties I look at, the rent from your tenant, while you’re house hacking, would probably only cover about 50 to 60% of the mortgage payment. So in that situation, do you think it’s still a good idea to invest in a house hack or do you think I should pursue a different option such as a live and flip? I’m pretty bullish about it. I still want to do it, but just want to know what your thoughts are. Thanks.

David:
All right, good question. Gabriel speaking for the masses here. I think there’s a lot of people that are thinking the same thing. I can answer this one somewhat succinctly. My thought would be is 50 to 60% of the mortgage less expensive than if you had to pay all the mortgage or all the rent. If so, you’re winning and you own a home and you’re getting tax benefits and you get future appreciation. And when the rents go up, that 50 to 60 slowly becomes 60 to 70, 70 to 80 and so forth. Rob, what say you?

Rob:
Yeah, I guess there is this idea, this misconception that you have to pay all of your mortgage and you have to subsidize your entire mortgage with house hacking. That’s just a really nice bonus on the top, right? The first house hack I ever did, I got 400 bucks a month for my buddy. My mortgage was 1,100 bucks, so that meant out of pocket I was paying $700 a month, which was still less than 1,100 bucks a month or whatever my mortgage was, right? So at the end of the day, look, as much as I want you to subsidize all of it, let’s not get spoiled here. It is a gift to have a lower mortgage payment. And if it gets you into ownership a little bit faster and makes it cheaper to own than it would be to go out and rent to property, I think it’s always fine to house hack.

David:
Yeah. And I would say if you’re only seeing 50 to 60% of the mortgage covered, are you looking at the wrong houses? Are you just looking at a regular house that’s not an investment property and you’re saying, “Well, a three-bedroom, two-bathroom, if I rent out two of the bedrooms, I’ll make this much money,” but you should be looking for a five-bedroom or you should be looking for a triplex or you should be looking for a house with a basement and the main house and an ADU? The property itself makes a very big difference when you’re trying to generate income. The floor plan, the asset itself makes a difference. I mean, Rob, is this a mistake that you think people may be making where they’re looking at the wrong house and saying house hacking doesn’t work?

Rob:
Honestly, I really just think the mistake is in the mindset of how much you should subsidize. I think ultimately the way I look at it is if I were going to go out and rent a place and it’s going to cost me 1,500 bucks, but I get the opportunity to go buy a place and it’s going to cost me, let’s say 17,00 or $1,800 a month, if house hacking gets that monthly price to be less than what I would be paying renting, then it’s always a viable solution for me.

David:
The idea of house hacking is to cut into your housing expense. Now, if you can live for free, if you can make money, that’s amazing. We would never say don’t do it. But the better way to look at this is it better to keep paying rent and not own a home? Or is it better to save money on your housing allowance and own a home? And that’s what we’re talking about. And the advice that I often give is just when you’re looking for the area that you’re going to house hack in, look for a house itself that either has more bedrooms or more units. Look for ways you can bring in more income on the house instead of just saving the expense by buying a cheaper house.

Rob:
Good question, Gabriel.

David:
Thank you, Gabe.
All right, moving into Jeff from Austin. He says, “What role should property tax play in determining where to invest?” Oh, this is good. I’m glad I got you here for this one, Rob. “For example, in Texas, they have a fairly high tax rate because there’s no estate income tax. Does that make the investment bar higher in Texas than in another state that has a lower rate? Wouldn’t it in theory change the equation when analyzing for cash flow?”
Oh, I love this. Thank you, Jeff. This is a case of the clearly over-analyzing Alfred, which I think we’ve all been there. I started off my career I think in the same kind of thought. So basically, because property taxes are higher in some states than other, should you have a higher expectation on the 1% rule or someone else when look at properties? What do you think, Rob?

Rob:
I wouldn’t necessarily a higher expectation. It’s just, yeah, does it fit the 1% rule if that’s your metric, if that’s your golden metric? And it just means it’ll be harder in some of these areas, but I would imagine that when that’s the case, if property taxes are higher, then my assumption here is that rents would probably be higher to match the landlord. Landlords will charge more because they pay more in property taxes and thus rents might stay abreast with that, with property taxes. What do you think?

David:
Never heard you say abreast on this podcast before. I’m still-

Rob:
I was trying to work it in when I can.

David:
Yeah, I’m still trying to acclimate to that. Yeah, this is not that complicated. When you’re running numbers in Texas if you’re going to invest there, you just use a higher number for the property taxes to see if the rental is going to work.
Here’s something I’ve learned about things like higher property taxes. Life is like this. It is very easy to focus on the negative and not think about the positive that comes with the negative, right? So for example, when it comes to investing in Hawaii, they have HOAs in most of the condos. I’ve got a couple condos out here, that’s where I am right now in Hawaii, and everyone says, “Ooh, I don’t want to invest in somewhere where there’s HOAs. That’s an extra expense.” But property taxes are insanely low in Hawaii, so it almost balances out. The condo fees are about the difference of what property taxes would be in most properties. So it kind of breaks even.
In Texas, yes, you have higher property taxes because they don’t have a state income tax, so it’s harder for an out-of-state investor to make that work. However, that means more people move to Texas. As more people move to Texas, rents go up. So in five years or 10 years later, your property value and your rents have increased substantially because it’s such a desirable area that people want to move to because there’s no state income tax. Now, the flip side is you have higher property taxes, so you just deal with it. I want to encourage everyone, don’t throw something away the minute you hear something that makes it bad or hard without asking the question of, “Well, how would that also benefit me?” You really want to weigh the two together. Robbie, it looks like you’re deep in thought over there. I like this.

Rob:
Well, yeah, it’s all relative. In Florida, you would have higher insurance costs, so that wouldn’t necessarily be a reason to not get into the Florida market. You would just have to underwrite four higher insurance costs, right?

David:
Yep.

Rob:
That might be not the best example because those can always increase, but I will say, man, those Texas property taxes do bite you in the booty, man. Houses in California, when I would underwrite them, always work better than in Texas because the property taxes here are crazy, man.

David:
Yeah. So then you say, “Should I invest in California?” Well, it’s wildly competitive. There’s 10 offers on every single house, so I don’t want to deal with that. But what does that do? That drives the price of homes up all the time. So then you make a bunch of money if you own in California for a long time.
Every market is going to have these ups and downs. So Jeff, the idea is you find the strategy that works in that market. And because I’ve been around long enough, I’ve seen, if you’re going to invest somewhere that does not have appreciation, you have to buy at a better price. You have to buy equity. Because you’re not going to get what I call market appreciation equity. If you buy in California, you buy in Florida, you buy in Texas, 10 years later, it’s most likely gone up quite a bit. If you buy in Indiana, if you buy in Kansas, it’s probably going to more or less be the same so you got to make sure you get in for a better price when you go. There are strategies that work in all these markets. You just can’t cross collateralize them. You can’t take the, “I want a huge discount” strategy and apply it to an area that’s also going to have massive growth. You’re not going to walk into Miami right now and get it at 70% of ARV like you might if it’s an area that doesn’t have as many buyers.

Rob:
Great question, Jeff.

David:
All right, our next question is also from a Jeff in Flagstaff, Arizona.

Jeff:
My name is Jeff Mileback. And thank you for taking my sell or hold question. I have 450K in equity on a great property. It’s a low interest cash flow and I love it, but the equity sits there. I’m also in contract on a property in a good location that costs 450. So, do I sell the great property and buy the new property? This will increase my cashflow about 1,000. It’ll sell an asset I love and it’ll trigger a 75K tax bill. Or do I sell the great property and 1031 exchange it into two new properties? This will increase my cashflow a little, but exchange a great property for two good unknowns. Or 3, keep the great property and buy just the one new property. This will decrease my cashflow by 800, yet it’ll keep a property I love and add a new one I believe in? I think do 3, but I feel fear because it hits my cashflow. Any other ideas?

Rob:
That’s a good question. Okay, so I guess scenario 1 is sell the great property, buy a new property and he’s going to trigger a tax event there. 2, sell the great property, 1031 into two. So-so properties that are good but he doesn’t really know. And then 3, just keep the great property that he has and just buy the one new property. I would say if you really love a property, you should hold onto it, right? It’s always a bummer when you let go of a property that you really like. It’s never a bummer to let go of properties that you don’t like, right? You’re usually pretty happy about that. But the pain is equal on both sides. And so if you have a lot of heart for a property and you really like it, then I would keep it because you probably will kick yourself for a long time that you sold something that you really liked, especially considering that selling it is not really going to increase your cashflow substantially. I really don’t see a reason to do that.

David:
It’s hard without knowing more of the goals here. Because if you’re trying to go big, it usually makes sense to buy more properties. But the downside of going big is it could put you back. Sometimes it takes longer to get those properties up and running. Sometimes those properties don’t do as well as the one that you had and you were like, “Man, I wanted to increase my cashflow and increase my net worth, but I’ve decreased my cashflow.” And then you got to think about the economy that we’re in, the market itself, right? If rates tomorrow went really low again, it would look really smart to buy more properties because the value of them would likely go up. If rates keep going up and we slip into a recession, because from what I’ve been hearing, Americans are starting to run out of reserves and their debt is starting to go higher and higher and higher, this would look really bad.
So there isn’t a clear cut answer because we don’t know about the environment that we’re investing into, which makes me think we want to kind of play it right down the middle. I would probably be leaning towards keep the property you have, use the money you have to buy the next property. And that will cut into your cashflow, but it’s the safest way that I can think about maintaining value without risking all the cash flow. If you sell, you buy two new ones, you don’t know how those ones are going to work out. You might find yourself with nothing. Any flaws in that logic, Rob?

Rob:
Mm-mm. No, I agree with you.

David:
Yeah. And I think to factor into our decision-making here, it is work to get a property stabilized, right? You don’t always think about it, especially if it’s a short-term rental, or in this case if it’s like several units over one property. You don’t just buy it and the money comes in. You buy it, you got to make some repairs, you got to get to know the tenants, you put new management in place. It takes a while for things to settle out. So it’s a shame once you’ve got it sort of smooth rolling to just sell it to someone else who buys it and gets to enjoy all that work you put in and then have to start all the way over at scratch doing the same thing with new properties.

Rob:
Yeah. So one little question I have is, why would buying the new property, if he keeps this property, why would that affect his cash flow?

David:
Because I think the new property he buys, he’s assuming isn’t going to cash flow. It’s going to take him a while to get it back up.

Rob:
Oh, I see. I see. So the plan is for it to cash flow. It’s just the stabilization is unclear at the moment.

David:
Yeah. And I know what you’re thinking Rob, is like, “Why would you buy anything that doesn’t cash flow?”? Which is, that should probably go into this conversation. Like, why would you buy a property if it’s not going to cash flow? Unless he has a plan, there’s like a ramp up period. So assuming that these are multifamily properties or these are properties that are like commercially operated, it can take a while to stabilize them and get them turned around.

Rob:
Yeah. So moral of the story, I think hold onto a great property that you really like. And I think scenario 3, keep the property, buy the new property and play the stabilization game.

David:
Yeah. And if you’re worried about losing cash flow on the new property, just don’t buy something that doesn’t cash flow right off the bat. Just keep waiting. And if we continue down the road we’re headed, you’re going to see more and more people dumping their properties on the market when they realize that, “Hey, this didn’t work out like I thought it would.” All right, good question there. Thank you for that Jeff.
All right. If you have questions that you think that I could help answer, remember, you can submit your questions, and we sure hope you do, at biggerpockets.com/david. We have more listener questions coming for you shortly about when to pay off your HELOC and recommendations for long distance investing from two long distance investors ourselves, Rob and I.
But before we get to that, a few comments and reviews from fellow BiggerPockets listeners. All right. The first one comes from Captain Christian, “Superb and relevant content.” This is an Apple Podcast review. “Huge fan of the podcast. I listened to it on double speed and it makes you guys sound like you are incredibly witty and quick.” So that’s an added bonus for you. Very nice.

Rob:
I think that’s a nice thing.

David:
Yeah. I just need to figure out how to do that in real life.

Rob:
We’ll just talk faster.

David:
Like the Micro machines guy? “I love the content, the real life application of the demonstrate. You have to ask specific questions about the location, the prices, about that [inaudible 00:15:07] deals and how people are putting them together. This market requires tenacity and creativity and I’m glad you’re able to pivot and show your audience how this market is still absolutely wide open for serious investors.”
Captain Christian, what a clutch review. Very well said, well-spoken. This seems like a brilliant person. What do you think, Rob?

Rob:
Yeah, nice guy. Nice guy. Can I read the second review here? It’s also a five star review.

David:
Yeah.

Rob:
From our friend Boatguy545, and he says, “Too good to be free. Excellent source of real estate knowledge. No period.” Meaning there’s more that he wants to say, but he’s restrained. He’s a man of few words and he just wants to give us a quick little compliment in and out. We appreciate you Boatguy545.

David:
Remember everyone, there’s even more free content at biggerpockets.com, so go check it out. There’s the best forums in the world of real estate investing. There are blogs, there’s an agent finder tool, there’s calculators you can use to analyze properties, all kinds of stuff to help you build that dream portfolio.
All right, moving into the YouTube comments from episode 840 from Travis Andres. “This is great, guys. I love how you both talk out the deal and possible scenarios. It really helps in seeing the thought process of how to come up with potential solutions.”
Yeah, that’s the harder part, right? Because we could give our advice, but then you have to remember to go back and say, “ell, here is what I was thinking when I gave that advice” so that you can take our logic and apply it to the situations that you come across with your own investing because not everyone’s going to have the exact same question. So thank you, Travis, for acknowledging that.
Remember everyone that we love and we appreciate all of your feedback, so please keep it coming. And remember to comment and subscribe to the BiggerPockets YouTube page. Also, if you’re listening in your podcast app, take some time to give us an honest rating and review. Those help us a ton. Let’s move on to the next question.

Rob:
Travis in Michigan writes, “Late in 2021, I use a HELOC, a home equity line of credit, as the down payment on a duplex in Michigan. The duplex was turned key but has the potential to add a couple of bedrooms in the future. Currently, it is fully rented, so we’ll probably add rooms at the next turnover. My question is, should I be working to repay the HELOC or should I wait? The HELOC is a ten-year interest-only draw period currently in year two. And after 10 years, the loan locks an interest rate and is amortized over 15 years with no future draws. The rate is variable and currently at 4.5%. The monthly payment on the $40,000 that I’ve borrowed is $125. I have about $10,000 of cash reserves that I keep for all three of my properties for vacancy CapEx and repairs. The property cash flows even after the HELOC payment. So I’ve been paying $500 a month to knock out the principal balance. But because it’s a lower rate than I could refinance at today, I’m not likely to do that.”
“Should I be putting that 8K in reserves against the HELOC? The HELOC is completely liquid. I can just borrow it back out if I needed a repair or even vacancy. For some reason, the cash in the account feels safer than the HELOC debit card. Should I even be paying the extra principle every month? Am I thinking about this wrong? Appreciate all the advice. Rob, you’re my favorite guy in the world.”
Oh, that was very nice, Travis. All right, that was a lot, but I think the gist of the question is he got a HELOC, it’s at a variable interest rate, it’s 4.5%. He’s got eight years before that starts to change and fluctuate. Should he pay it off sooner than that?

David:
Well, the 4.5 rate surprised me. I thought it’d be much higher than that. That’s a very low rate.

Rob:
Yeah, but variable, wouldn’t that imply that it jumps around? Or is he saying it’s variable after the 10 years?

David:
No, it jumps around, but it’s currently… Usually they only jump once a year and sometimes they can only jump by one point a year. So he probably got it at 3.5%. It’s been bumped up to 4.5%. Next year it could be 5.5%. It could go up to usually a percent every year. A lot of these adjustable rates are not completely adjustable. There’s limits of how much they can adjust up or down. And he says after 10 years of having the HELOC open, it basically turns into an amortized loan. That’s a normal thing that a lot of HELOCs will do.

Rob:
Got it.

David:
They don’t want make it a balloon payment that the whole thing is due. It just turns into a loan that’s paid back over a 15-year period that’s amortized. So he doesn’t have a whole lot of pressure that this thing needs to be paid back. The loan balance isn’t huge and it’s at a low rate. In this case, I’m probably okay to build up those reserves, because 10K really could be a little bit bigger.

Rob:
Yeah, I would say that. I mean, I think I agree, David. I mean really at the end of the day he’s paying $125 a month on this HELOC. That’s not a lot. If he told me that he was paying $2,000 a month and he only makes $25,000 a year and most of his money goes to this HELOC, I’d be like, “Get out of that if you can, if there’s a way.” But considering it seems to be really insignificant to his overall cash flow and return in my guess here, then I would say I’d probably just ride that one for as long as you can have a low interest rate.

David:
Yeah. And I like the idea of adding the bedrooms after the turn when the current tenants are gone to be able to increase different ways you can rent it out.. Hopefully rent it out by the room because you’ll probably make more money here. I think you’re probably overthinking it a little bit, Travis, but that’s okay. That’s what we’re here for. If something goes wrong, it’s nice to have that money in the account that can get you through it. I’d like to see you with 30,000 instead of 10,000, so maybe make that one of your goals for 2024, Travis, how to build up that savings account. Get after it, brother.
All right, our next video is coming from Chase who’s looking to buy in Alabama.

Chase:
Hey David, my name’s Chase. Thank you for all that you do at the BiggerPockets podcast and BiggerPockets network. I’ve been listening for the last couple months and learned a ton, so thanks for all that you do. So I have about $50,000 to work with and I’m new to real estate investing. My goal is not to become a professional real estate investor, neither full-time. I currently live abroad, planning to stay here, but I would like to get a rental property or two. Now, I’m looking at a suburb in Southeast Alabama. It’s a growing place, but a very small market nonetheless.
My question for you is, with the numbers I’m running, I could get a 30-year mortgage on one property that would generate about $250 a month in cash flow. The same property would be about -100, -$150 a month on a 15-year mortgage. Now, since I know my limits and I don’t plan to be a professional real estate investor, would you all consider this 15-year option as an effort just to build equity in a home? Thanks.

David:
All right, Rob, interesting take here. What do you think?

Rob:
It is an interesting take. It is. I rarely endorse a 15-year mortgage to be honest, just because I do like people using leverage and getting into more properties, but that’s not what he wants to do. And so if he’s just looking to pick up a property to build equity and when he retires have a couple of paid-off houses, then I don’t think I actually mind the 15-year mortgage because that means that in 15 years… He seemed like a young guy. When he is 40, 45, 50, if he has a couple of these that he’s stacked up, they’re all paid off, gives him options, gives him the option to retire early, right? If he can pay off a couple like six-figure houses, then he could effectively retire from his job a few years early and just live on that income. So I, for the first time ever, might be okay with this. What about you?

David:
I actually cover a strategy in the third pillar in Pillars of Wealth called the 15/15. And it’s really simple. You just buy a property, you put it on a 15-year mortgage. And even if you don’t make money, you just break even, or let’s say you lost a little bit, God forbid, in the very beginning, but you’re paying off massive chunks of principle, in year two, you do the same thing. You buy another property, put it on a 15-year mortgage. Third year you do the same thing. Fourth year do the same thing. By the third or fourth year, that first one that might’ve been losing money with rent increases should be breaking even or starting to make money, okay? And if you just repeat this for 15 years, the stuff you bought in years 1, 2, 3 by year, 6, 7, 8 should be cash flowing to make up for the properties that are losing money because the 15-year mortgage is higher. So overall the portfolio will eventually balance itself out.
Now here’s the beauty of it. In year 15, the property you bought in year one is paid off. You do a cash-out refinance on that property on another 15-year note. You live on that money for the rest of the year tax-free. Remember, when you do a refinance, you don’t get taxed because you didn’t earn money. You just took on debt and were paid in money. So let’s say you borrowed 150 grand, 200 grand against that house, that’s the money that you live on for the year. Next year, the house you bought in year two is paid off. You do the same thing. Next year you do the same thing with the house you bought in year three. When you get all the way to 15 years of that, the house that you refinanced the first time is paid off.
So essentially, if you just can buy a house and put it on a 15-year note every year for 15 years, you’ll never work again. You’ll never pay taxes again. You’ll just live off of the money that kept coming in. And it doesn’t need to be something that you put a whole lot of thought into. You just have to be able to live beneath your means to pull it off.
So for someone like Chase here, if you’re going to be focusing on making good money at work, saving that money and putting it as down payments, you’re going to be living beneath your means so that you have some cash in case something goes wrong, I don’t think this is a bad strategy at all. What do you think hearing that, Rob?

Rob:
No, no. I think it’s a perfectly viable strategy. The only thing I would say because I am kind of teeter-tottering on this one is when you get a 30-year fixed mortgage, your overall payment’s going to be less. I think you could still aggressively pay down your principal as if it were on a 15-year amortization schedule.

David:
Totally that. Yeah.

Rob:
But it gives you options in case he’s ever in a time where, I don’t know, maybe he loses his job or he just needs extra cash flow, he could pull from that at that point because he’s making more absolutely from a 30-year. So I would consider that as just like a, “Hey, when times are tough, you may want the lower mortgage payment,” right? And then also if you ever lose your job and you got to ever cover the mortgage on a 15-year mortgage, you’ll be a little bummed that it’s higher than it could be, right? So something to consider. But all in all, I would say, yeah, that seems like a good strategy to me, David. And yeah, 15-year, I think it actually makes sense for Chase.

David:
The only real upside with getting a 15-year mortgage instead of a 30 is your interest rate’s a little better.

Rob:
It’s lower, right?

David:
Yeah. Yeah. But it comes with risk. So I like your idea there. Put it on a 30-year mortgage and just make extra principal payments so that it’s paid off in 15 years. Or maybe in times when you’re doing really well financially, you make even bigger principal reduction payments and you get it paid off in 10 years and you speed up that process. Now, we never talked about this. If you’re wondering why, “David, why have you never said this in any of the years on the podcast?” It’s because interest rates were like 3% and it didn’t really make a whole lot of sense to pay that debt off when they were so low. But now that we’re getting up into 7, 8, 9, 10% interest rates, this strategy can start to make sense because that extra principle you’re paying off is giving you a much higher return than when rates were at 3 or 4%.

Rob:
Lurve. All right, well great question, Chase. That’s a good one. Makes me rethink… Yeah, I guess I never really thought I’d flip for my original stance on that.

David:
Well, it is. And not everybody has to be like you or me. You and me are knee-deep in this stuff. We love real estate. We talk about real estate. We have businesses surrounded by real estate. We give advice on real estate. You can like it but not love it. You can date it but not marry it. You don’t have to jump in with both feet completely obsessed with real estate investing.

Rob:
That’s right.

David:
All right, that is our last question for today. Rob, thank you for joining me here on Seeing Greene.

Rob:
Hey, of course.

David:
What were some of your favorite parts of today’s show?

Rob:
I honestly really like answering the HELOC question, for example. I mean a lot of these questions, it’s kind of funny because they just have different answers in 2023 than they had in 2021. You know what I mean? And so it’s always nice to kind of go back and take a look at some of these not basic concepts, but fundamental concepts such as 15-year versus 30-year, home equity lines of credit, and kind of analyze them kind of in the landscape of 2023 with the way interest rates are. So it’s an interesting way to figure out if and how my perspective has changed. And I feel like pretty much every time I do the show with you, I’m like, “Oh yeah, I guess that’s different than what I thought a year ago,” which is how real estate works.

David:
All right. In today’s show, we covered a wide range of topics including how property taxes should factor into your market analysis and property analysis, when to sell a property even if it’s cash flowing and what to do with the capital, and when a 15-year mortgage might make sense. We even painted a picture for everybody of how you can work hard for 15 years and then really never work again, especially with the advent of DSCR loans that you can use to qualify for future refinances if you just make smart financial decisions and put that money into a growing asset like real estate.
If you’d like to connect with us, check out the show notes for this episode where you can get the contact information for both Rob and I. And if you’re not already doing so, please make sure that you subscribe to the BiggerPockets YouTube channel as well as the podcast app. We are on major podcast platforms all across the country. Please subscribe there and leave us a review. Hopefully, we can read your review on a future show. This is David Greene for Rob, putting the Rob in Robin to my Batman, signing off.

Rob:
Nice.

Mat Ishbia, UWM CEO, joins ‘Closing Bell: Overtime’ to discuss his outlook on the housing and mortgage market.

Dave:
Hey, everyone. Welcome to the BiggerPockets Podcast Network. I’m your host today, Dave Meyer, and we are going to be digging into the state of multifamily in 2024. And to talk about this really important topic, we’re bringing on two of the best in the business. Honestly, these two investors are guys I’ve been following for most of my career. They’re people I look up to. And I promise, you are going to learn a lot from each of them. The first is Matt Faircloth. You’ve probably heard him on this podcast before, you’ve been listening for a while. He’s the owner of the DeRosa Group. He’s a BiggerPockets Bootcamp instructor. He wrote a book called Raising Private Capital, and knows a ton about real estate investing. The other is Brian Burke, who is the president and CEO of Praxis Capital. He has been investing for a long time, over 30 years, and he has bought and sold over 4,000 multifamily units.
So if you guys want to learn about what’s going on in the multifamily market, these two are the people you want to be listening to. And the reason we want to talk about multifamily right now is because it’s facing market conditions that are very different than the residential market. If you paid attention in 2023, the residential market was flat. There wasn’t a lot going on in terms of sales volumes, but things chugged along, and honestly outperformed a lot of expectations.
But when you look at the multifamily market, things are very different. Prices have dropped anywhere from 10 to 20%, depending on where you are in the country. And this obviously creates risk for multifamily investors. But the question is, does it also create opportunity in 2024 to buy at a discount and get some great value? So that’s what we’re going to jump into with Brian and Matt today. So with no further ado, let’s bring them on.
We are, of course, here today to talk about the multifamily market. And so Brian, I’d love just to have your summary first of all about what was going on in the multifamily market in 2023.

Brian:
Well, nothing good was going on in the multifamily market in 2023. I always say that there’s a good time to buy, there’s a good time to sell, and there’s a good time to sit on the beach. And so this beach here in the background is just really a demonstration that I live by what I say, and I actually put my money where my mouth is. There’s really no reason to invest in real estate in 2023. It’s just better to be on the beach or play golf, which is what I think I’m going to do after I get done recording this podcast. Because I’m not really paying that close of attention to making acquisitions right now, because there’s just no reason to. 2023, I think, was a year of challenge when you had a bid-ask spread between buyers and sellers, where nobody could get on the same page. Buyers wanted to pay less than sellers are willing to take, and sellers wanted more than buyers were willing to pay. And there was no bridging that impasse, and I don’t think that 2024 is going to look much different, frankly.

Dave:
Matt, what do you think? Would you concur?

Matt:
Well, it’s easy when you’re Brian Burke to say, “I’m going to just chill out and not do anything.” But it’s through no harm in trying that we didn’t do anything, either. We worked really hard to try and do deals last year. But Brian’s correct, the bid-ask spread was too far apart for most deals to get done. And those that I saw do mid-size multifamily deals, which is just what we are targeting and what Brian’s targeting as well, those that were targeting those kinds of deals and that got them likely overpaid. If you look at where the market is now, and you look at where things are starting to settle down, I think that we hit the peak in 2023 of the market. I’m not sure if Brian disagrees with me on that one or not, but I think that the market hit its apex. And it’s tough to do deals when that’s happening.
And so now on our way back down, we really spent 2023 tightening up our company. We made a lot of hires, changed a lot of things around, and tried really hard to get deals done. Didn’t. Just through no harm in trying, but just the numbers weren’t there. What sellers were asking and what properties were trading for. Other people were buying these properties, just not us. It just didn’t make sense. Didn’t pencil out. Would not have achieved anywhere near the investor returns that we wanted to see. So we tried, but we didn’t. We struck out last year. And I don’t think that’s going to happen this year, though.

Brian:
Matt and I did a podcast in August together on On the Market, and if you remember, we had a pact to disagree with one another. So I’ll start it off this time. I’m going to disagree with Matt’s 2023 calling the top. I think the top was actually in 2022. And so we started selling in 2021, and continued selling into the early part of 2022, and then I think the market started to fall. So while Matt was out digging for needles in haystacks, he could have been out here on the beach with me the whole time. Come on, man.

Matt:
I could have been joining Brian on the beach, but I’m stubborn. I kept trying to get deals done. And Brian ended up, I’m not going to say this very often on the show, but Brian was right, that there was not deals to be had. And maybe the market did peak in 2022, but I still think that there were a lot of stragglers, a lot of lasts of the Mohicans, so to speak, for folks trying to get deals done, Brian, in 2023. And I mean, we got bid out on a lot of deals, so there are still people that are literally trying to force a square peg into a round hole with a very big hammer, trying to hammer that square peg into that round hole to make deals work. And a lot of deals fell out, but they still went under contract, and we got beat at the bidding table. So I, again, don’t think that’s going to happen moving forward, though.

Dave:
So let’s dig into that a little bit, Matt. You said that things were not penciling. You were trying to bid.

Matt:
Yep.

Dave:
Prices are starting to come down in multifamily from 2022 until now. What about the dynamics of the market makes you want to bid less than you would have in 2022 or 2023, and what is preventing deals from penciling?

Matt:
Well, it’s very simple, in that unless you’re going to go and do a deal and just buy it straight cash, you’re going to have to borrow money. And the cost of money. The cost of money has gotten much more expensive. In some cases, it’s doubled if not more, meaning a 3.5, 4% interest rate is now getting bid at 8% on a bridge loan, if not more. And so that same deal that would’ve maybe made fiscal sense to a degree, maybe even would’ve been pushing the envelope at debt quotes of 2020, 2021 is now subject to debt numbers in the 6, 7, 8, 9% range today. So that’s the main thing that makes the numbers not pencil.
In addition to that, I think that we were getting beat by folks that were underwriting to 2021 and 2022’s rent increased numbers, saying, “Well,” let’s say Phoenix, Arizona or a market that’s seen a lot of rent growth, and I’m not throwing shade at Phoenix, I’m just saying that market has seen a lot of rent growth. And so if I underwrite a deal, assuming… and you know what happens when you assume, right… That rent growth in Phoenix is going to continue, it may be that deal pencils out, but we weren’t willing to do that. And we felt like rent had capped, and the data now shows that it has, but we were assuming that it had six months ago.
And so you go in with new numbers for debt, and not numbers for rent expansion, it’s not going to pencil. Now again, other folks are making other assumptions. And when you underwrite a deal, you have to make certain assumptions. We were making more conservative ones, and that added up to the numbers coming in at best case, 10% below what the seller was asking. But the deals were still trading at or around asking up until recently.

Dave:
All right, Matt, so as you’ve said, the price of debt and borrowing money has made deals really difficult to pencil in 2023. Now we got to take a quick break, but when we come back, Brian, I want to hear if you agree with Matt’s analysis.
Brian, what about you? You said that you basically sat out 2023. If you weren’t looking at deals, were there any macro indicators or anything that you periodically peeked in on to know it’s not even worth looking at individual deals at this time?

Brian:
Yeah. We’ve been following it pretty closely to see when the right time is to get back in. And Matt’s right. I mean, God, I hate to say that. Matt’s right, but the cost of debt has definitely been a factor in why deals haven’t been trading. There’s no doubt about that, but it goes beyond just the cost of debt. It’s the cost of the entire capital stack. Even equity, when you think about it, three years ago, investors were trying to find places to put their money. And they were getting a quarter of a percent in a savings account. So these alternative real estate investments looked pretty darn good. Well, now they can get 5.5 in a money market. And so taking on a bunch of additional risk to maybe start out at 3% cash-on-cash return, if you can even find a deal that throws that off in year one, followed by maybe getting up to 6, 7, or 8% cash-on-cash return in a few years, the risk premium just isn’t there.
So it’s more difficult for investors to fund these kinds of deals. So I think availability of capital and the cost of the whole capital stack is part of it. The other part of it is expenses are growing. Insurance is getting much more expensive in some markets, utilities are going up, payroll is going up. All of those things are getting more expensive. And then layering on top of that, the income stream isn’t growing. And really, the reason that people were paying so much money for income streams, which is really what we’re buying. Yes, we’re buying real estate, but the reason we’re buying the real estate is because it throws off an income stream. Income streams were growing and growing rapidly a few years ago, but now they’re not doing that. Income streams are shrinking, rents are declining, vacancies are increasing. As we see some trouble in the job market, we’ll probably see increases in delinquency.
At the same time expenses are going up, interest rates are going up, the whole cost of capital is going up, so you just can’t pay as much for a shrinking income stream as you could pay for a growing one. So really, what this whole thing comes down to is price. You can make any deal out there work at the right price. And the problem that we’re seeing is that sellers want to price the assets they want to sell based upon the things they were seeing in the market two or three years ago, and that just isn’t reality.
So what am I looking at, Dave, in terms of indicators? I’m looking at more of the psychology than I am specific numerical indicators that are very easy to quantify. I want to see when people start hating on real estate. Then that’s going to be when it starts to get interesting. When you start to see more foreclosures, that’s going to be when it’s going to be interesting, especially if no one’s bidding on them. When you see pessimism about the economy, it’s going to get more interesting. That’s what I’m looking for. I’m not looking for, “Oh, rates have to hit X, and rent growth has to hit Y.” And while certainly, those factors will make it easier to quantify future income streams, that isn’t telling me exactly when I think we’ve hit bottom.

Matt:
Well said. I still have perhaps just more optimism. I’m not sure Brian’s familiar with the term, but I have optimism for 2024, with regards to where things are going to go. Did we hit the bottom? No, but I think that we’re going to see more things. And we even were starting to see more opportunities open towards the end of Q4 of last year. There was one deal that we looked at that was being sold for lower than what the seller paid for it. The seller paid 90,000 a door for it. Two years ago, it was on sale for 75,000 a door, pretty much what they owed on it. And this is a seller that bit off way more than they could chew, bought way more than what they could handle, and just needed to unload. And they were end up cutting a lot of their equity.
That was the beginning of what I think we’re going to see more of that. But you’ve got to have a really small haystack if you want to find a needle. And so our company’s only hunting in a few markets. And we were starting to see a few distressed deals show up in those markets, and I think it’s an indicator of what we’re going to see more of this year.

Dave:
One of the things I keep wondering about is when this distress is going to come, because it seems like people have been talking about it for a long time.

Matt:
Yeah.

Dave:
You barely go a day without a top media outlet talking about the impending commercial real estate collapse, and how much commercial real estate mortgages are coming due. But it hasn’t really happened. Matt, it sounds like you’re starting to see a little bit.

Matt:
Yeah.

Dave:
But let me just ask you this. Are you surprised that there hasn’t been more distress to this point?

Matt:
Well, let’s comment on that. Because they’re our lovely friends in the media. And Dave, I just commend you, because you’ve done a great job on this show, and on your outlets and on your Instagram channel as well, in breaking down a lot of the reports that we see on the real estate market in the media. So there’s a lot of media about “This pending tidal wave of less commercial real estate that’s going to be with all this debt that’s coming due.” Okay, that’s true, that there is a lot of debt that’s coming due. That properties are performing at lower interest rates, 3, 4, or 5% interest rates. And those properties are cash flowing or just getting by now, and then those rates are going to reset, right? That’s what they’re saying is those rates are not going to go from 3, 4, 5% up to 6, 7, 8%. True.
The thing that they leave out there in a lot of those articles or in folks that are screaming that from the mountaintop is that most of that debt is retail and office. And that’s not a space that Brian and I are in, and I don’t want to be in retail and office. There’s enough to do in the multifamily space, and in a new space that we’re trying on. That’s not like retail shopping centers and office space. So we do believe there’s benefit in other asset classes, but not there. Multifamily is starting to see some shifts, but I don’t think it’s going to be a “blood in the street” kind of thing like a lot of folks are predicting, like a lot of media is predicting it’s going to be. There’s not enough debt that’s in distress that’s going to come due. The number that I saw was something like Bloomberg issued an article, 67 billion in debt that’s marked as distressed.
The thing is, that sounds like a lot of money, but it’s not. Compared to the amount of debt that’s in all multifamily. So 67 billion in multifamily debt is marked as distressed. But in the trillions in multifamily debt that’s out there, that is a smidge. And so what I think that we’re going to see is the strategic outlets of bad debt and deals that are going to get released to the market. But is it going to create a crazy market correction? No, I don’t think so. I think over time, cap rates are going to go up and sellers are going to have to get real. But I disagree with Brian that there’s going to be this panic in the multifamily market, and that it’s going to become a space of bad emotion of “You know what? Multifamily, forget that. I don’t want to be in that market.” And that’s when you really want to buy anything you can get your hands on.
But I think that the opportunity is going to be in niches of markets. Meaning if I choose Phoenix as a market, I want to target, me just really drilling in on that market and then finding the opportunities, maybe the broker’s pocket listings or the off-the-market stuff that is going to be passed around to a small circle. I think that’s where good deals are going to be had, is inside of market niches.

Dave:
And Brian, it sounds like you think there might be more of an inflection point where distress hits a certain level and things start to accelerate downwards, I would say?

Brian:
Well, I think I would say not quite those extreme set of terms, but I saw an article recently, it was talking about Atlanta, Georgia, right? Atlanta, Georgia is a big multifamily market. There’s lots of multifamily units in Atlanta, Georgia. And it was somewhere in the neighborhood of 30 or 40% of the properties in Atlanta had loans maturing in the next two years. And a large percentage of those that have loans maturing in the next two years were loans that were originated in this height of the market period of 2020 through 2022. And so those were bought at very high valuations.
Valuations now are lower. And when those loans come due, there’s going to be some kind of a reckoning. Something has to happen. Either capital has to be injected into those deals, or the deals will end up selling or getting foreclosed. And 30% is a big number. And certainly, not all of those are going to wind up in some kind of a distress, but that would be a major market mover, if 30% of the properties started going into foreclosure. And that would cause a cascade of negative effects in properties that weren’t experiencing loan maturities.
Do I think that’s going to happen and play out that way? Not really. What I think is more likely is that there’s going to be a lot of these loans that are going to end up trading behind the scenes, where large private equity is going to come in, absorb the loans, buy them at a discount, and then ultimately, either they’ll foreclose and take the properties and they’ll get them at really good basis. Or they’ll sell them at current market value, and probably make a profit based on the spread between the price they purchased the loan for and the price they sold the asset for, which will, by the way, be a lot less than what that asset sold for when it was bought by the current owner. We had a deal that we sold a couple of years ago, and the current owner is trying to sell. And I calculated based upon their asking price, it’s a $17 million loss in two years.
So the distress has already begun to happen. Prices have already fallen. Whether or not people realize it or can quantify it yet, I don’t know, because there just hasn’t been a lot of transaction volume. So maybe it’s being swept under the rug, where people are like, “Oh, the market’s not going to crash.” No, I’m sorry to tell you, it’s already crashed. Prices coming down, 20 to 30% has already happened. The question is going to be, do they come down another 10 or 20%? And that’s what I’m waiting to see play out, whether or not that happens. Because one could easily argue, “Oh, prices are down 23%. It’s a great time to buy.” It is, unless there’s still more downward movement. So what I want to see is I want to see that those prices have troughed, and that they’re not going to continue to slide downwards before I’m ready to get in. I’d rather get in once they’ve started to climb and maybe miss the bottom, than to get in while they’re still falling and then have to ride the bottom.

Matt:
Rather not catch a falling knife. Right?

Brian:
Exactly.

Matt:
Yeah. The data that I’m reading, I mean, man, that sounds crazy for Atlanta. That means, first of all, I’m just going to throw it back at you, what you just said, what I heard, 30% of Atlanta traded in the last three years, right? That’s a lot of real estate. And that means that 30% of Atlanta is in a distressed position.

Brian:
Yeah, 30% of the outstanding multifamily debt is maturing in the next two years. That doesn’t necessarily mean that they traded. They might’ve refinanced, but 30% of the debt is maturing in the next two years.

Matt:
Yeah. Here’s what I’ve read, right? Not everybody is scrappy syndicators like you and me, right? There’s way larger corporations than mine and yours that own thousands and thousands of doors, and these guys are putting in loans backed by insurance companies going in at 50, 55% loan-to-value on their properties, because they’ve owned them. These are legacy assets they’ve owned for way more than 5, 10. They’re buy and hold forever kind of companies. And the data that I’ve seen are that those companies are going to be just fine. That if they end up having to take a little bit of a haircut on valuation, their LTV is so low that, “Oh, I can’t refi out at 55. I’ll have to refi up to 60 or 75.”

Dave:
So I just want to say something about the 30% number, because that number is actually not that high to me. Because if you think about the average length of a commercial loan, I don’t know if you guys know, what’s the average length of your term on commercial debt?

Matt:
Five to seven years.

Brian:
Or 7 to 10.

Matt:
Wait, wait, wait, hang on. You got bridge debt in there, Brian, and stuff like that. So I think that the bridge two-to-three-year product may pull down the 5-to-10-

Brian:
Fair enough.

Matt:
… agency. So meet me at five. You accept my terms [inaudible 00:21:43] percentage.

Brian:
All right, I’ll meet you there. You got it. I got it. Five it is.

Matt:
The answer is five.

Dave:
Okay, if five is the average debt, then doesn’t that reason in the next two years, 40% of loans should be due? Because if they come up once every five years, right?

Matt:
I’m going to let Brian answer that one.

Brian:
Yeah, well, the problem is that the debt is coming due at a really bad time. Certainly debt is always mature. That happens all the time, but how often does debt mature that was taken out when prices were very high and is maturing at a time when prices are very low? That’s the disease. It isn’t as much the percentage of loans, it’s the timing and the market conditions upon which those loans were originated, versus when they mature. That’s the problem.

Dave:
I totally agree with that. I just want our listeners to not be shocked by this number of 30%, and that it’s some unusual thing. Because if you consider five to seven years being the average debt, then always, somewhere between 28 and 40% of debt is always coming due in the next two years. So it’s just something to keep things in perspective.

Matt:
I think it’s somewhat of a shocker number, right, Dave? It is one of those things where it’s like, “We’re at 40%.” And it makes people say, “Oh my goodness, that’s so much debt.”

Dave:
And I actually think, I read something that I also think actually, that number might be low. It might be higher in the next few years, because it sounds like a lot of operators were able to extend their loans for a year or two based on their initial terms, but those extensions might be running out. And so to Brian’s point, we’re getting some really distressed or bad situations coming due at an inopportune time.

Matt:
Here’s what I’m hearing. Brian and I are plugged into very lovely rumor mills, and have lots of other friends in the industry. So here’s what the coconut telegraph is telling us that I hear, anyway. Banks are doing workouts. They don’t want these things back, although they’re very pragmatic and very dollars-and-cents-oriented. And if you owe $15 million on a property that is now worth seven, the bank’s probably going to say, “Yeah, probably going to need to go and take that thing back and collect as many of our chips as we can.” But if you are in the middle of a value-add program and you’ve got some liquidity, and you’re doing what you can do, what I’m hearing is that banks are doing workouts. And this is on floating rate bridge deals, right? That’s the toxicity that’s in the market, these bridge deals. It’s not so much someone that’s got an agency loan. That they’ve had interest rate locked for the last five years and they got a refi. That person’s going to figure it out.
I’m talking about this bridge loan that they bought two years ago on an asset that they needed to do a ginormous value-add program on, and try and double the value of the property in a year or two, and it didn’t work out, right? I’m hearing banks are doing workouts and they’re allowing people, they’re negotiating. Brian, that’s what I’m hearing. You probably heard this, too. They’re being somewhat negotiable on the rate caps, which are these awful things that are really causing a lot of strain on a lot of owners is these rate cap, which just an insurance policy you got to buy to keep your rate artificially lower than what it really is. I’ve heard that there’s that.
And I’ve heard that the banks are cooperating with owners that can show that they’re doing the right thing. And they’re not so far into the hole that there’s no light at the end of the tunnel. Brian, I’m curious what you’re hearing on that. And again, this is my inner optimist. I am not sure if you want to access that part of the outlook or not. You’re more than welcome to give me the other view.

Brian:
Yeah, the other view is that they can postpone this stuff all they want, but what they can’t eliminate is the day of reckoning. Sooner or later, something has to happen. They either have to refi, they have to sell, they have to foreclose. Something is going to have to happen sooner or later. Because even if the borrowers have to pay higher interest rates and delay rate caps, sooner or later, the borrowers run out of cash. And then the borrowers have to go to their investors and say, “Can you contribute more cash?”
And the investors are going, “I’m not throwing any more good dollars after bad. No way. I’m not sending you any money.” And then something has to happen. The lenders can do what they can do initially, but then the lenders will start getting pressure. And so here’s what a lot of people don’t realize is that lenders aren’t loaning their own money. Lenders are loaning other people’s money as well. And that might be money that they’re borrowing from a warehouse line, money that they’ve raised from investors, money that they’re getting from depositors. Wherever that money comes from, they might be getting pressure, saying, “You got to get this stuff off your books. You’re not looking so good.” Regulators are putting on pressure. So eventually, lenders have to say, “We can’t just kick the can down the road forever. Something’s got to give.” And that day has to come.

Dave:
Brian, you seem very convinced that the writing is on the wall and a day of reckoning is coming, but Matt, you seem to be more of an optimist. So I’m curious to hear from you. Do you see the same thing? But before we get into that, we have to hear a quick word from our show sponsors.

Matt:
There are a lot of folks that believe that the Feds saying that they were going to cut rates three times this year that read that. I mean, I talked to one person and said, “Well, they said three, so that probably means nine, right?” Like “What?” We’re not going back to the party time of interest rates being 2.5, 3%. That’s not going to happen again. And if the Fed really does cut rates three times, it’s going to be a dent compared to what they’ve done already. So there are folks that believe that by banks cooperating with borrowers, that will allow some time for rates to get down to where the borrower needs them to be. Probably back down to 3.5, 4%. I don’t think that’s going to happen.

Brian:
Okay, I’ll take that.

Matt:
Oh, what you got?

Brian:
I’ll take on that argument. So you’re saying that interest rates aren’t going to get back down to 2%. I agree with you. Now, when interest rates were at 2%, people were buying multifamily properties and all kinds of commercial real estate at extraordinarily high prices. And those high prices means that they were low cap rates. And cap rate is a mathematical formula that’s used to take the temperature of the market. Some people say, “Oh, a 4% cap rate means you get a 4% return.” That’s hogwash. We can have a whole show on that. But the bottom line is that very low cap rates, this mathematical formula that we’re talking about, it means that the market is extraordinarily hot. The market is not extraordinarily hot anymore.
So a 4% cap rate, that’s now a 6% cap rate, what that means is that’s a 2% difference. Doesn’t sound like much, but going from a 4 to a 6 is a 50% haircut in value. Mathematically speaking, you have to cut the price of the property by 50% for the income to go from a 4% cap rate to a 6% cap rate. And that’s what we’re seeing now. So when these loans finally do come due, and the property is worth half of what it was at the time the loan was originated, what may happen? The lender is really going to force their hand when the value can climb just high enough for the lender to get their money back. They don’t care about the owner, they don’t care about the borrower. They don’t care about the investors that put their hard-earned money into that deal. All the lender wants is their money back. And as soon as that moment comes, the bank is suddenly going to become that much less cooperative.
And when that happens, that’s the day of reckoning. It has to happen sooner or later. Now don’t get me wrong. I mean, I have a lot of this pessimism and stuff, but fundamentally, the fundamentals of housing are extraordinarily sound. People need to have a place to live. There’s a housing shortage across the US. Right now, there’s a little bit of a glut of construction. That’s going to work its way out, because nobody can afford to get a construction loan right now. Banks aren’t lending. Pretty soon, all the new deliveries are going to stop. The fundamentals of housing are sound. Housing is a good investment, but timing means something. Buying at the bottom of the market and riding the wave up is so much different of an outcome than if you’re buying before the market is finished falling, and you have to ride through a three or four-year cycle to get right back to even. That just doesn’t work. So I’m bullish for maybe 2025, 2026, 2027, but short-term bullish, no. I can’t get there. The fundamentals are there, but the rest of the equation just doesn’t work yet.

Dave:
So now that we’ve heard your takes on both last year, 2023, and what might happen this year, what advice would you give to investors who want to be in the multifamily market this year?

Matt:
Great question, because unless you’re Brian Burke, you can’t just hang out on the beach and play golf, I mean, in that. So let’s see how Brian handles that one. For what I think that investors should do, if they really want to get into the multifamily market, if they want to get involved in what I think is going to be a changing market, and there will be opportunities that are going to come up, what I believe you should do is to do what we did, which is stay super-market-centric. If it’s Atlanta, because according to Brian, 30% of the multifamilies in Atlanta are going to be refinancing or with debt coming due, just for example, and that’s probably true in most markets, if you stay market-centric, pick a market. Not 2, not 10. A market. And get to know all the brokers in that market. There are deals that are going to come up of that 30% that are likely going to be sold at a significant discount off the market.
Is market pricing where it’s going to be a big solid yes to get in? No, I don’t think it is. I don’t think that the market itself, where all the properties going to be trading or what sellers are going to be asking is going to make sense. So I think that you need to be the riches in the niches, so to speak, to find a market. And then get networked and look for opportunities that may come up. You could also do what we did, which is continue to monitor multifamily, make bids, rebid, something like 280 deals last year, or at least analyzed 280 deals and bid most of those as well.
But we also looked at other asset classes as well. Our company’s looking at everything from flagged hotels, and that is a solid asset class that makes a lot of cashflow, to other asset classes, including loans. Our company’s getting into issuing loans for cashflow. And the bottom line, guys, is whatever you get yourself into this year, it’s got to be a cash-flowing asset. It’s got to be something that produces regular measurable cashflow on a monthly quarterly basis, because cashflow is what got my company, DeRosa Group, through 2008, ’09, ’10. And it’s what’s going to get folks through 2014, ’15, and into the future, is cash-flowing assets. And not 2, 3, 4% cashflow. Significant, high-single-digit cashflow is what you’re going to need to go after. So that’s what I say you pursue.

Brian:
All right, well, challenge accepted, Matt. So not everybody has to sit on the beach for the next year. I can’t make that claim. I might, and I might not. There might be some opportunities out there to buy this year.

Matt:
You’re too itchy, man. But I don’t see you sitting on the beach.

Brian:
Yeah, probably not.

Matt:
You’re going to be doing it, too.

Brian:
I got to do something. I got to do something. There’s no doubt about that. So here’s my thoughts on this are, if you’re just getting started in real estate investing or you’re just getting started in multifamily, you actually have an advantage over Matt and myself. And that may seem awful interesting to make that claim, but here’s why I say that. I think that you’re going to find more opportunity in small multifamily now than you will in large multi. Now I’m not going to go out and buy anything less than a hundred units. For our company, it just doesn’t make sense to do that. Matt is probably somewhere in that zone, too. We’re not out in the duplex, fourplex, 10-unit, 20-unit space.
But if you’re new to multi, that’s really where you should start, anyway. You want to get that experience and that knowledge, and figure out how it works. That helps you build an investor base. It helps you build broker relationships. And frankly, in that space, in those small multi space, I think that’s where the needles are going to be found in the haystacks. Because it’s the small deals where you have the mom and pop landlords, that quintessential, as they’ve called, the tired landlord that wants to get out. That’s where the people are searching eviction records to talk to the owner to see, “Hey, I see you have all these evictions. Do you want to sell? Because it’s a pain in the neck.”
And people are like, “Yeah, I’m out.” You’ve got retiring owners that want to get out. That’s where you’re going to find opportunity in my view. I don’t think you’re going to find opportunity in 100 and 200-unit deals, because number one, those buyers are very sophisticated, generally well-capitalized. But even if they’re not, they’ve got sophisticated lenders, they’ve got all kinds of challenges, prices are down. They probably haven’t owned them all that long. They have a ton of equity, versus the mom and pop landlord that’s owned it for 50 years that has the thing paid off. They could even maybe give you seller financing.
If you want to get started, I would suggest getting started right now on two things. One, build your business. Build your systems, build your investor base, build your broker relationships, because those are all things there’s plenty of time to do. Brokers will return your calls right now, because no one else is calling them. You might as well give them a call. Build that stuff now, because when you are busy and the market is taking off, you’re going to be running a hundred miles an hour with your hair on fire. There’s going to be no time to do that.
The other thing, build all of your systems. Get together your underwriting system, learn how to underwrite. Take Matt’s classes and BP’s seminars, and all this different stuff. Learn how to analyze deals and get ready. And then go out and look for smaller multi, where all the deals are. That’s going to be a great way to start. Then when all the big multi comes back in a year, two, three, however long it takes, you’ll be more ready for that, because you’ll have all this experience and you’ll have all the systems. You’ll have the relationships. And I think that’s really the play right now.

Matt:
Well said.

Dave:
So Matt, tell us just briefly, what are you going to do in 2024?

Matt:
Great question. What DeRosa Group, our company, is going to do is we’re going to continue to monitor multifamily in the markets we’re already invested in, so we can continue to scale out geographically in those geographic markets. We’re going to pursue new asset classes. Like I said, flagged hotels is an asset class that we’re going after aggressively. And we also have a fund that just puts money into hard money, just a debt fund. That’s just an easy way to turn money around and produce easy cash flow. So we’re keeping our investors’ funds moving in other asset classes, while we monitor multifamily very, very closely, continue to bid it, and hope that we find something that makes fiscal sense for our investors.

Dave:
And what about you, Brian? Is it just golf this year?

Brian:
Yeah, I’m not that good of a golfer. So I’d like to say that, yeah, I could just play golf all year, but I’m really not that good. So I think, no, we’ll do more than that. Just like Matt, we are watching the multifamily market extremely closely. We’re looking for the signs and signals that we’ve reached the bottom, and it’s time to invest. Meanwhile, we’re investing in real estate debt. We have a debt fund where we’ve been buying loans that are secured by real estate to professional real estate investors. I think right now, the play for us is we’re more of watching out for downside risk than trying to push upside. So that’s going to be our play for 2024. And then as soon as we see the right signal, then it’s full speed ahead on searching for upside again.

Dave:
All right. Well, thank you both so much for joining us. We really appreciate your insights and your friendly debates here. Hopefully, we’ll have you both back on in a couple of months to continue this conversation.

Brian:
Can’t wait.

Dave:
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.

ATTOM’s Year-End 2023 U.S. Foreclosure Market Report shows that foreclosure activity increased last year from 2022 levels, but is this a cause for concern for investors? 

The ATTOM report shows that foreclosure filings, which include default notices, auctions, and repossessions, stood at 357,062, up 10% from 2022 and 136% from 2021. These figures look much less alarming, however, when set in the context of pre-pandemic foreclosure levels. Foreclosure activity in 2023 was still 28% lower than it had been in 2019 and down a massive 88% from its peak in financial crisis-ravaged 2010. 

At its 2010 worst, U.S. foreclosures represented 2.23% of all U.S. housing units. At the end of 2023, this percentage stood at a mere 0.26%, a slight increase from 0.23% in 2022. 

ATTOM CEO Rob Barber commented in a press release that the 2023 rise in foreclosure activity should be viewed as ‘‘a market correction rather than a cause for alarm. It signals a return to more traditional patterns after years of volatility.”

It’s worth remembering that there was a foreclosure moratorium in place on federally-backed mortgage loans between March 2020 and July 31, 2021. This explains why foreclosure activity hit an all-time low of 0.11% of housing units in 2021. Inevitably, once the moratorium ended, foreclosure filings began climbing up. 

What Do the Numbers Mean?

Fortunately, what we’re not seeing is a nationwide wave of foreclosure activity that could signal systemic problems with the housing market and wider economy. Barber is confident that ‘‘while foreclosure activity may fluctuate, it’s unlikely to approach the highs seen in the last decade. Instead, we foresee a market that is more reflective of broader economic trends, with foreclosure filings becoming a more predictable aspect of the housing landscape.’’

Real estate investors on the ground appear to support the view that the rise in foreclosure filings at the current level isn’t worrisome. Yancy Forsythe, owner at Missouri Valley Homes, told BiggerPockets that the rise in foreclosure filings should be interpreted as ‘‘part of a market correction rather than a worrying trend.’’ In addition, while Forsythe is seeing ‘‘a similar trend of rising foreclosures in the Missouri real estate market,’’ it isn’t ‘‘alarming.’’

Still, a rise in foreclosures means that more people are unable to pay their mortgages. Investors should familiarize themselves with regional foreclosure trends. It’s on the regional level that the disparities in housing markets are beginning to show themselves. 

According to the ATTOM data, five states in 2023 saw foreclosure levels actually increase from pre-pandemic levels:

• Indiana (+73%)
• Idaho (+70%)
• Michigan (+15%)
• Nevada (+10%)
• Minnesota (+9%) 

However, these weren’t the states with the greatest overall foreclosure numbers. Those were California (29,180 foreclosure starts), Texas (28,533), and Florida (27,427). To put these numbers into context, these are all densely populated states (California has a population of 39 million), whereas Indiana is relatively sparsely populated (population of 6.8 million), and the rise in foreclosure activity here is dramatic. 

Investors need to take note of these numbers because a sharp rise in foreclosure activity means that, on the one hand, local homeowners are really struggling with affordability, and, on the other, they are having a hard time selling. Rachel Blakeman, director of Purdue Fort Wayne’s Community Research Institute, told the Fort Wayne Media Collaborative that in a thriving housing market like Northeast Indiana, ‘‘if you can sense that you’re starting to get behind on your mortgage and you need to get out of the house, you can probably sell the house relatively quickly. Depending on how long you’ve owned the house, you’re probably not underwater.’’

Redfin data for November 2023 shows that while home prices were continuing to grow in Indiana (2.2% year over year), the number of home sales declined by 9.34%. A stagnant housing market, combined with ongoing unaffordability, is bad news for local populations, and it’s not great news for investors. 

The Bottom Line

While foreclosure investing in hot markets can be lucrative, it is much riskier in areas where selling or renting out a property may present challenges. That said, high foreclosure numbers in large states are not to be taken as a sign of an unhealthy housing market. 

Take Florida, for instance. Yes, it is the state with the highest number of foreclosures, according to the ATTOM report. Yet even a rookie investor will know that Florida continues to be an attractive location for investing in real estate. 

Florida is experiencing a population boom, with nine of its largest metros expected to grow 10% or more in the next decade. Demand for Florida homes will continue to outstrip supply. What this means is that even homeowners who find themselves in a foreclosure or pre-foreclosure situation will have no trouble finding a buyer. If someone can’t afford a home in Florida, someone else will buy it.

As the Indiana example demonstrates, there will be housing markets that display different patterns within the same state. Investors should take note of this and only invest in an area with high foreclosures if it is also experiencing a population influx and has a healthy labor market. Before investing in an area, always investigate it for signs of a possible housing market decline: high foreclosure rates, high local unemployment, and high numbers of underwater mortgages.

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