January 2024

Real estate investing can be a one-and-done deal or a strategy with more work but potentially higher profits. If you’re an investor looking for ongoing passive income, the BRRRR method may be a good option.

The BRRRR method means you buy, rehab, rent, refinance, and repeat. It’s a cycle to build a robust real estate portfolio by purchasing undervalued properties using the equity of an existing investment property, renovating the new property, renting it out, and repeating the process.

But does the BRRRR method work? It does, and here are five reasons why.

1. Leverages Your Real Estate Investments

If you own a property with equity, you can leverage that equity to grow your real estate portfolio. Refinancing an existing property to use the equity provides the capital needed to purchase and renovate another property. 

This means you leverage your initial investment, putting the money to good use with the hope of high returns from the newly invested property from both capital appreciation and rental income.

Each time you use a property’s equity and reinvest the funds in another property, you amplify your earnings on the existing property while creating a potential for future passive income by renting the new property after rehabbing it.

2. Rehab Increases a Property’s Value

A big part of the BRRRR process is rehabbing a property. You purchase an undervalued property and rehabilitate it, potentially increasing its value. This could provide immediate increased asset value and allow potentially higher rental rates.

A higher property increases your net worth and potential future profits when you sell the property. It also opens more opportunities to continue the BRRRR method by leveraging the equity in the recently renovated property to purchase another property and further grow your real estate portfolio.

3. Creates Passive Income

A big reason the BRRRR method works is the passive income it creates. Initially, you must put in the hard work. Refinancing an existing property, finding an undervalued property, and rehabbing it requires extensive labor. Once you complete the process, you rent the property to tenants, and your workload decreases. 

If you manage the property yourself, there’s still work involved, but it creates an ongoing income stream that can be somewhat passive and creates an opportunity to further expand your real estate portfolio by tapping into that’ property’s equity and repeating the process.

4. The BRRRR Method is Repeatable

Some real estate investment strategies, like fix-and-flips, are a one-and-done strategy: You buy the house, rehab it, and sell it. You earn profits once, and there’s no ongoing or passive income.

Real estate investors can repeat the BRRRR method as many times as they want. This enables investors to grow their real estate portfolio as large as they want without generating a lot of capital.

5. Low Barrier to Entry

All it takes to start the BRRRR method is owning a single property. Once you earn equity in that property, you can use it to purchase another property, but this time it’s an undervalued property you can renovate.

The BRRRR method makes it easier for beginning investors to start investing, and experienced investors can grow their portfolios even further without waiting to have enough cash in hand.

Final Thoughts

If you’re wondering if the BRRRR method works, know that it does. But like any real estate investment strategy, it requires careful planning and consideration. It’s a great option for beginning and experienced investors looking to grow their portfolios.

The key is finding the best financing, undervalued properties, and having a team of reliable contractors to handle the rehab. 

Purchasing a property in a hot rental market can help you earn passive income while growing your overall real estate portfolio without the need for excessive capital.

Five Steps to Financial Freedom

How do you BRRRR? Buy a property under market value, add value with renovations, rent it out to tenants, complete a cash-out refinance, then use that money to do it all over again. In this book, author and investor David Greene shares the exact systems he used to scale his real estate business from buying two houses per year to buying two houses per month using BRRRR.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

The Federal Reserve‘s effort to bring down inflation has so far been successful, a rare feat in economic history.

The central bank signaled in its latest economic projections that it will cut interest rates in 2024 even with the economy still growing, which would be the sought-after path to a “soft landing,” where inflation returns to the Fed’s 2% target without causing a significant rise in unemployment.

“Rates are headed lower,” said Tim Quinlan, senior economist at Wells Fargo. “For consumers, borrowing costs would fall accordingly.”

More from Personal Finance:
Americans are ‘doom spending’ 
The first step to setting an annual budget
This strategy can help you meet New Year’s resolution goals

Most Americans can expect to see their financing expenses ease in the year ahead, but not by much, cautioned Greg McBride, chief financial analyst at Bankrate.

“We are in a high interest rate environment, and we’re going to be in a high interest rate environment a year from now,” he said. “Any Fed cuts are going to be modest relative to the significant increase in rates since early 2022.”

Although Fed officials indicated as many as three cuts coming this year, McBride expects only two potential quarter-point decreases toward the second half of 2024. Still, that will make it cheaper to borrow.

From mortgage rates and credit cards to auto loans and savings accounts, here are his predictions for where rates are headed in the year ahead:

Prediction: Credit card rates fall just below 20%

Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.

Going forward, annual percentage rates aren’t likely to improve much. Credit card rates won’t come down until the Fed starts cutting and even then, they will only ease off extremely high levels, according to McBride.

“The average rate will remain above the 20% threshold for most of the year,” he said, “and eventually dip to 19.9% by the end of 2024 as the Fed cuts rates.”

Prediction: Mortgage rates decline to 5.75%

Thanks to higher mortgage rates, 2023 was the least affordable homebuying year in at least 11 years, according to a report from real estate company Redfin.

But rates are already significantly lower since hitting 8% in October. Now, the average rate for a 30-year, fixed-rate mortgage is 6.9%, up from 4.4% when the Fed started raising rates in March of 2022 and 3.27% at the end of 2021, according to Bankrate.

McBride also expects mortgage rates to continue to ease in 2024 but not return to their pandemic-era lows. “Mortgage rates will spend the bulk of the year in the 6% range,” he said, “with movement below 6% confined to the second half of the year.”

Prediction: Auto loan rates edge down to 7%

When it comes to their cars, more consumers are facing monthly payments that they can barely afford, thanks to higher vehicle prices and elevated interest rates on new loans.

The average rate on a five-year new car loan is now 7.71%, up from 4% when the Fed started raising rates, according to Bankrate. However, rate cuts from the Fed will take some of the edge off of the rising cost of financing a car, McBride said, helped in part by competition between lenders.

McBride expects five-year new car loans to drop to 7% by the end of the year.

Prediction: High-yield savings rates stay over 4%

Top-yielding online savings account rates have made significant moves along with changes in the target federal funds rate and are now paying more than 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.

Even though those rates have likely peaked, “yields are expected to remain at the highest levels in over a decade despite two rate cuts from the Fed,” McBride said.

According to his forecast, the highest-yielding offers on the market will still be at 4.45% in the year ahead. “It will still be a banner year for savers when those returns are measured against a lower inflation rate,” McBride said.

Don’t miss these stories from CNBC PRO:

Subscribe to CNBC on YouTube.

As a real estate investor, you must always remember one thing: every type of investing strategy involves risk.

With that in mind, it’s good practice to learn more about low-risk real estate investing strategies. You may come to find that these provide the perfect balance of risk and profit potential. 

Below, we break down six low-risk real estate investing strategies. 

1. Real Estate Crowdfunding

Crowdfunding opens the door for a wide range of investors to engage in real estate projects through user-friendly online platforms. It lowers the barrier to entry, allowing smaller investors to participate in real estate markets traditionally dominated by larger players. 

Crowdfunding also fosters community involvement in projects, creating opportunities for collaborative investment and shared success.

Why this is low-risk

Crowdfunding in real estate reduces individual risk by distributing the investment across a large number of contributors. This collective approach mitigates the financial impact on any single investor, making it a safer option for those cautious about high-stakes investments.

Who this is best for

Crowdfunding is ideal for new or small-scale investors seeking entry into the real estate market without substantial capital. It’s also well-suited for those who prefer a community-oriented approach to investment, allowing for shared decision-making and risk.

2. Real Estate Syndication

Real estate syndication involves pooling funds from multiple investors to purchase a single property, often larger and more expensive than typical individual investments. 

This method allows investors to access high-value real estate opportunities without bearing the entire financial burden. Syndication also provides the benefit of professional management, reducing the individual investor’s workload and expertise requirement.

Why this is low-risk

Real estate syndication spreads the risk among multiple investors, reducing the financial burden and exposure for any single participant. This collective investment in larger, potentially more stable properties, offers a buffer against market volatility.

Who this is best for

Syndication is best for investors who have more capital to invest but prefer not to handle the day-to-day management of a property. It’s also suitable for those looking to diversify their portfolio with significant real estate assets without the complexities of sole ownership.

3. The BRRRR Method

The BRRRR method, which stands for Buy, Rehab, Rent, Refinance, Repeat, is a comprehensive approach to building a real estate portfolio. It starts with purchasing undervalued properties, followed by renovating them to boost their value. 

Once rehabbed and rented out, these properties are refinanced to recover renovation costs, enabling the investor to repeat the process with new properties.

Why this is low-risk

The BRRRR method is low-risk due to its focus on adding value through renovations and ensuring cash flow through renting. By refinancing, investors can recover most of the invested capital, reducing the amount of money tied up in any single property.

Who this is best for

This approach is ideal for investors who are hands-on and have a good understanding of property renovation and management. It suits those looking for a long-term investment strategy that builds wealth through property accumulation and equity growth.

4. Real Estate Investment Trusts (REITs)

REITs offer investors a way to invest in property portfolios without directly buying physical real estate. REITs, often traded on major stock exchanges, provide a liquid form of real estate investment, enabling easy entry and exit. 

This strategy focuses on income generation, as REITs are required to distribute a majority of their taxable income to shareholders.

Why this is low-risk

Investing in REITs is considered low-risk because it involves diversified portfolios of income-generating properties, which typically provide steady returns. Also, being publicly traded, REITs offer greater liquidity compared to traditional real estate investments.

Who this is best for

REITs are ideal for investors seeking exposure to real estate without the complexities of direct property ownership. They suit those who prefer more liquid assets and are looking for regular income distributions, such as retirees or income-focused investors.

6. Airbnb Arbitrage

Airbnb arbitrage involves leasing properties long-term and then subletting them as short-term rentals on platforms like Airbnb. This strategy capitalizes on the difference between long-term lease costs and short-term rental income. It’s particularly effective in high-demand tourist or business areas, where short-term rental rates can significantly exceed the cost of long-term leases.

Why this is low-risk

Airbnb arbitrage is considered lower risk because it doesn’t require property ownership. The primary investment is the lease and setup costs. 

The strategy capitalizes on the difference between long-term lease expenses and short-term rental income, potentially yielding high returns without the commitment of property purchase.

Who this is best for

This strategy is best for individuals who have expertise in the short-term rental market and possess skills in hospitality and customer service. It’s particularly suitable for those who prefer not to invest large capital in buying property but are adept at creating attractive rental spaces.

7. House Hack Short-term Rentals 

This is often best suited for individuals who already own a home.

Start by finding a short-term rental in an area of high demand.

From there, put down 10 percent to purchase the property. Then, rent out this property when it’s not in use.

Conversely, when you do occupy it, rent out your primary residence. This strategy leaves you with two cash-flowing properties, and eventually, two properties that you own free and clear. 

Once you’re stable with a single short-term rental, consider doing it again. 

Why this is low-risk

House hacking short-term rentals diversifies income sources, reducing financial risk by spreading it across multiple properties. The strategy typically involves properties in high-demand areas, as this helps maintain steady rental income and property values.

Who this is best for

This approach is suitable for homeowners who are comfortable managing properties and dealing with the dynamic nature of short-term rentals. It is especially ideal for individuals looking to enter real estate investment with minimal disruption to their current living situation.

Watch our video below for more guidance on implementing this strategy.

Final Thoughts

These low-risk real estate investing strategies could be the key that unlocks a stable and profitable future in an industry you love. 

Remember, there’s no need to simultaneously experiment with all six strategies. Choose one, learn more, implement your knowledge, and continually tweak your strategy. This will lead you toward a successful investing future.

Smarten up your 2024 personal investing strategy with Dave Meyer

Set yourself up for a lifetime of smart, focused, and intentional investing with Dave Meyer’s guide to personal portfolio strategy. Play to your unique strengths, make investing enjoyable, and achieve your specific life goals on your own timeline.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Spencer Rascoff, Zillow co-founder and former CEO, joins ‘Money Movers’ to discuss the current state of mortgage rates and applications, what will change the patience of homebuyers, and more.

In November 2023, Fannie Mae implemented a game-changing reduced down payment requirement of just 5% for two-to-four-unit properties for conventional loans. 

This presents a golden opportunity for house hackers looking to purchase or refi a two-to-four-unit property. However, few sources have broken down what this means for investors. Here, I’ll look at this new product, compare it to alternatives, and discuss what this means for real estate investors. 

First, we will walk through eligibility, then compare this loan to its FHA alternative and summarize the impact for investors looking to purchase or refinance.

Eligibility

Fannie Mae laid out these new down payment requirements in their desktop originator release notes. It is important to highlight that this change only applies to someone’s “principal residence.” Lenders are strict about owner-occupied requirements, and this product is only for those living in the property they are purchasing. 

Thankfully, two-to-four-unit properties can be incredibly easy to house hack, as the units are already separated—meaning you don’t have to share the same living room as your roommates. Additionally, they offer a very easy transition to rent them as an investment property if you move out (after the required time period). 

Conventional loans have been an option for a long time, but the down payment requirements were higher. For example, a first-time homebuyer who would have qualified for 3% down on a single-family conventional loan used to be required to bring 15% down to closing for a duplex (or 25% for three to four units), which forced many buyers to opt for the 3.5% down option with FHA. 

FHA loans require a minimum down payment of 3.5%. While this has made these loans attractive, the new 5% down payment requirement for conventional now provides investors with additional flexibility. At just 5% down, investors now have the option to choose between FHA and conventional financing for multifamily investment. 

To take this analysis one step further, I tested the 5% conventional loan option by reaching out to one of our investor-friendly featured lenders on BiggerPockets to compare my FHA loan to a conventional loan. 

I’ll uncover some details you will want to know if you are serious about using this product. If you want to skip to the results, scroll to the comparison summary below. 

Comparison to FHA

FHA loans have long been a popular choice for owner-occupied two-to-four-unit properties due to their lower down payment requirements. However, the reduction to a 5% down payment by Fannie Mae offers a competitive alternative with unique benefits. There are multiple things to consider when comparing. 

The Federal Housing Administration’s primary goal is to ensure that Americans have access to safe, affordable housing. So it is no surprise that when it comes to affordability, FHA loans have the upper hand, with relatively low down payments and interest rates. After all, that is part of the purpose of the FHA. But depending on your situation, a conventional loan could be less expensive and offer a more compelling solution. 

But there is so much more to consider than just APR, fees, and closing costs. You must also consider: 

• The closing process 
• The refinance process
• Mortgage insurance 

Here’s a comparison of multifamily loans:

The Closing Process

Because one of the goals of the FHA is to ensure safe housing, they have more stringent requirements on the condition of the property. The classic example of this is when the seller is under contract and told they need to touch up paint prior to a loan being funded. Although most agents and sellers do not mind getting out a paintbrush to close a deal, this is one example of how FHA loans differ from conventional loans and why sellers sometimes prefer conventional loans. 

Mortgage Insurance

Mortgage insurance is an additional payment paid by the borrower to insure the lender against a situation in which the borrower stops paying their mortgage. One of the biggest differences between FHA and conventional loans is how mortgage insurance works. Both FHA and conventional loan products require mortgage insurance if the down payment is under 20%, but the mechanism to charge this insurance is different. 

A conventional loan also needs insurance if the down payment is under 20%, but this must be purchased from a private company—this is called private mortgage insurance (PMI). With conventional loans, you can have this insurance removed after reaching 20% of equity in the property, which allows you to lower your costs in the long term.

The federal government insures an FHA loan through a mortgage insurance premium (MIP) to make housing more affordable. This mortgage insurance can be removed only in specific situations. You can find all the details here on HUD.gov. 

A workaround for removing mortgage insurance payments (MIP) in some situations is to refinance into a conventional loan. However, you don’t necessarily know what rates will be in the future, and there is no guarantee that your current rate will be available when you reach 20% equity, so using a conventional loan locks in your ability to remove PMI once you reach 20% in the future. 

FHA also has an upfront mortgage insurance premium. Conventional loans do not have this upfront cost, which is an advantage in the short term.

Refinancing

The conventional 5% down option could be an option for those who are refinancing out of an FHA loan and want the ability to take off the mortgage insurance in the future. There are three reasons to refinance: lower your monthly payment, extract equity, or switch loan products. Refinancing into a conventional loan at 5% down could give you flexibility in the future if the rate and terms are attractive to you.

Your lender will be able to tell you what loan product will accomplish your goals. Keep in mind that FHA loans have a streamlined option that makes refinances easier in the future, which is a nice feature when you do not want to go through the whole underwriting process again. 

Comparison Summary

After learning about this new loan product, I decided to put it to the test for myself by running a comparison between conventional and FHA. For help, I used Find A Lender at BiggerPockets. I performed a search in my state and selected “HouseHack” and found Mike Stone with Megastar Financial in the results. 

Full disclosure: I have also worked with Mike in the past, and he is awesome. He helped me with my first FHA loan, so he was the perfect lender to help me with my comparison analysis.

I provided my information to Mike and asked him to compare conventional and FHA on both a refinance that I am considering and a purchase. 

First, I need to point out that your scenario could look entirely different. This is in no way meant to compare between FHA and conventional for any other investor. I am simply sharing what the difference was for me. For your situation, consult with a licensed loan officer. 

Here are the results comparing a 5% down option for both conventional and FHA. 

The results surprised me. Not only did the FHA option offer a lower monthly payment, but it also required $3,000 less to close. 

However, my lender, Mike, shared several important pros and cons to consider beyond just the pricing. 

Conventional advantages 

• Mortgage insurance is more straightforward to remove 
• The closing process tends to be easier 
• Less strict requirements in general 
• No self-sufficiency requirement for three to four units 
• Allows borrowers to qualify based on rental income
• More likely to close faster (although this depends on other factors) 
• Ability to have more than one conventional loan at a time 

FHA advantages 

• Government-subsidized mortgage insurance 
• Less strict credit score requirements
• FHA streamline refinance
• You can always refinance in the future

For me, FHA was still the clear winner, but I am considering conventional on my next property for the reasons I’ve discussed here. Ultimately, comparing loan products on a two-to-four-unit house hack is best done with a savvy, investor-friendly lender who can run through multiple scenarios and coach you through the best option for you. 

Final Thoughts

What we know is that by offering a competitive alternative to FHA financing, Fannie Mae has helped to reduce barriers to entry for house hackers. This new option can provide increased leverage and flexibility. As the real estate market continues to evolve, savvy investors can now choose the option that best suits their investment goals, ensuring they are well-positioned to capitalize on the income potential of multifamily properties.

Get the Best Funding

Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!

Andy Walden, vice president of enterprise research at ICE Mortgage Technology, and CNBC’s Diana Olick join ‘The Exchange’ to discuss the state of mortgage demand, the overall health of housing, and more.

David:
This is the BiggerPockets Podcast show 871. What’s going on, everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, joined today by the data deli himself, Dave Meyer. And when you’ve got Dave and David together, you know what that means. It’s a bigger news podcast. In these shows, we dig into the news, the data, and the economics impacting the real estate industry, so you can use that information to build your wealth.
Dave, welcome to the show.

Dave:
Thank you, David. I appreciate it. I’m excited as always to be here, but today, I’m particularly excited because our guest is one of my all-time favorite guests. His name is Rick Sharga. And if you haven’t heard him on any of our shows before, Rick owns CJ Patrick. It’s a company that focuses on market intelligence, and data, economic research, all specifically for real estate investors. So all the work he and his team do is extremely relevant for the both of us and everyone listening to us. And today, we’re going to dig into some of the research he’s done specifically around foreclosures in the US and what’s going on in that part of the housing market.

David:
And after the interview, make sure you stick around all the way to the end of the show because Dave and I handle a question Seeing Greene style at the end of the podcast about a listener who’s trying to figure out if they should use a HELOC or a cash-out refinance to scale their portfolio. All that and more on today’s epic show. Let’s get to Rick.
Welcome to the show today, Rick. Excited to talk about foreclosures. That’s always a fun topic for real estate investors to get into. But before we talk about where they’re at today, let’s talk a little bit about historical foreclosure activity. What can you share with us?

Rick:
Yeah, thanks for having me on the show. Always good to talk to you guys.
Foreclosures are an unfortunate reality in the mortgage industry. Typically, people do pay their mortgages on time and regularly, but about 1 to 1 1/2 of loans at any point in time are usually in foreclosure. And about 4% of loans are delinquent but not yet in foreclosure. We saw a huge spike back leading into the Great Recession about 10 years ago, where foreclosure rates actually approached about 4% of all loans, which was just remarkably high, and about 12% of loans were delinquent. And a lot of that was because of really bad behavior on the part of the lenders, to be honest with you. And a lot of real estate speculation that was kind of reckless. But historically speaking, you’re looking at about 1 to 1.5% of loans in foreclosure, and that would represent a kind of normal year.

Dave:
I think a lot of real estate investors follow foreclosures really closely because it, one, has implications for housing prices if there’s all of a sudden huge influx of foreclosures that could put downward pressure on prices. But also just because recently, there’s been such a shortage of supply and inventory on the market. I think a lot of people are wondering if foreclosures are going to take up and perhaps increase the amount of homes that are up for sale or up for auction in the case of a foreclosure at any given time. So I’m just curious, Rick. What’s been happening recently, and is there any chance that foreclosures might add to some inventory in the coming year?

Rick:
Let’s unpack a couple of the things that you said there. The interest that I’ve seen from investors in foreclosure properties over the years is purely mathematical. Typically, you can buy a property in some stage of foreclosure for a whole lot less than you can buy a property at full market value. And we can talk about it as we get into our conversation a little bit. But there’re three different stages of properties and distress that people can buy foreclosures during, and the risk and reward varies accordingly.
When COVID hit, we were already in a market where there wasn’t a lot of foreclosure activity. We were probably running at about 60% of normal levels of foreclosure. So a little more than a half a percent of loans were in foreclosure at the time. Then the government put a foreclosure moratorium in place that lasted over two years. So really, about the only properties that were being foreclosed on during that pandemic era were commercial properties or properties that were vacant and abandoned. But if you had a more conventional, traditional loan, even if you were behind on your payments, you were fairly safe.
And then the government also put a mortgage forbearance program in place where basically all you had to do, as a homeowner, excuse me, was call your mortgage servicer, say that your income had been affected by COVID, and you were allowed to skip mortgage payments. And that program lasted for about two years. So we’re coming out of a period where we had virtually nothing going into foreclosure for an extended period of time, resulting in some of the lowest foreclosure activity levels in history. And even today, we’re running at about 60% of the level of activity we saw back in 2019, when, as I mentioned, foreclosures weren’t particularly high to begin with.
We’re also seeing a difference in the stages of foreclosure and the rate we’re seeing compared to pre-pandemic. So if you look at foreclosure starts, that’s the first legal notice a borrower gets that they’re in default on their loan. They’re coming back at about 70 to 80% of pre-pandemic numbers. But if you look at the number of properties being auctioned off in foreclosure sales, they’re still down at about 50% of pre-pandemic levels. And if you look at bank repossessions, which is what happens to properties that don’t sell at those auctions, they’re at about 30% of pre-pandemic levels. So if you’re an investor looking to buy a foreclosure property, the market’s a whole lot different than it was prior to the pandemic and way different than it was going back to the crisis in 2008.

David:
You mentioned there’s three levels of foreclosure. Can you briefly cover what those are, and then we’ll talk about how those are different now compared to where they were in the past?

Rick:
Yeah, sure. That’s a great question. There’s what we call a pre-foreclosure stage, and that’s when the borrower gets that first legal notice of foreclosure. In a state like California or Texas where the foreclosures are done in a non-judicial process, that’s called a notice of default. If you’re in a state like New York, or Florida, or Illinois where it’s a judicial foreclosure process, it’s called a lis pendens filing. So you get that first legal notice, and that starts the gears moving on a foreclosure. There’s a timeline that every state has that goes from that first stage to the second stage, and that’s a notice of sale. That’s when the borrower has kind of exhausted that pre-foreclosure period. And the lenders basically told them that the property is going to be auctioned off either by a courthouse auction or a share of sale on a certain date. So that’s the second stage of foreclosure. And that results in that auction, that share of sale, taking place, where typically a lot of investors will buy those properties.
The properties that fail to sell at those auctions are typically repossessed by the lenders. Those properties are taken back as something the industry refers to as REOs, that stands for real estate owned, because the industry has no creativity whatsoever in naming things. But at that point, the bank or the lender has repossessed the property to basically make it whole for whatever the unpaid loan balance was. And they’ll resell those properties either through a real estate agent or through one of the online auction companies. So those are your three stages of foreclosure.

David:
And so pre-foreclosure would be like a notice of default, and anything else would be included there.

Rick:
Yeah, and what’s really interesting in today’s market, David, is that we’ve seen the percentage of sales of distressed properties shift dramatically from where it was five or 10 years ago. So normally, you see a pretty high percentage of distressed property selling at the auction or selling as lender-owned REO assets. Today, about 65% of distressed property sales are in the pre-foreclosure period. So the homeowner’s getting that first notice of default. And rather than losing everything at a foreclosure auction, they’re selling the property themselves on the open market to avoid losing everything to a foreclosure.

David:
Perfect. So you’ve got pre-foreclosure, which is when you’ve missed payments, you’ve fallen behind, the bank sends you a letter saying, “Hey, you’re in default.” I believe in most states they have to put something in the newspaper. There needs to be some kind of public declaration that the person is going into foreclosure. Funny, I see Dave making a face because that’s weird, right? Why are you putting our business out in the streets like that? But I think the idea was people could say, “Well, I never got that letter.”
So a long time ago, they would post it out there in the community bulletin board or put it in a public space so that the person couldn’t claim that they weren’t notified. That’s what most of the wholesalers or the people that are looking for off-market deals, they’re fishing in that pond. They’re like, “Who’s got a notice of default or an NOD? How do we get ahold of them, because if they have some equity but they’re going to lose the property, let’s buy it first?” You mentioned that, Rick. If that doesn’t work, the bank then says, “Hey, we’re going to sell the house on the courthouse steps in some kind of a public auction and get our money back from the person if it’s a non-recourse loan. If your property sells for less than what you owed, then hey, you’re off the hook.” But if it was a recourse loan, you are still on the hook for whatever was owed after the auction, which sucks because stuff never sells for as much at auction as much as it would sell for on the open market.
And then, if it doesn’t sell on the courthouse steps, then the lender or… What’s usually the case is the bank has to take the property back. It becomes a part of their portfolio. They take title to it, and it’s referred to as REO because it’s looked at as real estate owned on the bank’s books. That’s when a bank would go say to a real estate agent, “Hey, sell this thing. We don’t know what the heck to do with it,” right? Like when you hand a grown single man a baby and he’s like, “I don’t know. What do I do with this thing?” That’s how banks feel about taking properties back. So that’s where you can… You can find those properties on the MLS, but that’s a great explanation because people just throw the word foreclosure around.
And it’s confusing because not everybody understands that a foreclosure that’s listed on the MLS as REO is not going to be something you get a great deal on because all the other buyers see it, versus a foreclosure that you’re buying on the courthouse steps could be a great deal, but you’re going to have to have all cash. You’re not going to get a title check. You’re not going to get inspection, and then a foreclosure… In pre-foreclosure is something you actually probably could get a really good deal on because the person’s motivated to sell it. However, it’s hard to find them. Because you have to find the person that’s got the property. Okay, that’s a great explanation. Thank you for bringing some clarity there to all of our audience.

Dave:
Okay, so now that we understand the three different levels of foreclosure, the question is what does the current foreclosure landscape mean for your real estate investing strategy? We’ll get to that right after the break.

David:
Welcome back. We’re here with Rick Sharga, president and CEO of CJ Patrick. And he’s spelling out his company’s market intel on the state of foreclosures in the United States, as well as what that means for real estate investors.

Dave:
So, Rick, you mentioned that the early stages of the foreclosure process have started to tick up, but sales are not. And that is likely, from my understanding, because people are selling them earlier. Is that a consequence of all of the equity that the average American homeowner has?

Rick:
Yeah, that’s your spot on, Dave. There’s $31 trillion in homeowner equity out there. That’s an all-time record. And when I go out and talk to groups and I point out that there’s a lot of equity, the pushback I usually get is, “Well, yeah, but people in foreclosure don’t have equity.” Well, yes, they do have equity. In fact, according to some research from ATTOM DATA 80% of borrowers in foreclosure have at least 20% equity. I’ve seen some other reports from companies like Black Knight where that percentage is a little lower, but you’re still talking about close to 70%. So if you’re sitting on a 400,000-$500,000 house near 20% equity, that gives you 80,000-$100,000 cushion to work with. It also gives you the potential of losing 80 to $100,000 of equity if that property gets auctioned off in a foreclosure sale because the lender is going to sell it only for the amount still owed on the property, not for all of your full market value.
So intelligent people who have fallen on difficult times financially are leveraging that equity and selling the property off either at or close to full market value. But if you’re a savvy investor if you know how to work with borrowers in that kind of financial distress, you can usually find yourself a property, negotiate a deal that gets you something below full market value, but let that distressed homeowner walk away with some cash in their pocket and get a fresh start.
If you’re a rental property investor, you might have somebody who’s temporarily fallen on hard times recently got a new job, but just can’t catch up on payments. And maybe they become a worthwhile tenant. So you can buy a property with a built-in render right off the bat. So it’s a very different market dynamic than what we saw during the foreclosure crisis of 2008 to 2011, where the right strategy was to wait for the lender to repossess the property and buy an REO because the banks were selling them at fire sale prices just to get them off the books. And your average borrower in foreclosure was way underwater on their loan.
It’s just not the case anymore. In fact, some of the equity numbers would just blow people’s minds if they saw somebody in foreclosure who’s sitting on 70% equity. And there’s a question I do get periodically, which is, with all that equity, how they wind up in foreclosure? And the truth is that having equity doesn’t prevent you from missing payments, and that’s what gets you into foreclosure. So typically, it’s the same old things. It’s job loss, unexpected medical bills, divorce, death in the family, things like that that cause people to miss payments and go into foreclosure, but that equity provides them with a much better chance at a soft landing than what they had with no equity back in the day.

Dave:
Rick, I think that’s so important that the amount of equity that you have in your home and your ability to pay your mortgage are not the same thing. And you can have relative wealth in one area and still have negative cash flow as a household. And so unfortunately, people do fall on hard times even though they have positive equity. And I do want to get to talking about why people have so much positive equity, but I have one question. Someone on our podcast on the market recently, it may have been you, Rick, so please forgive me if I’ve forgotten, was telling me that the banks also now sort of have expanded their playbooks for how they can intervene in these unfortunate circumstances. It seems like back in 2008, they really didn’t know what to do with someone who stopped paying their mortgage. Are they more equipped to handle that now?

Rick:
Well, it was a bit of a perfect storm back in 2008. The banks didn’t have a particularly robust toolkit of ways to help borrowers who wound up in default. And they got overwhelmed with just the sheer volume. Again, we had four times the normal level of foreclosures, and they were all happening at once, and these loans that were just awful, awful loans that were written at the time. So in a lot of cases, there was very little the banks could even do.
So fast-forward 10 years to today, the loan quality of mortgages written over the last decade has been extraordinary, probably the highest quality in history. We’ve had an enormous amount of equity growth. And in the meanwhile, the mortgage servicers have really developed many more processes and tools they can use to help borrowers. In addition to that, we just went through this forbearance program that has been for my money, probably the most successful example of the government and the mortgage industry working together to achieve a positive outcome ever.
8.7 million borrowers took advantage of that forbearance program. There’s probably about 200,000 remaining in the program today. But of that 8.7 million, the people that have exited less than 1% have defaulted on their loans. So it’s just been a remarkable, remarkable success story. And what we’re seeing is the large entities that play in the mortgage space, Fannie Mae, Freddie Mac FHA, have kind of co-opted some of the techniques that we saw used in that forbearance program and are making those available to mortgage servicers to create loan modifications and loss mitigation strategies.
Fannie and Freddie have been instructed to make a similar forbearance program part of their ongoing loss mitigation activity. Ginnie Mae lenders have been given the option of extending the terms of a mortgage from 30 years to 40 years to get the monthly payment down again on distressed loans only not as a new loan.
And the FHA has a program where they can actually remove part of the mortgage loan and tack it onto the back end, so that you don’t owe any payments on maybe 10% of your loan until you either sell the property or refinance the loan at the end of the term, and that lowers their monthly payments.
There’s a lot more creative processes involved today and lost mitigation and loan modifications than what we saw 10 years ago. And candidly, the servicers are reluctant to foreclose on anybody. They’re not absolutely sure. They can’t help salvage because they don’t want the CFPB to come down on them with the wrath of God either. So there’s some motivation from that perspective as well.

David:
That’s a great insight into the history of foreclosures. And I do like that you mentioned the last housing crisis we had around 2010, ’11, ’12. It wasn’t just, “Hey, it’s a bad economy.” It was an absolute collapse of the housing market, which flooded the market with an insane amount of inventory at the same time that people were losing their jobs, and we went into an economic recession. So you had way fewer buyers to buy these properties, and in an outrageous amount of supply that hit the market, which led to an utter collapse of housing prices. And I think a lot of people feel like foreclosure is synonymous with buy it for 30% of what it’s worth, and that’s not the same. And I really love that you pointed that out.
Going into 2024, I think that just from what I see in the market, there’s a good chance that we’re going to have more foreclosures than what we’ve traditionally had. I don’t know it’s going to be an incredible spike like what we saw before. What do you think people should look out for or expect regarding foreclosure activity going into the new year?

Rick:
So I’ll answer that question, but I want to touch on something you said earlier because I think it’s critically important. We really did have a perfect storm back in 2008. We’ve never seen that set of dynamics happen at the same time. And what people don’t realize is right before the market crashed, we had about a 13-month supply of homes available for sale. In a normal market, you’re looking at about a 6-month supply of homes available for sale. In today’s market, you’re looking at about 2 1/2 to 3 months supply. So we’re dealing with an overabundance of inventory back then, right before everything started to go bad at from a lending perspective, and it built on itself. So that combination of more supply than demand plus distressed inventory coming to market really is what cratered home prices. And people were buying properties at 30 cents on the dollar.
Investors actually helped pull up the economy out of a recession by going in and starting to gobble up all that inventory. But last time, that big Great Recession, was the first time that I’ve ever seen where the housing market actually took the economy into a recession. Usually, the housing market helps the economy recover from a recession, but this time, we actually took it in because things were so bad. Not a replay of that at all in 2024. In fact, we ended 2023 with about 0.4% of loans in foreclosure, which again is way lower than normal. To put that in perspective, that means you’re looking at somewhere between 200 and 250,000 homes in some stage of foreclosure. And in a normal market, that number would’ve been more like 500 to 600,000. So just not a lot of activity. What continues to happen is that people get that first notice, and instead of going into hiding and denial, they’re acting quickly and selling off a lot of those properties. So that’s adding a little bit to the for-sale inventory but not really adding to distressed property inventory in the long run.
My most likely scenario for the balance of 2024 is we see a gradual return to pre-pandemic levels of foreclosure starts, but we will continue to see a lag in the number of properties that get to the auction. And we’ll continue to see fewer bank repossessions than we’ve seen in prior cycles. We probably don’t see those come back to normal levels at the earliest until 2025.

David:
Interesting. And what is it about 2025 that you think we’ll start to see that change?

Rick:
One of the reasons I think we’ll see a higher number of REOs in 2025 is simply the length of time it takes people to execute a foreclosure. So if you’re in states that have relatively high numbers of foreclosures starts today, like New York, and Florida, and Illinois, it takes 1800 days on average to finish a foreclosure in New York. So foreclosure start from 2023 probably won’t get all the way through the process until sometime in 2025. And so what I’m expecting is a lot of the activity that we’ve seen start in the last year doesn’t finish until we get through 2024 and into 2025.

Dave:
Rick, the New York Fed puts out some really interesting data about loan delinquencies. And if you look at other debt classes, like credit card debt or just consumer debt, auto loans, it does look like defaults are starting to tick up. Is there a reason they’re going up in those other types of debt but not for mortgages?

Rick:
It’s another reversal from where we were in 2008. Back then, people were paying their car loans but letting the mortgages go. And the running joke back then was you could sleep in your car, but you couldn’t drive your house to work. In today’s market, you’re absolutely right. What we’re seeing is an increase in consumer delinquencies, in credit cards, in auto loans in particular, in other consumer loans. Student loans haven’t started to go delinquent yet, but we’ve only just seen the payments start again on student loans after a hiatus of a couple of years. But mortgage delinquency rates have actually been going down. And part of me believes the reason for that is people realize how much equity they have in these homes, and they are protecting that equity even if it means they’re going to be a little late on some of some of their other credit responsibilities.
The other thing that’s probably worth taking a little bit more of a look at when you were talking about these trends is that a lot of the delinquencies in the other areas of consumer credit are only 30-day delinquencies. So somebody’s missing a payment or late on up payment, but they seem to be catching up pretty quickly after that. And even with the increases we’re seeing, the delinquency rates are still probably around half of what they were back in the Great Recession. So it’s not a crisis yet, but we do watch consumers for financial stress.
Last quarter, actually the third quarter of 2023, was the first time consumer credit card use had ever surpassed a trillion dollars. That’s a big number in and of itself. And it happened at a time when, because the Fed had continuously raised the Fed funds rate, credit card interest rates were on average at about 25%.
So we had a trillion dollars of credit card use at some of the highest interest rates ever. That could lead to some problems down the road. And in the auto market during the pandemic, we saw an awful lot of subprime lending in the auto industry so that people could sell cars, and a lot of those bad loans are simply coming home to roost, so it’ll be interesting to follow.
But the metric I would give people to watch, if you’re curious about mortgage delinquencies, is the unemployment rate. Very, very strong correlation between the unemployment rate and the mortgage delinquency rate. And if you look at late 2023 mortgage delinquency rates, they were at about 3.26%, while unemployment was at about 3.6%. So there really continues to be a correlation. If you see unemployment numbers start to tick up, you’ll probably see mortgage delinquencies start to tick up. But your question is great because, unless a mortgage goes delinquent, it’s not going to go into foreclosure. So if you’re looking at historically low levels of mortgage delinquencies, it stands to reason that we’re not going to see a huge wave of foreclosures until those numbers change.

Dave:
Thank you for answering that. That’s something I’ve been wondering about for a while.

David:
This is such great context for all of our listeners. And I imagine many of our listeners want to know if these foreclosure trends will lead to more supply. We’ll get Rick’s answer to that right after this break, and stay tuned to the end as we answer a listener question on our Seeing Greene segment. My favorite part of the show.

Dave:
So it sounds like, Rick, at the top of the show, I mentioned that foreclosures are pretty important to the housing market because it is one channel by which supply enters the housing market. It sounds like you don’t believe, and the data seems to show that foreclosure is probably not going to add a lot of supply next year. So, Rick, let me ask you, do you think supply will increase in the housing market in the coming year and help thaw the market a little bit? And if so, where could that supply come from?

Rick:
So supply almost can’t help but go up a little bit in 2024 because it’s been so, so low in 2023, almost the lowest levels in history. And that was certainly true for a while in the new home space, where we had just almost no supply of completed homes available for sale. I don’t expect to see a flood of existing homes listed for sale next year. In fact, I don’t think we can expect to see a whole lot of those homes listed until we see mortgage rates drop down into the fives.
Right now, you have 70% of borrowers with an active mortgage who have a mortgage payment of 4% or lower, and the math just doesn’t work. It’s not that they’re being picky and don’t want to sell, it’s they can’t afford to. You sell a house with a 3% mortgage. You buy another house at exactly the same price, and you’ve effectively doubled your monthly payments. Most people simply can’t afford to do that. So that’s going to continue to suppress the number of existing homes that are listed.
You will see people who need to sell their house continue to list their homes, and that’s people in foreclosure, people that get a job transfer, people that have a kids or get married, or there’s a death or divorce. So you’ll see that. But where I do think we’ll see an increase, and we started to see indications along those lines, is in the new home market. We saw housing starts for single-family owner-occupied units jump up pretty significantly in November, which is the most recent month we have those numbers for. And the builders seem to be trying to take advantage of a market where their prices are almost at a parity level with the median price of existing homes being sold and where they’re offering concessions and buying down mortgage rates for their buyers.
So in some markets, it’s actually a better economic decision for a buyer to buy a new home than it is to buy an existing home. And I’ve actually seen some investors take the tack of targeting new home builders in their markets and looking for kind of the builder-close act deals. So you go to a Pulte, or a Toll Brothers, or some other builders and a development. And they have two homes left on the lot. And they want to close out that development, and reliquidate or recapitalize, and move on to their next project. So it’s a time when investors looking for the best deals really, really do have to be pretty creative in their approach. And in some of those markets, those properties represent good deals for rental property investors. Tough to get them to pencil that for a flipper, but for a rental property investor, there might be an opportunity there.

David:
One of the things I liked that you mentioned, Rick, is that foreclosure activity is related to economic activity, right? A big piece of it is recognizing that if there’s equity in the home, you’re way less likely to get a foreclosure because the seller is just going to sell it even if they fall behind on their payments. But the other ingredient in the recipe of foreclosure is you can’t have equity, and you have to not be able to make your payment, right? So what are some of the economic indicators that you pay attention to, or you think that real estate investors should be paying attention to, that aren’t directly related to foreclosures, but sort of are the lead into towards them?

Rick:
Yeah, you just tapped into the biggest one, David. The unemployment rate is huge. I’m still among what’s probably a minority of people right now who believes that the country will see a bit of a recession this year. Not a particularly severe one, not a particularly long one, but something of an economic downturn. I think the consumers pretty much tapped out at this point. And if we do see consumer spending come down, it accounts for 70% of the U.S. GDP. And theoretically, at least we could see a bit of a recession. If that happens, we’ll see unemployment numbers go up. If we see unemployment numbers go up, we’ll see mortgage delinquencies go up, and more people either having to sell off these properties or wind up in foreclosure. So that’s the biggest number I look at. And in a lot of markets, your national numbers are almost meaningless, so you really have to be looking at what’s going on in your neck of the woods.
The other number that really is important for investors to keep an eye on if we’re talking about foreclosure potential is sales volume and prices. If you’re in a market where prices are going down, it’s that much more difficult for a borrower who’s kind of marginal in terms of their equity to be able to avoid a foreclosure. So if you’re in the Pacific Northwest, if you’re in coastal California, particularly some of the higher-priced areas, if you’re in Austin or Boise, some of the markets that were just soaring during the pandemic, you’re likely to be seeing prices come down a bit. On the other hand, if you’re in the Southeast or the south, huge swaths of the Midwest, we’re seeing prices go up over 5% year over year. So you’re looking at the number of jobs created. You’re looking at unemployment. You’re looking at sales volume. You’re looking at prices. And a combination of those that looks negative tends to lead to more foreclosure activity.

David:
Great stuff there. This is awesome, Rick. I really appreciate you sharing this, especially because foreclosures are such an interesting topic in the world of real estate investing, but there’s a lot of misinformation out there. And a lot of people that have the wrong impression about how these things actually work.

Rick:
Just one thing I’d like to add, if you guys don’t mind. I still see an awful lot of people talking about the pending and impending housing market crash. None of the data supports that at all. One of the things that could precipitate a foreclosure cycle is a housing price crash. And I still see a lot of people trying to sell stuff on YouTube purporting this impending doom. None of the data supports it. And even if we did have home prices come down, much, much more than they’re likely to anywhere across the country, that doesn’t necessarily mean somebody goes into foreclosure. It just means they have less equity. Again, we have $31 trillion equity cushion right now, which is just the highest it’s ever been. So I just encourage investors not to buy into the hype, not to buy into the people that are selling services to get you ready for that foreclosure tsunami that’s about to hit. There’s just nothing in the real numbers out there that suggests any of that stuff’s going to happen.

David:
I appreciate you saying it because I say it a lot, and people get upset. So now I don’t have to be the only one that’s sort of carrying that torch. It’s very easy to scream. We’re going to have a crash, especially because the last one was so traumatizingly horrible. Everyone sort of got it in the back of their mind if they were there. So even hinting that that might happen again will just elicit this very strong fear response. That’s how you get views. That’s how you get clicks. That’s how you get likes, but it’s not how you actually run a successful portfolio.
Thank you, Rick, for being a light in this dark and scary world of foreclosure night in the real estate investing realm. We will see you on the next one.
All right, let’s jump into the next segment of our show, Seeing Greene. As a listener to this podcast, you are a part of the growing and thriving BP community, and we love you. And this segment is where we get to connect with community members like you directly by answering listener questions that everybody can learn from.
Today’s question comes from Nelson in Northeast Pennsylvania. Nelson writes, “I’m a big fan of the podcast and enjoy listening to every episode. Thanks for all the wise advice and amazing work that you and the BP team do. I purchased a triplex in 2015 and house hacked it, and the property value has roughly tripled leaving me with about $300,000 in equity and great cash flow. For my next investment I’m looking for something priced around 300 to 500,000, but I’m not sure what’s the most optimal way to apply my new equity. Currently, I’m looking into getting a HELOC but would also consider a cash-out refinance if needed. My question is how would you recommend that I use the equity in a case like this? Should I purchase a $300,000 property in cash giving me additional buying power and leaving only to HELOC to pay down, or should I use this equity to put 25% down on a more expensive property and pay a separate new mortgage? I’m not averse to taking risks, but I just want to be careful about over leveraging myself.”
Great question here, Dave. What do you think should be considered?

Dave:
Well, first of all, thank you for allowing me to be a part of Seeing Greene. This is quite an honor. I feel like I’ve made it in my podcasting career now that I get to be on this segment. It’s very fun. This is a great question from Nelson, because I think a lot of people face this. You find one deal. It sounds like Nelson’s had a ton of success here, which congratulations, and you try and figure out what to do next. And I feel like I always give boring advice here because it really does depend on your personal goals and what you’re trying to accomplish. But I do think the question is about really where Nelson finds himself in his investing career, because buying a property in cash does feel appealing. I think for a lot of people right now, if you have that ability because mortgage rates are so high, but you have to remember that that is going to eat up some of your appreciation potential because you won’t have leverage on the property.
And just to remind everyone, leverage is a benefit you get when using debt because, proportionally, when your property goes up in value, you earn a higher rate of return. And so generally speaking, for most people, and I don’t know Nelson’s specific situation, I think that if you’re sort of earlier in your investing career, I think taking on at least some debt is appropriate because you’re going to get the benefits of that over the long run. Plus, the benefit of buying in cash is better cash flow. And if you’re continuing to work and have a full-time job, you might not need that cash flow right now. That’s sort of how I see it, David. What do you think?

David:
When prices and rents were… They’re never guaranteed, but as about as close to a guarantee as you can get the last eight years or so that they were going to go up. I leaned more towards erring on the side of boldness. I think you should borrow more. I think you should buy more. And I made it clear that my stance on that was because the government was creating so much money. There was so much stimulus going on that all the winds were at your back and pushing you forward. Now, does that guarantee a deal’s going to go wrong? No, but it definitely puts the odds in your favor.
In the market we’re in right now, we’re sort of in a stalemate. It’s not a bad market where we think prices and rents are going down, but it’s just not as likely to go up. We sort of got opposing forces. They’ve got everything locked into one place. So I would still say buying is a good idea, but I wouldn’t say buying aggressively is as good of a plan.
I would like to see Nelson probably take out the HELOC, buy something in cash, use that extra cash flow from the property that doesn’t have a mortgage to pay off that HELOC, which theoretically means every payment he makes on it is going to be less than the last one was.
Now, the reason that I like that is it covers him on the downside because he’s paying off his mortgage. It’s a safer way to buy, but it also gives him upside potential if the market does turn around. If rates drop back down to something in the mid-fours or something, or we get another round of stimulus and like, “Oh, here goes the party again. Prices are going up,” he can always throw a mortgage on the new property, put more debt on it, and now he’s got that capital to go play in the game when the odds are on his favor.
So you have to… There’s no guarantees. You have to put yourself in the position where you’ve got flexibility in different areas. I think with the market we’re at right now, but of a stalemate, he’s got some upside. He’s protected against some downside. It’s sort of right down the middle. What do you think about that?

Dave:
Yeah, I think that’s a very good and defensive strategy, and generally agree with that approach in this type of market is definitely not leveraging yourself. One thing that I’ve been considering for deals is sort of taking the middle road and maybe putting 40% equity into a deal instead of what is usually the minimum for an investor of 25%. Would you ever consider doing something like that, David?

David:
This is a funny thing that you’re asking me that. So I was talking to Jay Papasan. He’s the author of The One Thing with Gary Keller as well as a lot of the other Keller Williams books. And he said something that made me feel really stupid. I was saying, “Yeah, there’s not much cash flowing right now.” And he goes, “Unless you want to put 50% down.”

Dave:
Yeah.

David:
That’s a great point. We just sort of assume 20% down is the only way to get cash flow. So we analyze a deal. It doesn’t work at 20% down. We go, “Oh, there’s no cash flow. There’s no point of buying real estate. I’m just going to sit over here and sit on my thumbs.” That’s not true, though. If you have more money to put down at will cash flow, you’re just going to get a smaller ROI because the capital investing is greater.
And so I think what you’re saying is a great point. If you’ve got more money, you still can buy real estate, and you’re not taking on additional risk because it is going to cash flow. You just can’t buy as much of it, which is one of the reasons that I continually give advice that we need to be saving our money and making more money, not just thinking about real estate investing. When real estate is doing awesome, of course, all we talk about is how to buy more of it, how to acquire it, how to build value in it. But when it’s not doing awesome, it’s just doing okay. You can still do awesome with the other two pillars of defense and offense, which I covered in my book, Pillars of Wealth, and you can get that on the BiggerPockets bookstore as well as your book, David. Do you want to share where people can get your new book?

Dave:
Yeah, thank you. It’s right behind me. I just got it for the first time, actually holding it in my hands. It’s called Start with Strategy. You can find it at biggerpockets.com/strategybook. It’s all about how to individualize your approach to real estate investing based on your own goals, risk tolerances, and circumstances in life.

David:
All right, so do you ever want to Dave and I visit your house at the same time? Go to the BiggerPockets bookstore, buy each of our books, put them on the shelves next to each other. It look like we’re holding hands, and you can tell your friends that you’ve been visited by David Greene and Dave Meyer at the same time.
Dave, thanks for joining me on the podcast and on Seeing Grain. Awesome doing a show with you as always. Hope to see you again on our next joint venture. And if you didn’t know, Dave is a huge aficionado of sandwiches. His Instagram is TheDataDeli, so go check him out there and let us know in the comments on YouTube what your favorite sandwiches because we want to know.
This is David Greene for Dave’s Strategy and Salami Meyer signing out.

John Lavollo, UBS analyst, joins ‘Squawk on the Street’ to discuss the optimism in the housing market in 2024 and outlook for the sector.

Ashley:
This is Real Estate Rookie, episode 356.

Tony:
Today, we have the data deli himself, Dave Meyer. You guys might know Dave. He is the host of the BiggerPockets on the Market podcast. He’s the VP of Digita at Bigger Pockets, and just an all around really awesome and intelligent guy, and I love talking to him. Today, he’s got a new book out. It’s called Start with Strategy. We’re going to talk a little bit about how strategies should be played into your journey as a rookie real estate investor. Guys, this is probably one of the most overlooked things I’ve seen rookies do, so make sure to pay attention in all of today’s episode, because you’re going to get some good stuff.

Ashley:
As always, I’m Ashley Kehr, joined by my co-host, Tony J. Robinson.

Tony:
You’re listening 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.

Ashley:
Today, we’re going to learn that investing is more than just running analysis. Today, we’ll get into three of the five things you need to evaluate when you are starting in real estate, or maybe you need to even re-evaluate to hone in your real estate strategy. So, this will include personal values, transactional income plan, and a resource audit. Have you guys done any of those before? We may even have a little bit of time to get into some market predictions from our favorite data wrangler to see what he has in sight for 2024.
Dave, welcome back to the show, and Happy New Year.

Dave:
Thank you, Ashley, Tony. Happy New Year. It’s great to be here.

Ashley:
Is this maybe your third time on the show with us? Maybe even more. I think you’re one of the few that has been on several times with us.

Dave:
Yeah, I think I have. It’s been a long time though. I feel like it’s been a year or two since we’ve done this, so I’m glad to be back and talking about this topic, which I think is particularly useful for rookies. So, I think this will be a great discussion.

Ashley:
Dave, part of the reason you are here today is because you have a new book out too. So before we get any further, I’d love to just hear a little bit about your book.

Dave:
The book is called Start with Strategy. The basic idea is to help real estate investors develop a business plan for the real estate investing business. We call it investing, but as everyone who’s getting into this knows real estate is really entrepreneurship. Just like any business person, anyone who’s starting a company, you need to have a strategy and a plan that you’re going to follow not just for your first year, but figure out what goals you’re aiming for in the long run, and work backwards to decide how you’re going to get there. The book is a framework. It’s super interactive, but also provides a lot of background context on how every individual, no matter what experience level you have, can come up with a strategy that’s personalized to you and your preferences, goals and all that.

Ashley:
Dave, do you have maybe a story that you can share with us as to a reason as to maybe why you decided to write this book, or why it’s important to start with strategy? Why did you even think of this?

Dave:
I think we all experience this in real estate, where you get overwhelmed by how many amazing choices there are. There are so many good ways to invest, and it’s hard to pick. I think I see this all the time, both I’ve experienced and see with other investors, that you don’t really know what to do first because you don’t necessarily know where you want to end up. I have experienced this quite a lot in my life. When I was right out of college, I wanted to do so many different things with my life. I wanted to travel and be a backpacker. I thought about going into finance. I wanted to be a ski bum, and I was really struggling to figure out what to do next, because I didn’t really have an idea of what I wanted my life to be in the long run.
Actually, I went out to breakfast with my grandfather, and I was explaining him my young angst about not knowing what I wanted to do with my life. He asked me a really simple question. He was like, “Well, where do you want to end up?” I was like, “I don’t know. I’m just trying to figure out what to do tomorrow. I don’t know. I don’t want to think about a year from now or 10 years from now.” He is like, “Well, you’ve actually quoted this thing from Alice in Wonderland,” but he basically said, “If you don’t know where you want to go, then your next step doesn’t even matter, because you don’t have a destination in mind, so what route you take is irrelevant.”
I’ve thought about that a lot over the last few years, and really worked on figuring out what my long-term goals are, and then working backwards into the strategies specifically in real estate that work for me. So, I asked him, “What should I do next?” He pulled out some old Alice in Wonderland quote, and basically said… I’m going to butcher this, but paraphrasing it, basically said, “If you don’t know where you want to end up in your life, it doesn’t really matter what you do next, because any path will lead you to somewhere. Unless you have a destination in mind, it’s really irrelevant.” I’ve thought about that a lot throughout my life, and it’s guided a lot in my decisions, but I think it’s true in real estate as well where people want to figure out, “Do you want to flip houses? Do you want to be a rental property investor? Do you want to quit your job?”
When really all of those answers, you can’t really come up with answers to them unless you have an idea of where you want to be at the end of your investing career. That’s what inspired me to write this book was helping people figure out what they want, and then plan backwards.

Tony:
Dave, I think you bring up a really good point, and I want to comment on that. First, I just want to clarify the quote, because I think it’s such a good quote. I actually looked it up right now. Alice says… She’s talking to the Cheshire cat. She says, “Would you please tell me which way I should go from here?” The cat says, “Well, that depends on where you want to go.” Alice says, “I don’t really care where I go.” The cat says, “Then it doesn’t matter which way you go.”

Dave:
Thank you. Thank you. My grandfather would be very proud. Happy that you actually got the quote.

Tony:
I think it’s such an important thing, Dave, for rookies to understand, because you are inundated with all these different options when you first start. There’s different asset classes. There’s single family. There’s small multifamily. There’s large multifamily. There’s storage parks. There’s everything else you can think of. Then within those, you can flip. You can wholesale. You can hold long-term. You can do turnkey. There are so many different strategies, and I think what most people get caught up on is that they want to try a little bit of everything, which maybe isn’t bad to begin with just to see which makes the most sense for you. But I think after a time, you’ve really got to dig deep into one strategy to get good at that thing.
The goal is that it does align with your long-term goals of where it is you want to be. I always tell people, “When you’re investing in real estate, you’ve got to look at what your motivations are. Is it cashflow? Is it tax benefits? Is it appreciation? Is it you want to just have a vacation home, and someone subsidizes the cost for?” All those things tie into what strategy makes the most sense for you. So I guess for you, Dave, after you had that conversation with your grandfather, what was the realization you had about what does Dave want out of real estate investing?

Dave:
It took me a while, and ultimately, when I was maybe 22 at the time, I felt very conflicted about two different paths in life. Part of me really just wanted to be a heated nest. I’d like to ski, and I just like to hang out with my friends, so I wanted to do that. The other part of me has a lot of frankly just financial anxiety, and so I really wanted to make a lot of money to have more stable income. I felt very torn, and ultimately just decided that my goal for my career in life was to find a way to do both. I really was dead set on having fun, having great relationships with my friends and family, but still making money and not making a trade-off, because it’s easy to make a trade-off.
If you want to make a lot of money, you can work a lot of hours, or you can just have fun, but that comes with financial consequences. So, I set out to find a way to do this, and then I discovered real estate investing, and I was like, “This is the way that I’m going to do it. It’s a perfect way to strike the balance between living a life that you actually enjoy, and providing yourself and your family with financial security.” That’s what got me into real estate in the first place.

Ashley:
You just mentioned having some anxiety. How does that actually play into making that decision?

Dave:
I mean, I think I just ultimately… Realistically, my upbringing, my parents were fine financially for a while, and then it all exploded and melted down very quickly for my family, and put us in a difficult situation for a couple of years. That just stuck with me, and I always had this feeling that your career could go away. My dad lost his job for a while, and I just didn’t want to be in that position. It always sort of stuck with me, and I was always hustling and trying to make side businesses, and working two jobs in college and after school even. That was great, because it made me feel better about my financial situation, but I also was in my early 20s, and wanted to do stuff.
So, I felt like I really needed to find a better balance, and not just only focus on this financial anxiety that I have, and find a healthier way to deal with it than overworking.

Ashley:
We have to go into break here, but real quick, where do we actually start with this? What is the starting point? You had mentioned you need to know where your destination is. What would you call that starting piece? If we’re on the game board of we’re playing some Alice in Wonderland board game here, and we’re trying to pick, I’m envisioning Candy Land in my head. Which way do we want to go? What is that first step, that goal, that destination, the big Candy Land castle? What do you call that, and how should everybody be looking at that as their first step?
If you guys are enjoying this episode with Dave, you can get more from Dave and other real estate experts in a brand new multi-day virtual summit that is happening January 29th to February 2nd, Get Prepared to be Successful in 20204. 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. Visit 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. Let’s hear a word from our show sponsor.
Okay, welcome back from our short break. Dave is going to get into your first step. We had mentioned playing the game Candy Land. You’re trying to figure out your path. There’s the Candy Land castle at the end. What is that? What is the game piece? What is the first thing that you need to decide and build out and plan before you can actually build out your whole strategy? Dave, what would you call that piece?

Dave:
For me, the whole place, the destination you’re trying to achieve is what I call a vision. I try and re-craft this every single year, try and make sure that I’m still pointing in the right direction, but there are subcomponents of vision. You have financial goals. You might have what your job is going to be, some professional goals, but for me, the first thing I always reevaluate is what I call my personal values. I know this doesn’t necessarily sound like real estate investing, but I think it’s super important to figure out why you’re investing, and why you’re doing this in the first place, and what you actually value in your life.
This is common in businesses, right? We don’t talk about it as much in real estate investing, but every Fortune 500 company has values. They have a mission statement, and so I encourage people to do that for themselves. It’s something I do for myself by creating or tweaking my own personal values each year to make sure that everything I do in real estate or really in my whole professional life is aligned with the life that I want to live.

Tony:
Ash, I know for me, I probably haven’t done a good enough job of creating a value statement, I think, for my real estate business. Have you put any thought into that, Ash?

Ashley:
I actually had a consulting company that I was working with last year that helped me with doing a little bit of planning and writing out my mission statement and the vision for the company, because we were hiring for a couple of virtual assistants. It was the thing that I procrastinated on the most.

Dave:
It’s really hard.

Ashley:
Out of all of the stuff that I had to get to them, that was the thing. They’re like, “You know what? We’re going to send you this form. Just fill out this form, and we’ll help you do that, and even fill them.” They pieced it all together by doing a really good job of asking me certain questions that could help them understand, “Okay, we think this is what you would want your mission statement to be.” Then I would read it, and tweak it, and change it a little bit, but that helped me. But as far as sitting down and drawing a blank board, or Googling other companies’ core mission statements, their values, what are their five pillars? Always been very difficult for me to do that, because I’m just like, “Just sit down and do the work.”
I don’t care, whatever company culture, things like that, but I know that it is really important, and things that you should do. I definitely learned a lot last year doing it with that consultant.

Tony:
I guess, Dave, what’s your guidance for that rookie investor who’s maybe never taken the time to sit down and think about values? How does one even come up with that list? Is it 50 values? Is it five values? Just walk us through maybe some tactical secs and actually putting that together.

Dave:
Sure. Well, first, I’ll say I definitely identify with this. I came across this idea of personal values from an executive coach that I worked with for a few years, and she was like, “You have to do these values.” I was like, “Man, I’ve got so many other problems to deal with. This is the last thing I’m going to do.” Finally, after maybe six months of nagging me, I sat down and did it. It’s honestly changed my life maybe more than any other professional thing I’ve done. I know that sounds strange if you’ve never done the exercise, but the way my coach, Lauren, had put it to me was, “Your values are the things that you can’t live without in your life.”
So, she encouraged me to come up with no more than five personal values, and you really… It’s hard. You really have to think about it, but she gave me a list of basically words. It was 50 words. This is in the book. We have a template for it, but circle any words that resonate with you that are important to you. Then you basically go through this pruning process of narrowing down what things are really important to you. It’s hard, because everyone wants to… Most people aspire to have a lot of these things. They’re words like honesty, integrity, trust, adventure. Those all sound pretty good. But as we all know, as human beings, you have to make trade-offs.
You can’t be everything, and so you need to narrow down what you want. Ultimately, I was able to get it down to five things that are super important to me. I use that, yes, in real estate investing all the time, and I’ll explain that in a minute, but I just use it in my job. I use it in my friendships and how I choose to spend my time every day. I can just share them with you. For me, the five are growth, just like personal growth, adventure, freedom, mental and physical health, and meaningful relationships. I look back at those all the time. If I think about, “Do I want to write another book?” I have to decide like, “Is that going to impede on any of my values, or is it going to support my values?”
If I decide, “Do I want to flip a house,” is that working in alignment with the things that matter to me in my life or not? It really just has helped me improve my decision-making skills a lot, and that applies to real estate for sure.

Tony:
Dave, I appreciate you sharing that. One question that it makes me think of is do you always feel that those values are an equilibrium where they’re always perfectly balanced, or do you find yourself going through seasons where maybe you prioritize one value over the other? Because that’s something that I’ve found as I’ve progressed in life and in entrepreneurship and in business is that sometimes you have these seasons where you can really focus in on one piece of your life, and there’s other seasons where you got to shift that focus towards something else. So, is your goal to always keep those perfectly balanced or just to be within range, but sometimes you got to shift resources and priorities?

Dave:
That’s a great question. I wish it was easy to do all of them, and keep them all in balance, but I think it’s unrealistic. I think the key is to… If you’re going to live outside of some of your values, that it’s a conscious decision. Sometimes I’ll prioritize work, and that means I’ll have less adventures, or maybe I’ll spend a little bit less time with my friends for a couple of months, but that’s a decision I’m making to pursue another one of my values, or something else that’s really important to me. I’m not just letting this happen to me, and just making decisions willy-nilly based on whatever opportunity comes up. Because like you said, it’s impossible, but I think it’s important to know, “Okay, I’m going to take a step back from this,” but knowing that to live the life you want, you have to get back closer to equilibrium at some point.

Ashley:
Dave, you had also mentioned that one of those beliefs that were important to you was personal relationships. So, how does this impact your investing, your personal core values per se?

Dave:
The way it mostly impacts me is that I actually pretty significantly limit the amount of time I’m willing to spend investing in real estate. I know it sounds silly for someone who does this for a living, but I work full time, and so my real estate investing portfolio is above and beyond my job at BiggerPockets. I find that if I were flipping houses, or doing BRRRRs, or really trying to grow my portfolio as quickly as humanly possible, I would run out of time for the meaningful relationships that I want to prioritize. So, actually, we can talk about this later, but for me, my goal is 20 hours a month on my portfolio or less on average. That, for me, gives me enough time to pursue the meaningful relationships that I have outside of real estate.
Now for some people, that could mean being close with the people you work with. I live in Europe, and so I almost exclusively invest passively. I don’t have a lot of opportunity to build meaningful relationships with the people I invest in real estate with. So, I need to limit and compartmentalize my real estate investing so that I can find those meaningful relationships elsewhere in my life.

Tony:
All right, guys. Dave, so much good information that you’ve shared already as expected, but coming up, we’re going to cover how to audit your personal resources. But before we go there, Dave, can you tell me what exactly is a transactional income plan, and how does that add to this vision that you’ve talked about so far?

Dave:
Transactional income is just a source of making money that’s outside of investing. So, a job is basically transactional income, but there are types of real estate that are transactional as well, like flipping a house, or being a real estate agent for an example. I think one of the things that I struggled with early in my career, and I see a lot of rookies struggle with is trying to figure out what they’re going to do and if they should make real estate investing a full-time job. To me, it’s super important in your vision to figure out whether or not you want to make real estate a full-time job, or it’s going to be something you do on the side, because that will really help you narrow down the options that you have as a real estate investor to just the ones that make sense.
Some are easy, whether you work full-time or not. Others really only make sense for people who are full-time into real estate. I think making that distinction is very important and helpful for setting your strategy.

Tony:
Dave, one thing that makes me think about, so many people in our rookie audience are focused on walking away from their day jobs, and understandably so, but I think some people almost get too excited about that idea sometimes. They lose sight of how important that transactional income is to their goals of building their real estate portfolio. It makes me think. Someone shared this analogy with me before, but have you guys heard the term escape velocity? It’s like you have to travel at a certain speed to break Earth’s gravitational pool, and if you don’t travel fast enough, you’ll get to a certain height, and then earth is just going to pull you back down.
It’s a similar concept for real estate investing. If you step away from your W-II job too soon, you haven’t yet reached the speed to reach escape velocity. You’re just going to pull back down to reality. I’ve seen people, I’ve met people who have maybe pulled the trigger too soon, and then they have to go back out into the workforce again, because they weren’t quite ready to step aside on their own. So, there’s a lot of benefit to keeping your day job. I think the goal is to get to a point where you’ve 1.5x or 2X what you need to survive on before you pull that trigger.

Ashley:
Even then if you have hit that 2X, that 3X, whatever that amount is if you’re able to do both things too, and you enjoy your job, and you enjoy being a passive investor, then that’s something you can do too. I think there is that big misconception of, “I haven’t reached financial freedom until I’ve quit my job.” Well, no, that’s not true. You can still make it as a real estate investor, and still carry on a W-II. That’s even more impressive if you’re able to balance out both than just, “You know what? I have to quit my job, because my properties are so overwhelming. I need to manage them, and take care of them.”
So yeah, I agree. I think that’s a common misconception is that you need to build your real estate, and then quit your job, and then you’re free, and everything’s wonderful and great. But in the U.S., one thing is health insurance. That’s actually an incredible difficulty once you become an entrepreneur, and you don’t have that anymore. So, it’s not always just the pay. It’s the benefits too.

Dave:
I think you both hit on really important topics here. I think it’s really just comes down to what you want out of life, because I think most people say, “Oh, I want to quit, so I can work on real estate full time.” That might make sense for you, but you have to recognize in 90% of those cases, you’re just trading one job for another job. So, you’re trading your W-II job for working at real estate full time. I am making presumption, but both of you work in real estate full time. I’m sure it still feels like you have a job, right? So, it’s really up to what provides you… To me, it’s just two questions. What provides you with more resources, and what provides you with the most fulfillment?
Because if you have a job that you don’t like, but it gives you a lot of money to invest, or a lot of time to invest, or skills that you can bring to your portfolio, you may want to stay in your job, or even if you just really like your job, and you’re fulfilled by it, that’s a trade-off that you might be willing to take. So for me, I only recommend people quit their job and go into real estate full time if it will move them up on one of those spectrums. Is it going to improve the amount of money you’re going to make, or the time that you have to invest, or is it going to make you feel more personally fulfilled? Then you might want to consider it, but don’t just do it, because people on Instagram are doing it, and make it seem like that’s the ultimate goal of real estate.

Tony:
Last thing I’ll say about the personal income piece is that what I’ve found, what I’ve seen from other folks is that the fastest way to grow your real estate portfolio, unless you’re doing creative finance, or you’ve got capital partners, but if you want to use your own money from your own W-II job is to grow the amount of money you make in your day job. Oftentimes, the fastest way to do that is to leave to another company. I know for myself, I got, I don’t know, like a 45% pay increase by going from one company to the next. It’s crazy to think that someone who’s never seen you work before is willing to pay you 45% more than a company you’ve been at for years, but that’s typically the case.
There was this study. I can’t remember. I wish I knew the exact numbers, but it looked at people who job hopped every 24 to 36 months versus someone who stayed at the same job. They lined those people up after 15 years, and the people who job hopped made exponentially more than the people who stayed at the same company. So if you’re looking for a way to shovel, then focus on maybe looking at a new position with a new company.

Ashley:
Didn’t they say that’s the problem with the-

Dave:
Yeah. Can we tell that to BiggerPockets? It’s like they always reward the new customers. They’re like, “Come to Verizon, and we’ll give you a new cell phone.” You’re like, “I’ve been here for years. Give me the new cell phone. I’ve been coming here forever.” It’s like the same idea with jobs. They need to incentivize people to leave something that’s comfortable a lot of the time. So, it makes sense. I think the other thing in addition to making more money too is if you want to grow your portfolio, but you’re working 70 hours a week, can you find a job that maybe you make even the same amount of money but you work 40 hours a week? That opens up a whole lot of time where you can be looking for deals, or networking, or doing all this other stuff that could help grow your portfolio.
I just think thinking critically about your job and how it supports your investing is really important. It’s not just how quickly can I leave it? It’s, “Is this helping me get to ultimately where I want to go” For some people, the answer might be, “Yes, you should quit your job.” If your vision is, “Hey, I want to leave my job in five years,” you can make that happen sometimes. Some people can make that happen, but if you know that, “Hey, I want to keep working for 20 more years,” that’s going to open up so many more real estate investing strategies to you. You can take on more risk. You can think more long-term. More markets are going to be available to you. So, knowing where you stand on that spectrum will be super helpful.

Ashley:
We’re going to take a short break real quick, and then we’re going to be back and just follow up talking about a resource audit and what you can do today. Then we’re going to go into a little bit of 2024 predictions.
Welcome back to the show. Dave, the third thing that we wanted to finish up here and talk about is doing a resource audit. So, what is this that something somebody can implement today? Maybe is this something you’re going to continuously do throughout the year or maybe once a year?

Dave:
Resource audit is basically looking at the various resources that you have today to contribute to your portfolio. This is really just helpful in figuring out what you should do next. As we were talking about earlier about, money or capital is obviously a very important resource for real estate investors. It is a capital intensive business, and so knowing how much capital you have is super important, but one of the things I personally love about real estate investing is that you can get by or get started. Even if you don’t have capital, there are other resources like time and skills that you can contribute to a portfolio to help you get started. As long as you have one of those three things, you’re able to build a portfolio.
Just a small example, when I got started, I had no money. I had no skills, but I had a lot of time, and so I used that time to go find deals. I used it to self-manage a property that I basically only earn sweat equity in and that was able to get me started. So, even if you’re new and thinking, “I want to get into real estate in 2024, but I don’t have a lot of money,” figure out what you do have, because there are things that you can contribute. If you have time or skill, like I said, you can find ways to use those resources to get into real estate, but for me, the first step is just figuring out what you got.
You got time. You got skills. You got money. If you don’t have any of them, it’s going to be hard, but if you have at least one of those three, there is a path forward for you.

Tony:
Ash and I talk about this in our book, Real Estate Partnerships, where every real estate deal, it’s like a puzzle, and certain people have certain puzzle pieces, and they’re missing other puzzle pieces. So if you have time, if you have the ability to analyze deals, maybe you’re lacking capital, or maybe you’re lacking the ability to get approved for a mortgage, go find someone else that can plug those pieces in for you, and then the two of you work together to take that deal down. If the inverse is true, where maybe you have the capital, you have the ability to get the debt, but you’re a physician who works 90 hours a week or something crazy like that, and you know you don’t have the time, go find some young college kid who just graduated, or something like that who’s got an abundance of time that can do that legwork for you.
So, it’s all about finding that puzzle piece that matches with what it is you’re missing as a real estate investor.

Dave:
That’s such a good analogy. It’s so true, and it changes over time. If you start without capital, that’s okay. You just hustle and learn some skills, use your time. For most investors, I find that that’s how almost everyone I know started is they didn’t have a lot of money, but they just hustled their way into it. Then over time, as you have more capital, usually, you buy other people’s time, or you buy their skillset to help you grow. So, that’s why I think it’s useful to do this once a year. Just be like, “All right, now I have less time than I used to have, but I have more capital. So, given that reality, I need to change my portfolio in X, Y, Z ways.” So, it just helps you figure out what to do next.

Ashley:
Dave, how do you evaluate those skills for yourself? When you’re looking at yourself, what skillsets do I have? Is there a way to do an evaluation on yourself?

Tony:
Just to preface that, I think it’s such an important question, Ash, because a lot of rookies, they’re not self-aware as to what value they bring. So, I think this is going to be super practical advice, Dave.

Dave:
Oh, good. I think this is… Again, I agree with you Tony. This is one of the things that most people overlook, because there are a lot of skills, and I think… Basically, in the shortest example, I have a list of skills. I have one in the book, but you can really look on BiggerPockets. I’m sure there’s other places of lists of skills that you need. I think the two important things to think about are, one, how good am I at it today? Two, how hard would it be for me to learn this skill? I think that’s the one that people really overlook, because it’s easy to start and be like, “I’m bad at all of these, and I’m going to try and learn all of them.”
That is where so many people go wrong. I went deeply wrong here. I was like, “I’m going to be super handy. I’m going to start building staircases, and drew in drywall.” I’m so bad at it. I am just awful. There’s no reason I should spend any time doing that, and so I go through these lists, and just say to myself just as an example, finding deals, that’s something I’m okay at. I’m not great at it. I know people who work full-time in real estate who are much better at that than I am. I have a network, so I’m not going to probably do that much time like learning how to do outreach to off-market deals. I’m going to rely on other people to do that.
For deal analysis, that’s something I’m good at, and that’s something I’m going to contribute to my portfolio. When I talk about finance and tax, that’s actually something I have professional experience with, but I hate it, so I’m going to pay someone to do it. I don’t want to learn how to do it. I think it’s just really important for people to be realistic about, one, there’s a lot of things you need to do that need to get done, let me say. You don’t need to do them, but that need to get done for a real estate portfolio to be successful. You do not have to nor should you do all of those things.
So, I think it’s really important to just focus on the ones that you like and that come easily to you, and to outsource the other things. It will save you a lot of time in the long run. Honestly, it might seem like it’ll save you money to try and do everything yourself, but take it from thousands of investors who have tried to do everything themselves. It does not save you money.

Ashley:
I can definitely relate to that too. Dave, I do have a question though as far as when you’re picking your skillset and the things you actually are going to do for your first property, your first business, whatever it may be, is there a preference you have, or a way to differentiate choosing between something you want to do but maybe know nothing about, and have to take the time to learn or something that you do know but you don’t want to do it? You had mentioned finance and taxes. You know that stuff. You could do it but you hate it, but maybe compared to doing drywall, whatever, you’re actually super passionate about it.
You want to learn it. It would be fun to get your hands dirty, but it’s going to take you longer. You’re not going to do as good of a job of doing it as someone. So, is there any kind of balance where maybe you should do something you hate doing, because you do know it? I guess, just what are your thoughts on that as far as putting a value add to what your skillset is?

Dave:
That’s a great question. I think it comes down to what other resources you have, because if you don’t have a lot of capital or time, and you’re really relying on your skillset to grow your portfolio, you may have to contribute something you’re not good at. I can imagine or know people who are contractors who don’t really like it, but they want to get into real estate. It might be a good way for you to get in to use your skills as a contractor at the beginning while you build up those other resources. So, I think there are things like that. I also think there are certain skills that every real estate investor just needs to have at least a baseline of.
To me, I call it portfolio strategy, but that’s just what we’re talking about here is, one, just understanding where you want to be and how real estate can get you there, I think, is super important. Deal analysis, everyone needs to be able to do at least a basic level of deal analysis. You can’t really outsource that. I do think networking is also another skill that people overlook that you can’t outsource. You can’t have someone make relationships on your behalf. So, I think there’s certain things like whether you like it or not, you probably should learn those skills. Whereas things like taxes or property management, those things are easily outsourced.
I guess that’s another way you could look at it is taxes, property managers, lawyers. Those are all things, contractors. You can hire those people easily. Could you hire someone easily to analyze single family rental properties for you? Probably not. I think that it’s probably just worth learning for yourself. So, I would think about it that way.

Ashley:
That’s great advice. The one thing that I would add to it too is your own time and the value on your time. If you’re considering,,, you say you have your W-two. You have a side hustle, maybe a remodeling business, so you could go and you could stop remodeling for other clients. You could go and you could work on the house that you’re flipping yourself. Well, what is actually the time value trade-off on that? As a contractor doing luxury remodels, are you making $100 per an hour? But if you go into your own flip, and you do the math, and after three months of flipping this house, you only ended up making $50 an hour, so would it been more cost-effective to actually just hire somebody else out to do it, and then you go and maintain doing your flips, and then you ended up netting the same amount, $50 or whatever it may be, because they were able to work all day, and then ended up selling the property in a month instead of the three months, because you had to do it at night?
Things like that too, I think, are important to take into consideration as to your time value. That even goes back to quitting your job. Are you going to be working more hours but actually making less being a real estate investor, because you’re spending more time on it than what you would if you would actually go to a W-2, and you could hire out?

Tony:
A lot of times, Ash, I think, does come down to the numbers and what makes more sense as you lay everything out. I think the mistake that a lot of rookies make is that they just go with their gut, and they don’t really back it up with a deeper analysis here. One thing I just wanted to comment on, Dave, you mentioned being able to outsource the networking. I actually read in this book, and it was called… I think it was called Book Yourself Solid. It was an old marketing book that I read years ago, but he actually did have this process for outsourcing some of his networking, where he had someone on his team that every month, they would just send out emails to people in his database or whatever it was. It’d be something simple like, “Hey, Dave, see you got a birthday coming up this month. Hope all is well.”
Then when they replied, he would reply himself, but he had his team going through and send an emails through his inbox for these different little things, and he would just reply when those came in. So, super ninja trick and probably beyond what our rookies are working on right now, but it could be an easy way to build that out. All right, what I really want to talk to you about, Dave, and what I’m most excited to hear your thoughts on are your predictions for this year. Obviously, 2023 was a crazy year for real estate. We came off this high that we saw in 2021 and early 2022 where interest rates peaked to their highest in decades.
I know I lost money on a flip, I have friends who lost money on flips. We have commercial real estate is going through this crazy cycle. What are you seeing for 2024? I guess first what I’ll ask you is where do you think interest rates are going to go? Are they going to hold steady? Are they going to go up? Are they going to come down?

Dave:
Oh boy, my favorite topic. Let me just tell you, I actually did very well in interest rate predictions in 2023, and very poorly in 2022. So, let’s take that with a grain of salt just so everyone knows. My general feeling is that interest rates are not going to move as much as people think. They’re in the high sixes as of this recording. I’m going to give you a broad guess and say I think they will end with the first number still being a six at the end of this year is my guess. I’m hopeful that they might come down into the low sixes, but I just want to explain that a little bit. We hit about a high of 8% average 30-year fixed mortgage rate in October of 2023.
They’ve come down a little bit. As bond yields have fallen, the Fed has signaled that they’re going to cut rates next year, and that’s encouraging. All of that is very encouraging. The thing is the market, mortgage companies and bond investors who really set mortgage rates are already pricing those things in. So, a lot of the declines that we are expecting or that the Fed is signaling are now priced into mortgage rates, and so we’ve already experienced some of the benefit of what is planning to happen next year. If the Fed stays on course and does exactly what they said they’re going to do, which let’s talk about their track record over the last three years, never happens. So if they do that somehow, then we will probably have mortgage rates right where they are right now, but the Fed…
This signaling is exactly that. They’re not saying they’re going to do three. They’re very data reliant, and so they’re going to change things as they need to, and as inflation and the labor market change. My guess is they will cut rates a little bit, but we just don’t know. So, I think it’s a little early to say that rates are going to get down as the fives. Hopefully they do, but I think that’s a little early to say. My guess is that they’re going to be more stubbornly high than, I think, a lot of people are hoping for.

Ashley:
So, we should buy a house right now, or we shouldn’t?

Tony:
That’s what I was going to hit on too, Ash, because I think what a lot of people are doing right now is that they’re waiting to buy that first real estate investment, because they want to see rates come down to whatever rate. But my thought is that once rates dip, it’s going to be a bloodbath, because you’re going to have so many people that are sitting on the sidelines jumping back into the market, and we could get to a point where people are going 10K, 100K over asking again like it was a few years ago. You can always refinance your rate, but you can’t refinance your purchase price. I can’t go back to the bank, and say, “Hey, I know I bought this for 300,000, but can I actually rebuy this today for 250,” and the bank’s like, “Okay cool.”
So, Dave, what’s your advice to the rookies? Should we be waiting for rates to fall? Should we be pulling the trigger today? What’s your thoughts on that?

Dave:
I generally just don’t believe in timing the market. That’s just like I study this full time, and I don’t know what’s going to happen. I just want to make that very clear. So, I believe more in just buying when you have the time and the financial resources to do it, because at least if you’re like me and investing on a 10 or 20-year time horizon, then you’re probably going to be fine whenever you do it. I do think, Tony, there is some wisdom to what you’re saying that prices… I think there is a good chance that if we rates fall, we’re going to see a very significant increase in competition. I think that is one of the more likely outcomes for 2024.
Not necessarily will happen, but I think there is a good chance that happens. So, buying now when rates are they have come down is wise. I also just think when people talk about “rates coming down,” I find that people have wildly different expectations of what that means. I’ll just say this, I think if we ever see mortgage rates in the three percents in our lifetime again, that I would be surprised, and something will have gone terribly wrong with the economy. I just don’t think that’s going to happen. So, could they come down to the fives? Yes, but realistically, they’re going to come down slowly. So, you have to think about what’s your strike price? Okay, they’re at six and three quarters now. You’re waiting for six a quarter. You’re waiting for five and a half. You could be waiting two years for that.
During that time, who knows what could happen to the housing market. So, I just think ultimately, rates, they do matter. It is important, but they’re on, I would say, a positive trajectory now where we’re probably not going to get back up above maybe in the low sevens. So, if you find deals that make sense, you should go for them. Then if rates happen to go down, you can refinance. I think the two things I always say to people is, one, don’t count on rates to go down. If your deal doesn’t make sense, and you’re like, “I’m going to buy it, and then when rates go down in six months, I’ll refinance. Then my deal will pencil.”
I don’t generally recommend that, because no one knows if rates are going to go down. It’s something that’s outside of our control. The other thing is if a deal makes sense with high rates, then it’s going to make even more sense in low rates. So if you can find a deal right now, you might as well buy it, and then it can only go up from there.

Ashley:
I think where some people got into trouble and could get into dribble is where they’re over leveraging themselves, and then they’re at the point where they have to refinance somehow, or they have to put financing on the property, and when they ran their numbers at the property having a 4% interest rate, and now all of a sudden they have to actually get an 8% interest rate. That has caused a lot of trouble the last couple of years, especially now if somebody went and they were rehabbing a property for a year, and now they’re trying to go and refinance, and the rate is very different from when they bought it. In New York state, here, it can take you three months to actually close on a property, and that’s normal window of time.
So, those three months, if you were buying a property the end of 2021, and then didn’t close until 2022, even right then was starting to make a difference, then you have to rehab your property, and then the rate increased. So, the best thing you can do is make sure you have multiple exit strategies on a property that you’re not over leveraging yourself. You have some kind of backup plan if you are going and needing to refinance. Like Dave mentioned, he’s long term buy and hold most of his investments, where he’s not worried about having to go and refinance and get a rate. If the deal works, the numbers pencil, the day that he’s buying it, what it’s at and what his interest rate is, great. That’s awesome.
You could always go and refinance for that lower rate, but you’re not at risk of having to be told, “Sorry, you’re going to have to pay this higher interest rate.” There’s also five-year arm loans or even seven-year arm loans where your mortgage is fixed for a certain amount of years and then it becomes adjustable. That’s where other people will get into trouble too is that they got this lower interest rate for the first five years, and then when those five years are up, it’s going to adjust. So, we actually did that on one property, where it’s a seven-year arm, and for seven years, it’s like 5.12%, which is a great rate. We got this a year ago, great rate at that time. In seven years, that interest rate could go up to 13%. It has a max of 13%, and then I think a floor of 6%.
That would make just a tremendous difference in someone’s mortgage payment if all of a sudden they haven’t planned for that year seven, and they have to go and refinance, or it goes to that adjustable rate. But even if you’re going to refinance, you’re most likely going to be that high rate too, so having some way to get private money or have the cash to pay that off, things like that. So, you want to look at as to, “Should I invest now because of the interest rate, or shouldn’t I?” It’s based upon what your strategy is, and that’s all basis of today’s episode is start with strategy. So if you’re holding onto that property, who cares?
Like Tony said, you’re going to buy it for cheaper right now with the higher interest rate so that when you go and sell it in 20 years, because you’re ready to go move to the beach, and sell everything, you’re going to have paid less for it than somebody who waited and wanted that lower interest rate, but yet they had purchased their property for more.

Dave:
I think, Ashley, you made a lot of great points. One thing I wanted to second is that people focus a lot on what rates are and if they’re up or down. I think there’s benefits to both, right? It’s more affordable when rates are low. There’s less competition when rates are high. So if you’re a real estate investor, there’s pros and cons of each. For me, the thing I root for, I obviously have no control over things, but if I had my druthers, I’d root for just stability or predictability. I think we’re getting to that point where rates are going to be more stable. That is just what you need to make a decision, because as you said, Ashley, that makes it so that if a deal pencils, and you have to still wait two or three months to close, you have a reasonably high confidence that you’re not going to be looking at a totally different monthly payment than you were a couple of months ago.
Unfortunately for the last two years, year and a half, it’s been really volatile and hard to make decisions. So, even though I’m not sure which way rates are going to go, if they’re going to trend up a little bit, trend lower, I think they’re going to be a lot more stable, and the band of that rates is going to narrow. So, that just makes it easier for people to make decisions. To me, that’s one of the most important things in getting back to a healthy housing market, more than rates going down to 5% or 4%. I think, predictability really matters a lot in the psychology of home sellers and home buyers.

Ashley:
Well, Dave, thank you so much for such incredible insight. We really appreciate having you on the show. Can you let everyone know where they can find your new book, Start with strategy?

Dave:
Absolutely. Go to biggerpockets.com/strategybook. That is where you can find the book, and it comes with all sorts of bonuses. If you actually order it now, but it’s still pre-order, you get a free planner. So, it’s like a journal that goes along with the book, where you can actually develop your own investing strategy and business plan. If you buy that, if you go to biggerpockets.com/strategybook now, you can get that completely for free, which is a great deal. If you use the code strategy 356, you’ll also get 10% off.

Ashley:
Oh, we always love a good discount here on the Rookie podcast. You can use that 10% towards your first investment property.

Tony:
All right, guys, before we wrap here, I just want to give a quick shout out to someone that loves to say five star review on Apple podcast. This person says, “Best real estate investing podcast of all time.” They say, “I listen to this show every chance I get. I can’t wait for the new episodes to air. I always find value in some way, shape, or form. I’m fairly new to real estate investing, and I love when you guys talk about partnerships. You guys always seem to have something I need to hear on a regular basis. I love the podcast. Keep on giving back. I can’t wait to be on your show one day.”
So guys, if you haven’t yet, please do leave us an honest rating review on whatever platform you’re listening to. We’d love to read your review here on the show for the rest of the listeners as well. The user who left that podcast review was Nick@rei216. Nick, we appreciate you.

Ashley:
Thank you so much, Nick. Dave, thank you so much. Another great podcast to listen to is On the Market podcast, so make sure you go check out Dave and his crew as they talk about current and up-to-date information that you need to know as a real estate investor. Today’s episode was amazing, and we learned all about starting with strategy. We went over three of the five things that you need to start. The first thing was personal values. Second was transactional income plan and how to present that, and then also completing a resource audit on yourself.
Well, I hope you guys are an amazing new year so far. I’m Ashley, and he is Tony, and we’ll see you guys in the next episode.