February 2024

Olaolu Aganga, Mercer, joins ‘Closing Bell Overtime’ to talk investing opportunities in the current market.

When you’re talking to real estate investors, they’ll often tell you how many doors they own, meaning how many rental units they have in their portfolio. Stating door numbers, however, can often be misleading. Generally, the real metric to keep track of is cash flow because, after all, profitability is what counts in any business, right? 

Sometimes, though, the two can get conflated, and on occasion, owning just a few doors, irrespective of cash flow, can be a good strategy for building long-term wealth. 

Confused? Don’t be. Rapidly appreciating areas can often generate far more wealth than simply adding doors that make $200-$300/month without the headaches of multiple tenants. In those instances, clinging to the side of a speeding real estate train might be the best investment strategy to generate wealth quickly, giving you investment options further down the line.

Note that most landlords in America are not Wall Street behemoths or incredibly successful businesses with hundreds of doors in their portfolio but mom-and-pop owners with a few units to supplement their income. 

In other words, relax if you still need to purchase your first unit. You’re not getting left behind in the stampede touted by investment gurus to scale your portfolio. Owning just a few units puts you alongside most owners. If you already own a primary residence, turning it into a rental is relatively easy if you plan to move.

If you want to scale your portfolio, however, there are some important things to consider before starting.

Where Do You Intend to Buy Your Rental Units?

Your purchase power will be sorely limited if you intend to buy rental units in expensive areas. Assuming you’re not sitting on a trust fund or haven’t written songs for Taylor Swift or Beyoncé, there are the practical issues of how much you can borrow and earn from your day job, which will directly influence your purchasing power. 

If you are a high earner or have investors and can afford to start your rental buying quickly, scooping up dozens of properties in cheaper markets can help your scale. However, there are pros and cons to both approaches.

What’s More Important: Cash Flow or Appreciation?

In an ideal world, you can have both. If you purchase a home in a transitional neighborhood and ride the demographic and economic turnaround, you’ll score a double whammy.

For example, many homeowners in the New York boroughs of Brooklyn and Queens became millionaires over 10-plus years simply by house hacking and renting out small multifamily buildings in which they also lived. Their appreciation far exceeded any cash flow they could have made by purchasing rentals farther afield. 

If you’re not desperate to leave your job, have no problem house hacking, and live in a major city, getting an FHA 203K loan for renovations is a great way to start building wealth without the hassle of long-distance investing and leaving the running of your properties to third-party management companies.

Scaling Sensibly

If scaling your portfolio is a priority, you must decide how much time and money you can dedicate to real estate investing. If your immediate priority is to leave your job, cash flow is king.

Whatever your chosen method—BRRRRing, multiple house hacks, or syndication—you’ll need to earn over your income to cover inevitable repairs and vacancies. However, leaving your job might affect your ability to scale securely.

Choose Your Location Carefully

In a rush to earn cash flow, many new investors make the mistake of thinking that buying low in D+/C- neighborhoods will allow them to scale faster and earn more. They could be setting themselves up for disaster. High-crime neighborhoods come with a lot of risks—vandalism and nonpayment of rent being the most obvious to investors. Your only hedge against this is to buy so cheaply so you can easily absorb the rental loss.

It’s usually more profitable to add fewer doors in better neighborhoods. Although the cash flow in less expensive neighborhoods is appealing on paper, this is rarely achieved. Scaling sensibly, not over-leveraging, and remaining in solid neighborhoods where you’re not afraid to walk the streets at night almost always makes more sense than simply adding doors to your portfolio if that keeps you locked in landlord/tenant court.

Your Job is Your First Business Partner

Another mistake of newbie investors is being too quick to leave their steady, W2-paying job. Not only will banks be more willing to lend to you with a job, but the income it generates will help you manage the unforeseen expenses that come with real estate investing, allowing you to scale faster.

Case Studies

Rick Matos and Santiago Martinez live and invest in Lehigh Valley, Pennsylvania. They are friends and have done deals together in the past. Both have a similar number of properties in their portfolio—Rick has 44 units, and Santiago has 47. 

However, their investment strategies have differed. Here’s a look at each.

Rick Matos

Rick took 10 years to accumulate his 44 units, generating a gross rent roll of about $40,000/month and $25,000 in cash flow today. When he started investing, he was a full-time employee earning six figures. He took a HELOC on his personal residence (which was paid off) to buy his first investment property. At the same time, he earned his real estate license to help him purchase more properties, saving on commissions.

“A lot of the properties I bought at the time were REO/foreclosures in Center City, Allentown, and Easton, so I was buying them at a clip for cash for $20,000-$30,0000 using my 401(k), borrowing from local lenders and my dad who owns real estate in New Jersey,” Rick says. “In addition, I did a few flips and bought a few houses on credit cards. I was adamant that I wanted to keep scaling, and having a good income through my job helped me do that.”

Did Rick regret buying in a rough neighborhood? “Not at all,” he says. “In fact, if you look at how both areas turned around, all the investment poured in there, and how the property values have gone through the roof, I wish I had bought more! I was buying these houses so cheaply that I couldn’t lose.”

 “The rents paid down the loans quickly, and then I did a few BRRRRs, enabling me to scale, Rick adds. “But it wasn’t overnight. “It took me 10 years. For most of that time, I had a good income from my job, so I never touched the real estate money to live off. I could always put it back into the business. In fact, when I purchased the properties, they were often in bad shape, so I just used the income from my job to fix them up.”

When Rick finally left his job three years ago to focus on real estate full-time, he supplemented his cash flow by doing more business as a real estate agent (he is currently affiliated with the Iron Valley Real Estate brokerage), as well as managing properties for out-of-state investors from New Jersey and New York.

“I learned from my dad that real estate is not a get-rich-quick scheme,” Rick says. “It’s about buying homes that make sense and doing it slowly and methodically.”

Santiago Martinez

While in his early thirties, Santiago Martinez was an Olympic standard wrestler representing his native Colombia when he got his real estate license and began to scale rapidly. He amassed 41 units in four years (he previously purchased six from 2016-2019), borrowing private money—”usually at 8% with three points on the back end”—then refinancing and building a team to oversee renovations and management.

Although his portfolio currently generates about $43,000 per month in gross rent and he has close to $3 million in equity, thanks to the Lehigh Valley’s rapid appreciation, Santiago hardly sees any cash flow because net profits are eaten up in paying his virtual team of four to five people and three full-time contractors and various subs.

“I scaled and built the portfolio and the equity but didn’t make money personally because the drip system I was using meant that there simply wasn’t extra cash after all my expenses,” Santiago says. “Now, I’ve changed my strategy. I’m looking to make an active income by flipping and paying down mortgages. The portfolio is great, and I got some great deals, so I’m happy I could scale when I did before the rates went up, but now it’s about making them cash flow.”

Final Thoughts

Both Rick and Santiago benefitted from the Lehigh Valley’s rapid increase in sales prices to build equity. Because he got in earlier, maintained a full-time job, and built his portfolio slowly, Rick could scale without any sleepless nights, generating equity and cash flow at the same time. 

Meanwhile, Santiago’s rapid scaling is a testament to his networking, determination, and risk tolerance. It hasn’t been easy or without stress, as he readily admits, but his trade-off has been equity and doors rather than cash flow, which is no small feat. The next phase of his investment strategy is about paying down debt and realizing his portfolio’s tremendous cash flow potential.

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David:
This is the BiggerPockets Podcast show 900. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast and I’m here today with Dave Meyer joining me to co-host this momentous episode in BiggerPockets history.

Dave:
Well, thank you. I’m so excited to be here for this huge milestone. And in order to celebrate, we have something special cooked up we’ve been working on for quite a while here at BiggerPockets. We are bringing on three of our most beloved and seasoned BiggerPockets investors. These are people who have been around the BiggerPockets community for a long time. And we’re going to ask them some of the most burning important questions about the housing market. These are questions like, is now a good time to buy or should you wait for rates to drop, what strategies work in today’s market, and is real estate still a tool to help you reach financial freedom? We’re going to get into this, plus actionable, practical advice that these seasoned vets have for anyone who’s trying to get started today.

David:
That’s right. We have J Scott, we have Brian Burke, we have Scott Trench, and we have Dave and Dave all in today’s episode. So let’s get into it.
All right, let’s start with a question that is on the forefront of everybody’s mind. Should investors wait for rates to come down before they start to buy? Who would like to take a stab at this one?

Brian:
I say give it to J. That way I can disagree with him.

David:
All right. We’ll go there and then we’ll let Scott fill in afterwards. J, what do you think?

J:
I see rates being high. And when I say high, rates are relatively high. We’re at what? 6, 6.5% at this point, and that’s historically about where they’re supposed to be, but I think we all know that they’re likely to head down in the near future as opposed to up. And so from my perspective, that gives us upside. That means when interest rates were at 2%, 3%, 4%, all we had was downside. We knew the next move in rates was going to be up. And so if we bought any floating rate debt, if we bought anything that didn’t have long-term fixed rate debt, we were going to be in a position where when we had to refinance or when we had to recapitalize, that things were going to be worse than they are now.
But right now we’re in a situation where we can be fairly certain that the next move over the next couple of years is going to be down. And so if we can find a deal that works today and we can put decent debt in place, then the best case scenario is that in a couple of years, we can refinance that debt, we can bring our cost down, we can continue to cashflow or cashflow more. And our worst case scenario is we’re in the same position we are now a few years from now.

David:
Scott?

Scott:
To reframe the question, I think the right time to buy is when your personal financial position is conducive to it, right? For me, real estate investing is a long-term bet on inflation in US housing stock prices and long-term rent growth. And I buy based on that premise consistently but not aggressively over a long time horizon. That said, just to kind of disagree with J before Brian can, yes, the best scenario is that rates go down. But I think what’s much more likely is the fed’s going to do exactly what they said, lower them two to three times, and then it’s anybody’s guess after that. And if they do nothing, the yield curve will continue to un-invert and the 10 year will continue to rise and that is directly correlated with both mortgage rates and commercial debt financing rates. So I think that I’m planning on, and believe, that there’s a much higher probability that rates stay the same or begin to climb rather than stay flat or go down.

David:
Can you briefly define what you mean by the yield curve will continue to invert?

Scott:
Yeah, so when the Federal Reserve changes rates, they’re increasing kind of overnight borrowing rates, very short-term yields. The US Treasury borrows money both in a short term and long-term basis. And right now, short-term debt for the US Treasury is trading at a 5, 5.25 yield and longer term debt from the US Treasury is trading at a lower yield like 4%, 4.25 for the 10-year treasury. That’s an inverted yield curve. And what I believe is going to happen is either there’s going to be a recession that’s going to force the Fed to drive rates down dramatically very, very quickly, which they are not saying they’re going to do or planning on, or that 10-year treasury is going to be yielding more than the overnight federal funds rate and the short-term treasury rate.

J:
I think you’re overcomplicating this, Scott. And nothing wrong with that. I think it’s easy to overcomplicate, but I’m a big believer that history is the best predictor of the future. And historically, mortgage rates are somewhere between 1.5 and 2 points above whatever the federal funds rate is. Right now we’re at a smaller delta than that, but that’s historically where we are and I expect we’ll get back to somewhere between 1.5 and 2 points above the federal funds rate.
And if you look at basically what the market is pricing in for the federal funds rate at the end of 2024, it’s somewhere between 3.75% and 4%. Don’t know that that’s actually going to be the case, but that’s what the market thinks. So assuming we’re actually at 3.75 to 4% in Federal funds rate, at the end of this year, and assuming we expand back to that historic 1.5 to 2 points above that for mortgage rates, we’re probably looking at somewhere in the high 5s by the end of this year, which is a good bit below where we are right now. So I mean that’s my best guess. I know we’re all guessing and I am not saying you’re wrong. I mean you have as much chance of being right as I do, but I just think that we can take a simpler view than what you were putting out there.

Dave:
Given that we’re just guessing and we don’t actually know though, I’m curious what you think investors should be doing. Should they be waiting? Scott gave an answer that he thinks the best time is when you’re financially able to do that. Brian, what do you think? Do you think that investors, given the unknowable nature about the future of mortgage rates, should waiting or should they be jumping in right now?

Brian:
Well, I’ve often been quoted as saying the phrase that there’s a good time to sell, there’s a good time to buy and there’s a good time to sit on the beach. And as soon as the sun rises and I can open the curtains behind me, you’ll notice that I practice what I preach when you see the ocean behind me, that there’s actually good times to just sit on the beach. Now having said that, I think we’re starting to come to a point where we’re about to maybe crawl out of that hole. And I’ve been a pretty vocal real estate bear for the last couple of years. I think it’s no secret I’ve said on this show and other shows that in ’21 I started selling most of my portfolio. I sold 3/4 of all the real estate I owned in 2021 and early ’22 because I thought the market was going to come down. It did in the sector that I work in.
Now I’m in large multifamily, right? 100 unit and larger apartment complexes, commercial real estate type stuff. And in that market, it suffered a significant hit. Now conversely, single family on the other hand didn’t suffer any ills really at much at all in most markets. In some markets, single family is up over where it was a couple of years ago. So the question of whether it’s a good time to buy now is a difficult question to answer because there’s so many different components to real estate. There’s so many local markets in real estate, there’s so many different strategies in real estate that a case could be made for buying any time at any point during the cycle, no sense in waiting for interest rates to change if your strategy gels well with the current interest rate environment. So if you’re flipping, you don’t really care what interest rates are. You don’t care what pricing movement is, it’s an arbitrage play. So you can certainly still do that. So it’s a really tough question to answer.

Dave:
Scott, what do you think about this question?

Scott:
This melds perfectly with the way I think about things. In commercial real estate, large multifamily, syndicated funds, those types of things, there’s a time horizon for investments that is finite. You can’t just buy the thing and hold onto it for 30 years in most of these funds. That’s not meeting the expectations of investors. And there are debt and balloon terms and other things that force your hand at a certain point in time. So in that space, you have to do what Brian is doing to maximize returns. There has to be a buy time, a sell time, and a sit on the beach time. And I’m so glad you’re enjoying the sun soon here in Maui and got up early with us.
In the single family and small multifamily space that I play in, I don’t have that constraint because I’m using 30 year fixed rate Fannie Mae insured mortgages and I’m putting down a down payment and can operate myself if I need to and I can hold on for the decades. There is no timing pressure unless I screw something up badly in my personal financial situation. So to me, it’s always the buy time whenever as my capital accumulates, I’m dollar cost averaging into single family or small multifamily that I can hold in perpetuity here in Denver. But if I’m going into one of these other asset classes, I got to be really, really careful about when you go in because that matters so greatly to your returns and there’s a time pressure on it.

Brian:
And I would say that just to counter what Scott just said just a little bit, well yes, there’s always a time to get in somehow. If you tell a single family rental real estate investors who bought in 2004 that what their decision was a good decision, they would probably counter that point because there is times when single family can take a significant hit.
Now ultimately it recovered. It took years to do so and that was certainly an impact on the time value of money. But what you got to think about is the holistic world of real estate investing and where do you think the risks are. And in ’04 and ’05, home prices were so high. I mean they really only had one way to go. There were plenty of risks in the Fannie financing that was going on at that time and all that stuff. Now we don’t have those risks. So a sharp residential downside is probably not part of the cards. So you still have to factor in the overall market conditions and thoughts of where something’s hiding around a corner to kill you, but right now it’s not there in my opinion, especially in the single family space.

J:
And it’s also worth noting that, I mean no matter how smart we are, we are all dumb to some extent. I mean if I said to you, Brian, you sold everything in 2021, if I said to you in January of 2020 that we’re about to have a global pandemic, we’re going to be shut down for a year and a half, basically supply chains are going to be frozen, but you have the opportunity to sell your entire portfolio before March 13th, would you have done it?

Brian:
Yeah, I probably would have. And that would’ve been a huge mistake.

J:
Exactly. You’re the smartest multifamily investor I know, but even you couldn’t predict these weird macroeconomic situations. And so, this is why it’s often said that time in the market is more important than timing of the market. I’m not going to disagree that we can do this portfolio play where we say, “Hey, we’re not going to buy a whole lot when things are really frothy.” But to say we’re just going to sit on the sidelines… And I’m not talking about you. I mean, if you buy right all the time and sell right all the time, then you’re always going to have an opportunity to sit on the beach. You did that. Most of us, we don’t have that crystal ball. And so yeah, we can kind of slow down a little bit when we think things are frothy, we can speed up when we think there’s good opportunities. But to Scott’s point, I think it’s always a good time to be buying when your financial situation allows it and when your time horizon allows it as well.
And I’ll just say, I mean Scott pointed out that we can’t do that in the multifamily world. I agree. To some extent, it’s a lot harder because we do have investors. And our investors don’t want to sit on an investment necessarily for 10 or 15 or 20 years. And loan terms typically are not 30 years. They’re typically seven or 10 or 12 years. But that still gives us seven or 10 or 12 years. And if you look at historical trends again, what you’ll see is over any 10 year period in the history of this country, real estate has gone up peak to peak. And so yeah, maybe we’re not going to make a ton of money for our investors if we hold for 10 years, but we’re probably not going to lose money either.
And so if you make a good investment, and when I say a good investment, investment that’s not going to be forced to sell based on macroeconomic conditions, something that you’re going to be able to hold through a downturn, if you can hold that for five or 10 years, you’re probably going to come out unscathed and at least make a little bit of money.

Brian:
And you have to have the loan maturity to match.

Dave:
Am I the only one who doesn’t mind interest rates where they are? I feel like it’s actually a pretty good opportunity to buy right now. And I do think it sort of helps cool down the housing market and creates a little bit less competition. So for me, I’ve actually personally gotten a little bit more active in the last couple of months than I have in the previous few years.

David:
All right. We’re going to take a quick break but stick around because we’re about to answer the questions everyone is asking lately, is cashflow still possible and what strategies actually do work in this market right after this break.
And welcome back to the BiggerPockets Real Estate Podcast. We are here with some of the smartest real estate investors in the game right now, debating the most pressing questions on investors’ minds.

Dave:
Let’s transition our conversation here a little bit to what strategies actually are working in today’s market given rates. Let’s just assume they stay where they are because we don’t know what’s going to happen. Brian, I know you have a couple that you don’t think will work, but are there any that you do think are going to work in the coming months?

Brian:
I think you can flip houses in any economic climate. In fact, the best my flipping business ever did was during the ’08 to 2013 real estate down cycle. And you can do really, really well with an arbitrage strategy. You can also do really well with single family rentals. I mean, single family rentals aren’t really like… They’re not the cashflow play people want to think they are and that many people promote that they are. I mean, if you really looked at somebody’s five-year total cashflow including capital improvements and everything else, they’re not a huge money maker, but they’re a wealth builder.
I mean, the thing about real estate is there’s two things required to build wealth in real estate, money and time. And the money doesn’t have to be yours, it could be somebody else’s. But the time, you can’t do anything about. You have to give it time. And that time is going to create appreciation in two ways, rental growth and price growth. And it’s from that rental growth is where you’re going to start to make cashflow in time. And if you’re patient enough, and as J alluded to, if you can hold long enough, and I think even just as importantly, you have the financing structure that allows you to hold long enough, i.e. you don’t have a loan maturity looming and you can actually hold, you can do well. And I think I agree with you, Dave. I hate to say that. Gosh, that pains me.

Dave:
Do you want to agree with everyone or do you just come on here trying to disagree with as many people as possible?

Brian:
My role is to disagree. I’m brought on this show to be the bear or to disagree. But no, I agree that the strategy play I think right now in the single family side is, you can buy at today’s rates that are a little bit higher. And if you can find a deal that works, the numbers work at today’s rates. Then later when rates do fall, you can refinance and improve your returns and improve your cashflow. And this is a really good time to do that play. You couldn’t have done that play three years ago. That play was off the table. So when you talk about, and I talk about, “There’s times to do this, there’s times to do that, there’s time to do nothing,” there’s also times to just change up your strategy. And I think that’s the strategy play right now, Dave.

David:
Brian is like the enforcer that is brought in on a hockey team who ends up hugging everybody and being their friend when he’s supposed to be laying down the law.
Scott, what do you think about strategies that are working in today’s market? Is this a question that people are asking that they shouldn’t be or is this a relevant question that we should be putting focus on?

Scott:
I agree with the single family rental. And again, I’ll throw in the small multifamily property area. I did some research a few months ago and posted a webinar to the BiggerPockets YouTube channel, and I think released on the Real Estate feed here, around where to find the cashflow, right? And there’s markets around the country. I like upstate New York, there’s a couple of examples there. Cleveland, I love the south, especially in the build-to-rent space. A lot of people built a ton of properties. They’re brand new inventory, they’re designed to be rentals. And the institutions that were supposed to buy them aren’t there anymore. And so that’s a really good opportunity for investors to do that.
Are you going to get a ton of cashflow there with those deals? Nope. But you can cashflow with a traditional down payment and today’s rates on those. And I agree completely with Brian’s thesis here around, hey, if you’re going to be buying these types of properties, that’s a long-term wealth play. You’re letting the loan amortization go, you’re getting a solid but not incredible cash on cash return. You’re going to benefit from long-term rent and pricing appreciation on those.
If you want cashflow in a big way, the obvious answer in a higher interest rate environment is to turn to debt. For example, I purchased a couple of hard money notes last year and I’ve been re-rolling those, right? Flipping is still a great way to make money. And I feel like if my worst case scenario as a real estate investor doing this for 10 years is foreclosing on a property and finishing a project, I’m comfortable with that. And that’s given me a 12 to I think about 13% blended rate on the several loans that I’ve owned over the last year. So I think that’s an obvious solution here as well to be backed by real estate if you’re really looking for that cashflow. There’s no tax advantages to that. I paid a tax, man, on my interest by the way, unless I were to move it into my retirement accounts, but it is significant.

David:
Okay. So for years, we’ve been able to get almost every single benefit that real estate offers out of the same deal because real estate was in its heyday. You could get appreciation, tax benefits, cashflow, loan pay down, easy financing, the ability to partner with people, almost a free education from doing a deal and “Hey, if it didn’t work out, you could just sell it and make money.” There was almost no downside in general to real estate and you could get all the upside in the same deal.
It sounds like what we’re saying is that it’s not quite as easy as it was. It’s still possible, but you’re maybe not going to get everything out of the same deal. Do we think investors should be looking at building a portfolio that has some properties that are a long-term appreciation play, some opportunities like Scot just said that are going to be cashflow heavy but they’re not going to shelter your taxes, other properties that might be a good tax savings for money that you’re making in business? What’s your guys thoughts on if we need to maybe lower our expectations and become a little more strategic on the type of real estate we’re putting in our portfolio?

J:
Yeah, I think it’s important that we’re all a bit more introspective. I mean, I think the biggest lesson here is throughout again the history of this country, we’ve become accustomed to recessions every four or five, six years. That’s just the way it works. And basically what that means is every four or five six years, we as business owners and investors get our asses kicked and we learn we’re not the smartest people in the room, we’re not the smartest people on the planet and many of us have no idea what we’re doing.

Scott:
Except Brian.

J:
Except Brian.

David:
Nobody beats up the enforcer.

J:
And it forces us to really come to terms with the fact that we may not be as smart as we thought we were and it makes us get better at investing and do things the right way or get the hell out of the business. Well, the problem is, since 2008, we haven’t had that kick ourselves in the ass moment for people to recognize that they may not be as smart as they think they are, they may not be as good at an investor as they think they are. They may have been thinking for the last 15 years they’ve been doing everything right because you buy a bad flip, you take too long to flip it, you get the wrong financing, you spend too much on renovation, you don’t sell it for as quickly as you thought and you still make money because the market just kept going up.
And so I think we’re going to have a big revelation in this industry that a lot of people who have built big brands and big names, and hopefully I’m not one of them, but a lot of people that have built big brands and big names aren’t necessarily as smart and successful as they thought they were. So I just want to start with that.
In terms of what we should be doing now though, I agree with what everybody said, buy and hold. Like Scott and Brian both said, I mean there are lots of benefits. There’s cashflow, there’s principal pay down, there’s tax benefits, there’s appreciation. But the one thing we’re not going to see a lot of in a higher interest rate environment is cashflow. And so for all those people that for 10 years were saying, “I’m going to buy a couple rental properties and retire from my W2,” I still think it’s a great idea to buy a couple rental properties. Buy a property a year, but you’re not going to be retiring from your W2 thanks to the cashflow like you were doing a few years ago.
And so I think people have to kind of reset their expectations on the cashflow piece. But again, those other pieces are so valuable that if you’re buying now, in 10 or 15 years, you’re going to find that your net worth has increased significantly and you’re going to have an opportunity again at some point to recapture that cash flow. So buy and hold always good. Transactional type flipping stuff, I’d say be cautious, but it can still work.

Scott:
I think that the two kind of words that bubble to the surface in my mind in this conversation are fear and enough. And I think that over the last 10 years, there wasn’t enough fear in the real estate market, right? You talk about these commercial real estate deals, for example, like office and some multifamily in certain areas, you can be the smartest guy in the room. You can be doing this for a decade or two and there’s nothing you can do when Austin, Texas is adding 10% to its existing multifamily stock in year 2024. Rents are going down, property taxes are going up, insurance rates are going up. There’s nothing you can do and you’re helpless. And you’ve got to have fear in this business in addition to the long-term belief that I voiced earlier around depreciation and rent growth.
I have both of those at all times. I’m scared every time I buy a property to this day. I was terrified the first time in 2014. Prices have gone up for six years and we’re right around the corner from the recession that happens every five to six years that J just talked about, and in 2017, in ’18 and ’19. And there’s always a bubble. You’ve always got to have that fear I think in addition to the belief in the long-term thesis. And that comes back to me from the thing I’ve been harping on this whole time around personal finances and the ability to hold the asset for a very, very long period of time. That’s how you compound growth and don’t lose your principle.
And the other side of this is enough, the penny can’t double forever. It’s completely tied into the fear concept here. What is enough for you and do you need to keep leveraging that whole time and do you need to get there overnight? Can you accept the fact that a good real estate investor might get mid-teens returns over a 5, 10, 15 year period? A small spread to what you can get for example, against an index fund and a stock market, but a worthwhile one to chase. Not in the 20s, right? Not in the 25%. Not these huge doubling of your investment in three, four years that we experienced over the last 10 years. What is enough for you and are you structuring your portfolio to get there? And I think that those are the two things that got lost in the last 10 years by a lot of folks and some of the loudest folks in the real estate community.

Dave:
Scott, I love that so much. I completely agree with you. I think it’s so important that people have a healthy understanding of risk and reward. And everyone talks a lot about reward and how they’re getting these outsized returns, but they don’t talk about how much risk they’re taking on. And it’s okay to take on risk, but you sort of have to be thinking about that and cognizant that with reward and upside comes risk. And I think knowing when you have enough is also just probably the most important lesson I’ve ever learned as a real estate investor. You can use that to work backwards and figure out how much risk is appropriate for you and how much reward is appropriate to you to get to your long-term goals.

Scott:
It’s just super hard when these 22 year olds are racing past you from a wealth creation perspective because they’ve bought a hundred deals in the last two months with other people’s money. So I get it, but you have to have that fear and enough.

Dave:
But it’s a tortoise in the hare thing, right? You have to just be slow and steady if that’s your approach. If you want to go fast, you can, but there is more risk there.
All right. I like it. This is starting to heat up. When we come back, we’ll name the elephant in the room and ask the question, is real estate a viable path to financial freedom? Stick around.

David:
Welcome back, everyone. Dave Meyer and I are here with Scott Trench, J Scott, and Brian Burke and we’re talking about the biggest questions this market is asking. Let’s get back into it.

Dave:
Now, Brian, I want to turn it over to you, but I just first want to point out that you are perfectly blending into your background right now. Anyone watching this on YouTube, he just opened the door and he’s got this beautiful Hawaiian backdrop, but he’s wearing a Hawaiian shirt. And you can’t even see him. He just fits perfectly into this setting. But enough about that, Brian. How do you view this risk reward situation and discussion we’re talking about?

Brian:
Well, I think one of the biggest things I’ve seen in real estate in my 34 years of doing this in multiple cycles, I kind of see the same thing repeat itself time after time. People tend to fail to treat real estate investing like the loaded gun that it is, because this business can save your life and it can also kill you in a figurative sense. The risk is real and people tend to forget about it. And when you find the greatest amount of euphoria is usually the biggest signal to me that we’re nearing the end of an upcycle, and that’s what was happening in ’20 and ’21 when I decided to start selling everything, is because there was just so much euphoria, you couldn’t make a mistake, you could do nothing wrong, everyone was making money, everyone had to buy. And when everybody wants something, it’s a good to allow them to have it. So if you have it, it’s a good time to turn it over when everybody wants it. Because when nobody wants it, it’s a really bad time to sell it.
Scott nailed it. You really have to focus on the fundamentals now because no more is the market going to necessarily bail you out. Now you might get a gift in a year or two where you can refinance and get a lower interest rate and increase your cashflow, but you have to buy right. And there’s really a couple things I think that are failure points for most real estate investors. They either have the wrong strategy at the wrong time or they have the wrong capital stack. Those are the two things that kill people. They’re buying to hold when they should flip, or they’re flipping when they should buy to hold, or they’re buying and holding with three year maturities on their loan and in three years they’re going to have to refinance or sell or do something. You’ve got investors that have a short call window. You’ve got preferred equity, which means that somebody is going to knock on your door soon and say, “I want my money back.”
If there’s anybody that’s going to want their money back in a short period of time that’s involved in your real estate deal, you’re dramatically increasing your risk profile. If you have long-term capital, a long-term horizon and the right strategy, even if you bought wrong, you’re probably going to come out okay. I mean, you don’t hear a lot of real estate investors saying, “I failed because I bought this property wrong.” It’s like, “No, you failed because you got short-term financing, you had the wrong strategy.” That’s where people get tripped up.

David:
So we all agree that real estate is a great option, but it’s foolish to not consider the risk that you’re taking on when you buy it. Brian, you made some great points there of what people can do to reduce their risk.
In Pillars of Wealth I talk about, “Hey, if you want to scale up big and you want to go big, that’s great. You have to temper that with more savings, more reserves and more offense. You have to be able to make more money in your business if you want to scale up the real estate.” If it’s proportional, you’re fine, but to Scott’s point, it’s a big problem when you’re 22 years old, you have no money in the bank, you borrowed a bunch of money from other people, you don’t understand the debt instruments you’re using and you’re just throwing it all on black and trusted that Roulette’s going to work out every single time because it has before. So I thought that was some very sound advice.
Since I’ve been involved in real estate, the carrot that we’ve used to get people into this game is to buy some real estate, get some cashflow, quit your job. It’s always been the same strategy that’s been marketed over and over and over. “Do you hate your job? Do you hate your life? Does your cat sit on somebody else’s lap instead of yours? Are you having a hard time getting a girlfriend? Well, if you had some cashflow, all of that would go away, so come buy some cashflow and you can fix all your problems.” And now that the cashflow has somewhat evaporated from rates going up, nobody knows what to do and they’re all losing their minds. Is it still possible to reach financial freedom and quit your job in a couple years with real estate today? Or do we think that people should be acquiring real estate before a different purpose?

Brian:
Was it ever possible?

David:
It was presented that way, right? I mean, I think a lot of people listening to this, that’s how they got here, is that’s what they got sold, is they had a bad day at work and someone said, “Well, if you had cashflow, you wouldn’t have to listen to your boss or wake up on time or be sitting in traffic.” And so that’s why they got into the game and I see a lot of bitterness in the real estate investing communities when they’re like, “Well, I thought I was going to be able to quit and I can’t make it happen.” What do you think, Brian?

Brian:
I think that if your expectation ever was that you’re going to get all this cashflow in two years by buying any kind of real estate, you’re probably fooling yourself. Single family rentals don’t throw off enough cashflow unless you’re paying all cash, so that means you already have money and you’re already financially free. If you’re getting the money from somebody else, you’re paying them a lot of what you’re getting in cashflow. If you’re buying large apartment complexes like I do, there’s a concept called preferred return, which means that investors get 100% of the cashflow until they reach a specific return threshold. That means you as the sponsor who raised all this money is getting nothing in cashflow during that period of time. You really make your money when you sell.
So getting rich in real estate in two years, the problem with it is it’s just a misnomer. It’s a misguided expectation. Real estate has always been a long game. It’s always been a way to build wealth over time. You can buy all kinds of real estate right now and build up this huge portfolio with just a tiny, tiny, tiny bit of cashflow, and what’s going to happen is over time you’re going to be able to refinance into a lower interest rates, rents will eventually go up, those increased rents coupled with a lower mortgage payment are going to produce cashflow eventually. At some point the loan will be paid off and you’ll have massive cashflow. And if you do that enough and you can buy enough property, you’ll accumulate massive wealth. And I promise you, you will get a girlfriend and the cat will sit on your lap. All those problems will go away, but it’s not going to go away in two years. This problem takes time to solve like any complex problem.

Scott:
I completely agree with that. This has never been a two-year journey to wealth, and it never should be considered that. But I believe that if people are buying this year, next year, the year after, every other year, whatever, if you buy three to five properties over the next 10 years starting today, you have a great shot at accumulating more than a million dollars in net worth from a standing start, especially if you’re willing to house hack or do any of those strategies where you’re going to add a little bit of value or work on the portfolio yourself. And you will start seeing material cashflow by the end of that first decade in this business that has a really good boost to your life. You will see that continue to expand if we see anything like the historical appreciation rates and price growth in rents, which I expect and fundamentally believe in. But no, you won’t get there overnight. And it’s a consistent grind of continuing to accumulate, building up your cash position and steadily continuing to expand your portfolio at least in the single family space. Go ahead, Brian.

Brian:
I just want to add something to that, Scott, because what you said is absolutely true. And I just want to relate a story to people because I think it’s important. 25 years ago I made a pledge to myself that I was going to buy one house a year. That was going to be my big break. I was working, I was getting a W2, I was in law enforcement like David. I just wanted to buy a house a year and I thought that was going to make me rich. I started out on that and here I am 25 years later, I’ve bought over $800 million worth of real estate during that time.
Some of my very early single family homes that I bought, I did a 1031 exchange, which means I could sell these two properties and buy a larger property. I bought a 16 unit apartment complex. I held that 16 unit apartment complex for 15 years and then I sold that in a 1031 exchange and bought this very spot that I’m sitting in right now with this ocean view behind me in Hawaii. And that is how the road to wealth works. You start small with a goal, you take active steps to get there, you accumulate probably… It doesn’t matter if you get 100 houses in two years, like the 22-year-old you’re competing with whoever mentioned that. Where’s that guy in five years? Probably in bankruptcy court. What you got to do is just make a goal that fits for you, chip away at it one piece at a time, and eventually you’ll have what you’re seeking. It just will take time. It took me what? 20 years to get into here. And it will take you time. Just be patient.

J:
If only there was a game that taught us that if we buy houses today, in the future we could turn those into something else like hotels or something, that’d be really cool. We should create that game. The key here is that… And I think Monopoly is actually a good analogy for this because what do we do in Monopoly? We don’t spend the game trying to buy fancy cars and expensive dinners and traveling around the world. What we’re doing is we’re buying assets and we’re letting those assets grow. And most of us in Monopoly, we find every time around the board, we’re looking forward to collecting that $200 because we’re running out of money because we keep buying assets. And that’s the way to do it because by the end of the game, if you’ve done it well, you’ve got a whole lot of assets and that’s worth a whole lot of cash.
I think we kind of use the terms rich and wealthy interchangeably, but from my perspective, there’s a big difference. Rich people, they have a lot of cash. They can go out and buy a nice car, they can go out and go on fancy vacations and they can do all those things that you think about when you think about rich and flashy. But wealthy is where you want to be. Wealthy is your net worth. Wealthy is that equity. Maybe it’s tied up for now. Maybe it’s tied up for the next five years or 10 years, but at some point in the future you’re going to wake up and you’re going to realize that “I’m worth a lot of money and I can take that equity and I can convert it into cashflow or I can convert it into another type of equity and I can quit my job.”
And yeah, it’s not going to happen in two years, but again, if you do things the right way like Brian did and like Scott’s doing, like David did and Dave and me, I mean in five or 10 or 15 years, you’re going to wake up… You’re going to wake up in 15 years either way, at least wake up rich. Excuse me, wealthy.

Dave:
Great advice, J. If only there was a book that talked about return on equity that perhaps you and I wrote that people could check out, that might work out for people.
Last question here before we get out of here. I want to hear from each of you quickly what practical actionable advice would you give new investors. So we’ve talked a lot about what people who have been in the game for a while should be doing, but what advice would you give new investors who want to get started here in 2024? Scott, let’s start with you.

Scott:
It’s the age old stuff. There’s nothing new here. It’s strong personal financial position. Build up your cash reserves. Develop the mental models that you need to. That’s a pompous way of saying start learning the way that what J just said there. And look, consider a house hack or a live-in flip, right? Those are the most powerful tools you have the huge advantages when you’re just getting started that completely multiply your leverage and multiply your opportunity and upside while diminishing risk if you can live in the property, operate it yourself and maybe add a little bit of value. It’s all tax-free if you do the live-in flip correctly and live in there for two years and sell it within five years of doing that. I would strongly encourage people to be looking there for those opportunities because they’re so high upside and so low risk in any year, but at any point where you’re getting started.

J:
I meet two types of people in this business all the time. Number one, I meet people that have never done a deal. And most of the people I meet have never done a deal. 95, 96, 98% of the people I meet have never done a deal. And then the other type of people I meet are people that have done 5, 10, 50, 100 deals. There’s one type of person I never meet in this business, and that’s somebody that’s done one deal. So anybody out there that’s listening, don’t do a bad deal, but don’t give up until you get to that first deal because after you get that first one, it gets so much easier and you get your head around the process. And I promise you, if you do one deal, you’re going to do 10 or 20 or 50 or 100 deals.

Dave:
Right. Brian, what’s your advice for new investors?

Brian:
The first thing you need to be doing right now is getting your plan together. What strategy do you want to employ? What markets do you want to invest in? Where are you going to get your capital? And that includes both equity capital and debt capital. Get everything lined out. If you’re going to use investors, build your investor list. If you don’t know what you’re doing, build your partner list. If you don’t know how to turn a wrench, build your contractor list. Get everything ready, get it lined up because the opportunities are presenting themselves and they will in more quantity as time goes on. And if you’re ready for it, you’ll be ready to pounce when you see opportunity.
The people that get caught flatfooted are the ones that they have no plan, they have no money, and they just say, “Oh, I found this great deal,” and it’s like, “Okay, what do you know about great deals? Where are you getting the money? Where are you getting the debt? What are you going to do with it?”
“Oh, I haven’t thought about any of that.”
“Well, then it’s too late. The great deal is already gone.” So you have to have all that other stuff ready so that when the great deal comes along, you’re absolutely ready to do it and do it right.
The second thing I think people need to think about is don’t get in too far over your skis. One of the things that really killed investors back in the last downturn in ’05 was they took on way too much debt over what the property or they could support. The problem with this business is, if your career gets really shortened because you really screwed up, it’s even harder to get the second deal. J’s right. It’s easier to get the second deal, but it’s harder to get the second deal if your first one was a total disaster.

Dave:
Well, Brian, I totally agree with you. I think if I had to give my advice concisely, it would be to start with the end in mind, to really think about where you want to go, Scott alluded to that earlier, and what you’re trying to accomplish through real estate. And then work backwards to identify the strategies, the markets, the financing structures that work for you and are appropriate given your personal situation and your personal goals. I see a lot of people just jump right into that first deal. And J’s right, you should get into that first deal, but make sure that it’s one that’s appropriate for you and that is well aligned with your long-term goals.

David:
Nice. The thing I would tell a newbie is to think about the long-term. When you guys were talking, I was thinking about my experience that I’ve had in real estate since I got into it. And it seems like real estate tends to move in these really big waves. If you think about the market as the ocean tides, it goes up very quickly when we print a bunch of money and it goes down very violently when we get into a recession. And there’s occasionally times where it just slowly increases at that 2 to 3%, but we can never predict when that’s going to happen. So the idea is how do you get as many buoys in the water in the best markets that you can, and then you ask yourself the question, “How do I keep them there? How do I not lose the properties that I bought?” Obviously, cashflow is a really strong way to do that, but that’s the profit and loss of a property.
Think about the profit and loss of your life. Are you saving money? Did you get a little bit of cash and immediately go buy yourself a Mercedes-Benz and jeopardize the health of your investment portfolio because you can’t stop spending money? If you could be disciplined with your own finances and always be bringing more value to your employer, more value to the marketplace, more value to your customers, increasing your income while keeping your expenses low, you’ve now earned the right to take the risk that is involved with real estate investing that will pay off if you can wait long enough. So just stop trying to outsmart the market and out time the market and ask yourself, “How do I get the best buoys in the water, in the best markets and keep them there for as long as possible?”
And then what happens is 10 years, 15 years, 20 years later, you got a butt load, that’s a technical term everybody, of equity, and you can ask these cool questions like, “How do I move this into a different asset class?”
All right, gentlemen, thank you all for joining me here on this stellar 900th episode of the BiggerPockets Podcast. I was first featured as a guest on episode 169. And I can’t believe how quickly we are flying towards 1,000.

Scott:
I just want to throw something out there. You first appeared on Show 169. J, what was your first episode? Do you remember that one?

J:
Episode 10.

Scott:
Whoa! 10. That’s pretty good. Brian, what was your first episode?

Brian:
Episode 3.

Dave:
Talk about OG on this. J and Brian. Wow. Thank you guys for being around from the very beginning and coming back all the way here for 900.
If you are one of those people who have listened to all 900 episodes, please find me on BiggerPockets and shoot me a message. We want to hear from you and your experience. We would love to know if you have listened to all 900.

David:
And let us know in the comments on YouTube what your favorite BiggerPockets show was. All right, I’ve got to record episode 901, so I’m going to get us out of here. Thanks everyone.

Tony Malkin, Empire State Realty Trust CEO, joins ‘The Exchange’ to discuss the state of commercial real estate and New York City office space.

Dave:

Hey everyone, welcome to On the Market. I’m your host, Dave Meyer, and today we’re going to be wading into one of the most heated conversations in real estate, which is, can you even find cashflow in the first place these days? And where can you actually find cashflow? To join me for this conversation is Kathy Feki and Mr. Henry Washington. Do you guys hear this debate a lot, Kathy? Do you hear people saying that cashflow is impossible to find these days?

Kathy:

Sometimes, yeah, but only from people who I guess don’t know how to find it or are new to the business.

Dave:

All right, well you just took my second question away. I was going to ask if they’re correct, but it sounds like no. Henry, what about you? Do you hear this question come up a lot?

Henry:

All the time, especially since interest rates have gone up, that people’s favorite phrase is, “You can’t buy cashflow anymore,” and it’s just not true. I actually tell my students, I don’t know if you guys are aware, but every deal cashflows, every single deal ever cashflows. It just doesn’t cashflow at the price you’re comfortable offering or at the price the seller is asking for. But that doesn’t mean you can’t analyze that deal, figure out the price it does cashflow at and make that offer.

Dave:

And also every deal cashflows, depending on the amount of money you put down as well. If you buy something for cash or you buy it for 50% equity, it will, probably, cashflow. So that’s a very good point. So Henry, where do you think this notion comes from that cashflow is impossible to find?

Henry:

Yeah, I think, well, if you look at most traditional or new investors, what they want to be able to do is just call up an agent or hop on Zillow, Redfin or the MLS, find something that’s listed, make an offer at what they’re asking, maybe slightly below, and get this deal that cashflows. And if that’s the method you’re using to find deals, then yeah, nothing’s really going to cashflow. You’re going to have to have some special niche of being able to monetize that property in a different way, that’s going to allow you to buy cashflow, paying retail.

And a special niche, what I mean by it, it could be that you’re going to rent by the room. So you could buy a property potentially on the market, rent it by the room, that increases the amount of rent you’ll get, and then you can make it cashflow, or you can be strategic, like Kathy does, and buy houses that are listed but that are in areas where you can use them as a vacation rental. I think Kathy, you just bought one, where in Tulum? Right?

Kathy:

Yeah.

Henry:

I’m sure that will cashflow, right? It’s a different thing, but if you think you’re just going to find something on the MLS at retail price, that’s going to be a long-term rental and make you cashflow. Yeah. No, that doesn’t exist. And so I think people just see that and say “You can’t find cashflow.”

Dave:

That’s a great point. There are a lot of different strategies that work to generate cashflow in pretty much any market. And just for everyone listening, so you know, we’re also going to share, towards the second half of this episode, four markets that we have identified that will be really easy to find, basically off the shelf cashflow, you can just find it off the MLS. So we’re going to be sharing those four with you. But before we get to them, I want to talk a little bit more, Kathy and Henry, about strategies that you can use to generate cashflow in other markets. So Kathy, what are some of the ways that you approach finding cashflow in some of these higher priced markets or some of the growing markets that you invest in?

Kathy:

Well, for me, I’ve just found over the years that you have to find some form of distress, and that distress changes with the economy. So just in the last year or so, one of the big stressors was with builders. They couldn’t sell their inventory because, as interest rates went up, a lot of people couldn’t afford those, and builders were sitting on a lot of inventory that they needed to move. And builders are not like individuals selling their primary residence. They are in the business of selling, and they have loans, they need to pay them down. They got to sell and move these properties. So that was just one form of distress in the past year, where it was a little bit easier to negotiate with builders. Either they have to lower the price to make it work or they have to make the interest rate lower. Something needs to give, if I’m going to take this inventory off of your books, basically. So what we discovered is they were more willing to pay down the rate because then that kept the price up so it doesn’t affect their comps.

But when they’re paying down the rate, we’re actually finding these brand new homes cashflow really well. The other thing about cashflow is you got to look at all the numbers. So maybe day one, a certain property looks like it’s going to cashflow, but if it’s going to be breaking down all the time and you’re constantly feeding it, there’s no cashflow there at the end of the day or the end of the year or 10 years or whatever. With a newer home, we don’t have those issues. The insurance is way lower because insurance companies like to insure newer properties. Tenants like to live in newer properties, so rents go up faster. So over time, we’ve also found that these nicer properties actually cashflow better. So again, it’s just we look for the distress, I don’t want to say take advantage of it, but I guess that’s what I am saying, and you negotiate and work the valves that are going to get you to where you want to be.

Henry:

And just to be clear, I don’t want to say you’re wrong, but you’re not taking advantage, Kathy, because no one’s selling you a home that they don’t want to sell. Right? You’re offering a solution to that distress. They’re making a call of whether they want to sell it or not. And I will bet that these developers that you ended up buying these properties off of, were very relieved to now have these off of their books so that they can go deploy their capital in places that are more important to their business. It’s offering a solution, and people will take advantage of your offer, then you’re not taking advantage of them.

Kathy:

Thank you.

Dave:

Kathy, so that is one excellent way to generate cashflow, which is looking for distress. Henry, what are some of the other techniques or strategies that you use to find or create cashflow in your deals?

Henry:

Yeah, absolutely. For me it’s a volume and numbers game. It’s the same. You do have to identify… Distress is just one thing to look for, but what you need is this, I call it situations. I don’t buy houses, I buy situations. There are situations that people get into that cause them to need to sell at a discount and not want to sell. Everybody who just wants to sell lists on the market with an agent, they can get retail value. That’s amazing. I want them to do that. But there are situations where people need to sell, and can’t. And if you can identify what those situations are, get yourself in front of those people, and then offering a solution to their problem, by being able to make an offer, and then they then can make a decision on, “Is this offer going to provide me the solution that I need?”

If it does, maybe they take it. If not, then you move on. Now if you make 20 offers, there’s a high chance that 20 or 19 of them get turned down because you are going to have to offer at a price point that allows you to create cashflow if you’re only going to use a long-term rental strategy. And so that just means you have to make offers in volume. So I just try to find situations, analyze every deal that I can. I’ll make the offer to provide a solution if that works for them. That’s fantastic. And if it doesn’t, that’s fantastic as well.

Dave:

Now that we’ve discussed how to identify properties in distress, or asking for buy downs on new construction to generate cashflow, we have more strategies right after this quick break. Welcome back to the show. Great. All right. So looking for distress, buying these unique situations, two great ways to identify and create cashflow. I’ll add something that, Henry, you touched on earlier, but there are other ways to rent out properties that generate more revenue than long-term rental. So we talked about short-term rentals a little bit. And short-term rentals, generally speaking, get more revenue per night. So if you averaged out how much you can get from a long-term rental on, let’s just say, on a two bedroom, maybe you get $50 a day. On a short-term rental might get a hundred dollars a day, just for this random example. So that is a great way to generate cashflow. Now, short-term rentals tend to have more expenses too, so you need to be careful about that, but short-term rentals can offer more cashflow as are other alternative strategies like midterm rentals.

Similar to short-term rentals, they offer more revenue per night. And the third one that I would offer here is rent by the room. I’ve never done this personally, but I know people who do, either in a co-living model or in just finding a property manager who does rent by the room. But if you just rent out individual bedrooms to individual tenants, you usually get more dollar per bedroom, and that’s another way that you can generate cashflow. Of course that comes with more property management complexity. But these are all ways that you can consider generating more cashflow for your properties. Kathy and Henry, do you use any of these strategies yourself?

Kathy:

Yeah. I haven’t done midterm rentals yet. That’s next on my list, and I want to learn that. I know BiggerPockets has a great book on it that I wrote the forward for, so I have no excuse for not trying, but short-term rentals for sure. We did it by accident, just to try it, and we’re so surprised at the success of that. Of course, that was during 2021, at the peak of that whole short-term rental thing. So you got to understand that that’s a little bit more of a volatile market too, the short term, because it’s just dependent on when people want to travel. There’s more options now. They have hotels and so forth. But yes, we have found that the short-term rental, if the timing is right and the price was right and you’re in the right area, it can be so lucrative.

Henry:

We do short term and we are launching our first midterm this Friday.

Dave:

Oh, cool. Congrats.

Henry:

Thanks.

Dave:

Eager to hear how that goes.

Henry:

Me too.

Dave:

And I do want to just caution people, with both of those strategies, short-term and midterm, you do typically have opportunity to generate more cashflow on an ongoing basis, but a lot of times the upfront costs are more significant because you have to furnish those apartments or those properties. And so again, with all things in real estate, it’s just a trade-off and that if you were prioritizing cashflow, then these are some of the trade-offs you might want to make.

Kathy:

I just want to jump in on that too and say that with short-term rentals, you can talk to your CPA, but you can get some pretty significant tax deductions, which, in the end, that helps cashflow too. If you can write off a bunch of taxes.

Dave:

Yeah. Get to keep more of that revenue.

Kathy:

Mm-mm.

Dave:

All right, so we’ve talked about distress buying situations, and then some of these alternative leasing options for generating cashflow. And the last one I wanted to bring up was using less debt. Henry was talking earlier about that, depending on what price you offer, every deal cashflows. Well every deal cashflows as well, depending on the down payment that you choose to put down. If you were to buy something for cash, it will cashflow because you will have much fewer expenses. Of course, not everyone has that opportunity, but I do encourage people, especially in these high interest rate environments, to consider putting down more than 20 or 25%.

And I think a lot of times when debt is cheap, why wouldn’t you get the maximum amount of leverage? But in today’s type of environment, if you do prioritize cashflow, if you want to generate some money, consider putting 30 or 40 or 50% down on a deal, because that will quickly increase your cashflow potential and it’s honestly a good low risk way to buy rental property. So I would offer that as a fourth way of generating cashflow. Do you guys ever do this or you pretty much try to put down the minimum amount on most of your deals? Kathy?

Kathy:

I try to put the minimum down. We’ve helped a lot of Californians fix their mindset, I want to say around this. Because I’ve had so many people come to our events and say, “What do you mean you can’t cashflow in California? I’m cashflowing.” And I say, “Okay, tell me more.” And it turns out they have no debt. Maybe they’ve owned it for a long time or very low debt, and it’s like, “Well, I sure hope you can cashflow on your property. There’s no debt.” So really I think it’s important to understand the equity at play and could you take that equity instead of putting 40% down on one property, find a place where it works, where you could buy two properties with 20% down on each. I feel like in the long run you’re going to do better over time, but it just depends on what you’re trying to do. If you’re trying to build wealth and you’re young, I would try to leverage more and acquire more, versus as you get older, then maybe your goal really is cashflow and you want more security and you want more money down.

Henry:

I’m in a growth pattern still. And so the more capital I can keep in my pocket, the more I’m able to grow my business and my portfolio. So I want to put as little down, sometimes I want to put nothing. I would much prefer someone else pay for my equity. And so I’m going to have the seller pay for my equity by buying at a discount, and I’m going to have my tenants pay for my equity by paying down my mortgage. That’s the strategy that I want to employ so that I can acquire more now. And at some point, once I’m done acquiring, at a higher scale, I might look to pay cash for properties or put more down, because then essentially you’re playing the cash on cash return game. If I can put $50,000 down on this hundred thousand dollar house, I have a very low mortgage, but the return, the cash on cash return that I get in the rents is extremely high. And so I’m using my money to generate income. It’s more like a stock market game at that point, right?

Dave:

Yeah, absolutely. It makes total sense. If your goal is to maximize your equity and your long-term appreciation, then using maximum leverage or using more leverage, and it’s just another word for debt, for everyone listening, using more leverage and more debt, is a faster way to grow because you can spread your equity out across multiple properties, as Kathy said. But if you do want a cashflow, if you’re getting close to the end of your career, you want to slow down, you want to reduce risk, reducing that amount of debt can be very helpful to you in that effort. So those are four different ways that you can produce cashflow, buying situations, looking for distress, using alternative revenue models and lowering your total debt. But now we’re going to talk about four markets where you can generate cashflow right off the shelf off the MLS. Kathy, let’s start with you.

Kathy:

Yeah. This market is Youngstown, Ohio. Personally I do love Ohio. I think there’s a lot of opportunity in Cleveland and Cincinnati, Dayton, certainly Columbus. Youngstown has had a really tough time recovering from the crash of 1977. A lot of people don’t realize that places like Youngstown, where it was a really wealthy city at one time in the 20s and 30s, it was in the steel industry, just like Pittsburgh and Cleveland and Detroit. These were the New Yorks of the time. It’s where the wealthy people lived. And especially in the 30s, at its peak, is when they had the most population, because we had a war and steel was needed. But then in 1977 that all changed, and those companies left and people, I think 5,000 people were laid off in one day or something like that.

Dave:

Oh my god.

Kathy:

It has not been able to recover. There’s been a few attempts bringing in… I know Chevys were… GM had a plant there for a while and then that shut down just in 2019. So this town has had a hard time bouncing back like some of the other rust belt cities that have really invested in themselves. So right off the bat, I want to say this would not be a market that I would personally go to for cashflow, even though it’s on our cashflow list.

Dave:

I appreciate you bringing this because it is one of the highest ranking markets in terms of the metrics. And we measure cashflow potential in different ways. For the purposes of the show, we’re using a metric called the rent to price ratio, which basically just compares how much rent you can generate for every dollar of the purchase price that you put in. And Youngstown does pretty well. And Kathy, you did a good job explaining the reality of the situation in Youngstown. Do you see this often with cashflow cities that they are lower price or have lower economic potential?

Kathy:

No. No. I think you can get great cashflow in a market that is reinventing itself and that is creating job growth. I don’t know why this town hasn’t been able to recover. Rent to price ratio in this town is 0.65%. That’s not good. That’s terrible. So if I’m going to get that kind of ratio, I’m going to be in Florida, I’m going to be in a growth market. For me to buy in a cashflow market, I want to see a much better return than that. Because you’re not getting appreciation, so you’re going to have to make enough cashflow to cover any repairs that happen, any vacancies. And if you have a vacancy, who are you going to bring in? This is not a population that’s growing.

There’s not job growth, so you might have to lower your rents to get your property rented. So I know a lot of people might look at a price point and say, “Oh, this market has a median home price of $144,000. That’s a lot lower than the national average.” But the median rent is $937. So I would want to buy a house under a hundred thousand dollars, all in, for me to make this market make sense, because it’s a non-growth, linear, not even linear, a downward trending market. So again, you got to be careful when you say it’s cashflow. Sure there’s cashflow that might be better than LA or San Francisco, but the difference is that at least in those cities, you’re probably going to see rents go up over time.

Dave:

That’s a great point. And just to be clear, when we’re talking about the rent to price ratio for these markets, we’re talking about the average. And so there are certainly deals that would be better than 0.65. There are deals that would be worse than 0.65, but when we look across the country, the average rent to price ratio is about 0.6% or 0.55%. So this does offer better than average cashflow potential, just for the average deal. Again, there are plenty of other caveats around that. But to Kathy’s point, if this market is not going to appreciate, maybe that slightly better than national average cashflow potential is just not enough.

Kathy:

Yeah. And I’m not saying that you can’t make money in this market, but you better be buying some incredible deals, way lower than that median price, and be able to maybe improve it and provide the affordable housing. It just makes me nervous that there’s not a really strong job center there.

Dave:

All right, great. Well appreciate your candor and honesty about this, Kathy. Thank you. For our second market. I’m going to be talking about Syracuse, New York, which is very close to where I went to college, and is actually a market that I looked at, not super seriously, but did look into a bit, because there are some interesting things in Syracuse. The rent to price ratio there is almost 0.7, so it’s a little bit better than Youngstown. But what I like about Syracuse is, first and foremost, there’s a giant university there, it’s a growing university, and that’s a major economic center for the city. The second thing I really like is that Micron, which makes processors and computer chips, is moving into the area, and they said that they’re going to hire something like 10,000 people over the next couple of years, and those are really high price jobs.

So similar to what Kathy was saying earlier, some of these cities, Syracuse is also one of those cities that has had difficult economic times over the last few decades, but something like a huge booming industry with high price jobs moving in, can really turn the tide for an entire region. And that’s something I really like about Syracuse, and the numbers are bearing that out. So even though population has been growing, their forecasting population growth due to these new jobs in the next couple of years. And Syracuse was one of the fastest growing appreciation markets last year, with more than 10% year-over-year growth. So I think Syracuse is worth considering. I have looked at it a little bit and would consider it again in the future, because I do think that it’s showing signs that it’s turning the tide, as Kathy was saying. Now that we’ve covered our first two markets, we have two more markets right after a word from our sponsors. Welcome back to On the Market. We have two more cash flowing markets for you to consider. All right, so for our third market, Henry, what do you got?

Henry:

All right, we’re going to talk about Pittsburgh, Pennsylvania. And on the surface, Pittsburgh has some pretty good metrics in terms of cashflow and in terms of affordability. So if you look at the median home price, you have homes that are around $201,000. And if you look at the median rent, you’re at $1,300 or closer to $1,400. And so to me that says you can probably find a deal right there on the MLS that’s going to cashflow, because that’s a pretty decent rent for a low entry price home market. And what else I like about the numbers is the median income is 65 to $66,000. And so people can afford those homes and you can get cashflow in those homes. So those are some pretty stable market dynamics. Pittsburgh has some other strong dynamics as well. If you look at homes on the market, days on market is around 72 days, and things are selling with an average of just 1.8% below list price.

And so that means people are listing homes and people are buying homes. And so that shows that people do want to live here. But if you look at population growth, it’s down 0.6 or 7%. So definitely that is something you want to keep an eye on or have watch on, or have some sort of understanding of Pittsburgh as a whole. If you’re just an out-of-state investor, you need to understand why is the population growth down right now? Is it just a blip on the radar or is this something been trending year over year? Because if you can get cashflow, that’s great, but if people are moving out, your rents are going to start to go down and your property values are going to start to go down.

Kathy:

I can talk a lot about Pittsburgh because, first of all, I know this city really well. We started investing in 2009, I believe, in Pittsburgh. And when I went there, what I saw was a city, like I said, a different kind of city in the Rust Belt that was investing billions of dollars in its revitalization. There are really big universities there. They’re investing in biotech and-

Dave:

Robotics, right? Isn’t it a huge robotics city?

Kathy:

Yeah. There’s some really good colleges in Pittsburgh. We bought very cheap back then. It was right around the downturn, so I think we bought a duplex for $60,000. Today that rents for 1300, total. So the cashflow is pretty fabulous. Believe it or not, we’re selling that because there’s a lot of deferred maintenance and these tend to be older homes. It’s cold weather. We just didn’t want to deal with the deferred maintenance, so the person who’s been living there, it’s a dad on one side and the son on the other side, and it’s like, “Hey guys, this is your chance to buy this from me. You’ve been living here forever, paying me. Why don’t you buy it?” And they can do that deferred maintenance.

Turns out that that’s what they do. They’re contractors. So I bought cheap enough in that city that it really has worked for me, but there doesn’t tend to be appreciation. However, it still is growing, and there’s pockets that are growing. We bought a property, downtown Pittsburgh for around 200. After all renovation and everything, came in around 200. That just appraised for 350. So there can be appreciation if you’re in the right neighborhood, you know where the growth is. So again, just like Henry said, know the market before you dive in, because you could end up in one of the suburbs that just doesn’t ever show appreciation. Whereas there are parts of the city, closer to the universities, that are really taking off.

Henry:

Yeah. Pittsburgh’s showing a 4.2% increase in home value since last year. So there’s been some appreciation there. And there are some strong [inaudible 00:26:02] you’re right, the university, so you’ve got University of Pittsburgh right there in the middle of town. You’ve also got Carnegie Mellon, a rocks throw away from that, which is a huge technology school. Some of the smartest minds in the world go to school at Carnegie Mellon. And so these things aren’t going anywhere. They’re going to be there. They’re going to continue to draw people in there. And obviously the Steelers are a team that people… I think I read somewhere that 20 million people a year go and visit Pittsburgh, and I bet a lot of that has to do with football. So there is some draw there. And so I would just… The only caveat for me here is you got to watch that population growth.

Dave:

Yeah, totally agree. So some interesting stuff here, even though Kathy’s selling, but that’s super helpful to know, Kathy. I think that’s really important for people to understand that. A lot of these markets and a lot of properties that cashflow do have deferred maintenance, or are in neighborhoods that have less appeal, and that’s kept the price low, which is why the rent to price ratio is higher because the denominator is lower. So, that’s another market to consider if you want some off the shelf cashflow. The last one we’ll talk about quickly is Jackson, Mississippi. I’ve never been to Jackson. I’m going to ask you, Henry, have you been there because you live in that area?

Henry:

I do. Well, it’s like a, I don’t know, a five or nine hour drive. I can’t remember, but no, never been to Jackson.

Dave:

Oh, not that close. Shows my geography skills.

Henry:

I’ve driven through Jackson.

Dave:

Okay. I don’t know much about it other than what I’ve read on paper, but the rent price ratio is good at 0.7%, and the median home price is under 200,000. So definitely an affordable market. And what I really like about Jackson, just on paper, is the unemployment rate is extremely low. It’s at 2.2%. And so to me that suggests that the economy is doing pretty well. The whole country has a low unemployment rate rate now at 3.7%, but 2.2 is darn near the closest, lowest I’ve seen. So that is really an interesting thing. And what I’ve learned about Jackson is that even though the area surrounding is mostly agriculture and farming, the economy in Jackson is based off more manufacturing processed food, fabricated metal, machinery production, and that stuff is starting to come back in the United States a bit. So there’s some encouraging signs here for Jackson.

Again, it seems like all four of the markets, they all have interesting potential, but just like the other three, Jackson does have modest population declines of 0.7% in the last year. And just so everyone knows, population decline is something you should be thinking about, because when you want to forecast rents, if you want to forecast appreciation, you need to be thinking about supply and demand. And if people are leaving a market, you are inherently going to have less overall demand. But there’s some caveats that, if tons of young people are coming but older people are leaving, that can still increase demand because that’s who buy houses. So there’s a lot more to consider about this, but it is something that you should dig into if you’re going to look into any of these markets. Why are people leaving? What demographics of people are leaving? Are renters leaving? Are homeowners leaving? Because that could really inform how seriously you should take population growth versus decline in a particular market.

Kathy:

And crime, Dave. Really understanding crime rates in the certain areas. I know that’s a problem in the first city we talked about, Youngstown. There’s a big drug problem there. When you don’t have jobs, and that can be what people lean on, is the drugs. But what’s interesting about Jackson is that it’s one of the five top loneliest cities.

Dave:

Oh, that’s so sad.

Kathy:

It’s so sad.

Dave:

That’s terrible.

Henry:

The song is even sad. It’s just so…

Dave:

Oh man, I hope that turns around for Jackson.

Henry:

Poor Jackson.

Dave:

Poor Jackson. Wow.

Kathy:

I think because there’s so many people living alone, potentially. Yeah. I used to give Jackson a really hard time. I went there years ago to check it out because I knew somebody who was fully, almost completely invested in Jackson and doing really well. So if you know the city well, anywhere, you can make money anywhere, I want to just say that. If you know your city and you’ve got the connections, you can make it work. And I know people who did. I went there and I was like, “Wow, I don’t see really much chance of appreciation here. I don’t see a lot of growth. Nothing too exciting.” And I’m just not a flat cashflow person. I need to see growth. I just need to see growth. Otherwise… I’ve done it too many times where you have one renovation and it wipes out the cashflow for two or three years.

Dave:

Yeah. Absolutely. Well, that’s a great way to segue to the end here, Kathy, because next week we’re going to be doing a show on some of the best appreciation markets and ways to generate equity growth in your market. And so before we move on to that next week, I wanted to ask you both about where you fall on the spectrum, because really it is a spectrum. You can find great cashflow, but that’s usually in a market that’s not going to appreciate that much. Oftentimes the markets that have the best appreciation potential have lower cashflow, at least off the shelf. You’re not going to find it just off the MLS. And so Kathy, it sounds like you fall more on the appreciation side of the spectrum. Is that right?

Kathy:

Well, for years our business plan, when you could do this, was to put as little money down, even nothing, like Henry was saying. If you can get your money back out and still cashflow, my goal was like $300 per property per month with as little money in it as possible. That’s what I looked for. It is hard to do that today, but it can be done.

Dave:

And Henry, what about you?

Henry:

My goal is to buy value. From day one I want to walk into equity. I would love both. I want to walk into equity no matter what, and I would love the cashflow to go with that. But I may still buy a property where I walk into equity that doesn’t cashflow, because cashflow is only one of the ways real estate pays you. And in my opinion, it’s the least important way that real estate pays you.

Kathy:

Yeah, that’s what I was going to say. So when I started, that was my goal. And then I realized I need a lot of properties for $300 a month to really make a difference in my life. And then I started to see other properties that didn’t cashflow so well, but I was making 50 to a 100,000 a year, just on the appreciation. So that changed my mind. And then when I ran a real estate rental fund with that mixed, super high cashflow with super high growth, hands down, the growth properties ended up being about 28% return per year, and the cashflow ones were like six.

Dave:

For me, I like to look at it at a portfolio level and just make sure that my portfolio is at least breaking even in terms of cashflow. Because then I can look at individual deals and say, “Okay, if we’re going to do a renovation that takes one or two years, that’s fine.” Because on a holistic level, I’m still breaking even. I’m not having to come out of pocket regularly to support my portfolio, but I’m not carrying that much that every individual deal is earning some great cash on cash return, as long as my portfolio is relatively self-sustaining.

To learn more about this debate and the trade-off between cashflow and appreciation, make sure to check out our episode next week where we’re going to be digging more into the appreciation side of things. Thank you all so much for listening to this episode about cashflow. If you liked it, please make sure to give us a review on either Apple, Spotify, or YouTube. Thanks again. We’ll see you next time for On the Market. On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

The notion that investing in multifamily is always better than investing in single-family is false. The goal of real estate investing isn’t to own a particular type of property but to secure a reliable income. The reliability of this income doesn’t depend on the property type but on the tenant who occupies the property.

To show you what I mean, I will compare the financial performance of a typical fourplex in Las Vegas to the kinds of properties we’ve targeted over 16 years.

Typical Las Vegas Fourplex Characteristics

Note: The property cost and rent came from averaging the 36 fourplexes for sale today (Jan. 31, 2024). The typical in-between tenant renovation cost came from property managers who specialize in multifamily properties.

Almost all fourplexes in Las Vegas were built before 1986 and are located in distressed areas. The typical tenant stays less than one year, and the time to renovate and re-rent is three months. The typical cost for the in-between tenant renovation is $2,000. 

The typical unit rent is $800 to $900 a month. The typical cost to buy a fourplex in reasonable condition is $650,000 to $700,000.

Assuming a one-year tenant stay, the unit is vacant three months out of every 15 months. Assuming a higher-end $900/month rent:

• Gross 10-year rent: $900 x 4 units x 12 months x 10 years = $432,000
• Lost rent due to vacancy: Gross 10-year rent x (3 months vacant / 15 months) ? $86,400
• Number of tenant turnovers per unit over 10 years: 10 years / 15 months = 8 turnovers
• The number of tenant turnovers over 10 years for the fourplex: 8 turnovers x 4 units ? 32 turnovers
• Renovation cost for 32 turnovers: $2,000/turnover x 32 turnovers = $64,000
• I will ignore all other costs to keep the example simple.
• Net 10-year rent: $432,000 – $86,400 – $64,000 = $281,600

Our Single-Family Target Property Characteristics

Out of our over 490 properties, the average tenant stays for more than five years. The typical in-between tenant renovation cost is $500. The time to renovate and re-rent is one month. 

For the property segment we target, $700,000 can get you two properties. The typical rent for such a property is $1,800-$1,900/month. 

Assuming an average $1,850/month rent:

• Gross 10-year rent: $1,850 x 2 units x 12 months x 10 years = $444,000
• Lost rent due to vacancy: Gross 10-year rent x (1 month vacant / (5 years x 12 months)) ? $7,400
• Number of tenant turnovers over 10 years for the 2 units: 2 turnovers x 2 units = 4 turnovers
• Renovation cost for 4 turnovers:  ? 4 turnovers x $500/turnover = $2,000
• I will ignore all other costs to keep the example simple.
• Net 10-year rent: $444,000 – $7,400 – $2,000 = $434,600

This means the net rent from the Las Vegas fourplex over a 10-year period is significantly lower than that from two single-family homes. This is due to shorter tenant stays, longer vacancies, and higher turnover/repair costs.

Other Considerations

Here are some other factors to keep in mind.

Low income reliability

The tenant segment that occupies fourplexes in Las Vegas is near-minimum-wage workers. They are typically the first to be laid off and the last to be rehired during economic downturns. 

During the 2008 financial crash, many multifamily properties were vacant and boarded up. Many were foreclosed upon. However, our clients had zero decrease in rent and zero vacancies during the same period. The difference was due to the different tenant segments the properties attracted.

Limited rent growth

Because near-minimum-wage workers occupy multifamily properties in Las Vegas, the rent is tied to the minimum wage, which is currently $12/hour. So, you cannot increase the rent significantly unless the minimum wage increases. 

If you were to upgrade the units in an attempt to increase rents, it would not be effective. Individuals who can afford higher rents typically do not choose to live in distressed areas.

Inability to screen out bad tenants

The people who occupy multifamily homes in Las Vegas typically live cash-based lives. This means there is little financial history upon which to evaluate them for payment performance. 

According to one property manager, any financial history they have is likely to be bad. The screening process for cash-based tenants: “If they have two pay stubs and enough cash to pay one month’s rent, they are in.”

Leases mean little to cash-based tenants

Minimum-wage workers tend to have few possessions, so if there is an issue, they put their possessions on the back of a pickup and go down the street to the next property.

So, Multifamily or Single-Family?

Should you buy multifamily over single-family? It depends on the tenant segment it attracts. The property type does not matter.

My first investment property was a multifamily in Houston. On paper, it was a cash cow. In reality, due to nonperforming tenants, evictions, damage, and other costs, I lost money every year. My cash cow was actually a money pit.

I next bought two fourplexes in a suburb of Atlanta. They performed well, and there were few issues.

The difference was the tenant segments the properties attracted. The Houston property was a C (D?) class with near-minimum-wage cash-based tenants. The Atlanta properties were B+ class, and the tenant segment was credit-based and earned significantly more than minimum wage.

Final Thoughts

The type of property is irrelevant. Choose one that attracts a tenant segment with a high concentration of reliable tenants. In Las Vegas, the properties that attract the tenant segment with the highest concentration of reliable people are single-family homes with specific characteristics.

Buy the type of property that helps you reach your financial goals. Don’t follow others’ opinions.

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Tony:
This is Real Estate Rookie Show 370. Now, over the last year, you’ve probably heard about traditional short-term rental investing and this funny phrase called short-term rental arbitrage. Both of these strategies are better known as traditional Airbnb investing or Airbnb arbitrage. And arbitrage is where you’re renting a property from another property owner and you make the difference between the rent charged and the income brought in.
Guys, I’m Tony. Today, I’m rocking my first solo episode and I want to welcome you to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, rookies there are pros and cons to every investing strategy, but it’s better to know what those are ahead of time before putting your hard-earned money to work and that’s what we’re going to be talking about today. Now, I’m speaking with a rookie investor who has done both of these strategies, the arbitrage and the traditional ownership, and we’re going to hear what he would’ve done differently if he were to start all over again in 2024.
Keron, brother, welcome to the show, man. Super excited to dive in with you today, man.

Keron:
Great. Thanks for having me, Tony.

Tony:
So, we actually go back a little bit. I met you at one of our events back in 2022, and I think at that time you were just getting started, brother, so it feels like a really full-circle moment here to have this conversation with you. So, I’m really excited to hear how things have been for you. Now, give the folks a little bit of background, man. What inspired you to really jump into real estate investing? I know your parents kind of played a role in that, so just what was the big motivation for you to make this whole thing happen?

Keron:
I started my real estate journey technically back in 2015, but I didn’t really start ramping it up until 2020 when COVID hit. So, I started with the traditional house hacking back in 2015, bought a two-family house, lived in one unit, rent the other unit long-term, and that’s kind of where my real estate journey started and ended. And then, 2020 rolled around and something happened that clicked to me and I was like, “I need to really, really hop on this real estate thing.” So, I started deep diving into podcasts, this being the first one. And I listened to you when you were a guest and then when you became a host, which was amazing. So, listening to you talk about short-term rentals, that kind of put the idea in my head of, “Hmm, what is he talking about short-term rentals? I hear Airbnb and I stayed in Airbnbs before, but I never thought about hosting on Airbnb.” So, when I heard you moving away from the long-term rental strategy into the short-term rental, that’s what made me really deep dive into that.

Tony:
I love that, man. And now Keron, you had a very stable daytime job, right? People retire from that after decades and decades. So, what did you do for your day job? And I guess what was that moment to make you say, “I really need to jump into this full time”?

Keron:
So, I’m currently still a law enforcement officer. I’ve been a police officer for the last 12 years, and it’s been amazing. It afforded me the opportunities to dive into real estate and I needed an extra source of income on top of my 9:00 to 5:00 because I’m raising a family and I knew that I needed to do something else. So, that’s when I dove into the real estate game.

Tony:
Now, I just wanted to find some terms for folks that are listening. I mentioned them briefly in the intro here, but there are a few different ways you can go about investing in Airbnbs. There’s the traditional strategy where you own the property, right? You go out there, you get some kind of mortgage, you pay cash, whatever it is, but your name is on the deed, on the title for that property, you have ownership and then you obviously go and rent it out on Airbnb or Vrbo. The other strategy, which is incredibly popular is called Airbnb arbitrage, where instead of you going out and purchasing a property, putting your name on the title, you are renting a property from another landlord. And instead of moving into that property yourself, you turn around and sublease that on Airbnb.
Pros and cons to each, right? With ownership, you get appreciation, you get the tax benefits, and you get cashflow. Pros to arbitrage are you get cashflow, right? That’s the biggest thing for arbitrage. So, the goal of today’s show is to kind of drill down and see which strategy might work best depending on your situation. So, Keron, for you, where did you get started? Did you start with arbitrage? Did you start with ownership? And what has rental arbitrage really done for you done for your business and for your personal life?

Keron:
So, I actually started with the ownership piece. Like I mentioned, back in 2015, I house hacked my property. I’m actually still living in that same property. After six years of having great tenants, they were moving out. And at this point, this is when I was introduced to the short-term rental strategy. So, I said, “Let me turn this unit that I’m living next to into a short-term rental and see how that does.” So, fast-forward two months to set it up, it became a phenomenal, phenomenal short-term rental. It’s over 90% occupied every single month, and it is been cash flowing crazy. It’s been cash flowing crazy. Long-term rents were 1,400 bucks. And then, now I’m averaging anywhere from 3,000 to 5,000 a month.

Tony:
1,400 to almost 3,000 per month. That’s almost or more than double, if you hit 3K. And I think that’s the power of short-term rentals as a strategy. Because you’re house hacking this, so what do the expenses look like? Are you fully covering your mortgage? Is your cash flow on top of that? Just give us your quick numbers on the house hack.

Keron:
Yeah, so it’s actually fully covering my mortgage and expenses. So, heat, electricity, and water. And it’s providing some money in my pocket at the end of the day. So, I’m getting paid to live in my own house, which is insane.

Tony:
One of the biggest expenses for people, aside from taxes, is their living expense. And I think a lot of people when they look at especially house hacking, they feel like they’ve got to make a ton of money on the cashflow side. But even if you’re just able to break even. Now, you’ve just reduced one of your biggest expenses of your living down to effectively zero, which then frees up all this additional capital to then go pour into maybe that next real estate investment. So, it sounds like you absolutely crush it with this house hack. And just really quickly, Keron, what market is that? What market is the house hack in?

Keron:
We’re in Stratford, Connecticut, so Fairfield County, just about an hour north of New York.

Tony:
Okay. I’m from California. I’ve never heard of Stratford, Connecticut in my life, but it goes to show that short-term rentals can be effective in many, many markets across the country. And that’s part of the reason why I have a beef with the whole Airb-and-bust concept. It is true that there is some markets that have been more impacted than others. Our properties in Joshua Tree, we’ve seen revenues get squeezed in that market for sure. Our properties in Tennessee, you wouldn’t even think that there is a difference, right? Everything looks the same out there, so it is very market dependent. So, I’m just happy to hear that you’re not in some big vacation hotspot. You’re in Stratford, Connecticut, which is an hour north of the next biggest city, and it still works well for you.

Keron:
Yeah, it’s crazy because when I first started people were like, “Oh, who’s going to come to Connecticut for Airbnb?” And yada yada yada. And I pretty much shut those people down with the numbers that I’ve posted.

Tony:
I want to get into the transition to arbitrage, but one last question on the ownership piece. What is drawing people into your city? Are you noticing that it’s like folks who are visiting family, do you have a lot of traveling professionals? What is it that makes Stratford Connecticut a healthy market for short term?

Keron:
So, for me, the three major things that I looked for before I started this market was major hospitals, major colleges and universities, and we’re on the shoreline, so I’m five minutes away from the beach. So, those three things alone drive the guests to our property. But I narrowed it down to 18 reasons why people have visited my properties. I’ve literally went through messages and narrowed down 18 reasons why people have come to Connecticut and I’m like, “This is crazy.”

Tony:
So, you’ve got something that’s pulling people in, which is an important part of choosing your market correctly. Now, let’s talk about the transition to arbitrage, and before we even talk about why you made that transition, I just want to know what has that change in strategy afforded you when it comes to your lifestyle and just how things have shifted for you since you made that decision?

Keron:
I retired my wife from her 9:00 to 5:00 job. It was a great way to learn the systems and the processes for my business, and it created cashflow for me.

Tony:
You’re saying it like real calm, cool and collected, Keron. That’s a big deal, man. You retired your wife from this decision to focus on this new strategy. So, I think for a lot of people that are listening, the goal is to allow their spouse to maybe stay home with their growing family. Their goal is to eventually become job optional for themselves. And it seems like you’ve taken that first step, which is incredibly impressive, Keron. So, how did you do it? What pulled you into arbitrage? And then, what has your process been for kind of scaling it up? So, Keron, I want to hear your response to that, but before we do, we’re going to take a quick pause to hear a word from our show sponsors.
All right, so we are back. Keron just shared that he retired his wife by not only investing in this amazing house hack that he short-term rents, but also, focusing on the strategy of rental arbitrage, Airbnb arbitrage. So, Keron, a couple of questions here. First, what prompted you to make the transition into arbitrage, and then what steps did you take to actually build that side of the business out?

Keron:
So, what made me going to the arbitrage route was the barrier to entry with the rental arbitrage, and it was a new strategy that I stumbled upon and wanted to try my hand at. So, the barrier to entry was the low cost it takes than the traditional buy and hold route. So, I tried my hand at it and it was great. The barrier to entry for me for my properties were anywhere from 10,000 to 15,000. And having those low costs still with the cashflow was a win-win for myself and everyone involved.

Tony:
One of the big pros it sounds like then for arbitrage is that the capital needed to get started is lower than purchasing a property in most scenarios. So, you said you’re able to set one of these units up for $10,000 to $15,000, that’s your total investment?

Keron:
Yes.

Tony:
Wow. And what does that $10,000 to $15,000 typically cover? What are the costs associated with standing up an arbitrage unit?

Keron:
They normally require a security deposit and first month’s rent. And then, that also includes furnishing the property, so adding the toasters, the coffee maker, the furniture and everything that you need to run a functional short-term rental property.

Tony:
So, one of the things that people always look at when it comes to a traditional like owning a property for short-term or any other type of investment. Is their cash-on-cash return, or how long will it take for me to get my capital back? So, a 100% cash-on-cash return means that however much money I invested I get back in that first year. A 50% cash-on-cash return means it would take me a year and six months. So, what is the typical timeframe that you’ve seen to recoup that initial investment of $10,000 To $15,000? Is it a year, is it two years, is it three years? What does it typically look like?

Keron:
It’s roughly anywhere from six months to a year.

Tony:
No way.

Keron:
Yes.

Tony:
And I think this is one of the powers of this strategy is that you’re able to start recycling that capital relatively quickly because say you go out and you drop 10K, six months later you got that 10K back, redeploy that to another property, six months later you get that back and now you’ve got two units that are given off cashflow. So, you got more to dump into that third property and that’s snowball effect starts to move a little bit faster. How many arbitrage units do you currently have up and running?

Keron:
Four.

Tony:
And as you’ve set those units up, what was your process for identifying the right city for arbitrage and then identifying the right unit, like the right property itself?

Keron:
It was pretty much just where it’s located. Location, location, location, as is said in real estate. So, hospitals, major colleges and universities, and beaches are the biggest three biggest areas of where I want my rental arbitrage units to be. So, once I identify that area, as long as the rents make sense and I know that whatever I’m going to be cash flowing will cover the expenses and then still leave some money left behind, I know that’s going to be the great area.

Tony:
So, are you investing in your own backyard, Keron, or have you kind of ventured outside of Connecticut?

Keron:
I’m still in my own backyard, I’m still in Connecticut. But I’m looking to eventually branch out now that I created my systems and processes.

Tony:
I mean it’s good that you have been able to scale in your own backyard because your market can support that type of demand, which I think is really great. So, what are some of the other benefits, some of the other pros associated with going the arbitrage route? Obviously, it’s significantly less capital, your payback period is faster. What are some of the other benefits you’ve seen that come along with investing in the arbitrage model?

Keron:
Another pro is not being liable for the property maintenance, which is huge. If a furnace goes out, you’re not coming out of pocket a few grand to fix that. That’s going to be on the landlord, on the property owner. So, that’s a great pro for you because I’ve had that happen in one of my properties that I own and it’s not fun. It’s not fun.

Tony:
So, we launched a few arbitrage units, our first arbitrage units late last year and this last month the HVAC unit went out in one of our units. And same thing, instead of us having to coordinate that, we called up the owner said, “Hey, our next turner is on this day this time, please make sure you send someone,” and someone was there to get it fixed for. So, the property maintenance piece, definitely at least that expense comes down a little bit. Now, we do have an understanding with our landlord that some of those minor expenses we’re just going to fix ourselves. If there’s a clog in the drain, we’ll just fix it ourselves with our handyman. If there’s, I don’t know, a fixture that goes out, we’ll just have our handyman fix that. So, are you doing any repairs yourself or are you pushing everything to the actual property owner?

Keron:
Just the major things, like you said, the low-ticket items, I take care of myself. I don’t want to bother the landlord with that minute stuff, or anything that my guests might’ve potentially damaged, we’ll cover that cost no problem. But as far as the big ticket things that are out of our control, no, sorry.

Tony:
And I think I want to at some point get into how you negotiated securing these units because I think that’s a big part that folks overlook is sourcing, but also, convincing these landlords to accept you as someone who’s going to do arbitrage. But one of those selling points is what we just said is that we’re going to be the type of tenant that’s not going to bother you for all those little things because I have a guest checking in in four hours, I got to make sure it’s fixed before they check in, so I’m not even going to go to you for that. So, you’ll only hear for you if it’s something that’s big. So, I think it’s also a selling point for the landlords there.

Keron:
Big selling point.

Tony:
The reduced cost for property maintenance is something that’s a benefit for arbitrage. What are the things are you seeing that are a benefit or a pro to the arbitrage model?

Keron:
Minimal ongoing expenses. It allow you to build your systems and your processes, so that’s huge, especially for something that you don’t own. You don’t have to worry about coming out of pocket for major expenses for a down payment, and then trying to run a business that you have no business running, or that you have no idea about. And then, it don’t work and now you have to worry about selling a house. At least with a rental arbitrage unit, if it doesn’t work for you, you can simply step away, give the 30, 60 day notice to the landlord if it’s not working and you wouldn’t have to worry about any other major expenses that you can occur.

Tony:
So much truth to that and basically your exit strategy is a little bit cleaner, a little bit easier. I’ve told folks that I’ll only open up a short-term rental in a metro market or a suburban market if I can say one of two things are true, either one, that property also works as a long-term rental or two, I’m doing arbitrage because say that regulations shift in that market and now short-term rentals are no longer legal or whatever it may be, now I’ve only got to worry about breaking a lease and not trying to potentially sell a property at a loss. So, there’s some benefit there to the exit strategy. You talked about being able to build the systems and processes, Keron. What exactly do you mean by that? Maybe you can elaborate a little bit.

Keron:
So, with building that means pretty much automating your business and helping it flow a lot better and easier for you. That way, you’re not running around after every guest and having a headache. So, that means having your cleaners in place, building your automated messages system for your guests, so you don’t have to worry about sending each guest a message every day and then forgetting to send them the code to the door, having your electronic locks and things of that nature. So, sending your automatic pricing, your dynamic tools, so you don’t have to worry about missing a date that you know should have went up on on the rates, but you forgot and now you’re short-changing yourself. So, that’s what I mean by building those processes and systems.

Tony:
And are you self-managing these units yourself, Keron, or do you have a virtual assistant or a property manager? Are you self-managing that piece?

Keron:
Self-managing it every day.

Tony:
Just ballpark, like a weekly basis, how much time would you say actually goes into managing the current portfolio?

Keron:
I would probably say maybe three to four hours a week. Three to four hours, it’s so easy when you automate it and build your systems. It’s so easy.

Tony:
You retired your wife on three to four hours a week?

Keron:
Yep.

Tony:
That’s amazing, man. I love to hear it, brother.

Keron:
Now she takes care of the kids and she’s like, “Ah, it’s great, but they drive me crazy.”

Tony:
That’s how it goes, man. So, Keron, one of the other benefits that I think that comes along with rental arbitrage is that it kind of allows you to move into new markets a little bit easier. We talked about the flip side of that where you can get out of a unit easier, but the inverse of that is true as well where say you want to maybe test out a market and instead of buying a property there first, you can just set up an arbitrage unit for a fraction of the cost potentially and validate whether or not that market works for you. So, I asked a question earlier, have you explored any other markets and you said, “I’m still in my backyard right now, but I’m looking to expand.” When you go into that new market, are you going to focus on ownership? Are you going to focus on arbitrage? And I guess what’s the kind of process you have laid out to validate whether or not it makes sense?

Keron:
So, arbitrage would be a great method to try in a new market to test it out and see if that’s a market that we can move into. So, if I can set up an arbitrage unit and it can give me 100% plus cash-on-cash return within that first year, then that’ll be definitely a market that I would love to go into and potentially buy later on.

Tony:
We talked about all the benefits of rental arbitrage, but there are some limitations to the strategy as well, so it’s not all butterflies and rainbows here. But before we get to that, I just want to ask one final question about the acquisition side. What is your process for actually analyzing a potential deal to know if it’s going to be profitable or not from an arbitrage perspective?

Keron:
For an arbitrage perspective, I use AirDNA, I use Rabbu just to check the market out. The bedrooms and bathrooms, I look at those listings on Airbnb and try to match them up. And then, I look for those hosts in that area and see what they’re doing, see what their average nightly and daily rate is, and see how much they’re charging per night. And then, I can see what other amenities and what they’re providing and their setup and I can calculate it all from there to see if it’s going to be profitable.

Tony:
So, Keron, I want to get into the downside, some of the con difference of arbitrage. But before we jump in, we’re going to take a quick break to hear from our show sponsors.
All right, Keron, so I think you just convinced everyone listening to this episode that they need to jump into arbitrage. But again, there’s some benefits to each strategy. But just like all other types of real estate investing, there maybe some potential cons for arbitrage as well. So, from your perspective, what have you seen as some of the downsides of the strategy?

Keron:
So, one of the downsides I’ve seen from the strategy is the rates, the monthly rates on what you’re paying the landlord. Every year you get a percentage increase in the rent. So, you being an Airbnb host, you’re no stranger to that, just like a regular long-term rental occupant. So, you get hit with those rates and they could definitely cut into your business for sure.

Tony:
I have a friend who really focuses on arbitrage here in California as well, and I don’t know, he has 100 arbitrage units, something crazy like that. And he said he had to let some units go where he had almost an entire floor in a complex rented out. And when the owner saw how much revenue he was actually making from the arbitrage, he unreasonably tried to increase his rent. And instead of accepting that rent increase, he just walked away from, I don’t know, it was like 12 units in one building. So, the landlord definitely does have a little bit more control per se, but what I’ve seen some folks do who focus on arbitrage is that they’ll sign longer leases. So, they’ll enter into a lease agreement instead of it being one year, they’ll do three years to really lock in that low rate, so that way they’ve got a little bit of buffer against the owner, not getting greedy, but maybe trying to capitalize on what you have going on. So, what’s your normal lease length for the four units you have?

Keron:
I do the traditional yearly lease, more so because locking yourself into that two or three year rate could also be a downside, because now, if that rental unit is not working at all as a short-term rental, then you’re kind of locked into that rate and into that unit. So, it might be a little harder to walk away.

Tony:
And then you’re right, I think that works well if maybe you already have executed at least one lease. So, say you’re looking to re-up, instead of re-ing up for another year, maybe you push for that three to five year lease and see how that works. What we did for our first three arbitrage units, it was one building, same landlord, we got three units. And we actually did almost like a profit share, but what we set up was we had a base rent of $1,000 for each of the three units we set up. And then, the landlords get the first 100% of the profit up to, I don’t know, like $1,400 per month. So, they’ll get 1,000 but say that we didn’t perform that month, then they don’t get anything above that.
And if we get anything above that 1,400, then we get to keep that for ourselves. So, that’s how we kind of hedged our best because it was our first time doing arbitrage, it was in a market that we didn’t really know and we didn’t want to set ourselves up for these big expensive leases when maybe they weren’t going to work out. And it did work in our favor because it took us a little bit longer to get those units set up. We had a handyman that we had found and the guy just ghosted us, even kept some of our stuff. So, it took us a little bit of time to get those up and running. And luckily, we didn’t have to pay the full rent, we were just paying that 1,000 bucks per month. So, there are some things you can do on the negotiation side to try and work on that rate piece.

Keron:
$1,000, where’s that at? I need that.

Tony:
But you’re beachfront, right? So, your units are probably a little bit different than ours.

Keron:
Yeah.

Tony:
So, rates potentially changing as one con of the arbitrage model. What else have you seen as a potential downside, Keron, of the arbitrage piece?

Keron:
Another downside is if the owner decides to sell and then the new owner comes in and they don’t like the model, they could pretty much disrupt your whole business. They could say, “Nope, I don’t want any short-term rentals.” Or like you said with your friend, they want to charge you more or do it themselves, and then your units are gone.

Tony:
Yeah, and I think the bigger theme there is just between those first two cons you mentioned is there’s a lack of control that comes along with arbitrage where, yes, you get the cashflow for very little investment, but you also lose an incredible amount of control over how that property operates. The three units that we set up, the landlords actually text me and said, “Hey, we’re probably going to end up selling this unit or this complex.” And it’s a 12 unit, we have three of them. And they’re like, “Hey, if you want it, we will give you the first offer.” But I’m not quite sold on that city yet. I don’t know if we really want to go into it. So, now, like you said, they could potentially sell to another landlord that maybe isn’t as amicable to this profit share setup that we have. And when we renew the lease, they want to charge us an arm and a leg. So, there definitely are some downsides to having that ownership there. Well, any other things that kind of come to mind for you, Keron, in terms of downsides of the arbitrage model?

Keron:
Som, kind to piggyback off the pro where you’re not liable for the large ticket items, at that same token, now you’re at the mercy of the landlord when it comes to those items. So, if a hot water heater goes out and the landlord’s like, “Oh, I’m going to send my guy, but it’s going to take three days.” Well the guest is only here for three days, so you mean to tell me they’re not going to be able to take a shower? And I’ve had that happen to me before on New Year’s Day. So, it was definitely not fun, it was definitely not fun. And that can lead to bad reviews because they don’t have hot water.

Tony:
And how did you manage that? Did you just give the guest a refund? Did you pay out of pocket to get the hot water fixed? How do you manage that when the owner’s timeline for fixing doesn’t necessarily align with yours and the guests?

Keron:
Listen, one thing about me is we are going to get it done. It’s New Year’s Eve, I probably called 20 plumbers and one guy said yes, he’ll come in the morning bright and early. So, he was able to get there and he didn’t charge me an arm and the leg either, which was fantastic. But the great part of that was the landlord, he picked up that bill because I was able to get that fixed.

Tony:
One of my other concerns with the landlord as well is that the ones that maybe want to be too involved, where maybe they want to see your listing, and they want to check in on the property. Have you had any experiences like that where maybe the landlords are maybe overstepping boundaries a little bit?

Keron:
No, no, I haven’t actually. They love the units. They use my unit as kind of the model unit for any potential other long-term tenants that are coming in like, “Oh, look how this is staged.” They’ll show them pictures.

Tony:
You’re the selling point for them, right?

Keron:
Yeah. So, another con is having landlords show up unannounced. In one of my arbitrage properties, I had a landlord just show up, walk in the property and I have guests texting like, “Ah, there’s a strange man walking around the property.” And I’m like, “Oh, no.” So, I looked at the cameras and it was the owner. So, I messaged him, I’m like, “Hey, we have guests in the house, and they saw that strange van outside.” And he’s like, “Oh, no, that was just me checking out the property. It looks fantastic.” And I’m like, “Okay. Well, just let me know next time, so I can warn guests that somebody’s going to be walking the property or just checking it out.” So, that’s another con that may happen. And some guests, they don’t care about it, some do.

Tony:
Yeah, absolutely, man. So, one of the other big things that I see, Keron, and I’m curious what your take is on this… And I guess before we even get into this, what I’ve seen is there are four motivations that really drive people to invest in the Airbnb space specifically. You’ve got cashflow, appreciation, tax benefits, and then vacation. You can subsidize the cost of your vacation spots. But cashflow, appreciation, tax benefits and vacations. When I think about arbitrage, I feel like the only box you can really, really check is that first one for cashflow. So, I guess how do you feel about those other three of the lack of appreciation, lack of tax benefits? Is that a con to you or is it not as important because you’re not as focused on those ones right now?

Keron:
It can be if you want to build on those three other pillars, but if you’re just strictly in it for cashflow and low barrier to entry, arbitrage can be the route for you because you’re only furnishing getting in between 10 and 15. And every year you’re making 30,000, 40,000, 50,000 on that rental unit. So, cashflow, if that’s what you’re into, cashflow, that can be a great strategy for you, the arbitrage route.

Tony:
And that’s why I tell a lot of people, before you even buy a property, you just need to get clarity on why are you investing in the first place? What are your investment goals? If you are someone who’s, I don’t know, maybe you’re 55 and you’ve got a few years to retirement and you’ve got zero retirement savings in place, maybe you’re not as focused on appreciation at that point because you need cashflow today to help supplement your retirement that’s five to seven years down the line. But say that you’re 23, you just graduated from college, you’re a software engineer for some tech company and you love what you do and you don’t plan to retire until you get to retirement age. You’ve got three decades to start building that pot. So, maybe you don’t need the cashflow today and you can buy and focus more so on the tax benefits and the appreciation.
So, for all of our rookies that are listening, you’ve got to really identify what your goals are and if your goal is just to get as much cashflow as quickly as possible than arbitrage might be the best route for you. But if you also want to balance the cashflow with the goal of long-term appreciation and the tax benefits, then you’ve got to weigh those against the pros there. Now, one of the big questions I have, and I’m sure a lot of folks here have as well, is how are you sourcing these properties and what does the conversation look like between you and the landlord to get them to say yes? Because I can imagine, Keron, unless they’ve done this before, there’s probably a lot of hesitation from these landlords to just hand you the keys, knowing that you’re going to have 12, 13, 14, maybe 15 different sets of guests going through their property on a weekly basis. So, how are you sourcing and what does the negotiation process look like?

Keron:
So, I’m sourcing it through my network. Network is huge. Networking, the local [inaudible 00:31:48] and local meetups is very huge. So, that’s how I’m sourcing these landlords. And one of the landlords, he’s a huge apartment building guy. He comes to me with the deals now. I approached him about one property, he actually had a little pain with one of his rental units, and then I came to him with a short-term rental arbitrage. So, I solved his headache and he solved my problem of getting a unit. So, then he’s seen what I’ve done with that unit and he loves it, and he knows that I’m going to take care of it at all costs. So, now he’s throwing, “I got five here. I got eight here.” And I’m just like, “All right, give me those three. Give me those three then. I’ll take those.”

Tony:
Give me a little bit of time, right?

Keron:
Yeah, exactly. So, that’s how I’m sourcing those.

Tony:
So just walk me through. Say I’m starting from zero, Keron, I’ve got no network, I’ve got no relationships, I don’t know landlords that are building a bunch of units. If I’m a complete rookie, what steps should I be taking to find that first unit?

Keron:
The steps that you should be taking is doing your research, doing your homework, seeing what units are out there for rent and seeing how long they’re on those sites as far as days on market, that can be a way for you to get into with those landlords. You approach them with your pitch and with your ideas, and you lay out all the pros for them as a landlord. Most might say no, but all you need is that one yes. So, when you get that one yes, now you have a reference, and that’s what I did. You have a reference now for other potential landlords and now you have this paper trail and this track of what you’ve done with your units. So, that’s how I would get started.

Tony:
Keron, I want to get into how rookies can kind of mitigate their risk as they get into the short-term rental space. Because I’ve heard stories of other investors, and we’ll get into this in a bit, where maybe they over-leveraged themselves or they moved too fast. And guys, we actually have an episode coming up next week with a guest named Nicole Rutherford and she’s going to talk about almost an Airbnb horror story, where she over leveraged herself on the Airbnb arbitrage side and ended up with almost this mountain of debt that she had to climb out of. So, Keron, when you think about trying to mitigate risk as you set up an Airbnb arbitrage business, what comes to mind for you?

Keron:
Mitigating risk? Just not moving too fast. Making sure that that unit that you’re using and that you’re setting up is going to cashflow enough for you to pay off, not just your expenses, but your debts. And then once you get a grasp on that, then you can kind of do the snowball effect and get another one. Do the same thing with that one, and then you could keep going like that. If you have a large amount of capital and you could just throw it at anything then yeah. But I would take it slow and do the little snowball effect to mitigate that risk.

Tony:
And how much do you think your systems and processes you’ve built out have played in the reduction of risk for you? Would you say it’s a big part or are there other things that are driving it maybe more so?

Keron:
Oh, it’s definitely a big part. Definitely a big part. Having those systems in place, you’re able to answer guest inquiry a lot faster and capture those guests within that short timeframe, because without having those systems in place, you might have a guest inquire on a property, and if you’re out doing whatever, it might take you three, four hours to respond to a guest. They might’ve moved on to the other property. So, having those systems in place and answering guests’ questions to capture that lead is definitely instrumental in your profits and your average nightly rates and occupancy rates.

Tony:
So, Keron, we talked about a lot, but before we move on, I just want to understand, I know when I do traditional ownership, one of the things we focus on is reserves, right? We usually want somewhere between, at the low end, three months of our mortgage payment set aside, on the high end, somewhere in that six to 12 month range. How do reserves play into your business of rental arbitrage?

Keron:
Yeah, so reserves are definitely huge when doing the rental arbitrage business because God forbid something happens and your place doesn’t book up for a month or two, then that’s going to be bad for your business. So, what I try to do is upfront I try to front one to two months of those reserves and then the cashflow from the property being rented out, I build that up to another three to six months of reserves. That way, if I don’t have any bookings for a couple of months, I know I’m going to be covered on that end. So, that’s how I handle that.

Tony:
And I think the reserves give you that peace of mind to make sure that if things do hit the fan, if there is some kind of crazy thing that happens, like COVID, you’re not in the cold with four arbitrage that you have to worry about.

Keron:
And there’s other ways as well as far as additional insurance policies that can cover rental loss.

Tony:
Tell me about that, Keron.

Keron:
Yeah, so I have additional insurance… You actually had them on a show, Proper Insurance. Yeah, so I have that on my rental properties. So, if something were to happen fire or just a natural disaster, anything that would prevent me from having bookings or cancel my bookings, I will be covered with that rental loss from that insurance policy.

Tony:
Yeah. So, it’s a great way that’s relatively low cost to kind of give you some additional peace of mind that if things do hit the fan, you can still kind of rust easy at night knowing that you got a little bit of a backup there. Now, before we go, again, we had a rookie posting in the Facebook group and I just want to hear your advice, Keron. And again, this is Nicole Rutherford. She’s actually going to be on an episode that’ll be releasing next week. So, make sure you jump in to see the whole story here. But here’s what Nicole says. She says, “Hey, rookies, I’m in desperate need of help here. I’m doing rental arbitrage for the last year and I’m making somewhere between $1,500 to $2,000 per house, but that was only for the first six to eight months or so. Since then, with the increase of supply in our market, we’re now losing money and then landlords are trying to increase the rent even more, even though they aren’t asking for market rates.”
So, this is one of those risks we talked about where the owners maybe get a little bit greedy and want to gouge the rates there. “We still have significant debt from each home because we use the profits to open even more. What should we do? Option one, my partner just wants to sell everything off and move on. We’ll still owe about 80K between everything we put into the homes. Option two, find a three to four-unit home and use an FHA loan to rent out the other units. If it’s in a decent area, we can move the furniture there to convert to an Airbnb or just use as a long-term rental. And option three is use the furniture from our four houses for a staging company and then just pay down as much debt as possible.” So, Keron, I want to hear what’s your advice to Nicole given that situation? What would you do?

Keron:
If I were in their situation, I would probably go with finding a three to four-unit home and using a FHA loan, and possibly house hacking because that’s how I got started. So, house hacking and using those other units to produce that income that can help them chip away at their debt, and it covers their living expenses on top of that. So, I think that’s the route that I would take.

Tony:
Yeah, you’re the poster boy for that, right? You just crushed it with your own version of that.

Keron:
That was a lay up, man.

Tony:
I definitely like that option as well. I think the other option too, that Nicole could potentially explore is just because… Obviously, this is going to depend on the lease and what it looks like, but if the landlord is trying to increase rents, it sounds like you might be at the end of those leases, just look at exploring, moving into a different property. Can you find a different property, a different landlord that maybe is willing to offer you more favorable terms? And it seems like she’s got homes, single family homes that are, I think she said three bed, two to three baths. Maybe instead of doing three beds, can you just take those and move into one-bedroom apartment units and now you’ve got three one bedroom apartment units that you can leverage as well. So, I think there are some other options there as well, Nicole, to make it a little bit easier for you. But we’re going to find out what Nicole actually ended up doing in next week’s episodes, so let’s make sure we get back to that.
Now, we heard this strategy of rental arbitrage, Airbnb arbitrage, Keron, allowed you to retire your wife while working as a police officer. So, it’s something I just want to drill down on a little bit before we let rookies go because I’m sure they’re all wondering the same question. What kind of cashflow are you actually generating from your arbitrage units on, call it like an annual or monthly basis, however you want to break it up?

Keron:
So, last year we finished with our six properties that we have between the arbitrage and our traditional buy and hold. We finished just around 300,000 gross. And then, net is usually about just below 50%, so around 40%. So, that was about 140,000 net, which is in a matter 18 months we started these properties. So, I can’t complain.

Tony:
Absolutely crushing it, man. Dude, absolutely crushing it, brother. So, again, you’ve just inspired every single person on this call to go out there and build their own arbitrage business. But just to recap some of the amazing things you shared with us today, Keron, we learned about how rookies can jump in with this lower barrier of entry arbitrage model. You talked about the importance of building systems and how that’s allowed you to scale, but also, letting you build this thing up with a little bit of training wheels and a little bit lower risk. And then, obviously the possibility to partner with a great landlord in your market to make it a win-win situation for both of you. So, Keron, appreciate you coming on today, brother. I’m sure folks got a tremendous amount of value from the story. I’m so glad that I was lucky enough to interview you after all… It’s been, what, almost three years now since we first met. And seeing the growth is absolutely amazing, brother.
So, if folks want to get in touch with you, guys, go to the show notes for this episode. We’ll put Keron’s information in the show notes there. If you guys want to get in touch with me, my social handles will be down there as well. But guys, that is it for today. I am Tony J. Robinson, your host for today’s Real Estate Rookie Podcast, and we’ll see you guys on the next episode.

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