Richard

Mindy:
Welcome to the BiggerPockets Money podcast show number 310, Finance Friday edition, where we interview Jill, and talk about what to do with your primary residence after you move out.

Jill:
Now, I don’t know if I just keep that going with my investments or I try to cashflow all these renovations as quick as I can and, I guess, scale back on the investment piece. So I guess, how do I balance the retirement accounts, the after tax brokerage account, 529s, all these other things we invest in with the real estate piece now?

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and with me as always is my real life actual human being never going to ask you to IM him about crypto cohost, Scott Trench.

Scott:
With me as always is my spamming me with a new intro, Mindy, every week, but seriously, the spammers on these Instagram things are nuts. Please know that me nor Mindy, nor BiggerPockets Money Instagrams, none of those accounts will actually reach out to you and then ask you for Bitcoin or any other types of money or whatever from that. Please just report the fake accounts if one of them happens to try to go after you.

Mindy:
Yup, and feel free to send me a note or post a copy of it in the Facebook group, so that we can all report them and get that mess off of our sites. Thank you because I hate them. Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly, truly believe that financial freedom is attainable for everyone no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or to make the decision between you selling and renting your home, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I am super excited to talk to Jill today. She makes a good income. She has her expenses fairly under wraps. She is buying a second home and considering turning her first home into a short-term Airbnb.

Scott:
Yeah. I think it’s a good discussion and it’s a situation that probably a lot of people are going through. She has a good problem. She has a lot of equity in her primary residence and she needs to figure out how best to deploy that, whether it’s by keeping it as a rental and generating income or redeploying it.

Mindy:
I really like that you threw that out there, Scott, and gave her something to think about, “Hey, it seems like a no brainer, but maybe you could take this equity and this money that you have tied up in this house and do something else with it. Maybe you could redeploy it in a way that would generate even more income.” I really like the way that you gave her things to think about.

Mindy:
Before we bring in Jill, let’s note that the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal tax and financial implications of any financial decision you contemplate.

Mindy:
Jill and Joe are preparing to move to a new house that they plan to live and flip while turning their old home into a short or midterm rental. Debt is not Jill’s friend. So there’s a bit of anxiety surrounding this move. Even though she realizes that taking on this low interest debt can help her family realize their long-term goals, it’s still weighing on her just a little bit. Joe is newly self-employed, so they’re still navigating the fluctuating income while he stabilizes his new business. Jill, welcome to the BiggerPockets Money podcast.

Jill:
Thank you. So excited to be here and actually talk to you guys live.

Mindy:
I’m super excited to have you. I am going to say that Jill lives in a medium cost of living area and in the Midwest. So that gives you a framework for where these finances and this information is coming from. Let’s jump into your numbers. What do you make and where does it go?

Jill:
So I make 250 W-2 income. That’s straight, I would say, biweekly income, but then I do get a fluctuating bonus. That can be anywhere from 50,000 up to 100,000 depending on what’s going on. Then my husband has a new business that he started. He started it before COVID, but we had to put it on hold with COVID. We also were living abroad. So this is, 2022, his first year fully doing this. So it’s between 1,000 per month and 5,000 a month. I think there will-

Scott:
You make 250K base salary plus.

Jill:
I make about 200, yeah, 200 base, and then plus bonus, which averages about 50K.

Scott:
Okay. Got it.

Jill:
Then my husband’s around 1,000 to 5,000, I would say, per month. I think conservatively will profit about 30,000 this year.

Scott:
Great. This is all pre-tax.

Jill:
Yup.

Scott:
Awesome. So post-tax, we can plan on 175 to 200 maybe in post-tax dollars.

Jill:
Yeah. So I guess monthly, I get about $10,000 a month, and I take everything as much as I can out of my paycheck. So I’m a very automated person. So I take my 401(k). I actually do my auto and home insurance through work because I have a group plan and it’s discounted. I do a flexible spending account for dependent care. All of that is taken out of my paycheck before I actually get the money. So monthly, I have about 10,000 to work with.

Mindy:
Okay. I want to pause here and praise you for that because that’s awesome. You never see that money. When you take it out of your paycheck and you put it someplace else, that’s money that you can’t spend. I’m saying spend in air quotes for those who are just listening and not watching on YouTube. You can watch on YouTube if you want to see all these fun faces that I make all the time we record, but this is money that you’re not spending because you’re not seeing it. So it’s not there.

Mindy:
I think that’s really, really cool when you can do that. I don’t know that I have that option to pay my insurance, but there are things that I have pulled out of my paycheck ahead of time, and there are things you can have pulled out of your paycheck. If this is an option for you, if your expenses are a problem, if your spending is your big issue that you’re trying to tackle, see what you can pull out of your paycheck before you have to spend it because that’s a check you’re not writing. I’m so old. I write checks. That’s a check you’re not writing to pay the bill, but that’s also money that’s not available for you to spend. So it never hits your bank account and maybe goes someplace else before it gets to where it needs to go. So I love that idea.

Jill:
Yeah, and there’s a huge discount if you do payroll deduction. So I actually talked to the insurance to switch it at one point and it would go up $1,000 or something. So they really like that. If it’s through a payroll deduction, they give you a huge discount. So if your company offers it, try to go for it because it’s also a group plan so they give you lots of discounts.

Mindy:
That is an awesome tip. We were just saying, we learn something every show and that is awesome. Okay, Scott. Now, we got to talk after the show, maybe HR. Anyway, okay, let’s look at-

Scott:
Well, let’s go through expenses next and say where’s all that money going. How much are you spending per month and where is it going?

Jill:
So right now, we did make an offer on another house, but I won’t talk about that yet. So our current house that we live in, we have a mortgage. With the mortgage and taxes, it’s 1690. Childcare is 1200. I give a decent amount of donations to different organizations per month. So that’s about 300. Gas and car maintenance is 150. Medical is 350. I have an HSA. So I’m a big fan of the high deductible plan. So I try to cashflow anything we have going on with doctor’s appointments or prescriptions, and then just save the HSA. Clothes, kids’ activities, personal care, pets are about 300 per month.

Jill:
I know this is bad, but groceries and eating out is about 2,000 total per month for a family of four. All the home stuff, we do have someone who cleans our house, the lawn, garbage pickup, recycling, house items is about 600 a month. Then we have a few other bills, cell phones, streaming, which is 300. I’m down to one student loan, which is 160 per month, and we’re only keeping that just in case Biden forgives loans. We will try to take advantage of that, but it’s low interest. Travel is 400 per month. Then I do have a few investments that I put 200 into a 529 for my girls, and then another about 1,000 in a brokerage, after tax brokerage account.

Scott:
Awesome. So where are your assets and liabilities? How much cash do you have and what do you invest in?

Jill:
So I have a 401(k) through work, which is 440,000. Most of it’s pre-taxed. Recently through listening to your show, I switched to Roth. So about 10% of it is Roth now. I also have a Roth IRA that’s 40,000, a rollover IRA that’s another 40,000. I just set up a SEP IRA because of my husband’s self-employment. So we only have $650 in there, but we just started it last month. I have an HSA that has 10,000 in it, 529 plans for both my girls that total about 15,000 total. After tax brokerage is 33,000. Then I have about 60,000 in cash, and that’s going to go towards a down payment on a house. Then our current house mortgage is 200,000. We have about 250 equity into it and we just refinanced our mortgage last year for a 15-year mortgage and it’s 1.875 interest, which is unbelievable to me.

Scott:
Awesome.

Jill:
Then we have two cars that are paid off.

Scott:
Great. So what is your total net worth here?

Jill:
I didn’t total it up. So math is not my strong suit.

Scott:
Okay. So we got … Let’s do some quick math. We’ve got what? 500, 520, 550-ish in retirement accounts. We’ve got 565 retirement accounts and 529 plans. We got 33K after tax, $60,000 in cash, and 250 in home equity. So what is that? A little under a million dollars in net worth.

Mindy:
I have 839.

Jill:
My used cars are apparently very valuable these days. So maybe that gets me up higher.

Scott:
Great. Awesome. Okay. So what’s the best way we can help you today? What are your goals?

Jill:
So I mean, we have had a lot of debt. So graduating, my husband and I had between the two of us probably about 90,000 in student loan debt. So we’ve been plagued with student loan debt for a very long time, and we finally got to the point that we got completely, pretty much out of debt and we can really take any bonuses I get and my husband’s income and just use that towards investments.

Jill:
We’ve been wanting to get into real estate for a very long time, but because of the debt, I was never really comfortable doing this. So my last bonus that I got, I paid off all of my student loans, most of my husbands, and we also had a construction loan on this house that we had to make our HVAC. Well, we didn’t have an HVAC so we had to put one in. We had to make our house a bit more energy efficient. So I paid that off as well.

Jill:
So I finally got to the point I’m comfortable buying a second house, and we want to convert this house into an Airbnb. We live about a mile and a half from a very, very popular college football stadium, which is in walking distance. So people during those six home games, it’s about $1,000 a night on average that people get for their houses.

Mindy:
Wow.

Jill:
So even if we just rent for the tailgating for the home games, plus graduation and some of the big events, we think we could profit about $30,000 on this house. Our house right now is not in the best. We bought it before we had kids. So we didn’t think about neighborhoods, sidewalks, busy roads. So it’s not in the greatest place for us. We want to be in a neighborhood, but it’s really cheap here. We live right outside of the very popular town. So our taxes are lower. So I’ve been really reluctant to buy another house, but I think now with my debt situation, I’m comfortable.

Jill:
So we found a great house, one that needs a lot of work, but the bones are really good. I actually got advice from one of your recent shows about it’s a house that had no pictures online, just the front of the house, and we went to look at it and it’s dated, but the bones are really good. It’s all cosmetic work that needs to be done, and nobody was looking at the house. It was horribly marketed. So we made a low ball offer on it and they took it.

Jill:
So now, we have the second house. So we think we got a really good value in it. We can renovate it, live in it, which it has a neighborhood, and I think it’s the right place for us to be, and then try to really make profit out of the Airbnb on this house, but it’s still really scary to me to go there, but I still think all the planning and all the numbers work. We just have to go for it. So I guess, yeah, I just need advice on how to get started and how to make the most out of going in this direction.

Mindy:
Jump in with both feet and don’t look back. No, that’s awful advice. The video you’re referring to is my leftovers video, where I talk about in this market nothing is sitting around except every once in a while something is sitting around and it could be a disaster or it could back up the train tracks or it could be overlooked, and those are the properties that you look at.

Mindy:
I just today closed on a property for a client that was a leftover that is going to be gorgeous in about 15 hours of elbow grease. That’s probably what you’re going to be in too, maybe a little bit more than 15 hours of elbow grease, but I love a good live and flip.

Jill:
I think a little bit more, but our inspection was yesterday. The guy couldn’t believe that everything works. Appliances that were 50 years old still work, but the roof is redone. The HVAC is brand new. All the big stuff was done. It’s just shag carpets and wallpaper.

Mindy:
Oh, my good. Okay. Oh.

Scott:
Well, let’s take a step back here. Your current home is going to become the investment property.

Jill:
Correct.

Scott:
Right? Let’s start with analyzing that one. So the mortgage is 1690 per month, which you have a great rate.

Mindy:
She can rent it out six weekends a year for $1,000 a night, approved as a short-term rental stamp.

Scott:
So that’s 12 grand for 12 nights, 1,000 times 12. Okay. So that is a big chunk of your mortgage.

Jill:
Correct.

Mindy:
There’s other opportunities. It’s not just those, but those are the big ones. So I don’t like jumping in with both feet and not really running the numbers, but with this property, if you can rent it for $1,000 a night and your mortgage is 1650 a month or 1690 a month, you’re going to rent it for two nights for the weekend easily, maybe three nights, but probably two night minimum. That is a no brainer to just look at that and be like, “Okay. There are other opportunities as well. I will, at the very least, be able to cover my mortgage on this,” but you’re going to be able to do way more than just cover your mortgage on this.

Mindy:
There are setup costs. I mean, you have to furnish the whole thing and that’s something that I think that a lot of people who are considering short-term rentals don’t necessarily think about, and that’s going to be, Scott, have you set up a short-term rental yet?

Scott:
Well, I think we start with, Jill, have you analyzed this property? What is your analysis? We probably have more than, “Hey, I can get a thousand bucks on six big weekends.” What is the income you think that the property will generate? What are the expenses? Have you run that analysis?

Jill:
So my husband did some analysis. Yeah. He got on your website. He’s run a few numbers. So he thinks that we can have monthly, if we rented it out, 1800 a month if we did between home games, all the big events at this university that’s very close to us. Then we’ve also dabbled with sabbatical homes. I don’t know if you’ve ever heard of this.

Scott:
Right. How much per month?

Jill:
1800.

Scott:
1800 per month in income, in short-term rental income.

Jill:
Yeah. This is after taking out the mortgage, having extra costs for renovations or fixing up the house. He thinks it can cash flow 1800.

Scott:
What would be the gross short-term rental income before expenses?

Jill:
I don’t know. He ran all the numbers. So I don’t have it in front of me.

Scott:
Okay. I’m going to put in 3,500 as a placeholder there. I’m going to say you’re assuming you can get $3,500 a month, and then 18 of that will pass through as cashflow per month after your mortgage expenses, after cleaning fees or maintenance repairs, all that kind of stuff probably with … I’ll assume for now that we’ve got conservative allocations there for capex, handyman expenses, those types of things in there as well. Okay.

Scott:
You have $250,000 in equity and you’ll be generating about 20,000 to 25,000 in cashflow per year with 1800 per month in cashflow. So that’s not bad. That’s a reasonable investment opportunity. Let me ask you this. How long have you lived in that property?

Jill:
We are going on 10 years now.

Scott:
Okay. Would you buy another identical property and do the exact same thing with $250,000 down?

Jill:
I don’t know. This house is a difficult house. So to get it to this point, we had to do a lot of work on it, I guess. So I don’t know. It’s on septic. It’s well water. There’s a lot of things that we had to go through first time home buyer education to get it to the point that it is today. So I probably wouldn’t go for this exact house, but something similar.

Scott:
Okay. So here’s why I’m asking this is because you have 250,000 in equity that you can sell and tap into right now tax-free. You will lose that advantage if you move out of the place after two years. So my bias, in general, sorry, three years, that’s right. I have to live there two over the last five years. Thank you, Mindy, for correcting me there. So my bias is almost always to have a strong preference towards selling a primary residence rather than keeping it and reinvesting or keeping it as a rental.

Scott:
I think your situation might be different, and this is where I’m going to have to … because you have a 1.875% mortgage, but you’re on a 15-year term. So I wonder if you replicated this exact same project with another property if you wouldn’t have approximately the same cashflow because your payment will be smaller, but you’ll have a higher interest rate, for example, with it.

Scott:
So I think there’s some puts and takes here that make this really interesting from an analysis standpoint, whether to keep an Airbnb or sell because you could just sell and then redeploy into an even more ideal Airbnb investment, for example, and you get your gain out now tax-free and get a new basis to start with the new project with.

Jill:
Our reason for keeping it is this side of town has continued to develop. So when we bought it, it was farmland. People who had been here for 70 years live off the land type neighbors who shoot squirrels in the backyard, but we have … Definitely, the area is developed. So they’ve built really fancy condos on one side of us that are going for $600,000. They’re building a very nice pub in a historical barn across the street from us. So we keep thinking this side of town is developing more and more, and we really like this town.

Jill:
There’s not a ton of properties that you can have. The tax is this low in this location that, yeah, you have the same value out of it that we have here. So we’ve always wanted to hang on to the property because we actually have a decent amount of property as well. We have about an acre. So we wanted to see how this side of town developed, and I think our equity will keep going up on the house.

Scott:
Absolutely. What I’m trying to say, though, is you have 250,000 in equity in this property. You’ve done well, and it sounds like you believe it’ll be a reasonable investment going forward. Your problem is that in three years from now, if you sell the property, you’re going to lose. Right now, you have 250,000 in equity that you can harness and sell, probably all gain, but let’s assume it’s all gain. If you sell it in three years from now, you’re going to pay tax, 25% capital gains tax on that, and that’s going to cost you $62,500, right?

Scott:
If you sell this property and then redeploy it into an identical investment property down the block, you’re going to get a new mortgage and reset, but you’re going to harness that gain and have a new basis that you’re going to take advantage of that tax break with it.

Scott:
So that’s what I’m talking about here and that’s the decision you have to make. From there, we can say, “Okay. My property is good for Airbnb.” We know that. We’re happy with that. You’ve obviously done the analysis and you’ve got good, but can you do better or about the same with a nearby property, for example, right? I think that’s your challenge that you need to go through here because your strategy might be the right one.

Scott:
It just might be, “You know what? If I actually optimize … I bought this house to optimize for my family in our situation, and it happens to be a good Airbnb, but this one, a few blocks down the road, is actually even better from an Airbnb perspective with current market values, and for the next 10 years, I’ll be better off with that, make more return, executing the same strategy but just taking advantage of my tax break.” That’s what I’m trying to get at with these questioning, with these questions.

Mindy:
So you said well water, and I don’t know how sulfury your well water is, but when you say well water, I think sulfur water. I’m wondering how much of an attraction that is going to be as an Airbnb. Is there any plan to bring city water to the property?

Jill:
Not at this moment, but we do have lots of filters on it. So you don’t notice it now, but it took us a while to figure out the right combination of filters and softeners to get it.

Scott:
I grew up on well water. Do people not like well water?

Jill:
Yeah, we drink it.

Mindy:
No, it’s disgusting.

Jill:
No.

Scott:
Oh, it’s totally normal for me.

Mindy:
If you didn’t grow up on it, and there’s different kinds of well water. No, you’re weird. There’s different kinds of well water, Scott, and some of them are like, “Oh, okay. I didn’t even know this was well water,” and some of them are like, “Is there a dead mouse in this water?” It’s disgusting. My grandma had that kind of water. I never wanted to drink water at her house because it was just so gross.

Scott:
I always look forward to having a big glass of water at home, parents’ house.

Mindy:
You probably have. Yeah, there was something dead in my grandma’s well, I think. Anyway, yeah, so if you’ve figured it out, I would just be really, really sensitive to any reviews that you’re getting about that, and maybe have a trusted friend come over and taste that water, but like Scott is saying, you didn’t say that this is … I just always assumed that it’s in the middle of town when people are talking about this. It’s got an acre of land. Who’s going to take care of that acre of land. What is going on with that acre of land? Since it is near a place that holds football games, are people going to host big parties at your Airbnb? Could you be making your neighbors really upset?

Scott:
If she got an acre, then she’s got a big plot of land and they can throw even bigger parties. She can charge more.

Mindy:
Yeah. Absolutely.

Jill:
They’re very like “It’s your land. You can do what you want” kind of person.

Mindy:
Okay. Okay. That’s good.

Jill:
They’re shooting squirrels in the backyard. So it’s no problem. Yeah, no, we’re right over the border into the township let’s say, and it changes pretty fast, but because this town is so popular, it’s spilling out this direction. So there really is no more land in the town. Everybody has to buy land out here. So that’s why we think it’s valuable, but I think a lot of those concerns you have are something to consider.

Scott:
I think you got a great thing here I would consider. I would sit down and do the exercise and let your math tell you what it needs to, but I would consider selling the property, harvesting your capital gain, and then buying one or maybe two additional Airbnbs that are perfect for your strategy, right? Maybe there are other properties nearby even closer that don’t have a yard to maintain and all this other stuff and your yield goes up even further with that if you’re able to redeploy the equity into that. Just go through the exercise. You may determine, “Let’s keep it,” with that, but that’s a big lever in your financial position right now.

Jill:
Yeah. The other thing is within the town, you’re not allowed to have Airbnbs unless they’re part of your house, unless you’re living there. So that’s another thing. So there’s a limitation on how many Airbnbs can be in this town, which is maxed out, and now, you have to be living in the house. You can rent part of your property. So it’s actually-

Scott:
So if you’re one block away from the town, you’re not subject to that law and you have-

Jill:
Correct. So I have some loopholes, but yeah, I totally get what you’re saying.

Mindy:
Another thing to think about is the cost of furnishing it. I would definitely go after the college clientele and the college decor, which should be actively available in thrift stores and garage sales in and around. I don’t know if you guys have, do you call it hippie Christmas where all the college kids throw all their stuff away at the end of school?

Jill:
Yes. Graduation weekend is one of our favorites. We get lots of new stuff.

Scott:
A long thin table. Okay. Great.

Jill:
Beer pong tables, yup. We got it covered.

Scott:
Perfect. Well, great. So let’s talk about the new property that you guys are buying and your intentions with that one. Is that just going to be your primary residence or is there longer term plans for that?

Jill:
For now, yeah. Well, I mean, it’s a little bit of a question mark. I don’t like to be locked into places very long. So I mean, we’ve gone abroad twice now. If it was up to me, I would probably never settle into one place, but I think for my family, they need stability. So I want to get to a neighborhood, but I’m not sure if I want to stay there forever.

Jill:
So our idea was to buy this house, renovate it, make it either sellable or rentable, either one. We were open to either. Live there for the two years and then either rent it or sell it and then move to the next property or abroad or wherever we want to live at that point.

Scott:
Can’t argue with the live and flip. Sounds like you’ve really done your work and it’s mostly cosmetics. You’ll be able to move through it really quickly. Mindy is an example of how profitable that can be.

Mindy:
I’m going to change your mind a little bit and say you only have to live there for one year if you are going to rent it out. You have to live there for, well, you don’t have to live there, you have to live there for two years to get all of the capital gains exclusions fully tax-free, but if you’re going to rent it out, it doesn’t have to be a full two years. It can just be one year.

Scott:
Can you move in and then immediately rent it out for six months while you travel the world, that’s still your primary residence, your mail goes there, then come back and spend the next six month? Does that technically meet the requirements of that being your primary residence during that period?

Mindy:
I would not say to do this because that sounds a whole lot like mortgage fraud. It has to be your intent to live there, and maybe you could have a roommate, but if you rent the entire house out, then you have no place to live and therefore it isn’t your primary residence.

Scott:
Yeah. Obviously, we don’t want to do anything illegal. I’m just asking the question because I know that some, I have friends and family, for example, who live abroad and they need a US residence because they need to pay taxes in the US and get their mail to the US and stuff. So one of these individuals literally rents a place nearby to be his house while he is abroad.

Mindy:
That’s not mortgage fraud because he’s renting.

Scott:
Fair enough. Yeah. I don’t know the answer to it.

Mindy:
Spare bedroom.

Scott:
Just something to explore. Yeah.

Mindy:
I could rent him a house.

Scott:
Maybe you can have your cake and eat it, too, as long as you’re traveling or vacationing for a portion of the year and not living in these other places and are there for the most of the year.

Mindy:
Yeah. Well, I think she just needs to have a place to come back to. So if she rents the entire house out, then she doesn’t have a place to come back to. Whereas if she rents one bedroom out, she has a place to come back to.

Scott:
… or if it’s prepared for short-term rental.

Mindy:
Yeah. You can short-term rent your house out. You happen to not be there so you’re making money while you’re gone. That’s different. Let’s see. Yeah. Let’s talk about this new house. You have basically cosmetic stuff to do. That’s very exciting. The big things are done. That’s super exciting because, A, it’s really expensive with inflation and, B, you can’t find anybody to work on anything. So the fact that you have all the big stuff done, I mean, anybody can install flooring. It’s not that hard.

Jill:
Yeah. So it’s mostly floors, walls. The kitchen’s dated, but actually, everything works in it. So it is usable. It’s just we probably want to get, yeah, just facelift so it looks a bit more updated, but other than that, the outside’s nice. When they did things in this house, they did it high end. The windows are all Anderson windows from seven years ago. There’s no drafts in the house, no creaks in the house. It’s pretty unbelievable, and the neighborhood’s really nice. So yeah, I actually am worried we fall in love with it and never leave, actually, which was not originally the plan.

Mindy:
Well, you have to live someplace. If you like where you live, that’s great.

Jill:
Yup, but we have an out if we want it, I suppose.

Mindy:
I think it’s interesting. I know this is a side note, but I think it’s interesting that they didn’t get any interest on this house. You said there were no pictures up on the MLS. I wonder if they went with an agent who doesn’t offer full service in exchange for a discounted price for the agent agreement and then ended up costing themselves a lot of money because nobody came to see the house. It sounds like a case of what is it jumping over dollars to save pennies.

Jill:
Yeah. I mean, we’ve given offers to other houses and it’s crazy in this area. I mean, it’s down to cash offers, no inspection, and we’ve lost multiple other houses that we just weren’t willing to wave inspections on old houses. This house, there was another offer, but it was an investor and they wanted to go with a family that’s going to actually live in the house, but we had the inspection. We didn’t wave that. Yeah. We made an offer 10% below listing, which apparently the whole realtor office was shocked and celebrated that this went through. It’s the first below offer acceptance that they’ve had in a year. So pretty proud that we got it.

Mindy:
That’s an awesome, awesome story because in this market, yeah, nobody is doing that.

Jill:
Yeah, but it definitely was, I mean, we found a new realtor, so we had a realtor showing us houses that really didn’t know anything about investments and we couldn’t really get any good information. I happen to run into someone at my daughter’s preschool who flips houses and she has seven rentals in town. Within her first three houses she showed me, we made two offers on them. So she knew exactly what we were looking for. She knew the houses that have value in them. So really, finding a good realtor I think makes all the difference.

Mindy:
Yes.

Jill:
If I can give a plug for realtors.

Mindy:
Yes, you can. You should. Finding a great one is the key to your investing success, the key to your purchasing success. You can still find deals in this market. Now, you can’t find deals in this market the day they come on the market. This is a leftover property and it sat there for a while, and the reason that it sat there is because they didn’t get a good real estate agent, and that’s not your fault. That’s their fault. They should have chosen somebody else. That’s exactly what happened with the property that we closed today is that the listing agent didn’t insist that they clean the house. It was so filthy.

Scott:
Well, I think your real estate approach is awesome. You’ve made hundreds of thousands of dollars in your primary residence. You got a great option as an Airbnb. That seems pretty well thought out. I do think you should go through the exercise of at least looking to see what it would look like to sell and redeploy into similar properties, for example, and think about that tax hit, how that would work over a five or 10-year period because you may be able to get what you’re looking for there without that, but it may be that the nuances of your house are perfect being just over the township line and enabling you to Airbnb and having a perfect thing there.

Scott:
So that may be great. It may be an exception to that where you should keep the house. Your new strategy of live and flip, can’t argue with that. It sounds like you really did a lot of research and found exactly what you’re looking for. So I think that’s awesome. Is there another part of your finances or your strategy that you’d like to talk about besides the real estate today?

Jill:
Well, I think, I mean, my strategy before the real estate was just slow and steady, I guess, investing in my retirement, maxing it out as much as I could. We did start the brokerage account because I feel like all my money was tied up in retirement that I couldn’t access until I was a certain age, but now, I don’t know if I just keep that going with my investments or I try to cashflow all these renovations as quick as I can and, I guess scale back on the investment piece. So I guess, how do I balance the retirement accounts, the after tax brokerage account, 529s, all these other things we invest in with the real estate piece now?

Scott:
Great. I think if you’re going to have a rental property, the vacancy is going to kill you from it. So I think you make sure that you can move into your property, the new one, and that your current one is able to be rented out, and that’s the first priority because you’re going to be losing 3,500 a month or whatever your gross rent is every month that that place is vacant. So you have no choice there. That has to be your, I think, your top financial priority.

Scott:
Once that’s done, I think you have, it sounds like, the luxury of going right down the stack of maxing out your 401(k), maxing out your HSA, maybe contributing to other retirement accounts. Your husband has a business so there are options to really stock away a lot of money in pre-tax retirement accounts like a self-directed IRA.

Scott:
So I think those are all options to you, but I would also observe that the bulk of your position is currently in retirement accounts, and then currently primary home equity is soon to be rental home equity. So you’re not able to really access any of that except for the 250 in your house, which is why I think there’s a big decision there for you to sit down and do that analysis.

Scott:
So I think it’s a matter of what you want. Generally speaking, we hear people in a situation similar to yours that parallels yours saying, “I want more flexibility,” in a general sense. If you want that, then you’re going to have to make trade offs by not putting quite as much into the retirement accounts as you are capable of right now, paying taxes now, and generating a liquidity with that.

Jill:
Yeah. I mean, that was my worry because I’ve been working in corporate jobs since a long time. It feels like 20 years, since I was 20, and it’s exhausting, and I work pretty crazy hours. Eventually, I would like to have the flexibility that if I don’t want to work something as intense as I am today, I can do that, whether that’s scaling back and doing part-time or consulting or something more entrepreneurial. I want to have that option. So that’s why I wanted to diversify and have this rental income as well that I can access some of the money now instead of waiting till I’m 59 and a half.

Scott:
Yeah. I think you have to look at it and say, “Okay. Let’s say five years from now, where do I want to be?” You’re going to generate probably $100,000 in investible income after your expenses per year over the next couple of years, right? Right now, huge percentages of that are going to go into your 401(k), Roth IRA, your rollover IRA, all of those different types of things. It looks like maybe, I don’t know, 40 or 50 is going to go into your after tax stuff. So that’s going to give you 250 in cash that you’ll build.

Scott:
So by that point, you’ll have $600,000, $700,000 in assets outside of your retirement accounts in real estate and investments if things compound and go reasonably well, right? I don’t think that that’s flexibility in your situation. I don’t think you’re going to feel comfortable like, “Eh, I’m going to stop working now with that,” based on you’re spending with that.

Scott:
So I think you should back into that and say, “What would flexibility look like to me in five years? Is it a million in after tax investments? Is it a million and a half? Is it whatever? What does that look like? Is my position backing me into that?” I think that will involve hard trade offs about how much you contribute to retirement accounts versus how much you put into real estate versus how much you put into after tax brokerage versus how much you put into cash because you have plenty of income, but you just can’t go quite all the way down in the stack and max out everything in your pre-tax or towns and then have so much leftover that you can still have financial freedom outside of those right now.

Mindy:
Okay. So I have a little exercise based on your 401(k) only. The rule of 72 says that, essentially, your investments will double every eight years. This is rule of thumb. It’s not guaranteed. It’s not set in stone. Past performance is not indicative of future gains. All the disclaimers abound, but in 2022, your balance is $440,000. In 2030, your balance will be roughly $880,000. In 2038, your balance will be roughly $1,760,000. In 2046, your balance will be $3,520,000, and in 2054, in what, 32 years, your balance will be $7 million roughly in your 401(k), assuming you don’t put any more into it, assuming the same returns that we’ve seen historically. That’s a lot of money. Now, you’re getting into RMD territory. That’s just if you don’t put anything else in there. Do you have a company match?

Scott:
Yes, a very good one.

Mindy:
I would continue to put in, if I was in your position, I would continue to put in to get the entire company match. If that is you have to contribute over the course of the year, I would stagger it out over the course of the year. Because you want to invest in real estate, I might pull back a little bit in the 401(k) so that I could invest in real estate as well.

Mindy:
I don’t think that you are set in stone in your 401(k). I would still, I mean, personally, I would continue to invest all. I’m still maxing out my 401(k). Did we ask how old you are? I don’t think we asked how old you are.

Scott:
I’m 40.

Mindy:
40. Okay. So I’m 50, and I’m still maxing out my 401(k) just because there are ways to get to it before you are 55 or 65. The Mad Scientist has a really great article about accessing your retirement funds early. I’ll link to that in the show notes and I’ll email it to you when we’re finished here, but there’s lots of ways to access your retirement funds, the Roth conversion ladder. The 72T is at the separate but equal payments. He’s got three or four different options, including just taking it out early and paying the penalty.

Mindy:
I just still like that original house as a Airbnb with all of the stipulations that you have. It is so close. There aren’t a lot of competition so you would have a lot of demand for it. I think that perhaps your husband’s ideas that $3,500 is the income is maybe a little bit low. Always better to run the numbers with conservative because if he’s right, great, it’s still cash flows. If he’s wrong and he’s bringing in more money, “Well, oh, shucks, I brought in more money than I thought I was going to.” Who’s going to say no to that? “Oh, no, don’t pay me because that’s too much for this month.”

Mindy:
So I think there’s a lot of great options, but it comes down to … We’ve recorded a couple of shows this week and we’ve been using a fun little P word, a fun little four-letter word called plan. So I think it takes some time to sit down and talk about your financial plan, what is it that you want. When do you want to retire? When do you and your husband want to retire? Is it in five years? How much money do you want to have in whatever time? Let’s call it five years. How much money do you want to have in five years? Then you can step it back and say, “Okay. So in five years, we want this. Then we have to step back to these are the money moves that we need to make now,” or 10 years or 20 years or whatever it is, but sitting down and having a plan will help.

Mindy:
It’s not a five-minute plan. It’s not a come up with it in five minutes sort of thing. It’s not even a one day plan. Just start having the discussion with him, “What are you thinking about? What am I thinking about? Let’s get on the same page. Let’s figure out how to work backwards from that,” and then move forward towards that goal and continue thinking about it, continue fine tuning it and honing it depending on, because sometimes the stock market’s going to be down 15% in one quarter.

Jill:
Yeah. It’s rough looking at my accounts. Real estate looks-

Mindy:
Don’t look at them.

Jill:
I try not to, but it’s been bad.

Mindy:
Yes. I hear you. I hear you. I just don’t look at them, but I hear all these people talking about, “Oh, it’s down, it’s down.” I’m like, “Well, I’m not investing for tomorrow morning, so I don’t need to look at them right now.”

Scott:
What else can we help you with today?

Jill:
No. I think it’s this whole planning piece. I think we were just overloaded in retirement accounts, at least in my opinion, and I felt like we couldn’t access them. So I feel good that we’re moving more towards the real estate piece. I guess just planning the next five years, 10 years, 15 years. I mean, we always said 15 years we would try to retire. All of our parents are in their 65, 66 and still working full-time with no real intent to retire, and we don’t really want to do that.

Jill:
We really want to, when we’re 55, be able to scale back. I mean, our kids will be in college. We have lived abroad twice. I want to continue to live abroad and this time get to enjoy it instead of working the whole time. So I mean, I think my husband wants to make sure we enjoy today and I’m like, “Just shoot and do what we need to do to prepare for 55 so we can really completely be financially free and do what we want to do.” So it’s just balancing those two things, I think, and how to do that.

Scott:
Yeah. I think Mindy’s advice is spot on. Put together a plan. Say, “Here’s where I want to be in three years. Here’s where I want to be in five years. Here’s where I want to be in 10. Here’s where I want to be in 15. Here’s a portfolio that is supportive of that, and my current path is pushing me here. What adjustments do I need to make to get to exactly where I want to be backing into that portfolio?” Let’s say it’s two and a half million bucks in 12 years to cut three years off of your 15 with that, right? “What’s what’s that portfolio look like? Probably I’m going to be mostly in retirement accounts,” if that’s the case because you’re going to be close to that 59 and a half age point. You only need to bridge it for a handful of years, less than a decade.

Scott:
So you can go heavy into retirement accounts if that’s the plan and continue doing that. As long as you’re putting 30%, 40%, 50% of that cashflow into your after tax brokerage accounts, real estate, those types of things. I think you’ll probably be able to make it and have a strong cash position. So if it was five years, we need to really shift that, though, and we need to really pull it out the retirement accounts and into stuff that you can access right now, but it’s all about what that plan looks like.

Jill:
Yeah. I can’t get my head around five years, I guess, coming from a family that don’t think vacation days or anything. They’ve never taken them. They’re going to die working. 55 to me seems very early.

Scott:
You can make a step change, function change in your finances in five years with intent and grind, especially with your income.

Jill:
Yeah. True.

Scott:
I could see a situation. How’s this for five years, right? You are going to generate $500,000 in investible liquidity from your job and income and the spread there. Your husband is just starting a business, right? Probably your idea is that business is not going to be terrible and generate very little income for the next three to five years.

Jill:
No. It’s doing pretty well.

Scott:
You’re probably starting it because you think it will do something positive over a period of time. Okay. I’m sitting here in five years. I’ve generated $500,000 in investible liquidity, bought a couple of rental properties and some after tax stocks, continue to take the match in the 401(k). Now, my net net worth is sitting from 800. It’s at 1.3 million. Plus, I get whatever I’m adding to the pile from the business, right? Things may look very different from a five-year perspective of you’re intentional about this as a goal from that point in time.

Jill:
That’s true. It seems aggressive, but I think we could probably do it. It’s just, yeah, I’ve been working so long, I don’t know what it looks like to even think about not working in five years, but-

Scott:
Well, that’s what our job is to do that. Five years, I think, is a really reasonable amount of time in a situation like yours or someone who’s willing to make big changes to get a step function change in your situation. Is it enough to go from zero to multimillionaire retiree? No, but it’s definitely enough to go from zero to maybe a few hundred thousand in net worth for somebody or from a few hundred thousand to well over a million, in your case, with substantial actual passive cashflow if you’re intentional about it and that’s your plan.

Mindy:
Intentional and plan. I like those two words, Scott. Okay. Jill, well, this was a lot of fun. I really appreciate your time today. I’m super excited for pictures of your house. Please send them to me, your live and flip, and hit me up with any questions you have about it because it can be super fun. Every once in a while, you will hit a brick wall and be like, “Oh, what am I getting myself into?” So if you need words of encouragement, reach out because I have them. It’s not always pretty, but it’s a really fun cashing those big checks when you sell it.

Jill:
Have you seen shag carpets that have rakes in the rooms that you have to rake the carpet?

Mindy:
I usually rip those out the day I close.

Jill:
It’s in good shape, but it was funny. I was like, “Why is there a rake?” and the realtor is like, “Yeah. You don’t vacuum shag. You rake it.” So it’s going to be an experience.

Mindy:
Oh, yeah. When you pull it out, have a mask on like one of those big breather masks because all the garbage that they didn’t rake, didn’t vacuum up will be there.

Jill:
Good to know.

Mindy:
Gross.

Jill:
See, learning already.

Scott:
Smells like money.

Mindy:
Yuck. Okay. Jill, we will talk to you soon.

Jill:
All right. Thank you.

Mindy:
Thank you. All right. Scott, that was Jill. That was a lot of fun. I really, really enjoyed your take on where she’s going and I just always get something out of these episodes. I had a lot of fun with her today.

Scott:
Yeah. I think it was a good discussion. I think that she’s made a lot of really smart decisions. It sounds like they’ve really come into a really good income situation. I’m excited to see how her husband’s business takes off. I’m excited to see what they decide with the primary residence that they currently have, what they’re going to do with that. I’m excited to see how they’re new live and flip goes. So I mean, they’re doing all the right things and I think they’re going to build wealth a lot faster than they think over the next three to five years.

Mindy:
I agree. I think they have a lot of things going in their favor. Number one is that they don’t have debt and they have a great income. They spend less than they earn. She has an impressive income, and then she has things being taken out of her check before she even sees it. I love that tip. That tip right at the very beginning of the show, love that. Talk to your HR department and see what you can get taken out of your paycheck and see if there’s a discount for having that done.

Scott:
Yeah. By the way, let’s call something out here. She just finished paying off a lot of debt, has put everything into retirement accounts at this point, and has the home equity. This is really an inflection point for Jill, where she has created a really good situation, and has a lot of the ability to invest in a go forward basis. I think that she’s like, “What are you talking about? Five years from now I’m going to have a really good outcome here or have a lot of optionality.” Well, I think that’s right. I think you can’t count on it, but you can say looking back at stock market returns over the last 150 years, the compound annual growth rate is close to 10%. It’s a little less than 10%, right?

Scott:
So you say, “Okay. I got 800 grand, right? I’m going to save up 100 grand a year for investible liquidity, and I’m going to make a 10% return. So that’s 180 grand in wealth building going on every year with the 100 that I’m building compounding, right? Then that’s going to go up and then I’m going to increase my wealth by another 18 grand on top of that 180, so just under 200 grand the next year, and then 220, and then 240, and so on and so forth.”

Scott:
That compounding, and again, that’s going to happen in an average long-term environment. It may not happen next year. The next five years might be terrible, but why would you build your model on something that is drastically different from the long-term averages and plan for what you think is a reasonable set of events to happen downstream? If you’re used to having a huge debt burden, the opposite effect is taking place. Interest is accruing against you and you’re pushing the ball up the hill or the rock up mountain. Then when you get on the other side and you start investing, it’s starting to roll down the mountain from that.

Scott:
I think that’s what a lot of people can maybe take away from this is, yeah, it sounds crazy, but once you’re out of debt and beginning the investment process and thinking through it really intelligently, I think you have a really good shot at compounding those gains and snowballing over a fairly, and you should bake that into your plan because what’s at stake here is prime years of your life doing what you want to do. So that’s the consequence of getting this right, right? There’s a consequence to being too aggressive and running out of money and creating a problem. There’s also a consequence to not being realistic and being way too conservative and not doing the things you want to do earlier in life when you want to do them.

Mindy:
I could not have said it better, Scott. Absolutely, 100% agree. What is the opportunity cost of not being able to do the things that you want to do because you’re busy paying off debt? It just goes back to that spend less than you earn, invest wisely, earn more. There’s a lot of things that you can do to game the system just by being intelligent and being conscious with your spending. Okay. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 310 of the BiggerPockets Money podcast, he is Scott Trench, and I am Mindy Jensen saying, “Give me a hug, lady bug.”

David:
This is the BiggerPockets Podcast, show 624. One thing that makes people feel confident and comfortable choosing you as their realtor is when you also own real estate, especially if you own several properties. Now, you can sell someone who’s a little hesitant on buying a house with house hacking, but you can sell it even better if you do it yourself. You can help investors with buying homes, but if you own rental property yourself, you’re much more likely to do so.
When I’m looking to buy in different markets, the first thing I want is a realtor who owns these assets themselves and has connections in the space that I’m going to need. What’s going on, everyone? My name is David Greene and I’m your host of the BiggerPockets Real Estate Podcast. Here today with a Seeing Greene edition, as you can tell from the green light behind my head, if you are following us on YouTube. If you are not following us on YouTube, you probably didn’t just see the hand gestures that I made when I said show 624. And I would advise you to go check it out when you have some time, because shows are more fun when you can see the person who’s talking to you.
In today’s show, we are going to get into questions from the BiggerPockets community. What that means is, you, the people listening to this podcast, the people on the website, the people who will be attending BP CON, the people who love real estate investing, just as much as I do, get to ask your specific questions about what to do in your specific scenarios, as well as overall, general questions to help you Wade through the hurdles that you’re facing, making progress, building wealth. I love doing these. I love being able to help you. And I love you guys for submitting questions. So, if you would like to be featured on the show, just go to biggerpockets.com/david and submit your question there.
In today’s show, we get into some really fun stuff. In fact, some of it I’ve never answered before. We talk about how to help your parents with retirement using real estate investing. We get into what to consider as an investor, if you’re in a different country, that’s real long-distance investing. And we talk about how to rinse and repeat without putting 20% down on every single deal. We also get into, if an ADU should be built, how the ADU should be built, and how to structure, which moves to make, in which orders to make them, for several different callers.
Today’s quick tip, check out the BiggerPockets’ On the Market Podcast. We at BiggerPockets have brought to you a new podcast where we talk about what’s going on in the market and how you can be prepared to make the best choices for your financial future, by being educated. All right, let’s bring in our first question.

Arturo:
Hi, David. My name is Arturo. I am originally from Mexico, but I have been living here in Denver, Colorado for the last seven years. My background is in architecture and I just recently made a switch to real estate development. I have no deals yet, but I’m eager to take action on this in 2022 and get the first one going. My question to you is, for my first deal, should I leverage my knowledge and experience in architecture, project management, and real estate development, and do a more complex, higher risk deal, like a subdivision or a ground up development? Or should I take a more “conservative approach” and try one of the more common paths like wholesaling or a fix-and-flip, or house hacking?
I do know that you guys often recommend just get the first deal going, get some momentum, but I also feel like I have a unique set of abilities and knowledge that I can leverage to my favor and do a more successful deal. Let me know your thoughts. Thanks.

David:
Hey there, Arturo, thank you for the question. That was very well articulated. What I hear you saying is that, “Hey, I understand that the majority of newbies are recommended to get into something that’s a little more low-risk, with less moving pieces. Something like house hacking, low down payment options, but I have a skillset other people don’t have.” You understand architecture, engineering, you’re a builder. And I think this is a really interesting question. I’m glad you asked it, because we can get into some stuff here.
What I would recommend about this, is that you can take on projects that use your skillset more than an average newbie. So, a newbie is just somebody who hasn’t done something yet. They don’t have experience, so they don’t know what they’re doing. It’s not like because you’re new, you can’t do what experienced people do. If you have the experience of what they have, you obviously can. Now with building, you do have that experience.
So, I think you can take on a project that would need a bigger rehab. If I was you, I’d be looking in more expensive areas for houses that have problems, stuff that has foundational issues, roof problems, functional obsolescence. The floor plan is terrible. Something where this house is not very demanded by the rest of your competition and they’re not looking for it. Something that will require more work. But I don’t want you to fall into the trap of thinking that because you understand building, that you can make the numbers work on a property. Those are different skillsets, they’re not the same thing.
You still need to be keeping it easy when it comes to finding something that’s going to cashflow. That’s not going to require a ton of money being dumped into the property, that’s going to make you go broke. So, my advice would be, you find a more simple asset class, a small multifamily would probably be the best way to start, or a house hack. Within that asset class, that’s simple, look for a more complicated opportunity. Something that needs more work, that other people wouldn’t be able to handle. Something where your expertise can save you a lot of money, where maybe somebody else would have to hire an engineer to fix the problem, you can do it yourself. I think that’d be the best way to combine both elements, your strength, which your weakness, which is inexperience. You’re in a really good spot. I really hope to see you do well, continue working and making money and putting that into real estate. Let me know how it turns out.
All right, our next question comes from Justin Tomlinson in Trumbull, Connecticut. “How can I dominate a market as a brand new real estate agent, who is also brand new to the area and does not have the advantage over other agents? As you said in the video with owning properties or other investments. Where is the best place to start to gain the knowledge and market mastery to dominate my market?”
All right, Justin, the first thing I would say is if you want to dominate a market, what you’re really saying is, “I want to help more people than my competition.” You want to work with a lot of buyers and sellers. So, I wouldn’t look at it like how do I go dominate this market? Because you’re not really competing with other agents. This is a common misnomer amongst real estate agents. In their head, they think that they’re competing against the other agents in their office to get the client. But the reality is, very few people ever talk to several realtors. Most people find one realtor that makes them comfortable and they roll with that person and they hope it works out.
So, you’re not competing with the other agents in your office, because you’re not lining up for interviews with the same clients that those agents are going after. There’s nobody stopping you from selling more houses, other than you. So the question isn’t, how do I dominate my market? Or how do I beat my competition? You don’t have competition. The question is, how do I make myself someone that buyers and sellers feel comfortable with? And this is something that I’ve had to learn. If I get out there and I get the word out that I’m a realtor and I make people feel comfortable with me, they’ll use me. But if I start focusing on other things like The One Brokerage or my own investment opportunities, or a new book I’m writing, and I stop talking about what I do, people don’t know who I am. They use other realtors.
The fallacy is, we expect our phone to ring and people to come to us, and that’s not how this business works. You got to get out there and you got to go to them. One thing that makes people feel confident and comfortable choosing you as their realtor is when you also own real estate, especially if you own several properties. Now, you can sell someone who’s a little hesitant on buying a house with house hacking, but you can sell it even better, if you do it yourself. You can help investors with buying homes, but if you own rental property yourself, you’re much more likely to do so.
When I’m looking to buy in different markets, the first thing I want is a realtor who owns these assets themselves and has connections in the space that I’m going to need. If I’m looking for short-term rentals in Arizona with the realtor and they don’t own any, who’s going to answer my questions? It’s tough. Now, if I’m working with an agent that owns some of these asset classes themselves, or has helped so many other investors with that asset class, that they already have answers to the questions I may have, that makes me feel comfortable.
So, start by thinking about with a client, what do they want to see? A lot of realtors will say, “What car should I drive? How should I dress?” The question is, well, what’s going to make your clients feel comfortable? If you’re dressed super nice and a really expensive car, but you’re selling houses to blue collar people, that might make them feel uncomfortable. And likewise, if you’re working with high-level executives in Manhattan, but you’re rolling around in a Toyota Corolla and jeans and flip-flops, looking like Brandon Turner, that might make them feel uncomfortable.
So, the question that every real attorney needs to ask themselves is, “How do I make myself come across what a client is looking for in a real estate agent?” I would definitely get my newest book at BiggerPockets. And I had no idea that this question was going to be asked, so this wasn’t intentionally meant to plug it. You can find it at biggerpockets.com/skill. SKILL is a book that is the sequel to SOLD, that teaches people how to become a top producing real estate agent. And one of the first chapters in that book is all about top producer characteristics. They are the qualities that every single top producing agent has. And if you find those and you emulate those, you will appear to the public as a top producer and they’ll be much more likely to pick you as their realtor. Once you’ve got that down, it just becomes a game of evangelism. Get out there and tell every single person what you do and that you want to help them.

Roy:
Hi, David. I’m Roy Gotasdinar from Tel Aviv, Israel. First, just wanted to give you a fun fact. So, there’s a huge community of real estate investors in Israel, and we all follow BiggerPockets, the podcasts, the forums. And the names David Greene and Brandon Turner are household names in Israel. So, I thought you guys might like to know that, that you’re famous halfway around the globe.
Now a bit about me, I started investing a bit over two years ago in two markets. So, in Ohio and in North Carolina. Right now, I own eight rental units, single-family properties, doing BRRRR. Got another 200 contracts, so hopefully by the time this goes live, the number goes up to 10. Now, my question has two parts. First one is, as a foreign investor, I’m limited in the financing I have access to. So, I’m capped at 65% LTV with interest rates slightly higher than a US borrower. So question is, how would you recommend scaling and growing my portfolio quick, if you know that I’m limited in the financing I can get? Meaning it’s not 75 or 80, but 60 to 65.
Second question is, as I’m growing my portfolio, I realize that I’m getting more debt and I’m more exposed to the risk of not being able to handle my payments. So, I was wondering if you have any rule of thumb or benchmark regarding how much money you should have in reserve, so that if one, two, or three of your tenants don’t pay their rent on time, you’re not at risk of defaulting on your payments? So, thanks again. Really appreciate everything you’re doing. And I would be willing to come and be a guest at the live show. I would love to. Thank you.

David:
All right, Roy. Well, thank you so much. I had no idea that I was known in Israel or that BiggerPockets had a following in Tel Aviv. That is very cool. So, thank you for letting us know. You brought up some really good points that I think applied to a lot of different people. The first was, how do I keep buying properties? Now, I can tell from the questions you’re asking, Roy, that you got the bug. You’re falling in love with real estate. You’re thinking really big plans. You’re like, “I want to own every single house in the world.” And I remember being in that exact same place myself, where, when the man who owns the Keller Williams that I came to work at, sat down with me and we went over what drives me. He’s like, “Oh, you just want to buy everything in the country.” I was like, “Yeah, I just want to own all of it.” That has since changed, but I recognize those same drives in you.
When it comes for a foreign investor buying properties, you gave some really good information and you hit the nail on the head. The biggest hindrance is that there’s higher down payment requirements, often 35%. Now, most of those loans are done on a debt service basis. So, what that means is they’re going to look at what the property makes for income and qualify you based on that, but your rate’s going to be higher. Today’s rates are probably in the 8% to 8.5% range. And you can’t buy a primary residence, you’re only able to buy rental property.
You should also note that the monies that are going to be used for the transactions have to be kept either in an American bank or a bank that’s approved by lenders as American approved bank overseas. But your biggest hurdle’s going to be how much money you have to put down on the house compared to the average investor. If your competition can put down 20%, you got to put down 35. You’re going to scale slower.
So, here’s a few things that you can do to make sure you always have capital. One, I have a different approach. I know this is a real estate investing podcast, but I will still say, for the majority of investors, I am a fan of them continuing to work and actually focus on how to make more money, how to grow a business, how to work better within the business, how to get into a sales position or a commission-based system, do something to put more pressure on yourself, to earn more money, to invest in real estate. Don’t always look to real estate to replace the way that you’re making your money.
Number two, can you flip a couple properties and use that money to fund the down payment of other properties? Maybe not everything has to be a rental. The reality is most of us that are doing business like you, Roy, or we’re scaling fast, some of them are going to be great and some of them aren’t going to be so great. And it’s okay that not every deal is a winner, but if you do well and you hit value add opportunities and you’re buying in the right areas, you’re going to gain equity. And it’s okay to sell the ones that aren’t performing well, but have equity, and use that money to fund future deals.
So, maybe you need to work out a system where for every two rentals you buy, you flip a house. Or maybe every three rentals you buy, you flip one property, or you do something else to make sure income is coming in, so you can keep buying. The last question you asked is another problem that we have when we get crazy and we get the bug and we look to buy every property we can, the question starts to arise, “What am I going to do if I can’t make this payment?” Now, this is especially tricky in the market we’re in right now, because none of us know if it’s going to continue to run up, or if it’s going to stall, or if it’s going to go down. And if it does go down, how long before it goes back up.
There’s a lot of uncertainty in the market that we’re living in. So again, my advice to you is going to be, keep more money in the bank. Now, many people will say, “Put a bigger down payment on the house to decrease your risk.” I just don’t think that’s sound advice. If you put down 50% instead of 35%, it’s not going to affect your payment that much. If you don’t have a tenant in there, the difference in your payment between 35 and 50%, isn’t going to matter if you’re getting no rent. And real estate tends to work where either you’re getting your rent or you’re getting no rent. It’s not like tenants are saying, “Hey, I’m going to pay you 65% of what I owe you.” To where you can try to match that up with what your down payment is going to be.
You’re better off, in my opinion, having that money in the bank, in reserves that you can use it to make a mortgage, to fix up a house, to pay for an eviction. All the things that you need to run your business require liquid capital. So, I’d rather that you have a little bit higher of a loan balance, but more money in reserves to make the payments on it than you throw that money into the house as equity. And when the market crashes, there’s nothing you can do to stop that equity from leaving.
If the market crashes while you have money in the bank, you can either buy more property or you can weather the storm. So, my advice to you, to sum that up, would be to keep working and keep setting money aside. And only scale in proportion to what you can handle, if we do have a correction. Thank you very much for the question, Roy. I love hearing about the influence that we are having at BiggerPockets in Israel. And I hope we hear from you again.
All right. We’ve had some great questions so far and I want to thank everybody for submitting them. I also want to ask you to make sure that you like, comment, and subscribe on the BiggerPockets YouTube channel. Let us know, what do you like about these shows? What questions do you wish that we would ask? Do you think I should have gone into it longer and given a more in-depth example? Or do you think that I hit it just right? What do you think about the level of analogies that I’m giving on a show? Do you want to hear more of them or less? Let us know in the comments, what you like about our show.
In this segment of the Seeing Greene Podcast, we get into comments that other listeners have left in past shows, and sometimes they’re fun, sometimes they make you think, and sometimes they make me cry. The first comes from Dan Mercia, “Love the show. It has opened my eyes to a whole new mindset for my future and goals. My question is one that I haven’t heard yet. Everyone talks about having five, 10, 15 properties. How many mortgages can one have and how does one own more than two?”
Well, Dan, first off, this would be great to go to biggerpockets.com/david and submit as a question there for me to answer in full, but I’ll give you the short answer is, there is no limit to how many mortgages you can have. There is no law on the books in our country that says you can only have so many mortgage, at least not that I’m aware of. There are limits to how many Fannie Mae or Freddie Mac mortgages that you can get, because those are insured by the Federal Government and they tend to limit it to 10. Now after four, it becomes much harder to get the loans, but after 10 you can’t get anymore.
So, once you get 10 Fannie Mae or Freddie Mac loans, that’s where you have to switch and start looking at credit unions, portfolio loans, debt service loans. What we call non-qualified mortgages. Now, that doesn’t have to be bad. My company, The One Brokerage, does non-QM loans all the time, but they’re still 30-year fixed rate, safe loans. It just means that they’re not conventional mortgages. So, don’t despair, you can keep getting mortgages forever, as long as you can get qualified for them, but they won’t have the same terms as the Fannie Mae, Freddie Mac loans we all love.
The next comes from Five Deadly Venoms, that’s the screen name. “Hey, David. Thanks for making time to share all your knowledge. I’m definitely going to have to replay the return on equity versus return on investment part a few times.” Yeah, I don’t blame you for that. That is a complicated topic, but it’s still worth knowing. “I’d love it, if you could expand on that with an example, clearly it would be important to know when to sell. If it’s in a book, blog, or other video, please share and I’ll learn from whatever resource you have. Thanks again. Love your videos.”
All right. Thank you, Five Deadly Venoms. In long-distance investing, I do give examples of what it’s like to sell in one market and then go buy in another, taking the return on equity that may be low in a property you have in one market versus a higher return on investment you can get in another. I’ll give you an example of myself. I recently sold 25 properties in Northern Florida that had a lot of equity, but weren’t cash-flowing as good as I wanted. I’m taking that money and I’m putting it into more properties that I’m hoping will cashflow more.
If I looked at the equity that I had in my Florida portfolio, the return, meaning the cashflow I was making, was very small compared to the equity that I had. As I go reinvest that money, I’m thinking I can get a higher return on investment, ROI, on the new properties I’m buying, as well as taking on more debt, which to many people is bad, but for someone like me, that believes inflation is going to continue to occur, is good. And I’m also going to buy in markets that I think are going to grow faster than the market that I left.
So, if I do this right, these new set of properties I buy will continue to improve in value while giving me more cashflow than I was getting. And at a certain point, their equity will be greater than the return that they’re giving me in cashflow. I will then sell those properties and do the same thing again, years into the future.
Our next comment comes from Alexis King. “Hi, David. I enjoy the longer answers from you. You have so much to share and I like the way you explain things. I bought four properties last year and I’m looking to expand this year. Love the T-shirt since we are in a be comfy at work world, now. Also, I already booked my ticket, flight, and room for BP CON.” Well, Alexis, you sound like a BiggerPockets diehard. And I am going to be excited to see it at BP CON. Anybody else, if you want to check out BP CON, it’s in San Diego this year. You could go to biggerpockets.com/events and get your ticket there. In my experience, they do sell out. So, if you’re thinking about it, you should go grab it now, while you can, and maybe you’ll run into Alexis.
Alexis, thank you for letting me know. I’ve been sticking with the T-shirt vibe. It sounds like more people are liking that look than the more fancy, buttoned-up look. And I appreciate that. Also, thank you for letting me know you like the longer answers. If anyone disagrees with Alexis, let us know in the comments that you want a more concise answer or a shorter show.
Our last comment comes from Angelo. “Hey, David, great answers. Can you please take a second to review the question somehow, when you fire off answers, you miss things. Green Bay, Wisconsin, was the market the duplex was in. The tech industry is the industry the high paying W2 is in. Thanks.” Angelo, you are likely a high C on the DISC profile and you’re looking at the details. Yes, it is probably entirely possible that I said the wrong name of a city when it was Green Bay, and I might have said something else. I try very hard to articulate where I got my thought process from and why I’m giving the answer. So, that if I get a detail wrong, like I say, triplex instead of duplex, or Green Bay instead of Tampa Bay, people can still understand the logic and the principles behind the advice that I’m giving. And I also do try to review the questions where I restate what the person asked. I can definitely keep doing that and try to do better. Thank you for that feedback.
All right. Are these questions resonating with you? Do you like this feedback? Are you liking these Seeing Greene episodes? Let us know when the comments on YouTube, so we know what type of information we should give you. And I want to hear from you, please go to biggerpockets.com/david and submit more questions for me to answer on these shows.

Andrew:
What’s up, David Greene and the David Greene team. My name is Andrew Terry. First of all, I want to say thank you for BiggerPockets, David Greene. Rob, very good addition. I’m really loving what you guys are putting together. The new content is excellent. I have been listening to BiggerPockets since the beginning of the pandemic. So, quick about me, my wife and I have a travel company that we ran for about 10 years, which led us to buy this duplex, which I’m standing in front of, which we house hacked this side right here. We rent out that side right there.
Bought it in 2017, we do trips to Cuba, or were doing trips to Cuba. Pandemic happened, lost the travel company completely. And I was like, “Shoot, what do I do?” So, I started listening to BiggerPockets, watching Robuilt also on YouTube, getting all this different information and inspiration and all this kind of stuff. So, thank you guys very much, you helped me through a very difficult time. My wife was pregnant during the pandemic. We have a year-and-a-half year old baby now, who’s lovely, but dadda didn’t have a job, mamma didn’t have a job. That stuff was rough, dude.
So, I pivoted, I got myself real estate license. Real estate was the only thing that was working while travel was not working, and continues to be really slow. So, I got a real estate license, which is great. I’m here. So, I’m going to give you my breakdown. Ready? This is the question. We bought a duplex in 2017. We house hacked this side. Behind that building right there, there’s a free standing garage. We have a permit to make an ADU from the City of Los Angeles. They approved us and all that kind of stuff. It was a long and kind of expensive process, when I thought it was going to be cheap.
So, we’re able to do this ADU. This is the issue, we have equity in the house that we cannot unlock, so we cannot get to a HELOC. I don’t want to do a cash out refi, I’m going to go in the shade while I do this, because we just did a regular refinance. So, I don’t really want to do a cash out refi. We have a bunch of equity in the house. They will not allow us to do a HELOC because our travel company did so poorly in 2020 that our taxes reflect that.
The other part of it is, so we want to build the ADU to then rent it. We would like to rent our side that we’re now currently living in, that we’re house hacking. Rent the ADU side. So, turn this duplex into a triplex. Move to a single-family home here in LA, where we live, in Highland Park. So, A, there’s that, the ADU question. Do I get a HELOC? Do I just get a traditional loan to build it? We’ve had a couple of people that have said about 40 to $60,000 because it’s just a conversion, not a full build.
Part two of the question. So, an SBA loan for our small business, the travel company, is coming through to the tune of about $250,000, which is amazing. We don’t have to pay the loan back for three to four years. The interest rate on it is super, super low. It’s pandemic rate low. So, it’s around 2.5% on it. What do I do? I can’t really HELOC the house, or can I? Do I wait for this SBA money to do potentially that? Do we buy a single-family home here in Los Angeles?
Or, I’ve been looking into Tucson, Arizona. Do I take that money, invest in Tucson, Arizona, use the cashflow to help us rent something here and rent this out as a triplex? I know it’s a big old question. But, dude, you guys are the best, thank you very much. I was listening to the podcast yesterday and I heard that you’re taking questions. So, let’s see if you guys can help me with my query. Thank you very much. Have a good day. I appreciate what you guys do. Bye.

David:
Boy, Andrew, you have a lot going on in that mind of yours, between those two ears. And I love it, man. These are all really good questions. When I’m listening to you talk, I see a vision in my head of, your plan is not assembled. You’re still in the brainstorm phase. You’re going through all of these possibilities. And while I’m glad you submitted this question and I want you to keep doing so, I also just want to clarify, I can’t give you quick, concise, direct answers when the plan is still being formed.
So, what I can do is maybe try to give you some advice on how to form that plan and what some options could be. And then later, if you get a little bit closer and you submit the same question again, with some more detail and some more structure, then I can give you the specifics of what you’re looking to do.
So, you mentioned that you’re locked on a HELOC, which pardon the pun there, you’re not able to get one, but I don’t think you said why. So, the first question I would ask is, what’s stopping you from getting the HELOC? The next thing I would say is, if you can’t get a HELOC, can you do a cash out refinance? There’s different ways to get at capital.
Now, something you mentioned about the ADU only being 40 to 60,000. I really like that. Especially if you’re in Highland Park, Los Angeles. I have a real estate team there, we can help you get your next home, and we can also help with this ADU that you’re trying to build. 40 to $60,000 is a really, really good return on your money. And you mention this because you’re not building an ADU from the ground up, you’re just doing an extension. And that’s worth noting for all the listeners, if there’s ever an opportunity where you can extend onto a building you already have, not create an entirely new structure. It is much more cost efficient and therefore gives you a much higher ROI on the money that you’re putting in.
So, I think this ADU needs to happen. You got to find some way to do it. If you don’t have the cash in the bank, a good option would be a cash out refinance on your house. If you like your interest rate and you don’t want the rate to go up, because that’s likely why you didn’t propose that in the first place, a HELOC would be a really good idea.
Now, you mentioned the SBA loan, and I’m not an expert in SBA loans and I’m not giving legal advice, so I need to clarify that, but I wonder if you’re allowed to use that money for the ADU? Is the SBA loan related to your travel business or is it related to your rental property business? Because if you’re moving out of this house, at some point that may qualify as a rental property, that is a business, that might be something you could use the SBA loan for. I would definitely check with the person who’s helping broker this loan for you, to find out if that’s the case.
Now, if you can’t use the SBA money for that, but you’re saying that you can use it to go buy something in Arizona, I would wonder is it because it’s your primary residence, it means you can’t use that money? If you moved out, bought the single-family that you wanted to move into, and then used the SBA money to put in the ADU, because it’s a rental, that could be an option for you.
It sounds like you got money coming in from all kinds of different places. So, what we have to figure out is, how are you legally allowed to use the money that you’ve already got? Another thing I would say is, you don’t have to look at it like, “Can I take this money and buy a place in Arizona and use the cashflow to help supplement my mortgage on my home?” It gets tricky when you start looking at, I use this house to pay for that one, and I sold this one to buy this one. At a certain point, you just have to understand, I have debt. I have income. I’m trying to decrease the debt or the money I owe, and I’m trying to increase the income I make. And they’re not always tied to a bunch of other properties. I think people can make this more confusing than it needs to be, when they start looking at linking the chains together.
Now for years, Brandon Turner and I, would describe real estate this way, because it makes sense for a brand new investor who doesn’t have anything to connect the dots. “Oh, if I buy this house, it can pay for that. If I get that, I can go get this.” And it would get them moving in a direction. But once you get a couple properties, you have to let go of that way of looking at things.
When you said investing in another state, because Los Angeles is insane right now, I want to push back a little bit there too. You mentioned investing in Arizona. If you go to Arizona, they’re all saying, “It’s insane right now.” If you go to any of the states that you would think, “Oh, I’ll go there, because California’s too hot.” Prices, proportionally, could be even hotter in some of these out-of-state markets than what you’re getting in Los Angeles. They just seem cheaper to us Californians, because we’re used to prices that are so high.
So, don’t assume that you’re going to go to another market, like when I first wrote Long-Distance Investing, and get a much better return. When I wrote that book, it was a competitive advantage I had, to be able to buy in other markets where other investors weren’t. Based on that book, this podcast, and the popularity of real estate investing in general, the days of that being a competitive advantage are gone. Everybody now is looking to do the exact same thing you are and you’re going to be jumping into a market that’s just as hot or hotter than the one you’re in.
So, I like investing in the market that you’re in, because you can use small down payment loans to give yourself the advantage. If you can go buy another place to house hack, put 5% down and use some of that money from the $250,000 SBA loan, you’re good. If you can use the SBA loan to fund other parts of your life or business and therefore, free up cashflow from your personal self to put into real estate, you’re good.
Sometimes the money has requirements on how it can be used, but if it doesn’t, I definitely wouldn’t worry about where it’s coming from. It’s just money. Now, if the SBA loan comes with an interest rate, you need to be very careful that whatever you go use that money for, will make you more money than what it is costing to borrow the money in the first place.
Generally speaking, I love your energy. I love where your thoughts are. I love what you’re thinking about. Spend a little bit more time, getting some clarity on what you’re willing to do. If you want to turn your current property into a house hack and then move into a new property, that would be the first plan we should come up with, and then we should start talking about if you want to invest out of state. But if you get clarity on the big things, the small things tend to fall into place. And I’d love to hear from you again.
Also, Andrew, super grateful that you’re willing to help plan a trip for my company to go to Cabo. I went there last year and absolutely loved it. I tried to record a podcast with BiggerPockets, and the internet was really bad. It was notorious, it was with Scott and Mindy. And I remember whales spouting in the background behind me, but you couldn’t even see it, because the internet was going in and out. I loved that trip other than the one internet thing. So, I’d love to take you up on that. If you’d like to send me a DM on Facebook Messenger or on Instagram, I’ll do my best to find it. And I’d love your help. Thank you very much. And we’ll hear from you soon.
All right. Our next question comes from Nick E. in Indianapolis. “What are the best ways to help my parents create cashflow for retirement? They’ll be renting in three years and are looking for new ways to put their savings and equity to use. They’ve invested passively in other people’s deals, but are looking to be a little more active on the next round. They’ve got around $50,000 from their HELOC to invest. I was thinking of us going in together on a short-term rental with us both putting 50% and taking 50% of the profit. But I know that financing and operations can be more difficult with partners, especially family. They won’t really do anything themselves, so it would really be me bringing them along. So, I’m looking for something that would be advantageous for us both.”
All right. Well, first off, Nick, kudos to you for wanting to take care of your folks. I like where your heart’s at. I also like that you’re noticing that a partnership can be tricky, and so, in wisdom, you’re reaching out for advice. Let’s start there. The first thing I would say is, though your heart’s in the right place to want to help your parents, your head is not in a point where it really can. It sounds like you’re learning real estate investing at the same time that you’re trying to help them prepare for retirement. And all they have is $50,000 to help them do this. And it’s not even 50,000, it’s 50,000 attached to debt, because it’s coming through a HELOC.
Your parents are not in a point where they can actually make significant steps towards retirement, because they need to improve their financial education as well. Now, if you’re looking to help them, they may not be into real estate like you are, and you might find yourself doing all the work and all the risk. And if it goes bad, they’re going to blame you. So, here’s my advice, before you help someone next to you, you got to help yourself. Just like the flight attendants tell you on the plane, “Before you put the oxygen mask on your kid’s mouth, you need to put it on yourself.”
My advice is that you should buy a short-term rental yourself and manage it and work out a lot of the kinks. You should house hack something for yourself and manage it and work out a lot of the kinks. You need to go make some of the mistakes that every single newbie makes, just when you’re learning to ride a bike, you’re going to fall over a couple times and you’re going to scrape your elbow and scrape your knee, before you get your parents’ capital involved in this deal. They’re probably only going to give you one shot. And if you blow it, they’re going to resent you and it’s also going to hurt their opportunity to retire.
So, before you say, “Hey, let’s all jump in and do this together.” When they’re also inexperienced. My advice is you go do some of this yourself. Now, maybe they co-sign for you on a house hack, if you weren’t able to buy, maybe you let them buy into that opportunity, so they get some of the equity by giving you some of the money for the down payment. But as a newer investor, I’d want to see you do some low-risk, but high work opportunities. I mean, renting out the rooms on a big house that you house hack, or like you mentioned, a short-term rental in a market that does get a lot of people vacationing there, where you’re having to run the operation, but you’re learning a lot. Once you’ve got some experience and a proven track record, then you can talk about trying to help out your parents or using their money in the deal. Hope that helps.
Next question’s from Patrick Manari in Northeast Ohio. “David, I’ve been preparing to get into real estate investing for the last two years and I’m finally ready to get off the bench and into the game. I’m beginning my career with wholesaling, so that I can put together reserves, capital to help me with my long-term goal of buy and hold rentals. My question pertains to direct mail marketing. I have an understanding of the process and I’m prepared to do very targeted marketing, while tracking it to make adjustments as needed. My problem is, how do I find good targeted lists of motivated sellers? For example, bankruptcies, divorce, pre-foreclosures, et cetera. I’d prefer to be able to compile these lists as frugally as possible, as my startup marketing budget is pretty limited.
It’s worth noting, I do have my overhead factored into my wholesale cost and a big part of that is boosting the marketing budget as deals come through. I predicted numbers conservatively and look to come out of each wholesale deal with a 23% profit margin, assuming a very low assignment fee. I love the BP community and really enjoy the overhaul to the podcast format. Thank you very much. Patrick.”
Okay. Full disclosure, I’ve never put together a list. I’ve never marketed that way. I’ve never done direct mail. So, I’m not the best person to answer this question. If I was in your shoes, the first thing I would do is I would Google direct mail companies and I would get a baseline understanding of what they charge and what these lists are made of. The next thing I would do is go into the forums at BiggerPockets and ask this very same question, because many of the people that have experience with direct mail and putting lists together, are doing their stuff through BP and talking about it there.
The last thing that I would do is I would look for a company that offers you a form of a CRS and a list, all in one place. So, I know there are companies that help people do what you’re trying to do. They find the list, they give you access to the list and then they even help you with sending out the cards. If you can find a one-stop shop like that, you’re more likely to have success moving forward, because you won’t have to wonder about, what’s the thing that’s going to pop up that I didn’t see coming?
Now, all that being said, if you’re working on a small budget and you’re trying to make a business out of this, my advice is, don’t just start mailing lists. Everyone else is doing the same thing. They’re getting tons of these things already. This is not a new strategy. The people who are going into foreclosure, who have received notice of default, is getting letter after letter, after letter, from other people that are doing the same thing.
What people aren’t doing is the word of mouth campaign. If you can get ahold of people directly, who are in these situations and make a relationship with them, you’re not just one letter that’s been sent, trying to get a phone call back. You’re a human being that they remember, that made an impact on them, where they are more likely to work with you. So, my advice would be you take the relationship angle. You start telling people everywhere you go, you’re looking to buy houses that you can close in cash, that you can do a quick close, that you want to buy ugly homes. You get the word out there that that’s the case. You start talking to real estate agents who may come across deals that they don’t want to list. And if they can get a commission just by bringing it right to you, they’ll do so.
But look at the personal road before the direct mail road, if budgeting is a problem. The thing I don’t like about the direct mail road for a brand new person who’s trying to build a wholesaling business, is you’re competing with the big dogs that have huge budgets and can spend a lot more money than you can, to get the same result. I don’t want to see you put yourself at a position of disadvantage as a new person. So, work the relationship angle, where you do have the advantage.
Last piece of advice to you, since I know that I’m not the best person to answer a direct mail question, although I’m very grateful that you did send it in, so we can make it part of the Seeing Greene podcast. Check out Anson Young, he wrote the book for bigger pockets, Finding and Funding Great Deals. And he talks about finding off-market opportunities. He does a lot of business in the Denver, Colorado area, which is the mecca for BiggerPockets, where it all got started.
Check out episode 480 of this podcast, where we interviewed Dan Brault, who is a successful wholesaler, who is doing a lot of exactly what you’re talking about. Isn’t it awesome that BiggerPockets has episodes about almost every single question that gets asked and you have a resource you can go right to, that will give you specific help on what you’re dealing with?
Side note, we are trying to do more of that at BiggerPockets, where we are bringing in specialists to talk about specific topics of real estate. I’m talking about a multi-family specialist, a short-term rental specialist, an organization specialist, title specialist, entity creation specialist, and wholesaling specialists. If you like that, let me know in the comments that you prefer that style, or if you like the tried and true method of, I just want to hear a story from somebody. Let me know that as well.

Paula:
Hi, David. First, I’d like to start off by saying thank you so much for hosting this wonderful podcast. I love it so much. I religiously listen to BiggerPockets and it’s pretty much the only podcast that I can bring myself to listen to. So, thank you so much for all your hard work and all of your team’s hard work. It’s so, so appreciated.
But yeah, my situation is that last year I bought my first rental property here in New York City, and it was a huge accomplishment for me because I saved up pretty much my entire life, little by little, till I finally had $50,000. And then, I took all the $50,000 and put it towards a down payment because at the time, I didn’t have a mentor or anyone to really helped me with strategizing this investment or future investments. So, in my head, I thought, “All right, well, the more I put down towards my down payment, the less my mortgage payments will be, and the less debt I’ll have. Sounds great.”
But now I come to realize that maybe it would’ve been beneficial for me to take out an FHA loan or something like that, where I could put less money down, still get a pretty good interest rate and potentially buy a second investment property a lot quicker. So, the predicament I’m in is that now I really want to buy a second property down the line, sooner rather than later, but I’ve pretty much left myself with $0 in the bank account.
So, my question to you is whether you think I should continue working my W2 job and save up little by little, which may take a while. It took me a really long time, the first time around, but it’s doable. And that way I can save up for a 20% down payment on a second investment. Or, if you know of any alternatives for a non-first-time home buyer in terms of getting another mortgage with a lower down payment? Whether that’s an LLC, I’ve heard a little bit about that. I’m not too well-versed, but that is why I’m bringing the question to you. Hoping you have any advice for me. Thank you.

David:
Hey, thank you for that, Paula. Good news is, I do have several pieces of very practical advice I can give you and I think they’ll help a lot. Let’s see if I can remember everything you said here. The first thing I want to address is you mentioned first-time home buyer program or deal. This is a bit of a misnomer in our industry. There are very few actual loan programs for first-time home buyers. That was a big thing, and that phrase first-time home buyer program came around when we had the housing crash, where lenders were trying to come up with ways to help people who had never bought a house before and the government was subsidizing some of those loans.
It’s not called a first-time home buyer program. It’s a primary residence loan that you’re referring to. When you get a primary residence loan, meaning you’re going to live in the house, you get the low down payment options that are much less than 20%. You can get 3.5% down on a FHA loan, five to 10% down or anywhere in between, on a conventional program. And there’s other programs, where if you’re going to live in the house, you can get less of a down payment. That’s what you need to look for.
Now, you can contact us or another mortgage broker and say, “Hey, I’d like to know about primary residence loans.” And they’ll tell you about the low down payment programs that they offer. But the good news is no, you don’t have to save up 20%. You could get in for much less than that. Now, small multi-family tends to have higher down payments, even in the primary residence world, than single-family homes. So, you want to talk to a mortgage broker about your options, and then maybe give us another video and say, “Hey, how can I decide if I should buy a triplex or if I should buy a big house that has a lot of rooms?” Maybe we run the numbers together and see which one works better.
Another thing I want to address is you made the same mistake I made a bunch of times when I was new, and most newbies make, is they assume that they are more safe if they put a big down payment on a property. I did this so many times thinking, “I’m safer if I put a lot of money down.” It’s just not true. What it does is, it makes you more scared because you have less money in the bank in case your mortgage doesn’t get paid or in case something breaks. And when a next opportunity comes, you have less money to put into buying that deal, so you buy less real estate and ultimately, you become a worse investor because you don’t get as much experience.
So, you don’t have to put down the maximum amount you possibly can on a house. In many cases, you’re better to put down less. And if there’s money left over, improve the property, make the property worth more, keep it in reserves. Do something with it, putting it into another property, use it to build an ADU on the property, make the property worth more, rather than just putting a lot of money down on the loan. It sounds like you’ve already realized that though, so good for you.
Another thing I want to highly encourage you, you said it, you scrimped and you saved to get to the $50,000 at your job. And you’re saying, “Should I just go through that again?” Well, the answer is yes, but let’s do it with a twist. My assumption is that you now have more confidence because you’ve gone through this process of buying a home. You are now a homeowner and you should be very proud of yourself, especially considering how hard and how long it takes to save $50,000 in today’s economy.
You also have skills that you didn’t have before, which is probably why you should have more confidence. Use that new confidence and these new skills to go to your boss and say, you’d like a raise or you’d like a promotion, you’d like a new opportunity. If there is no opportunity there for you, start looking at different jobs that you could make more money. Take the new skills you have and find a way to make more money, so you can save faster.
Now, do that in combination with saving up money, to get your next home with the lower down payment. Move out of the one that you bought first, make it a rental, buy another one that will work as a house hack that could be turned into several different units. And now you’ve got another rental property. You can fight this battle on several fronts. Saving more money, making more money, and investing it more wisely. And when you get all three working together, your wealth building starts to skyrocket and be supercharged. Thank you very much for submitting the question. Please submit another one and let us know an update on how it’s been going and what more we can do to help.
All right, everyone. Thanks again for taking the time to send me questions. We could not make this show if you weren’t doing that. So, I’m very grateful. We had a great response from our audience and I encourage you to ask more questions in the future, so we can do more of these shows. I love doing this and from what I’m hearing, you guys love hearing it. Submit your questions at biggerpockets.com/david. And know that I look forward to hearing from you, as does everybody at BiggerPockets, because we would not have a podcast, if not for you.
If you liked this episode, be sure to like and subscribe. And if you’d like to follow me on Instagram, on LinkedIn, on Facebook, on anywhere, I’m davidgreene24. Also, if you found this video on YouTube and that’s how you’re watching it, check out our podcast, you can get it on Stitcher, on iTunes, on Spotify, everywhere there’s podcast, the BiggerPockets Real Estate absolutely kicks butt.
We have more episodes other than this Seeing Greene style. So, you can check out some of the interviews that we do with very interesting and successful guests. And let me know what you think there. Thanks again for your time. Thanks for your attention. I know there’s a lot of people you could be listening to, and I really appreciate that it’s me, that we’re taking this journey on together. I will see you on the next one.

Ashley:
This is Real Estate Rookie episode 192. My name is Ashley Kehr and I am here with my co-host Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration information and education you need to kickstart your real estate investing career. And I’m here with my lovely co-host, Ashley Kehr. What’s going on Ash? What’s new on the east coast these days?

Ashley:
Well, just a little update on my dead knee. I had surgery again on Tuesday, so two days ago where they had to go in and clean out all the scar tissue from my MCL. And yeah, so back into PT, I spend six months of physical therapy. I am best friends with my physical therapist, probably the person I talk to [inaudible 00:00:51].

Tony:
Knows all your deep dark secrets now.

Ashley:
Yeah. He’s also really starting to open up to me too. I heard about his sunburn and everything, so. But yeah, so I’ve just been the last couple days, just yesterday, just pretty much zoned out on pain pills and hung out. And today I held off on doing a pain pill, so that I could be a full body of mind. So, if I’m crying by the time we get to the end of our recording, that’s why.

Tony:
That’s why. All right. Well, hopefully your fingers crossed you’re at the end of this journey and you can get back to normal Ashley riding on bulls and hula hooping and all the stuff you did before your knee injury.

Ashley:
Yeah, if you guys last year at the BiggerPockets Conference, me and Tony got pretty wild out there, hula hooping, riding bulls, or maybe just me. But San Diego 2022 is where the BiggerPockets Conference is going to be held. So, makes sure you guys go to BiggerPockets.com/events and check it out and we’ll see you guys there. So, what’s new Tony?

Tony:
Yeah, we just got back from Cabo San Lucas actually. So, I know this episode comes out in June, but we just got past Memorial weekend. So, my wife Sarah and I it’s been like a busy, busy first half of the year for us and we just felt like we need a little bit of time. We’re not doing any work, we’re not doing anything. So, we got away. We went back to Cabo, which is where we got married and we stayed at that same hotel. We had dinner at the venue we got married at. So, it was cool to take some time and just kind of not think about work, but then literally as soon as we get back, on the drive home, the work starts again. We’re in the middle of raising money for our first hotel purchase.
And we’ve just learned a lot through that process. So, talking with all our investors and giving all the information that they need and figuring out all the stuff for the attorneys and the accountants and all that stuff. So, lots of lessons learned. So, I’ll be excited once we’re done with this to maybe do another reply where we can like break down all the stuff we learned going through this process because there’s definitely more to this than just buying like a regular single family house.

Ashley:
Yeah, that would be a great rookie reply to do, even if you’re not even close to doing a syndication deal, as a rookie just kind of figuring out if that’s something you’re interested in maybe in the future too. Be great to hear about that deal.

Tony:
Yeah, for sure. And just last thing before we move on like you said, even if you’re not focused on doing that right now, if your goal at some point is to scale, having at least a baseline understanding of syndications and how they work, I think will be something that you’ll want to start educating yourself on sooner rather than later. One of the very first books I read on real estate investing was about apartment syndication. Before I read all the books about flipping and house act and all these other stuff, it was apartment syndication because I knew we wanted to scale. So, there’s definitely some value.

Ashley:
Okay. So, let’s get to today’s question. This one is actually pulled out of the Real Estate Rookie Facebook group. So, if you have not joined that, make sure you guys join the group and answer all of the questions because if moderators will not let you in unless you agree to the rules and the conditions of being part of the group. So, this week’s question is from Natalie Ann and it’s a two parter. So, the first question is how did you narrow your focus to determine your strategy? I’m all over the place with purchasing a buy and hold and I’m also intrigued by doing a flip and having short term rentals. Tony, you want to start with that question?

Tony:
Yeah. So, Natalie super understandable position to be in. I think a lot of folks as they’re looking to get started in real estate investing, there’s this shiny object syndrome where you see someone having success in this niche, someone else killing in this other niche, and someone making tons of money in this other niche, you’re just like, man, I want to try it all. But I think one of the best decisions you can make as a new real estate investor is to specialize in one type of investing first. Now your question of how do you do that? There’s a couple things that or three things we’re going to look at, it’s your time, your desire, and your ability. So, if you look at those three things that should help kind of point you in the right direction. So, first is time. Some of these asset classes or types of investing are more time intensive than others, right? Like flipping houses and short term rentals are probably more work than a traditional long term rental.
So, think about the time availability that you have. So, time. Next is ability. So, what skill do you have and what type of investing does that skillset lend themselves to you? Do you know how to hang drywall and install countertops and do all that stuff? Then maybe flipping is a great place for you to start. Are you great on the phone and you can sell anything to anyone? Then maybe you start off as a wholesaler. Maybe you’re great at interior design and creating really cool experiences, so short term rentals might be good for you. So, think about where you naturally are skilled at and which one of those types of investing best relates to that. And then the second is your desire, right? So, we talked time, ability, and desires the last piece. So, even if you’re the world’s greatest salesperson, if you hate sales, then maybe wholesaling isn’t for you. So, you want to see where do those three things of time, desire, and ability all kind of intersect and that should help point you in the right direction.

Ashley:
Yeah, I think the biggest takeaway there is what are the resources available to you? Remember this is not a hobby. Yeah, you want to be passionate about what you are doing, but this isn’t a hobby where you’re just going to pick what you love. It’s also what resources do you have available to you that are going to make you successful? So, when I started, I started with buy and hold long term rentals because I was a property manager for long term rentals. I worked for an investor who did long term rentals. I knew what to do. I had access to his resources.
So, look around just like Tony said, maybe if you are into construction, you know how to rehab a property. Maybe BRRRR or flipping is meant for you if you can do those projects yourself or you can easily manage one of those projects. So, I think sit down and actually write out of a list. What are the resources you have available to you and then how do they apply to each strategy? And then also look at, okay, so maybe it’s close between two, which one are you passionate about? Which one do you get more excited about? And after I built my strong foundation of buying properties, I was very lost as to like, okay, where do I want to go now? Shiny object syndrome everywhere. I went to different conferences from self storage to mask your minds on commercial real estate and just like all over the place, not knowing exactly what I wanted to focus on.
And then I was talking to somebody about the different niches and what I was thinking of. And when I talked about campgrounds, they told me I just lit up. Like that was what I was passionate about, but I had gotten that strong foundation built of something that I could accomplish, those long term buying hold rentals, then I went off and really and pursuing what excites me, what I’m interested in. So, I think take it with a grain of salt. And even if you’re not going to do the thing you’re most passionate about and have fun with and love right off the bat, that’s okay. Find what you’re going to be most successful at first and build that foundation so that you can go off and play with what other type of real estate you want to.

Tony:
Yeah. Ashley, you bring up such a good point about building that foundation. And for us, when we started investing in short term rentals, we literally told ourselves or I told myself this, that I want to focus on this one asset class for the next five years because I want to become an expert in this one thing. And similar to you in terms of building that foundation because when you go really narrow and deep on one type of investing, the success you have I think compounds because all of your energy, all of your attention, all of your focus is on this one thing and getting really, really good at that one thing. So, people always ask me Tony, how did you scale so fast, and this that, and the other, and you’ve got this big portfolio short-term rentals in a relatively short period of time.
And it’s because that was the only thing that we were focused on, right? So, from the time that I woke up until the time that I went to sleep, the only thing that I was thinking about when it came to work was building our short term mental business. And when you have that kind of laser focus, it allows you to scale and grow a lot more quickly. So again, shiny object syndrome. I know it’s a real thing, but try and have that discipline to pick one thing and just go all and in at it.

Ashley:
So, the second question that Natalie had was how did you get good at analyzing deals? Practice, practice, practice, making mistakes. My first property I ever purchased, I forgot to include snow plowing. I live in Buffalo, New York, obviously the driveway needs to be snow plowed. And I forgot to add that in. And yeah, it didn’t kill the deal. It didn’t kill our cash flow, but it still wasn’t what I had projected it to be. And I had taken on a partner with that deal, so just from gaining experience from practicing analyzing deals and also looking at other people’s deals. So, looking at how they are analyzing it. So, joining Zoom calls, webinars where people go through and show you how they are analyzing deals, you’ll pick up so many tips and tricks and also just the biggest thing I can say is don’t fudge the numbers, verify, verify, verify.
So, if you want super accurate numbers and you have no idea what the insurance expense is going to be on a property because you’ve never bought in that market before, go to an insurance agent and ask them to estimate it. It is free. You don’t have to pay anything to have that done. So, verify as much information as you can to become really good at analyzing deals, then it will just be okay, I know this type of house in this area, the insurance per year is about $800 a month. So, I can use that as my number knowing it may be a little less or a little more than that, but that’s the average cost. So, definitely the experience is a good way to get good at analyzing deals.

Tony:
Yeah, and they say repetition is a mother of skill and I think that applies to analyzing deals completely. But I also think Natalie, that once you answer the first part of your question about which type of investment do you want to focus on, then getting good at analyzing becomes a lot easier. But if you’re trying to analyze multiple flips and then multiple long term, multiple short term, this wholesale deal, now you’re spread really thin on building that repetition. But if you answer question number one and say, “Hey, I’m going to do flips and that’s going to be the thing that I do.” Then you can say, “okay, every property that I look at, now I’m getting that repetition in of analyzing a deal as a flip.”
And once you’ve had that decision, it almost becomes like second nature. When I first started investing and we were buying in Shreveport, I knew the zip codes that I was looking at like the back of my hand, right? We were looking at 71104 and 71105. Then I could tell you what was a good price for properties in each of those zip codes, what they could rent for. When you really narrow in, it becomes easier to get better at analyzing those deals.

Ashley:
Yeah, you get a lot quicker once the things you can zoom through them, analyzing them, or even just looking at the property and be like, yeah, I know that this isn’t going to work for me. Even if I offer a $100,000 below asking price.

Tony:
Like Ashley, I’m sure you could in your neighborhoods where you invest, you probably wouldn’t even really have to analyze a deal per se right now to know whether or not you want to put an offer. And you could see, okay, I know like.. I mean, right? Like, am I right? Or do you like-

Ashley:
No, you’re exactly right. I’m going to look at a property tonight where someone texted it to you this morning and I was driving and I was going through my just thinking about it and I analyzed it in my head, be like, okay, this is what I think the rehab would be, this is what we-

Tony:
Totally, and same for us. We’re in Joshua Tree, like I can look at a listing and pretty much ballpark what we’re going to profit on that property as well. So, Natalie just the repetition is where you get really good at analyzing deals. And then I think the last thing is don’t be afraid to if you have other investors in your network, share your analysis with them as well, right? Or even posting in the Real Estate Rookie Facebook group. But I think if you can get some feedback from other investors that maybe gone down that path and like say that you’re a new investor in Buffalo, you post in the group and you don’t have snow plowing, there is one of your expenses. Ashley, one of the other experienced investors can point that out for you. So, repetition but then also trying to get some feedback from folks that have done it once or twice before.

Ashley:
Okay. Well, thank you guys so much for joining us for this week’s Rookie Reply. I’m Ashley at Wealth From Rentals and he’s Tony at Tony J Robinson on Instagram. And we’ll be back on Wednesday with a guest. See you guys next time.

It was just over a decade ago that the housing market collapsed, but are we in for a repeat? CNBC’s Diana Olick joins ‘Squawk Box’ with the details.

Dave:
Hi, everyone and welcome to On The Market. I’m your host, Dave Meyer. This past week has been a really whirlwind and pretty important week for the economy. And as such, we have decided to do our first ever bonus episode where we’re going to be talking about the news that took place over the last couple of days. We’ll go into some history to provide some context about how we actually got here and, of course, we’ll talk about what you as an investor should be thinking about over the next couple of weeks and months as all of the crazy information that we’re getting about inflation and the economy starts to unfold. The focus of today’s episode is really going to be about inflation.
If you’ve been paying attention last Friday, the CPI data, the consumer price index, which is one of the most common measurements of inflation came out for May. And what we saw was much higher than most economists expected. We all know inflation is high, but this was way higher than even most people were thinking it would be. So, it’s really important for us to understand what this means and what is going on. So, today, we are going to talk about what this inflation report that came out on Friday and set off this cascade of events over the last couple of days, what it actually showed. We’re going to go into a background of what inflation even is and how we got here. We’ll talk about what the Fed is doing in response to this reflation and, of course, what might happen next.
Okay, so what actually happened this week? Last Friday, the consumer price index came out and showed that inflation, measured on a year-over-year basis, which basically means comparing May of 2022 to May of 2021, went up 8.6%. That is 8.6% year-over-year, which is an increase from April which was 8.3%. And so, that is an increase and, of course, that is concerning. But to me, the biggest news here was the month-over-month data. From April 2022 to May of 2022, prices across the United States went up 1%. And I know 1% does not sound like a lot, but 1% in just a month is a huge number. This is one of the largest monthly increases we’ve seen. Back in March, it was actually 1.2%, but a lot of that was fueled by the invasion of Ukraine.
And having this 1% month-over-month in May was a big, big shock. Most economists were expecting it to be about 0.7% which would have been about the average that we’ve seen over the last six months. But again, it was higher than we expected and it actually showed that it was accelerating. The month-over-month data in April was 0.3%, so having it go up to 1% was really big news. The other detail about the report that, I know not everyone looks at the details of the reports and looks at every single data piece, I do which is why I’m here talking to you about it, but what really stuck out to me is that prices in every single category rose. In most of the last couple months, there have been a few categories at least, while even though inflation was going up, pretty much across the board it was going up, but there were some categories of expenses that were going down.
New cars were starting to go down, some sectors of energy like electricity after spiking in March started to retract a little bit in April. But in May, every single category that is tracked by the consumer price index went up. And so, this was pretty shocking, right? It was much higher than we were expecting. Most economists believed, at least at the beginning of the year and even up until a couple of weeks ago, that inflation was going to peak soon. That doesn’t mean prices were going to go down, that doesn’t mean inflation was going to stop, but it means that we’re going to see the pace of inflation, the pace at which prices were going up at least start to slow. They would go up still, but they would go up slower. Instead, we saw them go up faster, which is why so much has happened in the economy and the stock market and everything else over the last couple weeks.
So, that’s just some analysis. Hopefully, that helps you understand what happened and why it’s sent a shock through a lot of the financial system over the last couple days is because we’re expecting it to be down and it was up. So, to understand what this all means, I think it’s helpful to just go back to the beginning and talk about what inflation even is, what contributes to inflation. Inflation in its simplest terms is the dollar losing its spending power. Basically, if you want to buy something, you’re going to have to spend more money to buy the same exact thing. Another way I like to look at this or that I’ve heard it described that I think makes a lot of sense is too much money chasing too few goods, right? So, there is a lot of money floating around in the economy, there’s not enough stuff to buy and that sends up prices.
So, inflation is a bad thing, right? We all know that inflation is bad, but why? Basically, it stretches people’s budget, right? If you have to spend more money to buy the same exact thing, you’re going to have less money for disposable income, or to pay rent, or to invest in a business at the end of the day because you’re using more of your income on the everyday expenses like gas, and food, and all the other stuff that you need. So, in addition to stretching budgets, it also eats away at your savings. If for example you had $10,000 saved up, which is a lot of money so congratulations, and over the last year you had 8.6% inflation, that money in terms of spending power is now worth only about $9,140 because inflation has reduced it. So, that sucks, right? You had all this money saved up and now it is worth less. So, that’s another reason inflation is bad.
And generally, it’s just damaging to society, right? It causes people to lose faith in the U.S. dollar, which is a problem for import, exports. It’s just a problem for our country in general. And so, inflation has to be brought under control. It is a huge problem and it is worth noting that it usually, disproportionately impacts people at the lower end of the economic spectrum. Because people who don’t have a lot of excess or disposable income when gas prices rise or when food prices rise, they don’t have as much cushion with which to make ends meet and this really impacts them a lot. Now, before we get on, go and talk about how we got here in the first place, I think it’s important to mention that a little bit of inflation is actually kind of good. The Fed targets, the Federal Reserve targets inflation at about 2%.
I know that’s confusing because I just said inflation was bad, but a little bit of inflation actually stimulates the economy. Think about it, right? If you thought prices were going to stay flat or go down, you might not choose to buy a car right now or make some big purchase. You would wait until prices might go down. But if there’s 2% inflation, which is not so much that it’s causing all of the negative impacts that I was just talking about, it’s incentivizes you to make a purchase. If you were going to buy a car and you knew that a year from now it was going to be 2% more expensive, maybe you just buy the car now and save yourself the 2%. So, that is why a little bit of inflation, first of all, it’s natural, it happens in a capitalist economy, but it is also generally seen as a positive thing for a little bit of inflation.
But obviously, above 2%, the area that we’re in, 8.5% right now is crazy. That’s not what we want, it’s way too much. But I just want to make sure that you understand that a lot of inflation’s bad, little inflation okay and kind of good. Let’s turn our attention to how we even got here and why inflation is so high right now. Like I said, one definition, the one I really like to use for inflation is too much money chasing too few goods. Or if you want to sort of respin that sentence into more traditional economic parlance, you would say it is too much demand and not enough supply, right? Everything in economics comes down to supply and demand. And when you have inflation, it is pretty much always caused by too much demand. People want a lot of stuff and not enough supply, there’s not enough stuff to buy, and that always pushes up prices.
So, let’s look at supply and demand as it exists today or at least over the last couple of months. So demand is up, in my opinion, for two reasons. The first is pent-up demand, right? We all were just locked down for two, two and a half years, didn’t get to spend money on a lot of the things that we wanted to like travel, or going out to restaurants, or bars, or the movie theater or whatever, right? And now that the economy has opened up, people want to do stuff and they want to go out and spend. And so, they’re doing that. They’re going to the movies. I don’t know if you about you, but if you try and get a reservation, you try and go out to dinner without a reservation in a major city, it’s super difficult. People are out and about. And that is natural, in my opinion, there is a lot of demand.
There’s also another major force pushing up demand, which in my opinion comes from increased monetary supply. And I know that sounds pretty wonky, but if you’ve heard that inflation is usually caused by the printing of money or more money entering an economy, that’s what I’m talking about here. Over the last several years, the Federal Reserve and Congress has introduced a lot of new money into the economy. This has come in the form of stimulus checks and actually printed cash. It’s also come in the form of the Federal Reserve buying mortgage-backed securities and U.S. Treasuries and increasing their balance sheet. That adds more monetary supply to the system.
And interest rates are super low, which means that banks are more willing to lend out the money that they have. And so, rather than money sitting in savings account earning interest, it’s getting lent out and circulating around the economy. And when all this money is circulating around the economy, people spend more, right? If it’s super easy to get a loan at a low rate, for example, maybe you will buy a car, maybe you’ll buy a house. Maybe if you’re a business, you’re willing to hire new people, expand it to new territory, buy some new equipment, right? There’s so much money out there that you’re willing to pay more and that drives up prices, right? That means demand is higher because people just have money, right?
If you are usually willing to, let’s say you had $100 to your name and you wanted to go buy something, a sandwich, and you’re willing to spend 10% of your net income on a sandwich, you’d pay $10 for that sandwich. But let’s just say there’s so much money flying around the economy all of a sudden that your net worth is sort of goes up to about $120. And now, at 10% of your budget, you’re now willing to spend 12% on that sandwich. And that’s just a simple, silly example of how increased monetary supply could drive up prices. Now, those are some ways where demand is going up. The other side of this, of course, is supply. And we’ve all heard that the supply chain is damaged and is where there’s not enough goods. I think most, every one of us has experienced this in some way, whether it’s food or chips for a car or whatever it is, we all know that COVID really damaged the supply chain.
Now, in addition to COVID, the Russia-Ukraine conflict also really contributed to the supply chain issues. Russia has been almost completely excluded from the global economy. They are big exporters of things like fertilizer and food and all sorts of other things that are basically just getting pulled out of the global supply chain. And so, that just reduces supply even more. They’ve also seized a lot of Ukrainian assets and supply, and that’s getting removed from the global economy as well. And so, that’s creating supply issues. And third, we have China’s COVID policies. They’re pursuing this no, zero-COVID policy which is leading them to lockdown, huge cities. And that is reducing manufacturing. It means a lot of the materials and goods that are produced in China and then shipped over to the United States are not getting here, further exacerbating the supply chain issues.
So, we’re sort of in this perfect storm for inflation. Remember I said that it is too much demand and not enough supply. We just talked about why demand is super high right now. There’s pent-up demand, there’s increased monetary supply. At the same time, we also have reductions in supply due to COVID and the Russian-Ukraine. This is the perfect storm for inflation. And now, a lot of different economists, a lot of different people have different opinions about what’s really contributing to inflation. Some people think it’s a lot of monetary supply and that other people think it’s mostly because of the supply chain. I don’t personally do my own statistical analysis on this so I can’t say who’s right. But I think whatever it is, inflation is super high from some mixture of these conditions.
And I think if anyone says it’s only because of increased monetary supply or it’s only from supply chains issues, that’s not true. It is a mixture of these things. How much of it is one factor versus the other? I don’t know, but it is definitely a mixture and convergence of all of these economic forces that are causing this high inflation. Now, how do we fix inflation, right? So, now we’ve talked about what it is, what’s happening, how we got here, how does inflation get fixed? Well, if inflation is too much demand and not enough supply, you have to level one of those things out. So, on the supply side, you could have more goods. And in a normal time, that’s what happens, right? If demand goes up and people want to spend normally, manufacturers just increase their output to the point where they can meet that demand. But right now, that can’t happen because of all the constraints on the supply chain that we are already talking about.
Now, when a lot of economists said that they were expecting inflation to peak at some point in 2022, it’s I believe mostly because they thought the supply chain issues would get solved. Right? The demand side is a little more complicated, but most people were thinking, “Okay, the economy is going to open back up. Almost every economy in the world has opened back up.” China is still having some lockdowns, but with that, the thinking was supply chain would sort itself out. But unfortunately, right when it was starting to just, things were starting to get better, Russia invaded Ukraine and cause all of these additional supply chain issues. And so, we’re not seeing that get better.
The other way you could do it is of course lowering demand. And that is really where the Fed is operating. If you’ve been paying attention over last week, the Fed just announced a huge interest rate hike, 75 basis points, which is basically, it is the largest single interest rate hike since 1994. And so, they’re really going after this. And the way, the reason they’re doing this is to try and lower demand. I know they’re not going to say that, that’s not exactly what’s trying to happen, but they’re going to try and lower the monetary supply. By increasing interest rates, that means it is less enticing for people and for businesses to borrow money. So, rather than borrowing money for a bank at a 3% interest rate so that you can build a new manufacturing plan or buy some new equipment, you’re not going to do that because it’s more expensive and it is not as attractive as a proposition.
Or in the consumer side, maybe you don’t buy a car, right, because interest rates are high, so you hold onto your car a little bit more. This reduction in monetary supply should lower demand. Generally, this works. It is kind of proven that rising interest rates reduces monetary supply and it can calm that inflation. The thing is that it takes time. And so, we’ve seen that the Fed is trying to do this slowly. They announced back in, I mean the end of 2021, I can’t remember exactly, that they were going to start reducing their purchases and mortgage-backed securities and treasuries, that they were going to raise interest rates. And they signaled this for a long time because they didn’t want the stock market to overreact. They didn’t want businesses to freak out and think like, “Oh my God, interest rates are going up so quickly. We got to lay people off.”
They were trying to engineer what they’ve called the soft landing. And the idea here is that they could raise what they wanted to do. What they want to do is raise interest rates slowly or at the right pace, let’s say not slowly but at the right pace, to reduce demand and inflation but not increase unemployment and not send the country into a recession. And so, for let’s say the last nine months, that’s basically what the Fed has been trying to do. But like I said at the top of the show, we just saw this inflation print and it just doesn’t look like it’s working. And there’s a lot of reasons for that, right? I just said that increased monetary supply is not the only reason why inflation is high, but it is kind of the only thing that the Fed can target. So, they’re not fixing supply chain issues by raising interest rates.
But overall, I do think, this is just my opinion, I do think what the Fed is doing is the right thing. They’re trying to control inflation and that needs to happen because inflation can really spiral out of control. Inflation is tricky to bring down and it’s important to nip it in the bud before it gets to hyperinflation to the point where we have this spiral and the dollar is really considerably getting devalued even worse than it is right now. So, that’s why the Fed yesterday came out and said, or that when by the time this show comes out it’ll be two days ago, this is coming out on Friday, on Wednesday, they said that they raised it 75 basis points, really big increase to try and stem inflation. And this is really meaningful for a few reasons.
And it’s not like this was totally unexpected. The Fed has been raising interest rates, they’ve said they’re being in raised interest rates. But it seems less and less likely, at least to me, that the Fed is even really acknowledging that this soft landing that they’ve been trying to engineer is even possible. They’re going to keep trying to do it but it looks increasingly difficult. If they’re raising interest rates at this rate, it seems very likely that we are going to go into a recession. They didn’t say that in their guidance, they still are projecting the economy to grow. But they are saying that employment is likely to go up. They did acknowledge that. So, that to me doesn’t really sound like a soft landing. And I think a lot of things have to go right even for their projections of unemployment to hit what they are.
And so, this increased hawkishness, this increased aggressiveness by the Fed to raise interest rates so much and get inflation under control is a major reason why the third thing that happened this past week where stocks and cryptocurrency are just tanking happened. It’s because there’s all this uncertainty and now, there’s a general feeling that a recession is very likely, that unemployment is likely going to go up and this could impact asset prices, right? So, stocks are valued based on future earnings. But if the dollar is following the value of those future earnings, if the dollar value is falling because of inflation, the value of those future earnings is reduced. People as such, investors who invest in the stock market, are basically trying to figure out what stocks are worth right now.
They were trading at super high P/E ratios which is just a way of valuing stock based on the price versus their earnings. And it was extremely high. It was about 37 for the S&P 500 about a year ago. It’s down to about 22, which I’m not a stock market expert, from my understanding is still above the historical average which is about 18% or 19%. And so, what we’re seeing is the stock market returned to much more normal valuation levels and investors are just generally seem like they want to get out of more speculative, risky assets. And so, that’s why we’re seeing, in my opinion, the stock market tank particularly hard in growth, what’s known as growth stocks, which are more based on future earnings and growth potential and less on current day revenue and earnings.
And again, that’s why we’re also probably seeing cryptocurrency take such a big beating, because it doesn’t actually produce any value. I know people say, “In the future, that it is going to produce value.” I invest in crypto and I do think that it’s a really interesting thing, but right now it’s not really used, it’s not producing value right now. And so, people fearing a recession, fearing higher unemployment, want to get their money either into raising cash or into less speculative stocks like energy stocks for example. And so, that to me is why the market has been tanking. We’re now in bear market territory. But to me, it’s really a reaction to inflation. Inflation went up, we saw that last Friday. The Fed raised rates super high.
And the stock market actually tanked even before Fed raised rates because they all know what’s going on. They knew the Fed was going to basically go hard after interest rates and to the point where a recession is increasingly likely. I saw some data from Bloomberg that said that a recession by the end of 2023 is now about 75% probability. So, everyone’s seeing the same data, right, these sophisticated investors, that’s what they’re seeing and that’s what they’re worried about. So, hopefully, that helps you understand what has gone on in this kind of confusing week. And let’s just talk a little bit about what could happen next. And of course, no one knows for sure. That’s the one thing we do know, is that no one knows for sure.
What I do think is a pretty safe bet is the Fed is going to keep raising rates aggressively. I think there’s a possibility we’ll see another 75 basis point hike at their next meeting. They are saying that interest rates for the Fed or a funds rate is going to hit about 3 3/8 by the end of the year. Right now, it’s only about 1.75. So, we’re going to see, seeing steep interest rates increases through the rest of the year. And I do believe that we will see a peak of inflation by the end of the year as supply-side issues start to moderate. And I know I said that the Russian invasion screwed that up and it did, but I think the world adapts. And over the next couple months as economies open up, I do think China’s manufacturing will open up, the world will adjust to the Ukraine-Russia conflict. Hopefully, it doesn’t get any worse. That could happen but hopefully it doesn’t.
And if so, I do think we will see inflation peak. I still don’t think we’re getting down anywhere close to the 2% target by the end of the year, but hopefully we’ll start to see it in the 5%, 6% year-over-year mark instead of 8%, 9%, or maybe even 10%. But that doesn’t mean it can’t get worse, it might get worse before it gets better. But I do think by the end of 2022, we’ll start to see it start to come down. So, I’m not a stock expert but to me, the stock market is going to remain volatile. I’m sure people can make money into that, but I do think it’s going to be volatile. And frankly, I just think we’re going to see inflation for the foreseeable future.
So, to me, I think there are some ways to protect yourself. And again, I’m sure there are people who are more knowledgeable about the stock market than I am who could tell you how to pick stocks that are inflation resistant. But to me, I think, yeah I’m biased, but rental property investing is generally considered not just by people who are investors, real estate investors like me, to be one of if not the best hedges against inflation. And I should say that doing nothing right now is kind of risky because you are losing that spending power. Of course, buying at the top, of a peak of a market has risks too, but both are risky. So, you have to decide for yourself what’s right for you.
But personally, I continue to look for specifically rental property investing because I think that long-term buy and hold rental property investing offers the best hedge against inflation, in my opinion, for three primary reasons. I’m just going to go through this quickly, I’ve talked about this in other YouTube videos that you can check out. But I’d say that one is that housing prices generally keep pace with inflation. We’ve seen that over time. Will that happen this time? I don’t know. That historically, what I’m saying though is that home prices tend to keep pace or slightly outpace inflation in the past. And so, that bodes well to me.
The number one thing that I think is really important about hedging against inflation using rental property investing is rent. Rent is dynamic, which means that as inflation drives down the value of the dollar and the value of the dollar changes, you can adjust your rent every single year. So, if your expenses are going up or you’re losing spending power, you can change your rent accordingly and hopefully be continuing to make the same amount of money. That’s unique in a lot of investments, you can’t do that in the stock market. Sure if you own a small business you could do something like that too, you can adjust your own pricing, but rental property investing is one of the places where you can dynamically adjust your income to hedge against a devalued dollar.
And the last and third thing, maybe this one’s actually more valuable, I really like this, is that as an investor, if you are leveraging, if you are using a mortgage to purchase a asset, you are locking in your biggest expense, right? So, if you have a fixed-rate mortgage and even if it’s at 5% or 6% like it might be right now, that money is locked in. That’s what you’re paying for 30 years. And it’s the most common mortgage, I know there’s other types of loans. But just generally speaking, if you get a 30-year fixed-rate mortgage, you are locking in that price. And so, even as the dollar gets devalued, you still pay the same amount and you’re paying it with a devalued dollar. So, that means relatively, you are actually paying less.
So, that ability to be able to lock in your biggest expense while increasing your rent is a huge asset that I don’t think is available in pretty much any type of investment class. And this is why people, including non-real estate investors, generally think that rental property investing, one of the best ways to hedge against inflation. Just generally speaking, my advice whether you’re investing in real estate, or stock, or crypto or whatever is focus on the long term. Right? Right now is not a great time to focus on short term profits. And long term, look at this as an opportunity as James and Jamil and some of our other hosts here On The Market have talked about.
There are buying opportunities right now. Does that mean that housing prices are going to skyrocket in the next year? I don’t know. But I think if you’re seeing buying opportunities and you believe in the long term value of the housing market like I do, there are good opportunities right now. And so, I’m still looking to invest. I’m sure someone more experienced in the stock market will tell you the same thing. Things are 50%, 70% off their highs. Like look at companies that you believe in their 10-year value right now. These are ways that you could hedge against inflation in the long term and find good buying opportunities. Personally, again, everyone has to make this own decision for themselves, but to me, sitting on the sidelines is more than risk because you know you’re losing value in your dollar.
There’s risk in investing, there’s always risk in investing. Right now, there is guaranteed risk in keeping your money unless you’re trying to keep some dry powder which maybe you should do as well. But to me, I’m still looking for buying opportunities, things that I think have really good long term value. Last thing before we go, what happens to all this with housing prices? I’ve talked about this a lot so I won’t get into this super amount of detail today. But as for the housing market, demand is dropping. We’re seeing mortgage purchase applications at a 22-year low. And with mortgage rates likely to keep rising as the 10-year interest, the yield on the 10-year bond goes up, is we will likely see more downward pressure on the market. Right?
As mortgage rates go up, growth is going to, demand is going to come down as affordability is impacted. And so, I do think we’re going to see less and less demand. That to me will cool the market. But of course, that downward pressure that is generated by decreased affordability is in many ways offset by super low inventory. Right? And we talk, I talk about this all the time on Instagram, on other videos, it’s this tug of war that’s happening in the housing market, right? Mortgage rates going up and decreased affordability puts downward pressure on the housing market. But super low inventory puts upward pressure on the housing market. This is supply and demand, right? And so, we are seeing this tug of war. Where it all comes out, I don’t know.
I think that the important thing here if you want to stay on top of this is to look at two key metrics, days on market and active inventory. Redfin is a great place to look at this. And keep an eye on these things because they are good measures of the balance between supply and demand. If they are low, which they are right now, inventory and days on market, that means it’s a seller’s market. If they start to go up gradually, I think that means the housing market is going to cool, it might flatten, maybe even go slightly negative, but it’s probably going to get relatively flat. If those two metrics start to go up really rapidly over the next couple of weeks or months, that’s when I do think we could start see price declines.
And of course, it’s going to be different in every market. Some markets might see big price declines, some markets might go up. No one really knows. But I think if you want to know what’s happening in the housing market, those two things, days of market, active inventory, really good things to keep an eye on as things are changing so rapidly in the economy. So, hopefully, this was helpful to you. This is our first attempt at a news update. So, let us know what you think. You can go on the YouTube comments, you can hit me up on Instagram, you can go on the On The Market forums on biggerpockets.com and let us know what you think. But hopefully, this is helpful. And of course, my opinions and thoughts on this are just my reading as of now.
Data is changing constantly. The economic conditions are changing really rapidly right now. And so, we’re going to keep updating you. My job here is to interpret the data and analyze it as it comes. And if the data really changes and that changes my whole opinion about the economy, I’m going to let you know that and we will keep doing that here On The Market. So, thank you all so much for listening, hope you enjoyed this episode. We will be back on Monday for our normally scheduled episode. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub and a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

KeyBanc Capital Markets’ Kenneth Zener joins ‘The Exchange’ to discuss homebuilder stocks as well as companies that sell home goods and furniture.

Making common rental application mistakes can cost your landlord business dearly. The rental application contains critical information you will need to screen tenants thoroughly. For example, employment information, previous landlords, income, and permission to run a credit check are all standard on rental application forms. Rental application mistakes could mean the difference between getting a good or bad tenant. 

Mistakes on rental applications range from not checking illegible handwriting to omitting crucial information. So, what are the top six application blunders to avoid at all costs? How can due process during the rental application process save you from evicting a bad tenant and protect your income? 

The Importance of the Rental Application Process

The rental application process is the first step to assessing if the prospective tenant will be a good match. The application form helps determine the applicant’s ability to pay rent on time, look after the rental unit, and avoid getting into serious debt. 

Of course, you can’t foresee the future. But the rental application process gives you insights into the tenant’s rental history. And this can give you an idea of how suitable they are. That is why it’s vital to analyze their employer and landlord references, pay stubs, bank statements, credit score, and identity. 

Rental applications typically take up to seven days to process. However, the processing time can be shorter. After receiving the application, you should verify employment details and call previous landlords. Additionally, the rental application should ask for permission to run a credit history check. 

Because there is so much riding on the application process, there is no need to rush it.

Rental Application Mistakes to Avoid 

The first mistake many landlords make is rushing the rental application process. Unfortunately, the desire to fill vacancies as fast as possible can lead to costly errors. 

It’s good to remember that signing the lease agreement is easy. However, starting an eviction process is challenging and costly because a delinquent tenant defaulted on rent or trashed the place.

Apart from rushing through due diligence when processing rental applications, there are several other mistakes you must avoid at all costs. Here are six.

1. The rental application is discriminatory

Most landlords and tenants are aware of the Fair Housing Act. This makes it illegal for landlords to refuse housing to anyone based on race, color, nationality, gender, religion, age, disability, or familial status. Therefore, it would be a massive mistake if the rental application had illegal questions or clauses. 

For example, illegal questions on a rental application form would include: 

• What is your national origin, or what country did you emigrate from?
• Do you have children, or are you planning to have children?
• Have you ever been arrested?

Although most states allow landlords to check criminal convictions, asking about being arrested is a mistake. This is because being arrested doesn’t make someone guilty of a crime. 

However, it’s not against the law to discriminate against a potential tenant based on smoking or pets. Therefore, these are valid reasons for sending the tenant a rental denial letter.

2. The rental application denial letter is discriminatory

It’s not a mistake in the rental application process to disqualify a tenant based on their income, references, or credit report. Also, if a tenant lies on the application, that is a valid reason to reject their application. However, the rental application denial letter can’t mention anything discriminatory. 

For example, the application rejection cannot be based on any protections offered by the Fair Housing Act. In addition, it’s a mistake to deny tenancy based on arbitrary reasons. For example, sending a rental application rejection letter because you noticed the applicant had tattoos. 

3. Ignoring the law on rental application fees 

Don’t make the common mistake of ignoring state and city laws on rental application fees during the rental process. It is usually possible to charge fees for the tenant screening process. However, some states don’t allow you to charge tenants fees. In addition, it may be required to refund fees if you deny the tenancy.

4. Charging too much for the security deposit

The rental application contains information on the security deposit, and it can be a costly mistake to ignore state laws on these. Many states have rent control laws that regulate security deposits. These regulations control how much you can collect, how to hold the money, and when to return it. 

In some cases, landlords can request an application or holding deposit to allow the tenant to secure the property while screening takes place. If the application is rejected, it’s important to refund the holding deposit. 

The security deposit is different from the application deposit because it’s used to pay for potential damages during the lease. It is usually only paid after the application has been approved and the lease signed.

5. Setting the wrong rental rate

One of the worst mistakes during the rental application process is to get the rental rate wrong. The amount you charge in rent directly impacts your revenue and vacancy rates. If the rent is set too high, you will have trouble attracting prospective tenants to apply. Even if you find a suitable tenant, they may not stay too long if they find cheaper accommodation. 

Of course, if the rental rate is too low, you will find it difficult to make a profit, cover unexpected costs, or make mortgage payments. For example, it may be challenging to keep up with maintenance, and the rental unit could fall into disrepair. And this is usually a reason for tenants to get their landlord into trouble. You may even attract the wrong type of renter if you underprice the rent. 

6. Accepting illegible or incomplete rental applications

It can be a costly mistake to ignore the warning signs of a sloppy application. For example, spelling mistakes or illegible writing could create confusion down the line. Also, it could make the screening process difficult if you can’t read the social security number or the previous landlord’s phone number. 

It is also necessary that tenants complete every section of the application. If a section doesn’t apply, then they should mark that appropriately. 

Many landlords use a property management app or request tenants complete a digital application to fill out rental applications properly. This way, you can ensure that only a properly completed application can be submitted.

Last week, the Bureau of Labor released data showing the Consumer Price Index (CPI)—the most commonly used measure of inflation—rose 8.6% higher in May 2022 compared to May 2021. This is up from an 8.3% reading in April and represents the highest year-over-year inflation figure in more than 40 years. 

Unfortunately, another high inflation figure shouldn’t be a huge surprise to anyone. We all know that inflation has skyrocketed. We see it daily at the gas pumps, the grocery stores, and just about everywhere we spend money. 

But even as we all have come to expect inflation, the details of this most recent report were particularly bad. It actually represents an acceleration in rising prices. 

As you can see in the table above, we saw monthly increases in the CPI average of around 0.7% for most of the last several months. Then, in March, it spiked to 1.2%, primarily due to the impact of the Russian invasion of Ukraine and the corresponding shock to the energy market. 

In April, things started to look up. While prices still rose, a monthly increase of 0.3% was the best print we saw in months and offered a glimmer of hope that inflation, while still increasing, was starting to approach a peak. 

Then May rained on that parade. While most economists believed inflation in May would grow around 0.7%, it was up 1%, which is a big step backward.

If you look at the chart, in most of the last several months, at least one or two categories saw lower prices on a month-over-month basis. Every category in May saw increased prices for the first time since November 2021. 

This was a discouraging CPI report, and inflation will likely be with us for a while. So, the question remains, how and when will inflation come under control? 

To answer that question, we need to briefly review what inflation is and how we got here. 

What is Inflation? 

Inflation is when the spending power of the U.S. dollar declines. In other words, prices rise, and you have to pay more to get the same goods or services. 

Inflation is a highly destructive force in an economy. It stretches the budgets of everyday Americans and makes it more difficult for people, especially those at the lower end of the socio-economic spectrum, to make ends meet. It also damages the U.S. in terms of international trade and can cause other societal issues. It’s crucial to contain inflation when it spikes like it’s doing right now.  

It’s worth noting that some modest inflation is considered a good thing, as it stimulates the economy. Because people know (in normal times) prices will continue to rise a bit each year, they are incentivized to spend their money now rather than wait. For example, why would you wait to buy a car if that same car will be 2% more expensive next year? 

The incentive to spend ensures businesses can continue to grow. This is why the Federal Reserve targets 2% annual inflation. 

What Causes Inflation? 

A variety of complex factors causes inflation, but as with most economic concepts, it can be traced back to supply and demand. When demand exceeds supply, which is where our current economy is, inflation occurs. 

Right now, demand is up for two primary reasons. 

First, people want to do stuff and spend money again! After a couple of years of restricted activity, people want to travel, go out to eat, buy cars, and experience life again. It’s as if all the pent-up demand from the last two years is being injected into the economy.

Second, a tremendous amount of money has been introduced into the economy. This is known as an increase in “monetary supply,” meaning more money is moving around the economy. People are willing to pay more for goods when there is more money in the economy. 

Just think about it, if you had only $1,000 to your name, your willingness to pay for a sandwich might max out at $10 (1% of your net worth). But if you suddenly had $1,200 to your name because more money is injected into the economy, perhaps your willingness to pay for that same sandwich goes up to $12 (still 1% of your net worth).

Overall, demand is high due to the easing of COVID-19 restrictions plus a rapid and dramatic increase in monetary supply. These are conditions that make it ripe for inflation. 

But on the supply side, we also have conditions primed for inflation. Typically, in a healthy market, when demand spikes, suppliers increase production to meet that demand. This keeps prices relatively stable and allows the suppliers to sell more goods and generate more revenue. 

But, given the global supply chain issues we’re facing, suppliers cannot scale up production to meet demand. Instead, the only way to moderate demand is to raise prices. 

Right now, we really do have the perfect storm of inflation—super high demand alongside constrained supply. 

What Happens Next? 

Many economists and analysts (myself included) expected inflation to peak (not stop or deflate, just slow down) sometime in the middle of 2022, mostly because supply constraints would moderate. The thinking was that as economies reopened, the supply chain would recover. While demand would likely remain high, suppliers could increase production to meet that demand, and inflation would cool off. 

Unfortunately, two major geopolitical events upended that hope. First, Russia invaded Ukraine, and dramatic sanctions were introduced. Removing Russia (and Ukraine in many ways) from the global economy is straining a supply chain that was already struggling. Secondly, China has continued to impose lockdowns to contain COVID, leading to lags in Chinese manufacturing and the production of goods. 

It seems that the May inflation report reflects this new reality. Demand has remained high, as most people expected, but the supply-side relief that was hoped for is not coming to fruition. As such, inflation is higher than its been in over 40 years.  

This is where the Fed comes in. The Fed’s primary tool to fight inflation is to raise interest rates. Raising interest rates reduces the monetary supply because fewer people want to borrow and spend money. As we discussed before, when the monetary supply decreases, so does demand. In short, the Fed is trying to curb demand through both businesses and consumers by tightening the monetary supply. 

This typically works, but it takes time and can have other negative economic consequences—namely, a recession. 

As interest rates rise, people borrow less money to make big-ticket purchases like a new car or home. That reduces revenue in those industries, leading to less spending and layoffs. 

As for businesses, they are also less likely to borrow money and, as such, will purchase less equipment, hire fewer people, expand into fewer markets, and often have to lay off employees. This, in theory, cools the economy to the point where demand shrinks to meet supply at equilibrium.

So that’s where we are. Inflation is unacceptably high, and the Fed is raising rates aggressively to stop it.

My Thoughts

While no one knows what will happen, here are my current thoughts. Remember, this is just my opinion based on the currently available data: 

As the Fed raises rates, many parts of the economy will be negatively impacted. We’ve already seen the stock market enter bear market territory this week (down more than 20% off its high), and Bitcoin is down more than 60% as of this writing. There are still roughly 10 million job openings in the U.S., but I expect the labor market to loosen in the coming months as layoffs pick up. With all these factors converging, I believe a recession will likely come in the next couple of months. 

That said, recessions come in many different forms. Right now, it’s very unclear if it will come, how long it will last, and how bad it could get. I think that depends on if and when inflation comes under control. 

As for housing prices, which I’m sure everyone here is curious about, I think there is a growing market risk. I’ve said for the last few months that I believe prices will moderate dramatically and could turn flat or modestly negative (on a national basis) in the coming year. Still, I think that by the end of 2023, housing prices will be +/- 10% of where they are today nationally. On a regional basis, I expect some markets to see dramatic drops (more than 10% declines) while others may keep climbing. 

What do you think the implications of this inflation data are? Let me know in the comments below. Be sure to also listen to the On the Market podcast, where we discuss the direction of the economy and the housing market in more detail.

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