Richard

Another famous name is weighing in on the housing market. A few weeks ago, it was Elon Musk claiming that home values would plummet as commercial real estate faced headwinds. Now, it’s Barbara Corcoran—albeit a more experienced source when it comes to real estate—touting the opposite.

The statements came in a recent interview Corcoran did with Fox Business’s Liz Claman. “There’s no relationship between the commercial and the residential,” Corcoran told her. “The residential is starting to rebound, but the commercial is in trouble.”

“So Elon’s wrong?” Claman asked.

“Of course he’s wrong,” Corcoran said. “Yet again.”

An Interest Rate Bottleneck

According to Corcoran, what’s keeping prices from rising much now is a “bottleneck” caused by higher mortgage rates, which now sit at 6.71%, according to Freddie Mac.

Average rates have climbed nearly 150 basis points in just the last year and over 400 since rates were at their lowest—a mere 2.65% in early 2021.

The rising rates have put what many in the industry call “golden handcuffs” on today’s homeowners, discouraging them from listing their homes and buying new ones. (That would require trading an ultra-low interest rate for today’s much higher one). According to Redfin, about 85% of mortgage homeowners currently have a rate of 5% or lower. 

“Sellers don’t want to move from their apartment or their home because they don’t want to take on higher interest rates, and buyers are too afraid because they are getting less house. In fact, they’re getting half the house they would have two years ago,” Corcoran said. “So you’ve got a standoff going on.”

Higher Home Prices Could Be Down the Pike

Corcoran’s right: Buyers have definitely pulled back since rates jumped. Applications to purchase a home are now 27% below last year’s levels, according to the Mortgage Bankers Association, and home prices have stopped their steep upward climb as a result. The median sale price clocks in at $407,415, per Redfin’s latest numbers, up from $382,000 in January but down 4% from a year ago.

Things will change once rates turn a corner, though, Corcoran told Claman. “The minute those interest rates come down, all hell’s going to break loose. Prices are going to go through the roof,” she said. 

Many industry players expect rates will indeed fall later this year. MBA predicts rates will drop to 5.6% by the end of 2023 and 4.8% by the close of 2024. Fannie Mae’s latest forecast calls for 6% and 5.4% rates, respectively.

Those are just forecasts, but if they ring true, it could spur a jump in demand, which the housing market’s ill-prepared to meet. Housing inventory is currently near all-time lows, and according to Realtor.com, the market’s already 6.5 million short of demand. Lower interest rates would only add fuel to the fire.

As Corcoran put it, “It’s going to be a signal for everybody to come back out and buy like crazy. We could have COVID all over again.”

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On May 5, 2023, news broke that weight loss juggernaut Jenny Craig was filing for Chapter 7 bankruptcy in the US.

Of course, in light of the recent news of so many legacy brands crumbling (the 50-year old-home decor shop Bed Bath and Beyond filed for Chapter 11 bankruptcy in April, and the 30-year-old news outlet Vice Media filed for Chapter 11 in May), it wasn’t exactly shocking to hear that another big-box store was going out of business.

According to an insider I spoke with, who was involved in the M&A conversations, the company “had been declining year over year – they were bleeding cash and trying to figure out how to turn the business around.”

But, why was this particular moment the final death knell? After all, Jenny Craig (“JC”, or “Jenny”) had been through its fair share of private equity and corporate M&A over the years:

• JC was delisted from the New York Stock Exchange in 2001, and a majority stake in the company was sold in 2002 to ACI Capital and MidOcean Partners for $112 million;
• In 2006, Nestlé, the Swiss food giant, purchased the company at a premium, for $600 million;
• Nestlé divested the underperforming brand – selling it to North Castle Partners in 2013; and
• HIG Capital acquired the business in 2019 for an undisclosed sum.

In spite of recent financial challenges, certainly there was some sharky investor eager to scoop up the distressed assets along with 40 years of brand equity, at a deep discount, right?

Wrong.

Here are five reasons why the hate-it-or-love-it diet company met its demise. And if you’re running (or working for) a similar legacy brand – you should be paying close attention to avoid these pitfalls.

1. Jenny Craig, ironically, couldn’t trim the fat

JC’s business model historically focused on high-touch support for individuals looking to lose weight, leveraging a network of weight loss centers and personalized consultants around the country (as well as in Canada, Puerto Rico, Australia and New Zealand). These centers meant that JC maintained a hefty brick-and-mortar footprint, and remained loaded with debt because of this footprint – to the tune of $250 million. This “bloat” became unsustainable over the years – particularly with the accelerated shift to online coaching brought on by the Covid-19 pandemic.

According to the insider I spoke with, JC had a big fixed cost infrastructure. In comparison, newer and more popular weight-loss companies like Noom, which was founded in 2008 as a digitally-native subscription-based app for tracking food intake and exercise habits, offer a much more scalable model.

Part of the challenge was that for many Jenny clients, the centers were an important part of why they stuck with the program. One customer I interviewed named Ariel Faison, who maintains a YouTube channel providing tips on how to recreate JC menu items at home, shared that she had built a strong rapport with her coach, and looked forward to sitting down and sharing the ups and downs of her life and weight loss journey every week. Faison further explained, “it wasn’t just an automated chatbot – where an agent will get back to you. This was a real person, who would learn your habits and really be there as a friend.”

In late April 2023, the company woke up to the reality of its unsustainable model and announced it was overhauling its business with plans to close its 600 centers across the U.S. and revamp itself as an e-commerce player. But it was too late.

2. Jenny Craig, who?

Jenny Craig had its heyday in the 1990s and 2000s – recall their iconic commercial, 1-800 94-Jenny! The company initially IPO’d in 1991 and has been a household name for decades. However, like so many legacy businesses, the Jenny Craig brand hasn’t kept up with the changing times.

In response to the shut-down, Reddit users joked that they were surprised Jenny Craig was still around.

And this brand perception is not surprising, considering Jenny’s lagging social media presence. JC has 31K followers on Instagram, 236K likes on Facebook and 3K subscribers on YouTube. By contrast and for context, its close rival, Weight Watchers (which rebranded to “WW” in 2018) has 1.7M followers on Instagram, 2.9M likes on Facebook and 172K subscribers on YouTube.

Even though WW was founded in 1963 – making it two decades older than JC, they were able to pivot from “IRL” to digital- and appeal to a much younger demographic. How? I believe it was their clear shift in brand messaging from weight loss, to wellness; a focus on inclusivity and curves, and shift away from counting calories. When WeightWatchers rebranded in 2018 to WW – accompanied by the tagline “wellness that works”, they were specifically tapping into a cultural zeitgeist that prioritizes body positivity and getting fit, rather than just getting skinny. And, regrettably, that brand facelift, was something that Jenny Craig was unable to accomplish.

3. “Jenny Craig is for older, White folk”

In describing her experiences, Faison, who is a thirty-year old African American woman, explained to me that she didn’t see diversity at Jenny Craig. “I had heard about Jenny for years and years – in my mind – it’s an old people’s weight loss program. And I have never seen anyone who looks like me in a Jenny Craig center. But I’m used to it. I live in Arizona. You won’t see anyone who’s Black. They are all older and caucasian. [Jenny targets] older, white females. And a lot of them are lifetime members who have been with the company since 1993!”

Competitor WW was more proactive about attracting a more diverse clientele by leveraging celebrity brand ambassadors, like singer-actress Jennifer Hudson (joined in 2010), media mogul Oprah Winfrey (2015), DJ Khaled (2017), singer Ciara (2021) and actress Tia Mowry (2022), through the years.

Now this is not to say that JC never brought on a racially or ethnically diverse brand influencer. In fact, in 2008 rapper-actress Queen Latifah replaced the now late actress Kirstie Alley in Jenny ads. But unfortunately, for JC, the private equity community just didn’t believe that the brand could sufficiently capture a younger and more diverse demographic.

4. O–o-o-ozempic! And other prescription weight loss drugs

The market for prescription weight loss drugs is booming. According to Axios, it is estimated to reach $30 billion by 2030.

The Ozempic jingle accompanying nightly commercials for the “miracle drug” produced by Novo Nordisk and endorsed by celebrities such as Elon Musk and Chelsea Handler, is a steady reminder for Americans – you don’t have to suffer through calorie counting and food rationing, when you can take a daily or weekly injection and have it done-for-you.

Charles Barkley recently shared publicly that he was able to lose 60 pounds in 6 months on the drug Mounjaro, a similar weight-loss medication produced by Eli Lilly.

Both Ozempic and Mounjaro, along with others like Wegovy, Victoza and Saxenda, are part of a class of drugs initially designed for diabetics, known as glucagon-like peptide-1, or GLP-1, receptor agonists. The injectable hormones are designed to do three things:

• increase insulin production, in order to increase sugar absorption and decrease blood sugar;
• slow down gastric emptying so you feel full longer; and
• decrease your appetite by reducing the feeling of hunger in your brain

I asked Faison, who is a diabetic whether she had been prescribed one of these drugs, and she shared, when she first started on her weight loss journey she would have tried anything, but has since developed more discipline. “My mentality was, give me a pill, give me a shot, give it to me, put it in my body! But these drugs weren’t out at that time. Where I’m at now, I’ve learned to develop good habits, self monitor and be more accountable on my own – I am checking how different foods raise or lower my blood sugar.”

Now, it’s not the first time prescription weight loss drugs have popped on the scene. In 1996 the Food and Drug Administration (FDA) approved dexfenfluramine and fenfluramine (brand names, “Redux” and “fen–phen”), causing revenue at Jenny Craig and similar diet programs to plummet. So, JC hired part–time doctors to prescribe the drugs. Unfortunately, the drugs were quickly withdrawn from the market, when a study linked one of them to pulmonary hypertension and valvular heart disease. A cascade of lawsuits then followed, from injured patients who had developed abnormal heart conditions.

WW, which had previously sat on the sidelines during the Redux/Fen-Phen era, took a much different approach. In March of 2023, adopting a “if you can’t beat ‘em, join ‘em” approach, WW acquired Sequence, a subscription telehealth platform offering access to healthcare providers specializing in chronic weight management, for $132 million, enabling the company to offer these drugs to its customers as a premium subscription. This go-round, Jenny stayed out of the fray, likely because it was burned before.

There certainly are plenty of downsides to relying on medications for weight loss, which would cause many to question WW’s business strategy, including:

• hefty price tag — approximately $1,200 / month, without insurance;
• chronic supply shortages, preventing customers from obtaining;
• side effects including nausea, diarrhea, abdominal pain, bloating and in severe cases, pancreatitis and thyroid cancer; and
• the yo-yo effect — these are long-term / life-long medications, so many people who stop taking the drugs gain the weight back.

Despite the drawbacks, the frenetic market demand for these medications is not stopping, and is certainly slowing demand for traditional weight loss programs. And Jenny Craig was undoubtedly a casualty.

5. Meal delivery services are too expensive

At the end of the day, Jenny Craig’s core business was a meal delivery service, which although supremely convenient, was also very expensive.

The cost ranged from approximately $97 to $200 per week ($14 – $30 per meal) depending on the plan you chose, and customers were encouraged to add fruits and vegetables to supplement the pre-packaged deliveries. All-in, customers might be spending $600 – $1,000 per month on food, and that’s just for one-person, let alone a whole family. According to the Department of Agriculture’s most recent figures, in 2021, the average family of four spends approximately $1,000 per month on groceries on the low-end, and approximately $2,000 per month on the high-end.

Some former customers took to Facebook to complain about the expensive diet plan. “Food is great! Jenny Craig is expensive particularly if you have to purchase food from markets for other family members.” Another remarked, “​​I’m surprised they are shutting down. The food was very expensive. Shame that with their high prices she still couldn’t make it work. Seems she racked in tons of money.”

Jenny Craig certainly isn’t the only meal delivery service which has been struggling financially, especially given the drop in demand for meal kits post-pandemic. Freshly shut-down in January 2023. New York-based Blue Apron, which is still not profitable (sustained a $79M loss in 2022), said in early December 2022 that it was downsizing its corporate workforce by 10%. No matter how you slice it, whether it’s restaurant or at-home delivery, the margins are tough and food is a hard business.

Admittedly, there is still strong demand for convenience in the kitchen, albeit at a reasonable price point. And this is why the market for meal kits is quite crowded, with companies like Blue Apron, HelloFresh, Green Chef, Daily Harvest, Factor, BistroMD, offering everything from keto-friendly recipes and ingredients to dietician-designed meals that are delivered fresh and ready to eat in under 5 minutes. However, in a tightening economy, as Americans are looking for ways to trim their food spend, meal delivery services are considered luxuries. And again, companies like WW and Noom have adopted a more sustainable model, where the customer is responsible for their own meal preparation.

Conclusion

A recent study by McKinsey found that the average life-span of companies listed on the S&P 500 was 61 years in 1958. Today, it is less than 18 years. So by any measure, Jenny Craig had a solid run at 40 years. But that doesn’t mean we can’t unpack the ways that they could have breathed new life into the business, to get back to growth. The next question is – which, if any, of the many lessons from JC’s decline, can help you adapt to changing consumer preferences and stay competitive?

David Greene:
This is the BiggerPockets Podcast, Show 778.

Niti Shah:
This book is really about our journey and how we built our 10 million dollar portfolio and we’re able to quit our jobs. So we kind of reverse engineered that into saying, “All right, how do we work with the limited capital that we have? How do we work with the limited time that we have, but also, scale our assets really fast in three to five years as opposed to waiting 30 years?” And I think the question shouldn’t be, “Should I invest right now? The question should really be, how should I invest right now?” Because every market has its pros and cons.

David Greene:
What’s going on everyone? This David Green, your host of the BiggerPockets Real Estate podcast? You already know what time it is. The biggest, the best, the baddest real estate podcast on the planet. I’m joined today by my favorite co-host and good friend, also incredibly handsome man today. You guys got to check us out on YouTube. If you’re not seeing what I’m talking about, Rob Abasolo. Rob, good morning to you.

Rob Abasolo:
Top of the morning to you, Dave. Listen, today, I’m feeling good. I didn’t tell you this, but I know you know I’m not a morning person. Today, I woke up at 4:30, I worked out at five. I’m turning my life around and it feels good.

David Greene:
Today’s show is awesome. We are joined by Nitty and Palak Shah. You may have recognized Palak’s name from previous BiggerPockets episode, 368. They are back today because they just wrote a book for BiggerPockets. The book is called Accelerate Your Real Estate, Build a Hands-Off Rental Portfolio With the SCALE Strategy, where they have taken the BRRRR strategy that I wrote about and come up with a blueprint or greenprint as I like to call it, to scale that to growing a very big portfolio, and we get into a lot of very practical information on this topic. Rob, what were some of your favorite part?

Rob Abasolo:
To me, this is a part two to the BRRRR strategy because I mentioned this later in the episode, I really like this because a lot of people do the BRRRR, right? They do single BRRRR or double BRRRR or triple BRRRR and then, they’re like, how do I get to 20 or 30 or 40 or 50? We have a lot of investors that come into the show and say, “Oh, I did a hundred BRRRRs last year.” And then a lot of people are like, “I mean that’s cool, but I can’t even relate.” So this is actually the systemized approach for how to scale your BRRRR business and get into some of those larger number deals every single year. So very digestible and really the dream team duo here, I’d say. They had it down, like everything, the whole thing was just so massively orchestrated, I’d say.

David Greene:
BRRRRilliant analysis there, Rob.

Rob Abasolo:
BRRRRilliant. Thank you. Thank you.

David Greene:
Before we bring in Niti and Palak, today’s quick tip is going to be brought to you by my tasty cinnamon roll of co-host, Rob Abasolo.

Rob Abasolo:
And you’ll get that reference a little later, but today’s quick tip, we call this the Alex Hormozi hack, buy the digital and audiobook so that you retain the information better. You can read the book and listen at the same time. If you’re like me and you have to read a page five times to understand what you just read, this is going to help you get through the book, and I promise you this is a book that you’ll want to purchase. Also be sure to use promo code ARE778 for a tasty little discount on the said book, over at biggerpockets.com/arebook.

David Greene:
Very nicely done. You got that on the first try. You did a good job with it. You are really developing into quite the co-host that I must say.

Rob Abasolo:
Thanks. I appreciate it.

David Greene:
Today we’re joined by Niti and Palak. Palak and Niti, welcome back to the BiggerPockets Podcast. How are you two today?

Niti Shah:
Great. Fantastic.

Palak Shah:
Yeah, thank you for having us.

David Greene:
Well, Palak, we had you on the show back in February of 2020. What a time that was, episode 368. I can’t believe we have done that many episodes in that shorter period of time. That’s awesome. You were just three years into your investing journey then, and you were focusing on the BRRRR Method, which we immediately connected on for obvious reasons. Can you quickly share for people who haven’t listened to that episode, what made you start investing?

Palak Shah:
Yeah, sure. Niti and I were both in corporate and we had great jobs. We had slowly climbed the corporate ladder. I was a mechanical engineer. He worked in strategy and finance, and I had climbed the corporate ladder for 17 years and then, we decided to have kids. We waited until our late 30s because that’s what we were told you’re supposed to do, become financially stable and then have kids. Then, after we had kids, we realized that the higher up you go, the less time you have for your family. To me, it felt like a lie had been sold to me. I felt like society had conned me into this whole lifestyle that simply didn’t work. We were constantly stressed out and my resentment for that lifestyle started building. One day I told Niti, I was like, “We have to change something. This isn’t working. I’d never see the kids.”
And it was just really difficult, and after a lot of back and forth, we decided we were going to become a single income family, and I was going to start making an impact towards building something for our family that I couldn’t have otherwise, having that full-time job.

David Greene:
Well, I appreciate you sharing that because I don’t think that it is an easy conversation for most people. We always talk about it three years after it’s happened, when we’ve been so successful that we’re on a podcast and then, it gives us impressions to everyone listening like, “I just woke up one day and realized there’s got to be more to life than this. That bird chirping on my window is singing the wrong tune.” We just walked into our boss and said, “You know I just got to do this for me.” And we broke up with our old life, and the next thing we know, our next partner walked into our life sparkling and it was wonderful. That is not how this goes. You go from fighting one battle to fighting a completely different battle and getting your butt kicked. Rob, you had a similar experience. Do you remember what that was like for you?

Rob Abasolo:
Yeah, I opened my Zoom. It was during the pandemic, and I remember opening the computer and you had this speech for my bosses. I was like, “Listen here guys, I’m never going to work for a company again.” And then they joined and I just started crying. I was like … and they were like, “Is everything okay?” And I was like, “Yeah, I’m just quitting.” And they were like, “Oh my goodness, thank goodness.” And it was obvious to every person in my life, best friends, wife, coworkers, that it was time for me to quit, but it wasn’t so obvious to me, which is always very funny in retrospect because it just made so much sense and I didn’t see it there. It’s a very scary decision. So a lot of respect to you for making that decision.

Palak Shah:
I think the big thing was … I don’t know, I felt like a lot of women had paved the way for me to get to where I was in corporate and I felt like I was letting them down by quitting my job, but then Niti was pretty big on … he’s like, “You are not quitting your job to let them down. You’re quitting your job to build something else.”

David Greene:
What has happened since the last time we spoke? I believe you were around five million in assets at that time. What’s it been like since 2020?

Palak Shah:
So we’ve doubled our portfolio. So we are 10 million in assets, and I think six months after the podcast aired the episode, Niti quit his job and he was able to retire and join the business full time.

Rob Abasolo:
Did you expect for Niti to … or Niti let me ask you, were you expecting to quit six months after the podcast or did things just move so quickly that it sort of had to happen that way?

Niti Shah:
So we had been planning this for the longest time, and to what David said, it’s such a difficult decision because once you’re in your comfort zone, we’ve been in corporate … I’ve been in corporate for 15 years, and you are in this comfort zone of getting the paycheck, kind of knowing that you have a trajectory in the corporate life, that you work towards all your life. I remember coming home and telling Palak that we need to get out of this comfort zone. I cannot … if I think that I love my job, which I did, I did like what I do, except that when I looked at people who were 10, 15, 20 years ahead of being corporate, they were nowhere close to financial freedom.
I was like, I don’t want to do this for another 20 years and not be able to spend time with my kids and do things that I want to do. So I used to come back and tell her that I’m going to tell myself that I hate my job because you need something to compel you to make that change. Otherwise, it’s status quo, and wealth is not in the status quo. Wealth is beyond that. So you just have to keep motivating yourself that that’s what you need. So it took us … to your question, Rob, like we’d been planning that for three years ever since Palak quit her job. We’d been meaning for me to quit my job, and it happened maybe a year or so sooner than we had thought, which is great.

Rob Abasolo:
So it seems like you guys have made really great progress. You’ve doubled your portfolio, you’ve gone from five million to 10 million in assets. Tell us a little bit about your roles that each of you play in the business and are you guys complimentary to each other? Are you working on the same stuff? Break that down for us really quick.

Palak Shah:
In some ways we are each other’s business clones, and we realized that early on and as we started working together more and more, we started discovering that we were each good at almost everything in the business, but we were really good at certain specific things, and we realized that Niti was really good at strategy and he was the one who first found the BRRRR strategy and he’s really good at deciding which direction the business should go, and I’m really good at systems and processes and ops. So we have really narrowed it down to our genius zones now at this point. Yeah, I feel like once we did that, that’s when we really started thriving in this relationship because working together as a couple is a whole different ballgame. Nobody talks about it.

Niti Shah:
Yeah, and it didn’t happen … It takes time to figure that out, right? We didn’t know day one that that’s what our roles were going to be. Initially, we were like, “Hey, let’s both be involved in everything.” And that backfires pretty quickly because then nothing gets done. So it took a while to get there.

Palak Shah:
Right.

David Greene:
You’re releasing a book called Accelerate Your Real Estate, Build a Hands-Off Rental Portfolio with the SCALE Strategy. What was it that inspired you to write that book? Where did they idea start from and how did it come to fruition?

Niti Shah:
Yeah, this book is really about our journey and how we built our 10 million dollar portfolio and were able to quit our jobs. I think when we first started, there wasn’t really a clear path of how we were going to do this. We knew that we wanted to build wealth and build passive income.

Palak Shah:
And we knew we wanted to do the BRRRR strategy.

Niti Shah:
Right.

Palak Shah:
When we started executing it, we had to figure out what method of execution we wanted to implement, right?

Niti Shah:
That’s right, and I think even before that in corporate we thought that we had this kind of path that was made for us, but as Warren Buffet says, right, it’s not sometimes how hard you roll the boat, but it’s about the boat that you’re in. So we knew that we had to leave the corporate boat and find something else that we wanted to do, and that was the boat of real estate and how we selected buy and hold investing and the BRRRR strategy. Then within that, we said, okay, in a few years we want to own enough assets that we don’t have to do a nine to five job, but ultimately our goal was to be able to spend time with a family and spend time with our friends.
So we kind of reverse engineered that into saying, “All right, how do we work with the limited capital that we have? How do we work with the limited time that we have, but also scale our assets really fast in three to five years as opposed to waiting 30 years?” So that’s what really inspired the book and the strategy and the framework that we came up with.

Palak Shah:
And we found that … a lot of times, we found a lot of information that was available for people who had no money and had a lot of time on how to get into real estate and how to scale a portfolio or how to work towards it, but there wasn’t anything available to us on how we could execute the BRRRR strategy with limited capital, limited time and still not creating another nine to five for ourselves.

Rob Abasolo:
Yeah, that’s really cool. So would you say that this book is it … obviously, it’s going to be centered around the BRRRR strategy, but it’s not necessarily a how to execute the BRRRR strategy, from what I’m understanding, it’s more on the actual scaling of the operations. Is that right?

Niti Shah:
Right, so it’s almost, I think of like the BRRRR strategy as a strategy that can be implemented 100 different ways, but the scale framework that we talk about in the book is a specific blueprint to execute the BRRRR strategy. So thinking through every step in the BRRRR framework, how do you put systems and process and teams that really allow you to scale the business and treat it like a business rather than just a mom and pop investor?

David Greene:
Awesome. I feel like there needs to be a movement started that anytime we refer to a blueprint for BRRRR, we call it a green print

Rob Abasolo:
You heard it here first?

Palak Shah:
Yes. This is a greenprint.

David Greene:
A greenprint, yes, a green print to SCALE. You know what? The book scale that I wrote is green. This is getting even better. It’s a conspiracy. All right. We’re going to dive deep into some of this content from your book, Accelerate Your Real Estate, Build a Hands Off Rental Portfolio with a Scale Strategy but first, can you run us through the SCALE Strategy acronym and how it connects to BRRRR?

Niti Shah:
Sure. So think of SCALE as one step for every step in the BRRRR framework. So the by step in BRRRR is scalable acquisition and deal analysis. That’s S in the scale framework. So that’s really about not just how you buy a property, a lot of people get stuck in analysis paralysis, but how do you identify the neighborhood? How do you identify the property avatar, how do you build a deal pipeline, so that makes it scalable? Next step in the BRRRR framework is the rehab, which is construction without the DIY, right? And that’s exactly what that means. There’s a lot of people think that, “Oh, they have to do all the work and they have to go out there and do the tiling and do the kitchen,” and that’s not how you need to do it.
If you really want to scale, you want to build a team that allows you to do the rehab no matter where you are, even if you’re investing in a different city or different state, having a team that actually takes care of the rehab for you. Next step in the BRRRR process is the rent, which equates to adding cash flow. This is about how do you rehab the property in a way that attracts great tenants, that allows you to do your cash-out refi, but also maximize the rent that you get. Then, a lot of people talk about managing properties and getting tenant phone calls and having the systems, certain processes and teams to really be able to deal with it, as you scale your properties and as you … even if you’re investing out of state again or out of the … in a city that you don’t live in. Next is the-

Palak Shah:
Refinance.

Niti Shah:
Refinance, thank you. Refinance is leverage and commercial financing, and this is, I think by far, the most critical piece of the SCALE framework, which is understanding commercial finance. A lot of people can scale because they don’t understand how to do the short-term financing. How do the long-term commercial finance and how do you get past the 10 loan limit if you do conventional loans and things like that, which commercial financing allows you to do, it truly allows you to scale. So that’s a very important part of the process. The last is the repeat which is exponential growth. Exponential growth is all about treating this like a business, putting the systems and processes and teams in place in every step of the process that truly allows you to scale fast and focusing on the 20% of the things that give you 80% of the results.

Rob Abasolo:
I love this. I love this and I love that there is a part two to BRRRR, if you will, because we have so many people come onto the show and effectively, a lot of the times they might have already done 50 BRRRRs or 100 BRRRRs, and it’s really hard for a lot of the listeners to relate on how one goes from two to 20 or two to 40. So I think that this process really lays it out for people that want to go to that 10th or that 20th or 30th BRRRRs, so I’m excited to dive into that.

Niti Shah:
Yeah, and to that point Rob, in my mind, it’s as hard to do two rehabs at the same time as it is to do 10 properties at the same time. The difference is the scale, how do you go from two to 10? And that’s what the SCALE framework is about.

Rob Abasolo:
Okay. So on this topic, there are a lot of people out there right now complaining that BRRRR has really gotten harder than ever, but it seems like you’re actively investing this way right now, right? So what would you say some of the benefits are to the current market that we’re in?

Niti Shah:
Yeah, absolutely, and can I start with … take a step back and say this question has been asked by investors since 2015. Since we started investing, we were asking the same question. Everybody’s asking me, is it a good time to invest? Should I be investing right now? I think the question shouldn’t be, “Should I invest right now?” The question should really be, “How should I invest right now?” Because every market has its pros and cons. Back when we started investing, deals were easy to find. The interest rates were low-ish, but it was very difficult to find lenders. Palak had to call 100 lenders to be able to find-

Palak Shah:
Yeah, almost 100 lenders.

Niti Shah:
Lenders. So that was one challenge that you need to solve for as an investor to be able to invest in that market. Then fast-forward to when COVID hit, lumber prices went through the roof. Contractors were really, really hard to find because there’s so much money in the market and deals were really hard to find. There’s 10 cash offers for every deal that you’re trying to get. So that was a challenging market too, but again, as an investor, you figured out how to find the right deal, how to build a deal pipeline to be able to navigate that market.

Palak Shah:
At the same time, lending was easier, right?

Niti Shah:
Yeah.

Palak Shah:
We’d never seen 30 year fixed loans in the commercial world before COVID hit. There were maybe a few lenders offering that, but after COVID, everybody started offering those 30 year fixed commercial loans because it got much easier to borrow money. There was a lot of money in the market.

Niti Shah:
Yeah, and fast-forward to now where the interest rates are at an all time high, but guess what, the positives in this market are that it’s a lot easier to find deals than it was even a couple of years back. There’s less competition in a lot of markets. It’s easier to find contractors as a new investor because there’s lesser money in the market, so there’s lesser construction projects happening. So you’re likely to find a contractor easily, and lumber prices and some other material prices have stabilized. So there’s a lot of positives to this market. You just got to figure out how you’re going to tackle the high interest rate, and that’s it. So every market has its unique challenges that you need to see.

Rob Abasolo:
Yeah, yeah. It almost sounds like you’re saying probably in a lot nicer than what I’m about to say, but people always find a reason to complain about the market that they’re in, right? You’re totally right. When interest rates were low, everyone was like, “Oh, it’s so competitive and oversaturated now interest rates are high, but competition is low because no one wants to do this.” Now, everyone is like, “Oh, the interest rates are high. I don’t want to do it,” but most of the investors that I know in my community, in my network, everyone is still … the experienced people are still investing in real estate because they’re good at it. They just do it consistently, and I think that’s probably the mindset that you have to take.
We’ll have listeners that get really mad at past episodes. They’re like, “You used to tell us to invest and now the economy is this and you’re shifting your viewpoint.” I’m like, “Yeah, we are shifting our viewpoint. That’s exactly what we’re doing because the economy has shifted, so we must shift how we invest and how we look at different things.” This is one of those things as educators in this space, shifting is the most important thing we can do because the conditions change every single day.

Niti Shah:
Absolutely.

Palak Shah:
And as investors, it’s our job to figure out what the challenges are in the market and how to get around them and what the opportunities are in the market and how to take advantage of them. It’s going to be changing constantly and if that’s … that’s a skill that as an investor, we have to develop, that’s a part of growth as an investor, how to work with a changing market.

Rob Abasolo:
Absolutely. I mean, David, I know you, you’ve sort of shifted your strategy. I’m certainly shifting my strategy so many different ways. I mean, primarily I was a short term rental investor. I still am. I just invest completely differently. I don’t buy the same kind of houses anymore. I don’t buy in the same locations. I don’t buy with the same types of loans. I’m doing a lot of creative finance or sub two deals because that’s the best way to get a return for me. So ultimately, I think you have to know how to adapt to whatever market you’re in.

David Greene:
It’s always been that way like we were just saying. It’s hard to believe, but in 2010, which everyone refers to as the golden era, “Man, if I could go back to 20 twin, I would’ve bought every house that there was. I’m just waiting for the next time that happens.” The funny thing is, at that time, everyone thought you were fool if you bought real estate, you were being criticized, you were being mocked. There was contractors that were dying for work, that would take jobs at cautious to keep their guys fed it. It wasn’t, “Is there a cashflow deal?” It was, “Of all the cashflow deals, which one is going to get me the most for the least amount of work?” So we’re like, “All right, I can get a 25% cash on cash return with this one, and all I got to do is paint it.”
That one, I got to do some drywall and paint. That’s too much work, but there was no money. You couldn’t raise money to buy houses. We hadn’t increased our money supply by 80% at that time.

Rob Abasolo:
Yeah. Tell me this, because I was not investing in 2010. I’m sure you guys all were. I have to imagine that in retrospect, it seems like, “Oh my gosh, I wish I could go back to 2010 when the times were good,” but was real estate that obvious of a good place to be in 2010? I got to imagine it was still scary coming right off of 2008, just like you said, right? Most investors were probably terrified to get into real estate except for the people that have probably been investing their whole life.

Niti Shah:
Yeah, and this is a piece of advice we got from a mentor that we had when we first started investing, and he had been through multiple cycles, including the 2008 crash, and the first piece of advice that he gave us was don’t invest for appreciation, invest for cashflow, right? And that’s how he’d survived the 2008 crash because he was not investing just for … in markets where it was going up and he was able to survive the crash because he was cash flowing on all the properties. That’s the best part about long-term buy and hold rental real estate is that the cash flow allows you to survive periods of downturn, periods of recession,

David Greene:
Niti, I’m so glad you said that. You don’t know how much heat I’ve been taking from the real estate investing community for making that statement. I mean, I’m hated in certain circles that consider me a heretic because I’ve shared my opinion. Cashflow is not intended to make you wealthy. Residential real estate was never built for the purpose of creating cashflow. It does eventually do that, and at certain market cycles when the market is really low, you can get into cashflow earlier in the economic cycle of owning it than at other times. So for instance, any property that you buy in a decent area is going to cashflow in 15 years, maybe even in 10 years, it’s not normal that it does the first year you buy it.
That was an unusual phenomenon we experienced for so long, like you said, Rob in 2010 because prices were so low, but as investors, we’ve gotten addicted to this, like all that we think is I have to get cashflow so I can quit my job so I can get a girlfriend so my dog will like me so that my mom will finally respect me. All the things in life we want, we think cashflow is going to fix that problem, but those that have owned real estate for a while understand the perspective I have, which is that it is a defensive metric. It is designed to stop foreclosure just to keep the property alive. And over time, the appreciation that comes from inflation and the loan pay down and the value that you add to the real estate do create massive wealth that will dwarf what most people would make at a W-2.
It’s just so hard to get that through to the people who show up saying, I want cashflow for immediate gratification and they want to fix things. Is that a similar experience to what you’ve had?

Niti Shah:
That’s so true, David, which is what we talk about is, you need to stack assets like pancakes. In your initial years of investing, first two, three, four years of investing, you are just buying assets and yes, you need to positively cash flow so that you can see through periods of downturn and that it’s not burning a hole in your pocket. You need to positively cash flow, but don’t think that I’m just going to get to 10 houses and I just need that cash flow and I can retire in two years. That’s not the way to think about it.

Palak Shah:
It actually puts a lot of investors in that scarcity mindset I’ve noticed, because then you are worried about your $50 a month changes my cash flow if I just do this one thing, and I tell them there are four advantages to owning long-term buy and hold rentals. Cashflow is just one of them. There’s appreciation, debt, pay down and what was the first one?

Niti Shah:
Tax benefits.

Palak Shah:
And tax benefits, thank you. Then, with the BRRRR strategy, now we have forced appreciation, right? Cashflow is just a very small part of it, and when you start focusing so much on cashflow, now I see investors get into this hyper scarcity mindset where they’re trying to focus on that additional $20 a month instead of thinking that if I just own this property for 10 years, I’m going to make a hundred grand. Why am I worried so much about that additional $20 a month? I was reading the book, the Psychology of Money, and he talks about how Warren Buffet, he was always focused on longevity. He wasn’t focused on making that short term gain. He always talks about how. People who are able to withstand ups and downs in the market … yeah, there you go.
One of my favorite books, and he talks about how like … if you are able to hold on to your assets during ups and downs, whatever you need to do to make that happen, longevity is what’s going to win.

David Greene:
Yeah. Thank you for sharing that. This is gold everybody. Listen to this again. It’s different than what you’ve been told, but my opinion of why that is, is most of us hear about real estate investing for the first time from a guru, selling a course. And the fastest way to get someone to pay $100,000 to learn how to do something is to convince them that if they give you that $100,000, you will solve a problem for them no one else can, like getting cashflow to quit your job. So because of that … actually, I was up until 1:00 last night working on my next book for BiggerPockets, which is about the 10 ways real estate makes money, and basically they fall into those exact four categories that you two just mentioned, and how we’ve all been sold the bill of goods on how cashflow is the only thing to look for, and so many people miss opportunities.
So I am very glad to hear that we have this in common as well as our love for BRRRR. This is really good. From here, we’re going to go through each of the individual steps in the Scale Strategy, and for each one, we’re going to ask you about two things. The first is what myths hold investors back at each stage? And the second will be the tactics that you’ve learned that will help investors take action. So let’s start with number one, the scalable acquisitions and deal analysis by what is the myth here?

Niti Shah:
Yeah, so one of the challenges that I often see people get caught up when thinking about buy is they say they’re getting caught up in analysis paralysis, right? That’s the term you hear a lot, and a lot of times they say that they’re not finding deals because they’re so focused on deals. They’re just start looking at deals … every deal that comes to them, whether it’s a single family or a duplex or a quadplex or a flip or a BRRRR, sometimes people make that mistake. What they really should be doing … so that’s kind of the wrong way to do it. What they really should be doing is figuring out where they should be investing first.
What city, what market, and why. What neighborhood you’re going to be investing in. So pick the neighborhood first. Pick the ideal property avatar, which is really what your property should look like first before you start looking at deals. That we can eliminate 80% of the deals that don’t even apply to you, right? You’re like, “All right, this deal may be good for somebody else, but it’s not good for me.” So knowing that property avatar, knowing which property you’re going to buy, helps you hone in on properties that are the right fit for you and helps you move faster and get those properties under contract.

Palak Shah:
We learned this from experience. It took us one whole year to get our first BRRRR deal under contract because we were looking in the wrong neighborhood and we were trying to make it work. What we say now is figure out what neighborhood this strategy works in first before you deep dive into finding the right deal. Niti looks at hundreds of deals every week for our community, and what we find is first, if we help them narrow down the neighborhood before we even get them to look at a deal that accelerates the success rate, because you are not looking at deals all over the country, you’re not looking at all different kinds of deals. Now you’ve narrowed it down to the point where you are so focused that it’s very easy to spot a good deal when it comes.

David Greene:
Absolutely. I call that in long distance real estate investing, a target rich environment, you’re kind of starting with the end in mind. If you’re looking for cash flowing real estate, it’s going to need to be somewhere close to the 1% rule. Looking at luxury real estate isn’t going to make any sense because then you’ll complain that the BRRRR method doesn’t work as opposed to, I’m looking in the wrong area. Before Rob moves this onto the next phase, which is construction of Scale, I just want to ask you too briefly, there is a lot of criticism right now that people say BRRRR doesn’t work, but when I ask them why, they always say, “After you pull your money out, it doesn’t cashflow.”
My thought is, well then it wouldn’t cash flow if you just bought it traditionally either. The problem is that you’re looking at properties that don’t hit price to rent ratios that you need. Is that a similar experience for you too, on why you see people struggling with the BRRRR method right now?

Niti Shah:
Yeah, and I think of it is also, they don’t understand because a lot of people don’t understand commercial financing well, there’s so many things that you can do, so many different terms that you can get for long-term commercial financing that allows you to maybe … for example instead of a 30-year fixed you could get a seven-year-

Palak Shah:
ARM.

Niti Shah:
ARM.

Palak Shah:
Yeah.

Niti Shah:
Right, and that gives you a slightly lower interest rate. Instead of doing a 25-year amortization, and see if you can find a 30-year amortization. So there’s all these tactics that you can do to increase your cashflow, short term if that’s what your goal is, but here’s what I tell people. Don’t worry about the short term cashflow because guess what, your rent is always going to go up every year. You can increase your rents every year and in the next two or three years when the industries come back down again, because inflation will be down, that’s the idea and then, you can go and refinance and lower your monthly payment, and that drastically increases your cashflow again,

Palak Shah:
And you’re going to feel like I’m reading your mind, whoever is saying that their property doesn’t cash flow at the end and bar doesn’t work, it’s because you are looking in a neighborhood where you should be flipping properties, not boring. If you can cash out but not cashflow, that’s a great neighborhood to flip. That’s not a good neighborhood to BRRRR because that’s not a good rental market. You need to figure out what’s a good market where you can cash out and you can cashflow at the same time.

Rob Abasolo:
Yeah, it’s an excellent tip. Okay, so take us through construction that Scales rehab in the BRRRR acronym. What are the myths here and what are the tactics?

Niti Shah:
So the biggest myth for rehab, from all the investors that we talk to is people think that they need to do a lot of the work themselves or be the job site or go to Home Depot and pick all the materials and hire their own subcontractors. That’s a big issue that we see.

Palak Shah:
The real way to scale a portfolio is figure out how you’re going to scale this and how you’re going to scale your construction part without being at the job site every single day because you cannot be at 10, 20 different properties on a daily basis.

Niti Shah:
The key is to find a good general contractor. If you have a good general contractor who has their team and all you are doing is overseeing them, another mistake that we see a lot of investors make when it comes to rehab is that they’ll let … when they hire a general contractor, they’ll just let the general contractor run the entire project, decide what rehab needs to be done, and almost telling the investor what is going to happen in the rehab. It should be the other way around. As an investor, you should be in complete control of what needs to get rehabbed and why, and we talk about the Goldilocks on, which is what kind of rehab are you going to do to get the maximum amount of ARV without going overboard and over-rehabbing?
As an investor, it’s your job to tell your contractor how to do that and what that’s going to look like.

Palak Shah:
And contractors are creatives, right? They’re creatives. They’re going to find creative solutions for whatever dollar amount you give them, but don’t expect them to watch your dollar amounts. Don’t expect them to keep everything on track when it comes to the numbers, you are in charge of that. So, we find that a lot of investors get into this adversarial mindset when it comes to their relationships with their contractor. It’s not about that. It’s about developing the skill of how you’re going to learn to work with that contractor. That’s a whole different skillset that you need to develop as a new investor.

David Greene:
It’s such a good point. One of the hard lessons I had to learn when I was first dealing with contractors was … and this isn’t a bad thing, but the goggles that they look at a situation from are wildly different than the goggles that I look at it from, which you want … if you think about it, you want the contractor to see it differently. They look at the work that needs to be done, whether it’s framing something or repairing plumbing and their goggles, if they’re good, are what’s the right way to do it? I don’t want to cut corners. I don’t want to go the easy route. I don’t want to do what’s easier for me. I want to do it the right way, so this is going to last for 25 years.
Well, often the right way is seven times more expensive than the cheaper way. So when you compound that by the 11 different things you have them doing, they go in there and spend a lot of your money, but they’re not doing it to rip you off it. Their integrity feels like this is the way it should be done. I do things the right way, which is why you have to pay a lot of attention to the numbers that they’re giving you and what they’re saying to do, because frequently, they will explain why it’s so expensive. I will understand their perspective and say, “Well, do we really have to run the plumbing from here all the way to there? Can’t we just take out this one little section and yeah, I guess we could do that. That’d be fine, because the rest of it is okay.” It literally went from a $12,000 job to a $2,500 job because I just asked the right question.
I think so many people are afraid to do that because they assume the contractor is trying to rip them off. The contractor is trying to get them to spend more money. They don’t understand that. The contractor is afraid to propose the cheapest option because it makes them look like they’re the unlicensed person that’s shady and doing it on the side that they all can’t stand. Has that been a similar experience for you two?

Palak Shah:
Yeah, if you think about a consultant, you go to a consultant and ask for their services, they’re going to show you all the services they offer. They’re going to give you the breadth of the projects that they can do for you. That doesn’t mean you have to hire them for all of those things. It’s the same thing with a contractor. He’s going to show you all of the things he can do for you for your project. That doesn’t mean you have to do all of them. You have to decide which, and we talk about how … if you think of your rental as a product, think of the two customers that you’re producing that product for. One is your tenant, of course, that’s your end customer. Make sure it’s a space that’s comfortable that’s appealing to your tenants.
They can pay you the rent that you want, but also, the appraiser, you want to make sure that in the BRRRR strategy, at the end of the day, the amount that the property appraises for is going to determine the cash-out amount that you’re going to get. So you’re also rehabbing it for the appraiser. Now, if you are rehabbing it to the point where you get a super high appraisal, but then you’re not going to cashflow, it’s not going to help your project because now, you don’t have an asset, now you have a liability.

Niti Shah:
I think that’s … to what David, you said earlier, which is anytime somebody goes over a project like you’re early on in the rehab project and your contractor comes and tells you, “Hey, this is … we just found this surprise, this came up,” and surprises always happened on rehab projects. This surprise came up and now, it’s going to cost you 5,000 more dollars to fix that thing. Your immediate reaction shouldn’t be, “Oh, okay, that’s fine.” It should be, “Okay, but our budget is still our budget. Where can we find the $5,000 where we can cut down on other things so we can spend it on this?” And those are the kind of conversations that you need to have with your contractor because they’re there to help you.
They’re a part of your team. If you treat them as a part of your team and pick their brains, they can get creative and help you. If you tell them, that’s our end goal, they’ll help you get there.

Rob Abasolo:
Yeah. That makes a lot of sense. So earlier you mentioned thinking about the tenants you’re running to. How does that play into the question you asked at the adding cashflow stage? The adding cashflow stage is the A in the SCALE acronym?

Niti Shah:
Yeah. So for adding cashflow, it’s really … to Palak’s point kind of think back of what the property needs to look like, what’s going to get you the best rent. So this is where you do your comp analysis to say what other properties are renting for in your area. This is … and you pick a range of, say it’s 15 to 1700 or whatever, it’s renting for per month, properties that are similar to your properties and say, “Okay, if I do this, this, and this, I can rent it for 1700 because that’s what this other property is renting for.” If I don’t put for instance Central Air, maybe I’ll rent it for 1500. That becomes, again, a question that you need to ask your GC and put it on your numbers to see if your budget can support that.
If not, then don’t, and 1500 may still cashflow, right? So what you’re going to to do is make sure you get enough cashflow, but also that your cash-out doesn’t get impacted negatively.

Palak Shah:
One of the other myths I think that people have when it comes to that adding cashflow piece is they think that if you become a landlord, you are automatically going to answer those late night tenant phone calls. Almost everyone we talk to says that they’re afraid of getting a plumbing phone call in the middle of the night. Guess what? You can put the right systems and processes in place and build the right team to not have to answer that call and still keep your tenants happy and still get them the service that you want to provide them. So, it’s all about building it like a business and figuring out how you can provide the same level of service without being a part of that process on a day-to-day basis.

Rob Abasolo:
Could you give an example of a system or a process you could put into place for a plumbing issue that happens at night?

Palak Shah:
One of the things that we’ve done is we’ve assigned categories to the kind of problems that can occur. It’s green, yellow, red, right? You know that if something is green, it doesn’t have to be addressed immediately. If you know that if it’s yellow, let’s get back to them within 24 hours. You know that if it’s red, then it does need something that needs to be addressed immediately. See, first of all, it’s all about understanding what is an immediate issue versus what’s not because to a tenant, it may seem like it’s all immediate, but it may not be. Then, when it is in fact an immediate issue, you can hire an answering service and you can give them a list of vendors to contact when a specific issue occurs and then, build your … that’s all about building your team.
How do you build your team so that the right vendor can be contacted in case of an emergency? There are services that will provide emergency contacts. You just have to find them. You have to interview them within your neighborhood and find them.

Niti Shah:
To add to that, the best part of all of this, is that you don’t need to have any full-time employees. We have zero full-time employees and that’s … you can just outsource all of this. There’s services for everything these days. You can hire a contractor, you can hire an agency. There’s just so many options for you as an investor.

Palak Shah:
I highly … if you haven’t already, I highly recommend looking into virtual assistants. They’re amazing addition to your team.

David Greene:
That’s a great point. I heard someone else talking about that the other day, that they have a ton of property and no employees because they contract out all of the work. The argument against that is usually what you pay a little bit more than if you were just to hire a person. Their case was I save so much time, not training, not dealing with the human being’s drama, not, “I need a day offer today or I can’t work,” or they’re in a bad mood because their team lost in the playoffs, so they give bad service. You sort of avoid a lot of the headaches that come from managing people. I frequently said, if Notorious B.I.G. was still alive, he would’ve written the song, More People, More Problems.
Because as bad as this is to say, it often does come down to people can be the best, but they can also be the worst part of running a business. Whereas we know that we can count on ourselves, and that’s frequently what stops people from scaling, like you said, is they don’t want to have to take on new human beings that they can’t control. Well, if you’re contracting out to some other company that’s already got that problem solved, you can avoid that. So I think that’s really wise counsel. Moving on to the L, leverage and commercial financing. Let’s get straight to the tactics on this phase. What steps should investors take to optimize their financing?

Palak Shah:
Number one, we love hard money lending. We think it’s a really good option for new investors to leverage their money upfront. Number one, you can start with 25K and they can lend you the rest of the acquisition construction money. Also, a hard money lender can be like their big brother slash big sister looking over your project because they are putting their money into your project. They’re not going to lend to you unless the numbers actually work. They also don’t give you the funds for construction unless they sent an inspector out who’s going to take a look at the work that’s been done, and then they’re going to give you the funds as you progress through your project.
So now you have another set of eyes and ears looking over your project. So we highly recommend new investors consider hard money for short term. Do you want to get into the long term?

Niti Shah:
Yeah, and same thing for the backend, the long term financing, using commercial financing for that as well. This is where that question comes up these days of, “Well, on the conventional side, there’s a 12-month seasoning period.” Well, there is no seasoning period on the commercial side. Maybe some banks will let you do it within six months seasoning. And there’s some banks, you pay a little bit for premium, but they’ll let you refinance even before the six months are up. So there’s so many advantages to using commercial financing both for the front end, short term and for the back end long term. One other additional piece that I would say is that we always tell people always, always buy your investment properties under an LLC and not in your personal name for multiple reasons.
One, it gives you access to commercial financing, which you typically wouldn’t if you bought in your personal name. Two, from a liability perspective. In case lawsuits happen, all your assets are not at stake here. Now, I’m not saying don’t buy a second home in your personal name, that’s fine, but don’t scale with it. Don’t think that I can buy five or six. We did that. That’s how we started off. We bought a few in our personal name and we’re like, “No, well, let’s refinance it into LLCs.”

Palak Shah:
Yeah.

Rob Abasolo:
It’s funny, I’m laughing because you sort of just answered the number one question in real estate. I mean, we talk about YouTube comments, Instagram, “Do I need an LLC?” And people get so hung up on the LLC question and I feel like the answer is usually pretty easy. If it’s a commercial property, you need to buy it under an LLC or if like an investment loan, it’s usually going to go under your LLC and then, if it’s a personal or conventional, that’s typically going to go personal name and then a lot of people just will transfer it over to their LLC. Yeah, I agree. I mean I think … I’m glad you put a little bit of clarification there because I do think that hangs a lot of people up from both starting and scaling.

Palak Shah:
If you’re building a business, why would you do anything in your personal name? This is a business we’re working on, right? You’re building a scalable business, go get your LLC. That’s a simple way to answer, to LLC or not to LLC. That is the problem question, to quote Shakespeare.

David Greene:
Yeah. You also mentioned something that gets passed over, which is that you’re using commercial lending to buy residential properties. This comes up when people don’t understand that as an option because they say exactly what you said, “Well, there’s a seasoning period. I got to wait six months to get my money out. Now I got to wait 12 months to get my money out. BRRRR doesn’t work, or what do you do once you get to 10 properties?” Now, you can’t get into it, right? And the answer is pretty obvious, is you’re going to get commercial financing at some point when you’re doing this.
What were some of the hurdles that you two had to go through to get comfortable with the fact that you may not get super low rate 30 year fixed rate terms on every single property light people get used to in residential real estate?

Niti Shah:
It’s funny. When we first started investing, when we did the first few BRRRRs we got a really high interest rate because at that time it was hard to obtain financing, especially under LLCs. There weren’t enough lenders. So we got interest rates as high as six or 7%.

Rob Abasolo:
Hey, those are dreamy interest rates at this moment, by the way, right?

Palak Shah:
It seemed high at that time. Yeah.

Niti Shah:
Yeah, and it still seemed high at the time. Now, that the interest rates are a little bit on the high side, it can be a bit of a sticker shock for people.

Palak Shah:
Yeah.

Niti Shah:
Again, it goes back to there is so many things you can do to bring the interest rates a bit lower, right? Things like getting a higher amortization, maybe even getting a lower LTV, so instead of getting a 75% LTV, if you’re very concerned about cashflow do a 70% LTV, so that you’re going to cashflow a bit higher. There’s so so many things you can do if you understand commercial financing, which is why I’ll say education is important when it comes to financing.

Palak Shah:
You always use the word levers, right? Whenever we are doing deal analysis, Niti always talks about, “Hey, what are the levers I can pull to make this deal work?” Say we know what the interest rates are right now, and that’s the constraint we already have. Now, what are the other levers that we have the flexibility to pull? For example, can I negotiate harder on that property? Can I do the construction in a smaller amount? So, what you realize is whatever your constraints are, those are your constraints. Where do you have the flexibility? Pull those levers and if the deal works, it works, if it doesn’t, it doesn’t.

Rob Abasolo:
Well, man, I got so many questions, but that’s okay. We’re onto our last one here. It’s called exponential growth, and this is, as it relates to the repeat, you’ve already kind of started to talk us through this concept, but what would you say is the biggest myth with exponential growth, the final letter in the SCALE acronym?

Niti Shah:
I think repeat and the exponential growth comes from building systems and processes and teams throughout every step in the BRRRR process. So picking the right neighborhood where you can scale building a deal pipeline that allows deals to come to you that are the right fit for you, having a team in the rehab phase that does all the work for you, that you just oversee, even if you’re investing out of state, maybe hiring a property management company for when you’re renting out properties, or even if you’re renting it yourself, follow the systems and processes and teams. Same thing with when it comes to refinance, having a bank of lenders, having these relationships with the lenders at any time you want to refinance a property, they’re willing to do it for you.
Guess what, the more loans you do with banks, the better terms you get. There was a time when we first started out when we had to bring 25, $30,000 to the table to close on a single family deal, right? Now we bring $12,000 to the table because we have more experience. So, everything scales and all the efficiencies that you get as you scale, exponential growth happens as a result of that. And you want to treat it like a business throughout. There’s different steps that you can take as you’re building your portfolio to focus on the 20% of the things that really give you 80% of the results.
For example, when I’m analyzing a deal and if I find a good deal, guess what? That just made me 10,000 more dollars because I was able to buy it for cheaper. So that’s a $10,000 an hour job for me, as opposed to going to the job site and putting tiles in the bathroom myself, which I could easily outsource.

Palak Shah:
We had to learn how to do all of this, and we followed the framework. Can you automate? Can you eliminate? Can you-

Niti Shah:
Delegate.

Palak Shah:
Can you delegate? Then, if none of that is possible, then you do it and you have to learn what your method of outsourcing is we had to learn it … I’m an engineer, my method of outsourcing is I have to do it all once for myself to understand it. Then, I build a step-by-step process and then, I outsource it. Niti came into the business and he’s like, “Why would you ever learn to do something that you’re going to outsource anyway?” I had a light bulb moment and now, we’ve changed the way we outsource things. If we’re going to outsource it, just outsource it. And that saves so much time that we can focus now consistently on the business itself as opposed to trying to learn all these things that we were going to outsource to begin with.

Rob Abasolo:
That’s a great tip right there. I think that’s an understated tip because I’ll tell you, I am the … my worst enemy on delegation because I like to master something before I pass it off. Recently, I’ve kind of come to terms with the fact that it’s such a relief to delegate things out. I just delegated out something yesterday that was a billing and invoicing thing. I’m always behind on billing and I just delegated it out to my payroll person. It took me an hour to create the loom and to write out the process and sending it to them, and then I was like, “Oh my gosh, I will never have to deal with this again.” And it’s such a relief, so I think you’re 100% right. Delegate away, if it’s something that you have no intention on ever doing ever again, just give it away. There’s nothing wrong with that.

David Greene:
Just wasted time, right? Write that down. If it’s something you’re going to eventually delegate, don’t bother learning how to do it.

Palak Shah:
Yeah.

David Greene:
Learn how to delegate.

Palak Shah:
And it’s so hard to take your spouse’s advice on the way you’ve been running your business.

Rob Abasolo:
It’s the greatest tip of all.

Niti Shah:
It’s easy for me to take advice. I just do what she tells me.

David Greene:
That is a great … well, it worked with your suit today. You’re looking fresh, my man.

Rob Abasolo:
You are looking fresh, man.

David Greene:
That’s actually such a powerful statement. It’s so hard to take advice from your spouse or because I’m not married, but I remember what it was like with my parents, where they would tell you to do something and you don’t know anything. Then, my dad’s friend would tell me the exact same thing. I’m like, “That guy is really smart. I’m going to listen to exactly what he just said.” So now when I have to talk to one of my employees, I stop talking to them. I go to another employee and I say, “Will you tell so-and-so that he would do really well if he would do this instead?” And I just sneak it in there like a piece of broccoli inside the macaroni and cheese to a three-year-old, so they don’t know what I’m feeding him.

Rob Abasolo:
This is kind of like whenever you say a joke, but I say it louder and then everyone laughs and then-

David Greene:
And they laugh, because they think Rob is funny and they think that I’m scary. That’s exactly right. They’re like, when David says it, he’s a cop and it scares me, but Rob is fun and handsome looking like a reverse cinnamon roll over there. I love everything that he says. Yes, that’s exactly right. Rob has become my microphone.

Palak Shah:
We actually had to learn how to listen to each other from a business coach. We were talking to a business coach and then, I said something like … I said, we have a rule now, that I have this shiny object thing, I want to run after a lot of different projects, but we have a rule now if Niti doesn’t approve, I’m not allowed to take on any projects because I get myself in trouble. The business coach could see things way more clearly than either of us and he said, “Well, yeah, he’s strategy in the business.” And I was like, “Oh, I guess you are right. I should give my spouse credit for what they’re amazing at.”

David Greene:
We call that veto power. It’s good to have someone in your life that has veto power. That gives you the freedom to have crazy, amazing creative ideas without restricting yourself, and you don’t have to worry about if it’s a good idea or not. You just run with it. This is how Brandon Turner and I often operate it. He would just have the craziest stuff and he had complete freedom to think that way, but then, I had veto power. I go like, “Dude, that’s insane. We’re not doing it or oh, there might be something onto that. Let’s go deeper and see where you go.” When you try to measure yourself and be creative, your brain fights. It goes start, stop, start, stop, and you start to get nuts.
So I love that idea of somebody is the idea person, the innovator, somebody else who is the strategy person or the executor that brings some balance to the force, especially when it’s in a relationship. I love seeing a couple like you two working together through the challenges of a relationship and business, but making it work as a single entity with different strengths. I mean, that’s amazing. There’s so many takeaways from today’s show. I love what you’ve done with the BRRRR method where you’ve actually systemized how it can be scaled. I love some of the advice that you gave when it comes to contractors and using them as consultants. I love the idea of cash out or cash flow.
It could go either way. So when you’re buying your properties, make sure it works for each. Rob, what were some of your favorite parts?

Rob Abasolo:
You know what I’m like really starting to close a loop on this delegation thing, but I think just like you said, hearing someone else who’s done it much better than me, if I clicked and that’s it, I’m delegating everything. So moving on from this episode, you might see someone else behind the mic, but just know that behind the scenes, I’m feeding him all of the crispy knowledge nuggets that you’re going to be hearing.

Palak Shah:
It’s the AI version of Rob.

Niti Shah:
Looks like we created a monster here.

David Greene:
That’s exactly right. We don’t even know if this is Rob that we’re talking to. Maybe that’s why his tan looks so good. It’s actually a filter.

Rob Abasolo:
AI. I am ChatGPT.

David Greene:
All right. Well, thank you very much Niti and Palak. It was wonderful having you back on the show and hearing how your business has doubled since 2020. So if you want your business to double, go check out their book, where can people find it?

Palak Shah:
So, it’s biggerpockets.com/arebook.

David Greene:
All right. You heard that folks, head over to www.biggerpockets.com/are, for Accelerate Your real estate book, ARE book. Since you’re a loyal listener of the podcast and we love you, which is why you should go give us a five star review anywhere that you listen to your podcast, we are going to give you a coupon to get a discount for free. The show coupon for being a listener is ARE778 because this is episode 778. So go get your coupon and buy your book at the same time and learn how you can double your portfolio just like this couple did. It was so great to see you two again, where can people find out more about you?

Palak Shah:
You can find me on Instagram @openspaceswomen.

Niti Shah:
And you can find me on Instagram @rewealthblueprint.

David Greene:
Maybe you’re going to be greenprint at some point. Rob, how about you?

Rob Abasolo:
You can find me at Robuilt on YouTube and on Instagram. What about you?

David Greene:
You can find me @davidgreene24 on Instagram, Facebook, Twitter, all of it or davidgreene24.com, if you’re old-fashioned and like websites. All right. I’m going to let you guys get out of here because I’m sure you’ve got more deals to put together and rehabs to oversee. This is David Greene for Rob “The Reverse Cinnamon Roll” Abasolo, signing off.

Skylar Olsen, Zillow chief economist, joins ‘Closing Bell Overtime’ to discuss the state of the housing market, risk in real estate, and high rent prices hitting consumers.

With growth in the global economy and advancements in remote work, more and more companies are recruiting from a global talent pool. However, hiring internationally may not be as straightforward as hiring from within your own country. In order to do it right, you’ll need to consider a number of factors before moving forward, including the hours your team will work and what type of culture you’ll need to create.

Here, eight members of Young Entrepreneur Council discuss these factors and more as they share their insights on what all business leaders need to know about hiring internationally and why. Be sure to consider their advice to give your new team the best chance at success.

1. You May Need To Work With Unconventional Hours

Always consider time zones when setting up international teams. For example, 9 a.m. on the East Coast may be nighttime somewhere else and, as a result, you have to factor in reasonable time gaps between messages. Some employees may set boundaries with notifications about their hours, and encouraging that distance can ensure there are fewer miscommunications or bottlenecks. Use automated content management systems for regular check-ins on projects. If necessary, assign deadlines for regular communication. – Duran Inci, Optimum7

2. You’ll Need To Tailor Your Onboarding Programs

One thing many business leaders don’t address when hiring internationally is the importance of creating onboarding and training programs for each region. Recruitment and training processes that work well in one location might not be as effective elsewhere. Keep this fact in mind when expanding your market. You can reduce negative impacts and get everyone on the same page by hiring multiple recruiters and trainers from various countries around the world. – John Turner, SeedProd LLC

3. You’ll Want To Get To Know Your New Hires

When you’re recruiting from a global talent pool, it’s essential to know about the people you’re trying to onboard in order to foster a healthy work environment. This means getting acquainted with the diverse cultures they come from and the values they’re accustomed to. This would help you offer tailored experiences that would increase satisfaction and boost employee morale. For example, if you are familiar with the diverse cultures representing your workforce, you’ll be able to come up with a flexible and custom leave policy that covers regional and cultural holidays celebrated in different regions around the globe. So, knowing the people you onboard is of great help. – Stephanie Wells, Formidable Forms

4. You May Need To Provide Relocation Assistance

Hiring internationally is a topic near and dear to my heart. If there’s one thing companies need to know, it’s this: Be prepared to provide relocation assistance. Moving to a new country is a daunting task, especially if you’re doing it for work. As an employer, you have a responsibility to make the transition as smooth as possible for your international hires. This could mean providing assistance with visa applications, finding housing, navigating healthcare systems and even helping with cultural acclimation. Trust me, it’s worth the investment. Happy employees are productive employees, and nothing makes an international hire happier than feeling supported and valued. – Sujay Pawar, CartFlows

5. You’ll Need To Build An Inclusive Company Culture

One thing critical to hiring internationally is strong culture. It’s easier to define a culture around tighter geographical boundaries, but the greater access to talent is worth stretching those boundaries. I recommend bringing in a psychologist to help craft inclusive language in your messaging, both internal and external. If you embrace the excitement that comes with global talents, you give your team a competitive advantage. We live in a global economy with global clientele. Getting their voice within your company could be the difference-maker in a 360-degree inclusive workplace for the best and brightest to shine. – Harmony Brown, GreenWorks Inspections and Engineering

6. You’ll Need To Comply With Their Local Labor Laws

One crucial consideration when hiring internationally is compliance with local labor laws and regulations. It’s essential to understand and adhere to the employment laws and regulations of each country where you recruit. This includes being aware of legal requirements related to work permits, visas, taxes, social security, working hours, minimum wages and employee benefits, among others. Noncompliance can result in financial penalties, legal issues and damage to your company’s reputation. By ensuring compliance with local labor laws, you will not only attract and retain top talent, but you’ll also contribute to building trust with employees and stakeholders, ultimately fostering a positive work environment and supporting your global expansion goals. – Devesh Dwivedi, Higher Valuation

7. You’ll Want To Establish A Foundation Of Trust And Communication

If you’re looking to hire talent from around the world, it’s crucial to establish clear expectations and communication channels from the get-go. This means defining roles and responsibilities, outlining goals and objectives and setting up regular check-ins to ensure everyone is on the same page. From personal experience, I’ve found that misunderstandings can easily arise when working with people from different cultures and backgrounds. That’s why it’s important to establish a strong foundation of communication and trust with your team, no matter where they are in the world. By doing so, you can create a cohesive and collaborative environment that allows your business to thrive on a global scale. – Adam Preiser, WPCrafter

8. You’ll Need To Keep In Mind Cultural Differences

Employers should keep in mind the need to be culturally sensitive and attentive while making overseas hires. Communication, working methods and even fundamental beliefs about what constitutes appropriate behavior in the workplace can all be significantly impacted by cultural variations. Misunderstandings, poor communication and even discrimination can result from a lack of cultural awareness. For instance, actions or words that are deemed normal in one culture may be viewed as rude or improper in another. – Maksym Babych, SpdLoad

Commercial real estate is melting down fast. Home values next.

— Elon Musk (@elonmusk) May 29, 2023

That’s what Tesla and SpaceX founder Elon Musk tweeted last week in response to a stream of tweets from venture capitalist David Sacks.

In that series, Sacks claimed that Fed rate hikes and the increased borrowing costs they led to are causing a slew of problems in the financial world, including a soon-to-be crash in commercial real estate.

That latter part could certainly be possible. In fact, JPMorgan estimates that nearly $450 billion in commercial real estate debt could go into default this year. Meanwhile, Morgan Stanley Wealth Management forecasts a 40% peak-to-trough decline in CRE prices, increasing the risk of default even further.

Does that mean a similar drop in home values is coming, too? Let’s take a look.

Is There a Link Between Commercial and Residential Real Estate?

On its face, CRE and residential real estate seem to be experiencing many of the same issues—high borrowing costs and waning demand chief among them. But that’s about where the similarities end.

In CRE, loans are much shorter than the typical 30-year mortgage that most homeowners get. This means most borrowers need to either pay off the debt or refinance within just a few years of buying a property.

That’s a problem, as interest rates are now significantly higher than a few years ago. Throw in that regional banks—who have their own struggles to deal with right now—are often one of the bigger lenders in this space, and the risk for property owners only magnifies as those debts come due.

Residential borrowers, on the other hand, can often hold on to their loans for decades with no need for refinancing. And considering about 85% of mortgage holders have an interest rate of 5% or less right now, it’s a real possibility that they will stick around for a few decades.

There’s also the demand factor to consider. Since the pandemic, demand for commercial real estate has plummeted, largely thanks to remote work arrangements. Nearly 13% of offices sat vacant as of Q2 2023—an all-time high, according to CoStar. In some metros like Houston, Texas, and San Rafael, California, the rate’s almost 20%.

That dip in demand just isn’t there in the residential sector. Housing is a necessity, and while higher mortgage rates have resulted in a slight pullback from those with tight budgets, there’s always built-in demand for homes—even with today’s affordability issues. 

You could even argue that when CRE demand drops, residential demand increases. As Redfin CEO Glenn Kelman tweeted at Musk himself last week, “The loss in demand for commercial real estate is what’s driving demand for residential real estate. People who work from home need more space at home.”

There’s also the residential market’s ultra-low supply to think about. NAR’s recent data shows just a 2.9-month supply of homes for sale in the U.S. (A balanced market is considered 6.5 months, meaning supply and demand are matched). By these numbers, it’d take either a massive fall in buyer interest or a sudden glut of supply to cause any sort of fallout price-wise. 

Where Home Price Predictions Stand

While many of Musk’s followers agreed with his sentiments on Twitter, the bulk of housing experts aren’t predicting a big dip in home prices anytime soon.

The last Federal Housing Finance Agency House Price Index showed home prices up 4.3% between March 2022 and March 2023, while the CoreLogic S&P Case-Shiller Index notched smaller gains—just 0.7% annually. 

Still, the long-term forecasts are positive. CoreLogic projects a 4.6% bump in prices by April of next year. Zillow expects a 3.9% increase across 2023.

There’s no telling how accurate these are—and things can certainly change, especially with a possible recession and more potential Fed rate hikes on the horizon. For now, though, the data appears poised in residential real estate’s (and in homeowners’) favor. 

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

More than metrics, kick-off meetings or the promise of year-end bonuses, team performance is driven by culture. One sign of a toxic culture is high turnover, something supportive and empathetic leaders work to avoid. While some industries have higher attrition rates than others, a toxic corporate culture is 10 times more significant than compensation in predicting voluntary departures.

In contrast, a hallmark of work environments people want to inhabit is psychological safety, which encourages initiative taking and innovative thinking. It’s up to leadership to create psychologically safe workplaces for their teams. Here are a few ways to do it and why it matters.

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Encourage Diverse Perspectives

It’s not always bad for everyone on a team to agree—it’s called consensus. But when it arises out of fear, the result is groupthink. When groupthink occurs, expressed loyalty to the group or boss outweighs the best choices. The dangers of groupthink include making unethical decisions and having one person dictate the team’s direction. History shows that groupthink has been linked to disastrous outcomes such as the space shuttle Challenger accident.

If you’re not sure whether groupthink is happening within your team, look for the telltale signs. Are people radio silent when asked for their opinions? Is there a general feeling of apathy or complacency? It may be because team members don’t believe leadership values their perspectives, a reasonable conclusion when diverse opinions are actively shot down or passively ignored.

According to advisory firm McChrystal Group, only 37% of leaders encourage their teammates to voice alternate or opposing points of view. While not asking for others’ perspectives doesn’t constitute resistance to diverse ideas, it does discourage their expression. A psychologically safe environment is one where employees can openly disagree with leadership without fearing they’ll get penalized for using their voice.

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When you ask for diverse opinions and empower your team members to express them, you ensure the best ideas bubble to the surface. You reinforce healthy debate by promoting group discussion about the merits of each concept. Instead of putting your stamp on every initiative, demonstrate a willingness to listen to—and act on—team members’ contributions.

Make Room for Mistakes

In fear-based work environments, employees are afraid to make mistakes. It’s not the usual trepidation of slipping up and having an uncomfortable conversation at quarterly review time. Instead, it’s a fear that leads to hiding serious problems through questionable behaviors.

Say your company only evaluates sales teams based on closed sales. On top of this, there’s constant pressure from leadership to beat the numbers by achieving continuous growth. While expansion goals are admirable, what if the company is already the top dog in an oversaturated market? Surpassing last year’s numbers may be unrealistic, causing employees to find “creative” ways to mask underperformance.

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Furthermore, expecting perfection from your team can discourage the kind of risk taking that leads to innovation. Employees may experience stunted professional growth because they’re not in an environment where they can safely fail. Perfectionism can also lead to micromanagement, another factor that impedes psychological safety. When teams are micromanaged, they hold back, waiting for the boss to tell them what to do.

You can help your team without resorting to micromanagement if you time your offers of assistance right. Rather than swooping to prevent an error, which conveys a lack of trust, allow team members to proceed and experience any difficulties firsthand. By remaining available but not imposing yourself, you enable your subordinates to ask for assistance when they’re ready to receive it.

Set Clear Expectations

Have you ever worked hard on a project only to be told by the higher-ups that you went in the wrong direction? You had to start over because the work you did doesn’t come close to matching the new road map. You probably felt defeated or even got angry, wondering why leadership didn’t outline their expectations more clearly beforehand.

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Now imagine this scenario happening repeatedly on every project your team works on. They’d have to develop some thick skin and a nonchalant attitude to keep themselves in the game. But underneath it all, team members would lose confidence in their abilities to perform—or your ability to manage. They’d no longer feel safe taking initiative and would run every move by you first. Perhaps they’d notice problems and just wait for the chips to fall where they would.

Teams without clear performance expectations soon realize they’ll miss the mark anyway. Consequently, they conclude that there’s no percentage in putting forth top-notch effort. To avoid that fate, create psychological safety for your team by defining expectations clearly from the outset.

If there will be wiggle room in a project’s scope and outline, it’s OK to state that at the beginning. But asking your team to produce work and then completely changing the parameters afterward will demotivate them. In contrast, giving them clear expectations will encourage them to approach their work with confidence rather than doing only the bare minimum.

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Creating Psychological Safety

Leaders are responsible for making their teams feel safe when they express themselves at work. This includes voicing concerns and suggesting ideas for overcoming challenges.

Absent psychological safety, employees become anxious and motivated by negative consequences rather than positive possibilities. Team performance suffers as initiative and talent walk out the door. That’s why creating psychological safety is one of the most critical things managers can do to help their teams reach their potential.

David:
This is the BiggerPockets podcast show, lucky number 777. You don’t have to buy more real estate. You have to continually be active in adding value to the real estate you have, and when you’ve got to the point that you’ve increased the value as much as you can by doing the rehabs after you’ve already bought it at a great price, sell it or keep it as a rental. Move on to the next one and continue adding value to every single piece of property that you buy. That will turn into the retirement you want.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast here today with a Seeing Greene episode. In today’s show, I take questions from you, our listener base, and I answer them for everybody to hear. And you have struck the jackpot with episode 777 because this is a very fun and informative show. Today we get into several questions, including how to know if your property will work better as a long-term rental or a short-term rental, the spectrum of cashflow and equity and what that means, if the 4% rule of financial independence still works today and what may be changing about it, as well as what you can do if you get started investing later in life and you feel like you’re behind. All that and more on another awesome episode just for you.
Before we get to our first question, today’s quick tip is very simple. Check out real estate meetups in your area. Many of you are in certain markets in the country that we don’t talk about all the time on the show. In fact, I bet you the 80/20 rule applies. We talk about 20% of the markets 80% of the time, but what does that mean for the other 80% of the people that live somewhere else? Well, you still need to get information about your market and opportunities you have available, and there’s no better place to do that than a good, old-fashioned real estate meetup where you can meet other investors and hear what they’re doing that’s working, what challenges they’re having, and how they are overcoming them. If there isn’t one in your area, good news, you get to be the one that starts it, and you get to build the throne upon which you will sit as the real estate king or queen of choice. All right, let’s get to our first question.

Sam:
Hi, David. Thanks for answering my question. My name’s Sam Greer from Provo, Utah, a recent college graduate. My wife and I bring in about 180K a year. We have no debt, wanting to get into real estate, want a three bedroom as we both work from home and have a one-year-old. Rent here is about 2,200 for a three bed. A mortgage with a 5% down payment would be about 2,800. We’re wondering if we should continue renting, buying real estate outside of Utah as it’s much cheaper, buy here, try to house hack, although if you do a duplex, it’s about 2,800 accounting for the rent on the other side. Things are expensive around here. We’re wondering what we should do if it’s best to try to find a deal here or go out outside of Utah in a cheaper market. Any advice would be greatly appreciated. Thanks.

David:
Hey there. Thank you, Sam. So let’s start off with this. Real estate being cheaper somewhere else does not necessarily mean better somewhere else. There’s a reason that real estate is expensive in Provo, and that’s because you’re getting growth. So I want you to look at the way that real estate makes money. It really makes money in 10 different ways that I’ve identified, but there’s two main sources, which is cashflow and equity. Usually, a market that is stronger in cashflow will be weaker in equity and vice versa. So that doesn’t mean it’s a cashflow market or an equity market, although most of the time it would lean in one direction or the other. That means there is a spectrum, and on one end of the spectrum you’ll have equity. The other end, you’ll have cashflow. And you got to figure out where you’re comfortable fitting in there.
The Provo market is growing because population is growing. People are moving there, and people are moving there from California and other states that have money, which means rents are going to continue to increase. Values of real estate are going to continue to increase. That is a healthy robust market that you’re likely to do well in, but as you’re seeing, that means it’s not affordable. Now, here’s where I want you to change your perspective, and I want you to start Seeing Greene. It is not affordable right now, but it’s going to become even more expensive in the future. Now, I’m saying this because if you don’t buy in these high-growth markets, your rent continues to go up and up and up. So you mentioned that you can rent for 2,200 but own for 2,800. Right off the bat, that makes it seem like renting is cheaper.
It’s always like that in the beginning. Remember the story of the tortoise and the hare, where the hare came out the gates and was really fast, and the tortoise was really slow? The hare always looks like they’re winning the race in the beginning. That’s what it’s like when you think about renting and instead of owning. But over time, rents continue to go up. Your mortgage will be locked in place at 2,800. You actually even have some potential upside that rates could go back down and that 2,800 could become even less on a refi. So you might get some help on both sides, both from rents going up and from the mortgage coming down if you buy. So if you’re taking the long-term approach, buying is going to be better, and this is before we even get into the equity. We’re not even talking about the house gaining value and the loan being paid off. We’re only talking about the cost of living, which means buying is better.
Something else to consider is that you’re probably going to get tax benefits if you own that home. So if you get a benefit of say, $300, $400 a month in taxes that you’re saving from being able to write off the mortgage interest deduction, that 2,800 now becomes 2,400 or 2,500, which is much closer to the 2,200 that you’d be spending in rent. So as you can see, it’s starting to make more sense to buy. Now, that’s before we even get into house hacking. Can you buy a four-bedroom house or a five-bedroom house and rent out two of the bedrooms to family, friends? Maybe your wife isn’t into that. She doesn’t want to share the living space. Can you buy a property that has the main house that you guys stay in and has an ADU, has a basement, has an attic, has a garage conversion, has something in the property where you can rent that out to somebody else?
So your $2,800 housing payment is offset by collecting 1,200 or 1,400 from a tenant, which is house hacking, making your effective rent much more like 1,600. Now, that is significantly cheaper than the 2,200 that you’d be spending on rent plus you get all the benefits of owning a home. Now, I’ll give you a little bonus thing here. For every house hacker out there that feels like you’re not a real investor, that’s garbage. Let me tell you why house hacking is awesome. Not only do you avoid rents going up on you every year, so that 2,200 that you’re talking about here, Sam, that’s going to become 2,300, then 2,450, then 2,600, and it’s going to go up over time, but you also get to charge your tenants more. So you’re winning on both sides. Rather than your rent going up by a $100 with every lease renewal at the end of the year, your tenant’s rent is going to go up by a $100 with the lease renewal at the end of the year, which means a savings of $200 a month to you every single year.
Over five years, that’s the equivalent of a $1,000 a month that you will have added to your net worth to your budget. Now, how much money do you have to invest to get a $1,000 return every single month at a 6% return, that is $200,000. So house hacking and waiting five years in this example is the equivalent of adding $200,000 of capital to go invest and get a return, right? It makes a lot of sense, so take the long-term approach. Talk to your wife, find out what she needs to be comfortable with this. Go over some different scenarios, whether it’s buying a duplex, or a triplex, or renting out a part of the home, or changing a part of the home so it could be rented out. Maybe you guys live in the ADU, and you rent out the main house for $2,000. And now with your payment of 2,800, you’re only coming out of pocket $800 a month.
You save that money, and you do it again next year. When you first start investing in real estate, it is a slow process that is okay. You’re building momentum just like that snowball that starts rolling down the hill, it doesn’t start big. But after five, 10, 15 years of this momentum of you consistently buying real estate in high-growth markets and keeping your expenses low, that snowball is huge, and you can take out big chunks of the snow that have accumulated that’s equity and invest it into new properties. Thank you very much for the question, Sam. I’m excited for you and your wife’s financial future. Get after it. All right. Our next question comes from Laura from Wisconsin.
“My husband and I began investing in real estate in 2018. I’m 57. He’s 58. We got a late start and are now trying to navigate our way through to get us to retirement in the most efficient way possible. We weren’t always financially savvy, nor did we think about retirement as we should have, which has led to us now trying to play catch-up. I began listening to podcasts and reading books to get educated and use that to take action. We invest in B-class neighborhoods in Southeastern Wisconsin. Our business plan has been to rehab these properties so that we don’t have to deal with capex or maintenance. My husband is a contractor. We purchased our first single-family fixer in 2018 and fully rehabbed it to about 90% brand new. We did a ‘burb but then sold it in 2021 to capitalize on the market being in our favor. We 1031-ed that into a four family, then sold our primary residence that my husband built last fall and used that money to buy a single-family residence from a wholesaler and are now doing a live-in flip.”
“This has allowed us to personally live mortgage free. We do have a mortgage on the duplex and the four family. I don’t have a specific question. Just what advice do you have for those of us investors who got a late start? There haven’t been a lot of podcasts related to this topic. Cashflow is important to us, but appreciation is nice too. We aren’t comfortable investing in markets that provide the most cashflow. We also want ease of management. We love a good property that we can take advantage of Jeff’s strengths and add value to. We don’t want a huge portfolio, but are hoping to have enough properties to make a difference in our ability to retire comfortably. I realize this is a broad question, but maybe it’s a topic you can tackle in the near future. Thanks for all you do for the real estate investing community.”
Well, thank you Laura and I got some good news for you. You and Jeff were actually in a pretty good state. What I can do here is I can provide you some perspective that you may not be getting now. Most people look at real estate investing from the training wheel perspective they get when they first get introduced to this. So when we at BiggerPockets were first teaching people how to invest in real estate, it was a very simple approach. “Here is how you determine the cash-on-cash return. Here is how you make sure that you’re going to make more money every month than it costs to own it because that’s how you avoid losing real estate.” Now, this was important because BiggerPockets came out of the foreclosure crisis where everybody was losing real estate. So Josh Dorkin started this company because he had lost some real estate and he wanted to help other people avoid that same mistake.
At that time, it was just if you knew how to run numbers and you bought a property that made money not lose it, it was that simple. You were going to do well. And if you bought anything in 2011, ’12, ’13, 10 years later, you’ve done very well. So you understand what I’m talking about. Fast-forward to 2023, it is a fast-moving, complicated, highly-stressful, pressure cooker of a market, and we need a more nuanced approach to real estate investing that’s simple. Just calculating for cash-on-cash return and that’s all-you-got-to-do approach, it’s not cutting it anymore. So let’s break out of the training wheel approach of just buy a single-family house, get some cashflow, do that again, hit control C and then control V 20 times, you’ll have 20 houses, you can retire.
Real estate actually makes you money in more than one way. I’ve broken this into 10 different ways, and a couple of them are buying equity which means getting a deal below market value, paying less for a property than what it’s worth, forcing equity which is just adding value to the property, natural equity which would be the fact that prices of real estate tend to increase over time because of inflation, and then market appreciation equity which is investing in markets that are more likely to appreciate at a greater rate than the areas that are around them. Again, it’s not guaranteed, but it’s reasonable to expect. If you buy in a high-growth market with limited supply, it’s going to appreciate more than if you buy in a low-growth market with plenty of land and tons of homes everywhere, so they can’t go up in value. Now you’re already doing the first thing I would’ve told you, which is take advantage of your competitive advantage.
In Long-Distance Real Estate Investing, the first book I wrote for BP, I talk about this. Buy in markets where you have a competitive advantage. Where do you know a wholesaler that can get you deals? Where do you know a bank that will fund them? Where do you know a contractor who’s really good and reasonably priced? That’s the market you want to take advantage of. Now, you happen to sleep in the same bed as an awesome contractor, which is great. He’s always going to take your jobs first, and he’s going to communicate with you quickly. That’s the problem all the rest of us are having, but your husband does this for a living. You’re taking advantage of that. You’re also buying equity. You mentioned that you sold the house that you lived in, and you made the sacrifice, which was sacrificing your comfortability of loving that home that your husband built from the ground up with his own hands to get a good deal from a wholesaler and start over.
Now, when you bought that single-family residence from the wholesaler, you bought equity because you paid less than it was worth, and now you’re forcing equity by having Jeff work on it. That’s exactly what you should be doing. I understand you’re playing catch-up. That doesn’t mean you need to take more risk. That doesn’t mean you need to hope deals work out and just like buy a whole bunch of property. It means that you need to be more diligent about getting more out of every deal that you buy, which you’re already doing. You’re not paying fair market value for properties, and you’re not buying turnkey things. That’s a mistake a lot of investors make is they want convenience. They go buy a turnkey property, or they go to a market, like you said, where it appears that you’re going to get a lot of cashflow but you get no growth. And they end up either losing money or breaking even over a 10 to 15-year period.
You have already sacrificed comfortability in the name of progress, and I love that you’re making the right financial decisions. Hopefully you guys are also living underneath a budget, so keep doing that. I like the idea of you guys doing the live and flip. Buy a house that’s ugly, torn up, but in a great market. I call that market appreciation equity, it’s B-class areas, A-class areas. Just like you said, those are going to appreciate at a higher rate than C and D-class areas. Fix up the house. After two years, you’ll avoid capital gains taxes. You can sell it, and you can buy another one and repeat that process, or you can keep it as a rental, and you can put 5% down on the next house. You aren’t going to need a ton of capital. Because your husband does this work, you have an advantage over other people. Because your husband does this work, he has contacts in the industry.
Maybe he’s too old or his body can’t keep up with the demands of it, he can oversee the work that someone else is doing. Maybe he even mentors some younger kid that wants to come in and learn construction, and your husband can use his brain instead of his body to bring value into forcing equity. That’s another thing you should think about. As you do this, the equity that you’re growing with every deal should continue to increase. At certain points, rip off a chunk of that. Go buy yourself another four family. Go buy yourself another triplex. You’re already doing the right things. So to sum this up, you don’t have to buy more real estate. You have to continually be active in adding value to the real estate you have.
And when you’ve got to the point that you’ve increased the value as much as you can by doing the rehabs after you’ve already bought it at a great price, sell it or keep it as a rental. Move on to the next one and continue adding value to every single piece of property that you buy that will turn into the retirement you want. Thank you very much, Laura. Love hearing this story and glad that we have BiggerPockets are able to help you out with that retirement.

Vince:
Hey, David, thanks for taking my question. This is Vince Herrera from Las Cruces, New Mexico. I’m in the middle of closing on this property that I’m in right now. It’s my parents’, I made a deal with them to pay off the remainder of what they owe. And they sign it over to me, and I’m the owner free and clear. So right now, it’s really good. It’s only 30,000. So I looked up just really quick numbers on Rentometer and the areas around it, and it looks like I could probably rent, this mobile home for around a $1,000 a month. It’s a four bedroom, two bath. It’s in really good shape. It was recently remodeled. So I’m wondering, after I do this, should I try to use it as a short-term rental or long-term?
Obviously, I know I would probably make more as short term, but I don’t know how successful mobile homes are for short term, and I just don’t know what factors I should be looking at to make that determination. If you could help me out with that, that’d be great. My overall goal is to house hack small multifamily properties to build up my portfolio. So when I have something done with this property, whether it be short-term or long-term rental, I’d like to get into a small multifamily duplex, triplex, fourplex and house hack that, and then just keep going hopefully. So appreciate you taking my question and hope you have a good day. Thanks.

David:
All right, Vincent, thank you very much for that. This is a good question. To go short term to go long term, that is the question. All right. Now, like I mentioned before, what I usually need to give a good answer on this is an apples-to-apples comparison. So a lot of what I’m doing in real estate when I’m looking at two options is trying to convert the information into something that’s apples to apples. So what I wanted was to know what would you make per month as a long term? What could you make per month as a short term? Then I would look to see, because it’s going to be significantly more work to manage the short-term rental, is the juice worth the squeeze? If it’s an extra two grand or three grand a month, you can make as a short term rental, I’d compare that to what you’re making at work.
And I’d try to figure out would that make sense for you to put the effort into it versus if it’s another $300 a month, and it’s going to be a lot of work? Maybe it doesn’t make sense. So I use the BiggerPockets Rental Estimator, which anybody can use if they go to biggerpockets.com and they go to Tools and then Rent Estimator. And I looked up four-bedroom, two-bathroom, mobile homes in Las Cruces, New Mexico, and I used the zip code 88001. I don’t know exactly what the address was, but that’s the one that I picked. And rents seemed like they were anywhere in between $1,100 and $1,700, right? So we’re going to use an average above that, $1,300 for this property as a long-term rental. The next thing I would need you to do is to ask around at property managers that do short-term rentals out there and find out how much demand you have for short-term rentals?
You’re going to want to talk to either another investor that does it or a property manager that manages short-term rentals to figure it out. My guess is the people that would be renting out a mobile home as a short-term rental would probably be either a traveling professional that needs a place to stay for a month or two or a person that wants a budget deal because otherwise they would just stay at a hotel. So at a $100 a night, you would basically need to rent that thing out for around an average of 13 times a month in order to get similar revenue to the long-term rental. Now, of course there’s cleaning fees and other fees associated with short-term rentals, but it’s about half the month it’s going to have to be rented for at a $100 a night. Compare that to hotels. Can people stay at a hotel for less than that or more?
If a hotel out there is $200 a night, maybe you could get 150 or 125. That’s the approach that you want to take. I can’t answer your question on which way you should go until I know how much demand there is and how many people are traveling to Las Cruces, but I have given you enough information that you could figure this out for yourself without a ton of work. Also, congratulations on using the resources you have available to you, which was your parents to get this property, pay off the note, and take it over free and clear. I would love to see what you would do with this. This could be a great building block, a foundational piece to get some of the fundamentals of real estate investing down that would then help you buying the next house, which is hopefully a regular, construction, single-family home that you can buy with 5% down.
Reach out to me if you’d like to go over some lending options and come up with a plan for how to do that, and hopefully we can get you on another episode of Seeing Greene to give progress on the next property that you buy. Now, Vincent, at some point you may want to finance that mobile home, and you’re going to find that financing is not the same for mobile homes as it is for regular construction. You’re not going to get the same Fannie Mae, Freddie Mac 30-year, fixed-rate products, and that throws a lot of people off. There are still financing options available to you though. You just got to know where to look. Check out BiggerPockets episode 771 where I interview Kristina Smallhorn, who is an expert on this, and we go over some financing options as well as other things you should know if you’re going to be buying mobile homes or pre-fabricated properties.
All right, this point of the show, I like to go over comments from previous episodes that people left on YouTube. I find it as funny, I find it is insightful, and I find it as challenging, and sometimes people say mean stuff, but that’s okay. I’m a big boy, I can take it, but I like to share it with all of you because it’s fun to hear what other people are saying about the BiggerPockets podcast. Make sure that you like, comment, and subscribe to this YouTube channel, but most importantly, leave me a comment on today’s show to let me know what you think. Today’s comments come from episode 759. Let’s see what we got. From PierreEpage, “You should make turning on the green light part of the show, and then it will be harder to forget, almost like a quick tip being said in a certain way so consistently.”
Pierre, that is a great idea. This is why I like you guys leaving comments. I could not do this show without you. It could be that, like (singing). [inaudible 00:21:58] is that, isn’t that Sting or something that sings that? Is it Roxanne? (singing) Yeah. We could even make that the theme show for the Seeing Greenes, but we just have green instead of red. Maybe I should do that. When I start the show, I’ve got the regular blue podcast light behind me, and then we know it’s time to get serious because I flick it to green like Sylvester Stallone in that movie, Over the Top, where he turns his hat backwards. And it’s like flipping a light switch, and I go into Seeing Greene mode. Might have to consider that, Pierre. Thank you very much for that comment. In fact, if I can remember your name, I might even give you a shout-out when I do that for the first time.
Next comment comes from Patrick James 1159. Before I read this, I just want to ask everyone because I do Instagram Lives on my Instagram page, @DavidGreene24, and you try to read the person’s name that has the comment. And it’s always Matt_Jones_thereal.76325, and I wonder is there that many Matt Joneses that they need this many? Patrick James, are there 1,159 of you, and that’s how far you had to go? But as I read this, I realize the hypocrisy of what I’m saying because I’m DavidGreene24, and there probably were 23 before me, but I picked a number. However, my number was my basketball number in high school. I don’t know what number 1159 could be. It’s not a birthday. I’m curious, Patrick, if you hear this, leave us a YouTube comment on today’s show, so we know why you chose to throw such a big number at the end of your name.
All right, Patrick says, “I wish the best for everyone, but I’m leery of inflation and higher and higher rates. Two things that I can’t control, a grizzly burr.” Ooh, I see what you’re saying there like grizzly bear, but using burr, and you’re saying bear because it’s a bear market which has you nervous, which is why you said you’re leery of inflation at higher rates. Okay, you probably meant this as a joke, but I’m going to run with this in a serious way. It’s a problem, my brother. This is literally why I think the market is so hard, and I won’t take the whole episode to explain it, but if you’re struggling finding deals that make sense compared to what you’re used to seeing, you are not alone. We have created so much inflation that you cannot beat it by investing your money in traditional and investment vehicles, bonds, CDs, checking accounts, ETFs, even most mutual funds. Unless you’re an incredibly talented stock picker, you’re not beating inflation right now, and depending how inflation’s measured, that’s different, right?
The CPI think came in at 4.9, but if you look at how much currency has been created, there’s people that think inflation is closer to 30% to 50% a year. You’re not getting a 30% to 50% return on any of these options I mentioned. Where can you get it? With real estate, and that doesn’t mean a cash-on-cash return, I’m saying more like an internal rate of return. If you look at buying equity, forcing equity, market appreciation equity, natural equity, natural cashflow, forcing cashflow, buying cashflow, all the ways that I look at how real estate can make money when I’m Seeing Greene, you can start to hit those numbers over a 10-year period of time. And that’s why everyone is trying to buy real estate right now, even with rates that are high, even with cashflow that’s compressed. It’s hard, but it’s still the cleanest shirt in the dirty laundry, and everyone’s fighting for it.
So I hear you, Patrick. It’s rough. Patrick then says, “There be a grizzly burr in them woods.” This is a very corny Seeing Greene fan, and I love it. Thank you. Guys, who can out corn Patrick? I want to know in the comments. From Justin Vesting, “Hi, David. I just want to touch on something that I’ve noticed. You guys never interview or speak on the Northeast market, New England specifically, the toughest market in the US and where I’m located. I live in Rhode Island. Please do a show regarding the Northeast market, and if you could, Rhode Island would be fantastic. Hope you can make it as I would love to hear some insight in my market. Thank you.” All right, Justin, as I read this, I realize I forget that Rhode Island is a state in our country. I’m probably not the only one. There’s other states like Vermont and Maine that I can very easily forget exist. New England you hear about, but with Tom Brady gone, you hear about it much less.
So you’re right. We don’t do a whole lot of Northeast talk. We don’t have guests on that have done really well in those markets. Maybe we need to get someone to reach out to BiggerPockets.com/David and let me know if you’re a Northeast investor, so we can get you on the podcast because it’s tough. And I can see how you live there, and you’re trying to figure out what can be done to make money in those markets, and you’re not getting any information. So first off, thank you for listening even though you’re in a forgotten part of the country that I don’t know exists. This is like when you go through your closet, you find that shirt that you forget you had. You’re like, “Oh yeah, I haven’t worn this thing in three years. I remember I used to like this sweatshirt.’ But it’s like it’s brand new. You just reminded me we have 50 states and not just 47.
But on a serious note, yeah, we do need to get some people in to talk about that. I believe that we had someone from Bangor, Maine, it was like the first BiggerPockets episode I ever co-hosted with Brandon. We interviewed somebody from that market, and it was very rare. So if you’re a Northeast investor, let us know in the comments. And if you’ve got a decent portfolio, include your email, and our production team will reach out to you and interview you to be on the show. All right, a call to action before we move on to the next question. Get involved with your local real estate investor association or meetups. This is your best way to connect with investors in your market and get real-time info about what is working. If you’re investing in New England, please apply to be on the show at BiggerPockets.com/guest.
We also have an episode with Pamela Bardy coming up, so keep an eye out for 785, and she is from Boston, and you’ll love it. So if you’re in a market like the Northeast and you’re not getting as much information as you’d like, it’s more important that you make it to meetups and learn from other investors what they have going on. All right, we love and we appreciate your engagement, so please keep it up. Also, if you’re listening on a podcast app, please take a second to leave us an honest review. We love these and they’re super, super important if we want to remain the biggest, the baddest and the best real estate podcast in the world.
A recent five-star review from Apple Podcast from Legendary. “Finally took a second to write a review. Listened to you since the beginning, kept me going when I wanted to throw in the towel in my own real estate biz. Keep up the great work.” And that is from Jake RE in Minnesota. Thank you very much, Jake, for taking a second to leave us that review and especially for being so kind. So glad you’ve been here from the beginning. Love that we’re still bringing you value, and thank you for supporting us. All right, our next question comes from Tomi Odukoya.

Tomi:
Hey, David. My name is Tomi Odukoya. I’m an investor in San Antonio, Texas. Behind me is my vision. I have a question. I’m also a Navy veteran. I love your idea and thank you so much for pushing house hacking. I’m currently in my primary residence. I used my VA loan. I’m getting ready to close on a new bill duplex using my VA loan again. Current house, my primary has interest rate at 3.25%. I’m wondering when I close on the duplex and move into it, my current primary, should I transfer the deed to my LLC, or how should I take care of that, so I can rent out the current primary and also not have to worry about the liability, but hold onto the mortgage at 3.25%?

David:
Thanks. All right, Tomi, first off, thanks for your service, man. Really appreciate that you’re in the military, and love that you’re listening to the show. If we have other military members that are BiggerPockets fans, send me a DM on Instagram, @DavidGreene24 and let me know you’re either a first responder or military. Would love to get to know you guys better, and gals by the way. Okay, let’s break down your question. The good news is I think you’re probably overthinking it because you have the right idea, and I can see that you’re trying to keep your low interest rate. But you’re wanting to move out and get another house, which frankly, if I could just tell anybody what they should do with real estate, I’d be telling them to do what you are doing. Don’t overthink it. House hack one house every single year in the best neighborhood you can possibly get in with the most opportunities to generate revenue, whether that’s the most bedrooms possible or the most units possible, whatever it is. Just keep it simple. Put 5% down every single year. So you’re already on the right path.
Now, regarding your concern, if you’re saying that you may want to move the title into a new vehicle through a deed, so like starting an LLC to take a house that was once your primary residence and take it out of your name for liability reasons, I’m not a lawyer. I can’t give you legal advice. I can tell you if I was in your situation, I wouldn’t be worried about that. And I’m saying this from the perspective that LLCs are not airtight guarantees, much like your bulletproof vest which you’re going to wear if you’re in a position where you need to. It’s better than not having it, but it is far from a guarantee, right? The bulletproof vest doesn’t stop everything that comes your way, and you know that.
LLCs are like that. People tend to look at them like these airtight guaranteed vehicles that you’re protected in case you get sued and they’re not. They can actually have what’s called the corporate veil pierced. If a judge looks at your LLC and says, “That’s not a business. That was just his house. It’s still him that owns it. He doesn’t have a legit real estate business. He just took his house and stuck it in this LLC.” If you’re found negligent or at fault, they will still let that defendant come after you and take what they’re owed in the judgment. One thing people don’t realize is that your regular homeowner’s insurance will cover you in case you’re sued up to a certain amount. I would just talk to the insurance company, and I would make sure that you’re covered for an amount that is in proportion to what a judge might award somebody if you end up getting sued.
That’s one of the reasons I’m starting an insurance company is to help investors in situations like this as well as to ensure my property. So reach out to me if you would like us to give you a quote there. But the properties that I bought in my name, I didn’t move all of them into an LLC. The first properties I bought, they’re still in my name, and they’re just protected by insurance. So I think a lot of people assume LLCs are safer than they are. Doesn’t mean they’re not safe, doesn’t mean they’re not important. They have their role. But oftentimes the people that I know that are putting their properties into legal entities, it’s not always for protection. It’s more so for tax purposes. And the last piece that I’ll say is this becomes more important to put them in legal entities like LLCs when there’s a lot of equity, or you have a high net worth.
If you’re in the military, you’re grinding away, you’re getting your second property, you’re probably not in a huge risk of being sued. When you get a $1 million of equity in a property or within an LLC, now, there is incentive for someone to go after you and try to sue. But until you get a bigger net worth, it’s not as important. Because if you only have $50,000, $60,000, $70,000 of equity in a property, after legal fees, it doesn’t make sense for a tenant to try to sue you for something unless you really, really screw up because there’s not a whole lot for them to get. So don’t overthink it. I think you’re doing great. Make sure that you’re well insured. Buy the next property. After you’ve got several of these things, we can revisit if you want to move their title into LLCs.
Another reason that I’m not leaning towards it is when you do that, most times, you trigger a due on sale clause in your agreement with the lender that they have the right to come and say, “Now, we want you to pay our mortgage back in full.” They don’t always do that, but they can. And here’s my fear that isn’t talked about very often. When rates were at 5% and they went down to 3%, for a lender to trigger the due on sale clause and make you pay the whole mortgage off, they would lose the 5% interest that they’re getting from you, and they would have to lend the money out to a new person at 3%, which is inefficient. So of course, they don’t do that. But what have rates been doing? They’ve been rising.
So now I’m warning people, if you’re getting fancy with this type of thing, if you’re assuming somebody else’s mortgage and the lender finds out about it, or if you’re doing this where you’re moving the title from one thing into the next and hoping they don’t find out if your mortgage is at 3% or three to quarter, whatever it was you said it was at, and rates go to 7%, 8%, 9%, 10%, now the lender can triple their money by calling your note due and lending that money to someone else at 9% or 10% instead of you at 3%. You might actually see banks going through their portfolio of loans and saying, “I’m calling this one, I’m calling this one, I’m calling this one.” That would make sense to me.
So now with rates going up instead of down is not the time to try to move things out of your name and into a legal entity if there’s a due on sale clause. Hope that my perspective makes sense there. Again, I’m not a lawyer, but that’s the Greene perspective that I’m seeing. You guys have been asking great questions today. Our next question comes from Jeff Shay in California, where I live. Side note for all of you that don’t live in California, first off, no one calls it Cali in California. I don’t know where that started, but everyone outside of California refers to as Cali, but none of us call it that. It would be like calling Texas, Texi or Arizona, Ari. I don’t know where that started. It’s just a lot of syllables maybe, but you are guaranteeing that people will know you’re not from California if you say Cali.
And when someone says they’re from California, your next question should be, which part, Northern or Southern? Because they’re basically two different states. They have hardly anything to do with each other. So I’m not sure where Jeff is from in California, but if it’s in Northern California, it might be near me. Jeff says, “I’m 31, and my wife is 33. We’ve been investing in real estate. Our properties are more appreciation heavy, and eventually the plan is to sell off to purchase more cashflow-heavy properties or dividend stocks to maximize passive income. How do we begin to calculate when we can start doing this? Does the 4% rule still work in today’s financial landscape? Thank you very much.”
Jeff. I love this question. You’re doing it the right way. Let me give some background into why I think you’re taking the right approach here. So in general, real estate makes money in several ways, but the two main focuses are cashflow and equity, and it tends to operate on a spectrum. So it’s not like it’s cashflow or equity. It’s a lot of cashflow and less equity or a lot of equity and less cashflow, but there is some markets that fit right in the middle. Dave Meyer refers to these as hybrid markets. If you would like to know more about that, check out the bigger news shows that I do with James here on the BiggerPockets podcast network.
But the point is you have less control over cashflow. This is one of the ways I teach wealth building for real estate. Of course, we all want cashflow, and for you, Jeff, you’re trying to maximize how much cashflow that you’re going to get in retirement because that’s when it matters. When you’re not working anymore is where you need that cashflow. But I don’t control cashflow. The market controls that. I am at the mercy of what the market will allow me to charge for rent. That’s the only way I can increase cashflow is either raising rent or decreasing expenses, and it’s very hard to decrease expenses. You can only decrease them so much. Paying off the mortgage is one way, trying to keep vacancy low, trying to keep repairs low. But when things break in houses, your tenant controls that much more than you do.
So what I’m getting at is you have a lot less control over the outcome of cashflow. You have more control over the outcome of equity. You can buy properties below market value. You can buy them in areas they’re likely to appreciate. You can buy at times when the government is printing more money. You can force equity by adding square footage, fixing the properties up, doing something to increase the value. See what I’m getting at? Equity allows a lot more flexibility, but it’s not cashflow. So the advice I give is to focus on equity when you’re younger, grow it because you have more influence over that. And what I mean is you can add $50,000 of equity to a property much easier than you can save $50,000 of cashflow. I mean, think about how long it takes to save $50,000 of cashflow after unexpected expenses come up. That’s a long time.
During that period of time, you probably mill a lot more than $50,000 of equity. I mean, it might be 10 years before you get $50,000 of cashflow, but equity doesn’t help you when you want to retire. It’s a number on paper. It’s not cash in the bank. So the advice, just like Jeff is doing here, is to build your equity, grow it as much as you can. Then when you’re ready to retire, convert that into cashflow. Now, Jeff, you said, “Does the 4% work rule still work in today’s financial landscape?” I’m assuming what you’re meaning is you should invest your money to earn a 4% return because you’re going to live for a certain period of time, and that then your money should last you for how long you’re going to live. All right, so what is the 4% rule?
According to Forbes, the 4% rule is easy to follow. In the first year of retirement, you can withdraw up to 4% of your portfolio’s value, if you have 1 million saved for retirement, for example, you could spend $40,000 in the first year of retirement following the 4% rule. Now, I’m assuming what this means is if you can earn a 4% return on that money and only withdraw 4% of said money, you won’t run out of money in retirement. If that’s not exactly the 4% rule, I’m sure the FI people are going to be screaming. Let me know in the comments on YouTube. But it’s not super important if I have the rule down. What is important is that Jeff is asking, “How much money do I need before I can start withdrawing it, so I don’t run out of money in retirement? And at what point do I want to convert this equity into cashflow?”
So the good news is you’ve got the equity to convert, meaning you’ve run the race well. Good job, Jeff and your wife. You guys are 31 and 33, so it doesn’t need to happen anytime soon. Okay? Keep investing in these growth-heavy markets. Keep buying under market value and keep adding value to everything that you buy. I would wait until you no longer want to work or enjoy working. If you could find a job that you work until you’re 60 or 65 and you like it, it’ll be a lot less stressful to just keep working than it would be to try to retire at 50 and always wonder what’s going to happen. Now, here’s something that I think are headwinds that are working against you. Inflation is growing so incredibly fast. If I gave you a $1 million 30 years ago, you would feel a whole lot more secure than with a $1 million today.
What’s it going to be like 30 years from now when you’re in your early 60s? Is that million dollars going to be worth the equivalent of a $100,000 or $200,000 in today’s dollars? You wouldn’t feel very good retiring with a 100 grand. That might be what a $1 million is worth 30 years from now. It might be worse than that. I know this is hard to imagine, but if you went back 30 years and you looked at how much houses cost, you’d probably find that they were like $80,000, $90,000, a $100,000 in areas that they’re now $600,000, $700,000. They’ve gone up a lot, and we’ve printed more money recently than we have over the last 30 years. So I’m expecting inflation to be a beast. Now, this is good if you own assets. This is good if you have a lot of debt. This is very bad if you don’t want to work anymore.
In fact, when I first realized this, my plan of retiring at 35 and never working again evaporated because I realized the $7,000 of passive income that I had accumulated at that time was not going to be enough to sustain me for the rest of my life because of inflation. My rents were not growing at the same pace of the cost of living and all the things that I wanted to do. That’s when I realized, “I guess, I got to keep working, but I’d rather be a business owner than work at W-2. I got out of being a cop. I got into starting a real estate sales team, a mortgage company, buying more rental properties, doing consulting, the stuff that I do now, writing books.
Can you find something like that, Jeff, that you like doing, so you can keep working? Because my fear would be that the $40,000 that you might be living on right now, if you had a $1 million and you were using the 4% rule, would be the equivalent of $8,000 when you actually want to retire, not enough to live on in a year unless you move to a Third World country. So it’s a moving target is basically how I’m going to sum this up. By the time you retire, I don’t know if the 4% rule is going to work in today’s financial landscape, but I’m betting on, no. I’m betting on inflation being really, really bad and cashflow being hard to find for a significant period of time. So rather than investing to try to make money so I can retire, I’m investing to try to maintain the value of the money that I’ve already earned.
So if I earn a $100,000, I want to put that $100,000 in a vehicle like real estate where it is going to lose less, even if it doesn’t keep pace with inflation. If inflation is at 30% to 50%, I’m not bleeding as much as if I put it in a different investment vehicle. I realize that this is not a sexy concept, but it’s defense, and I think more people should be thinking defensively, including you and your wife. So keep doing what you’re doing, but we’re not going to make our decision on when you take out that equity and convert it into cashflow until much later in life, when you’re not able to work anymore. Now, what you still could do is you could take off some chunks. Let’s say you grow to $2 million of equity investing in California real estate, maybe you rip off 400,000, 500,000. Put that into a market that cash flows more heavily or an asset class that cash flows more heavily like a short term rental.
And then to get some cashflow coming in from that while you keep a 1.5 million in equity, let that snowball to another 2 million. At that point, rip off 500,000. Repeat the process. You could probably do three, four, five cycles of that before you retire if you do it every five or six years. All right, Jeff and Jeff’s wife, thank you so much for submitting this question. It was a great one to answer, and I got to highlight what I see going on with our economy and the future. And that is our show for today. I am so grateful that you all join me for another Seeing Greene episode. I love doing these, and I love your questions. If you’d like to be featured on the Seeing Greene Podcast, submit your questions at BiggerPockets.com/David because that’s my name, aptly titled, and hopefully we can get you on here too, especially if you can keep it under two minutes, one minute. Those are even the best.
And when we first started doing the show, we got a couple complaints that we had people submitting seven-minute questions, so we’ve done a much better job of getting those narrowed down. But we could not do the show without you, the listener base, so thank you very much for being here. If you would like to know more about me, you can find me online at DavidGreene24, or you could follow me on Instagram, Facebook, Twitter, whatever your fancy is at DavidGreene24. Send me a DM there, and we can get in touch. All right, if you’ve got a minute, check out another BiggerPockets video, and if not, I will see you next week. Thank you, guys, and I’ll see you then.