Richard

Landlords have had to deal with fake tenant applications for years. But rental scam artists upped their game and have gotten increasingly sly in their attempts to evade background checks for rental properties. 

How can you protect yourself and your investment from these con artists? We wanted to share what to watch out for and how to look for discrepancies in applications. 

Below, you’ll learn what landlords need to know about the rising number of rental scams.

How can you protect your investment from rental scams?

Rental scams can leave a real estate investor out of thousands of dollars in lost rent or property damages. The best line of defense? Landlords need to vet their tenants properly. Seriously, find out as much as you can about the type of person you’re entrusting to live in your investment. 

For example, my property management company has put several checks in place to screen applicants. We’ve created a screening matrix to score applicants on factors like credit, income, past rental history, and past due balances.

With years of experience, our team created this matrix as a scoring system to assess risk. Applicants receive a “score” between 0.00 to 6.25 or higher (the lower, the better):

• 0.00 – 3.50 Low Risk (Security Deposit = 1-month rent or 1-month surety bond)
• 3.75 – 5.00 Average Risk (Security Deposit = 1-month rent or 2-month surety bond)
• 5.25 – 6.00 Higher Risk (Security Deposit = 3-month rent or 3-month surety bond)
• 6.25 + Denied or co-signer required

This matrix gives us a quick objective way to review applicants, but as you’ll see below, it’s by no means foolproof. So you’ll need to get your private investigator hat and magnifying glass out.

Who commits fraud and why?

The reasons for committing fraud vary as much as the people committing the crime. Some can’t afford the rent, some have no intention of paying rent, and others want to hide previous financial transgressions. 

Today, nearly everyone can alter copies of “official documents” with their phones. Sometimes, you have to dig deeper to uncover the scam.

Don’t get me wrong; we don’t always assume everyone’s out to pull one over on our clients. But if someone has nothing to hide, they shouldn’t get defensive when you start asking questions. 

By the way, if someone does get defensive, take that as a red flag and consider denying their application. 

But if the numbers don’t add up, addresses don’t check out, or social media profiles suggest someone very different, ask why. 

Detecting fraudulent pay stubs

Again, most applicants are honest potential tenants who want to rent your property and pay rent appropriately. However, those few bad apples mean you have to keep your guard up.

When an applicant submits their proof of income, especially pay stubs, pay close attention to the deductions and watermarks. Look to see if check numbers match pay stubs, too. 

Here’s a recent example of a fraudulent pay stub my company received (names have been altered for privacy): 

You’ll see that the deductions on the paystub didn’t add up correctly. Also, if you look closely on the right side of the check, it says “ADP”. However, there is no ADP logo at the top of the paystub. Most ADP checks show the logo. 

Does that make your Spidey Sense tingle? It should! Time to get out that magnifying glass, better known as Google, to learn more about the applicant’s employer. 

If a quick search doesn’t turn up the supposed employer or if an elderly person answers the “business” phone confused about why you’re calling, get suspicious. Sometimes when you ask for additional documentation like a W-2, the scammer knows you’re onto them, and they vanish. Consider yourself lucky for having dodged a bullet.

Identifying fraudulent documentation

Even when someone submits documentation with tax IDs or supervisor information, I recommend you confirm everything. We’ll see applicants claiming to have worked for a place for five years. We discovered that the “company” only filed for an LLC four months ago upon further research. Hmmm, something doesn’t add up. 

Things can get weird when a fraudulent application gets submitted on behalf of a totally different person. Use court records to verify a lot of information that’s submitted. These records can provide tons of info (from traffic tickets to divorce proceedings to address discrepancies).

Credit checks can unearth curiosities like mortgages in other towns or signatures on deeds that don’t match application signatures. Again, live by the motto: trust but verify.  

Closing thoughts

None of these discoveries makes my team super-sleuths (although they are pretty awesome). I wanted to demonstrate the time and effort we put into making sure we approve the right people and avoid rental scams.

A good review process makes everyone’s job much easier. Matrix scores only show part of the story. They help weed out the easy denials, but you have to use your intuition to unearth these scammers. 

“Untapped greatness lies within you. Born with unbounded potential, you have the capacity to do the impossible, and it is inherent in every human being. Unfortunately, most of us have been conditioned to deny our birthright and settle for the status quo. Unwittingly, we believe greatness is reserved for a lucky few, and the exceptional are truly an exception, set apart by some fantastical, foreign ability. Everything that propels your heroes and role models to defy convention and dare to be great also exists in you. Are you ready to tap into your unbounded potential? Recognizing and igniting your inner flame of greatness is as simple as making a decision to explore your full potential.”

This is the opening paragraph of my book Do the Impossible. It comes from the chapter “The Journey to Greatness”. I’m including this excerpt because more than anything, I want you to know you are capable of greatness. No matter who you are, what you have been through, or where you want to end up, you can transform your life into the one you truly desire.

Shift your mindset and make the impossible a reality.

Life is just waiting to give you everything you deserve and desire—you just need to shift your mindset to achieve it.

You are an infinite being born with unbounded potential. Whether you know it or not, you have the power to create your reality. That is your starting point. And that is the starting point of every other human being.

What do you desire that currently feels out of reach? No matter what your specific goals and ambitions are, I bet it boils down to wanting more out of life. Whether it be more success, time, money, enjoyment, freedom, or any other desire, there are areas of your life where you want more. Allowing yourself to acknowledge and pursue what you really want, even if it seems impossible, is how you uncover your most motivating targets. What excites you? The answer to that question is where you find your greatness.

Between your starting point (infinite being) and your target (truest desire), is your unique path to success waiting to be discovered. You were born with all you need to make this journey. Now, let’s explore how harnessing the power of mindset helps you hit any target with more ease and flow.

What is mindset?

Mindset is the way we view the world. It is an ever-running operating system. Your mindset resides within your frame – which can be simply thought of as your expectations or perspective. Your frame creates your reality. And the reality you create can attract the things you want, or it can block you from reaching your full potential.

You are a giant magnet creating your reality through your thoughts, beliefs, emotions, desires, and an endless list of other contributing factors. You generate these things, consciously or unconsciously, which means you have the power to change them. To attract the more out of life that you desire, you can set the frequency of you to match the greatness you want to achieve by shifting your perspective. That is the power of mindset.

What is a mindset coach?

We have been socially conditioned to see action as the key to success. This belief places our emotions, our thoughts, and our desires as secondary or, even worse, completely irrelevant factors in the equation of how life works. It’s true that we must take action to get what we want, but simply taking action does always result in success. You need to take the right action.

A mindset coach can help you pinpoint the right action. The key to living a fulfilling life is not so much about what we do but about what and how we think. Exploring your mindset with a coach can help reveal what is blocking you from taking the action needed to achieve your version of success.

At Jason Drees Coaching, we help clients remove barriers to success, such as disempowering thought patterns and limiting beliefs, so they can execute action that is aligned with who they really are and what they really want. Working with a mindset or performance coach provides an outside, objective view on how you are approaching life. Coaching is a great resource because it can be hard to evaluate and recognize the patterns of your mind internally.

How to change your mindset

Overhauling your mindset may seem like a tedious and daunting process. And, honestly, there are some approaches to shifting mindset that will tell you it takes a lot of time and work. What I have discovered over the past few years is a way to create instantaneous transformation through a technique called frame-shifting.

It starts with your frame – the level above your mindset that generates your ever-running operating system. That mental environment is your frame. When you approach shifting your mindset from this level, you can eliminate time and energy spent on dissecting and evaluating the thoughts and beliefs that are blocking your full potential and move directly into thoughts and beliefs that will unlock your inherent greatness.

In my post The End of Self-Improvement, I discuss the limiting belief that if you want to better your life you have to be better. This is a disempowering approach that denies the infinite nature of every human being. To get more out of life, you don’t need to improve yourself or be better as a person. You simply need to access the natural greatness that resides in all of us by aligning your mental environment—your frame—with what you want.

My coaching methodology focuses more on accessing alignment as opposed to rehashing what is keeping you in misalignment. Alignment is our natural or default state. It’s a state of equilibrium and balance. It’s a state of being that flows with what life brings us.

Final Thoughts

In my book and through the programs of Jason Dress Coaching, I share my experience of discovering how life really works. I spent years grinding and hustling to achieve greatness. But it wasn’t until I stopped trying to force things to happen and began to work with the flow of life that I began to achieve the success I desired. My journey is a living example of how framing can shift your mindset in a way that enables amazing, accelerated growth and expansion.

My mission in life is to share my experience with others so that they can transform their lives by making the impossible accessible. Life is waiting to give you everything you deserve and desire—you just need to shift your mindset to achieve it.

We all know that this is the hottest real estate market ever. Period. No other time in the history of the universe has it been this hot.

We also know that mortgage rates are going up, and both homeowners and investors want to buy a home before the rates go any higher. 

The economic law of supply and demand states that when demand is high, prices will rise. Well, demand isn’t going anywhere anytime soon, and supply isn’t changing either.

So, the question buzzing in our minds: what should homebuyers do?

Start thinking about purchasing the “leftover properties”

For context, I’m an agent in Colorado with multiple active clients. In our market, much like the rest of the United States, homes are listed on Wednesday or Thursday, showings occur throughout the weekend, and offers are due on Sunday evening for a response on Monday.

By Tuesday afternoon, the MLS is a ghost town, with tumbleweeds blowing across the screen, waiting for Thursday to start the circus again.

But not always. On some days, there are still properties leftover.

Granted, most of these properties are still on the market for a reason. Many are situated on undesirable busy streets or even an active train track!

If location isn’t the problem, there usually is an easily identifiable issue with the house.

For example, a beautiful house is listed in my market for a laughably low price. So low that you would assume the listing agent’s finger must have slipped when entering the price.

But, as it turns out, they didn’t. When you enter the home, there are cracks everywhere. Even worse, there are horizontal cracks, and that’s a terrible sign.

I’m not talking about these types of leftover listings.

Let’s look at another property.

About 15 minutes north of my town, there’s a listing that has been on the market for 44 days. It’s beautiful on the outside, and it used to be beautiful on the inside. It has 10-foot ceilings in nearly every room, including a 20-foot ceiling in the entryway, a sweeping circular staircase, a nice kitchen, and plenty of storage.

But, now that the carpet and paint is 20 years old and some of the floors are damaged from water leaks, the home clearly needs some help.

Yet, even with all of the potential, the property sits for 44 days.

The good news is that this leftover property was patiently waiting for the right buyer. That buyer happened to be a client of mine. After an initial listing price of $725,000, we were able to offer $670,000. The best part? The appraisal came out to $900,000!

We did all of this without a bidding war and giving up important leverage on the buyer’s side of the table.

How to find leftover properties

Listing agents are human, and humans make mistakes. I’ve seen some real doozies, including a house listed with zero bathrooms on the MLS. Legally, a house must have a bathroom, and this particular house had two.

While it doesn’t sound like a big deal, you wouldn’t see this listing if you were set up to receive listings with a minimum of one bathroom. Mistakes mean there’s a smaller number of buyers viewing a listing.

So, this is what you should be looking for — the unseen properties due to a listing entry error.

But listing mistakes aren’t limited to entry errors. Some listings feature photos from a completely different house. That means there are a lot of unsuspecting buyers walking into homes confused and walking out without making an offer. 

This happens all of the time with multifamily properties listed as single-family homes or houses listed as condos.

When your agent sets you up to receive listings from the MLS, they set up parameters, so you don’t get swamped with listings you’re not interested in. You don’t need to see those listings pop up if you’re not buying a farm or vacant land. Ditto single-family homes if you only want a condo.

But real estate agents can only send listings that are categorized correctly, and when an agent makes a mistake, it can have huge repercussions.

Side note: If you’re selling a property, make sure your agent sends you the listing and that you read it thoroughly to make sure all the information is correct. The agent can update the listing, but only if they know there is a mistake.

If your agent enters fewer parameters into the MLS when setting you up for a search, you’ll receive far more listings, which can be daunting in a robust market (lucky for you, there is a historic supply shortage right now).

But the more listings you get, the more possible mistakes you’ll find and more opportunities you’ll discover.

Is this groundbreaking advice? No. I know that. But in this market, getting into a bidding war and fighting over limited supply with other buyers is exhausting. Do whatever you can to take that out of the equation by looking at houses they aren’t looking at.

Waiving inspections and appraisals

Another fun aspect of the current market’s home buying process is waiving inspection and appraisal gap coverage. Right now, at least in my market, when you are writing an offer, to be competitive, you’ll need to waive your ability to request inspection repairs and, in most cases, cover any gap between appraisal and offer price.

You have to offer this because competing buyers include this in their offer. If your offer doesn’t also include this, you’ll go to the bottom of the pile.

You don’t have to offer these seller-friendly clauses when your offer is the only thing in the pile. It means you can have a home inspection — and if something pops up, you can choose to request a repair, a concession, or accept it as-is. Remember, any request is just that, a request. The seller can still say no, but if you waive the inspection to get your offer accepted, you can’t even make the request.

Appraisal gap coverage is another sticky clause being added to offers right now. Appraisal gap coverage means you will pay the amount you offered, regardless of the appraisal. 

If the appraisal comes in low, you’re bringing additional money to closing to cover the gap between what you offered and what it appraised for.

And while you don’t have to cover the gap entirely, you can offer to cover the gap only up to a specific dollar amount instead of the full amount; there are other buyers out there who are offering to cover the whole gap. Just think back to the property from before. Some buyers would have covered upwards of $200,000 in the appraisal gap.

Again, your offer goes to the bottom of the pile.

Final thoughts

Skip the bidding wars and the lines at open houses. take your time looking at a property and get an inspection by looking at the “leftovers”.

Rob:
This is the BiggerPockets Podcast show 598.

David:
You got to be dedicated. This is not a market where deals fall into your lap, or people come to you and beg you to buy a property and you make up your mind if you want to do it. A lot of competition for these assets right now, they’re going up in value very quickly. Rents are going up just as fast. The stakes are higher than they have ever been. And so now is the time to continue taking action.
What’s going on, everyone? This is David Green, your host of the BiggerPockets Real Estate Podcast, here with a very special episode for you. Today is all about The BRRRR Method. Does it work in today’s market? Is the BRRRR extinct? Did the BRRRR ever work? Has anyone ever even done a BRRRR or is this more of a concept than a real thing? All of those questions will be answered here today. I am joined by my amazing co-host, Rob Abasolo. Rob, how’s it going?

Rob:
Hello? How’s it going, man? Typically, I try to come in here with some profound quotes, a couple of sound bites, pontificate, have a little bit of banter. But we had so much good stuff in this episode that I think we can probably get straight into the nitty gritty of what it takes to execute a successful BRRRR.

David:
Yeah, to be completely honest with you guys, this is less of a podcast and more of a bit of like a masterclass. So this is probably what you would expect if you paid money to take a course on how to do a BRRRR, or you wanted to have somebody who is doing a deal, that you paid to show you what they’re doing, where you’re getting this all today for free. So in today’s podcast, we’re going to talk about what The BRRRR Method is. If you’ve heard about it, clarify how that works.
We’re going to run you through a hypothetical BRRRR where we give you the numbers and the details, show you where you would find them, and then show you how you can use BiggerPockets calculators to do the heavy lifting for you, and let you know if you should move forward with this BRRRR or not. We’re then going to show you how, if you’d like, you can sign up to use all of those resources all the time. And then we’re going to get into a deal I am doing right now. The property is in contract, I share some pictures. We share some videos. We give you the insight into how I’m doing the deal. And then I share all the numbers myself of this deal to show you not only that BRRRR is possible in today’s market, but to go even deeper and show you how you could make it work for yourself.
Before we get into all of this content, I’m going to share with you today’s quick tip. And it is, if you’ve ever thought about going pro on BiggerPockets, now’s your chance to do so. If you sign up using the code REPOD21, you will get a discount on the membership. You’ll get a free copy of my BRRRR book, one of the best selling books in real estate and on BiggerPockets. And Rob himself actually said some very nice things about it. But more importantly, you will get access to the calculators where you can run these deals yourself, just like I do, just like Rob does, so that you can start to taking action today. Now, if you’re already a pro member or you don’t want to sign up, that’s cool. You’re going to love today’s show because it is so nitty gritty, behind the scenes, brass tacks, insert analogy here for the realist.

Rob:
Even if you decide not to sign up for the pro membership today, you can still go in and actually use all of these calculators up to five times for free.

David:
Yeah. And I highly recommend that you do that. One of the big things that scares people from investing in real estate is math. They weren’t good at math before. They’re afraid of math, or they don’t know what numbers they need to be getting. Well, the BiggerPockets calculators will walk you through all the questions you should be asking, what the data that you need to be inputting is, as well as how to find it. It makes it not scary. So I never liked math when I was in high school. I didn’t like it when I was in college, I was not a math guy. I was more of a logic, reason type of a person. Well, I don’t mind math with real estate, I actually like it a lot of the time. So go check it out. Play with the calculators. They got a BRRRR calculator, a rental estimator calculator, a rehab budget calculator, all kinds of cool calculators for you to play with. And that being said, we are going to get into it. I hope you enjoy the show.

Rob:
Oh, one little thing here. Stick around into the very end for a very good story on quite the pickle that David found himself in on his own property. You got to stick around to the end though.

David:
Oh, and last thing, let us know what you think in the comments. If you are not watching this on YouTube, this is a show where you should be. Please follow us on YouTube because you’re going to see all the pictures that we’re sharing. And then let us know in the comments what you thought about today’s show. All right, let’s get into it.
All right, everyone, you are in for a treat today. Rob and I are going be going into The BRRRR Method. Questions have been asked. Does this still work? Can I still BRRRR? Is BRRRR dead? What does BRRRR mean? And today we are going to answer a lot of those questions, as well as give you some examples of a deal that I’m working on right now using The BRRRR Method. Rob, you’re kind of new around here. I like you. You’re doing a really good job. But I’m curious, what was your impression of The BRRRR Method when you first kind of got into the BiggerPockets world?

Rob:
Well, give me one second because I think I can show you how important this method is. Right behind me, at all times, I keep the BRRRR bible always on the set of the raw built studio.

David:
Also known as the BRRRRible.

Rob:
The BRRRRible. That’s right. I like that. Yeah, man. So I’ve really only done flips. I’m looking to get more into what you and I call the BRRRRster, which is obviously the same principles and everything like that. Except instead of refinancing it into a long term rental, we’ll refinance it into a short term rental. But all in all, all the same concepts apply here.

David:
Yeah. So in today’s show, we are going to go over a hypothetical deal to show you exactly how the BRRRR would work. We’re going to do what we can to explain how the BRRRR works in today’s market. What strategies you want to use, kind of how you want to execute this. We’re going to show you how BiggerPockets has resources that can do all the heavy lifting for you, because if you’re like me and you like to get everything done quickly, it’s very helpful. And then we’re going to, near the end of the show, break out a deal that I’m actually working on right now, it’s set to close in about a week. I’ve been getting my rehab estimate. I’ve been running my numbers. I’ve been making some content about what the house is going to look like. I’ve gone back and forth because this is a bit of a more complicated rehab, because it’s going to end up as like a BRRRRster, like we talked about. So it’s either going to be a short term rental, or it’s going to be like 30 day plus corporate housing type stuff.
I’m going to kind of test out both sides and see where I get more demand. But you get a behind the scenes look at exactly what happens when I and Rob look at a property, see what we’re going to do with it. Because as we’ve said before, in today’s market, you don’t really find great deals, you make great deals, the vision that we have, and then what it should look like in the end. So I don’t know that we’ve ever done a show where we went into this much depth about an individual property. I guess we did one that was about the property you and I are buying in Scottsdale, but there’s not a ton of rehab on that one. That’s going to be more how we’re going to market it, maybe how we’re going to furnish it, a little touch up here and there.

Rob:
A few little things to spruce it up. Nothing crazy.

David:
Yes. That is more strategizing how we are going to generate revenue with this property. Whereas this one we’re going to talk about today is going to be pretty straightforward with the revenue, but it’s going to be a lot more intensive on the creativity. So I’m ready to get into this thing. How about you, Rob?

Rob:
Yeah, man. I’m ready to experience a masterclass from Sir BRRRR himself. So I mean, this is an exciting day for me.

David:
There it is. So I’m going to ask you, young Padawan, what is your understanding of The BRRRR Method? Pop quiz. Let’s see what you know.

Rob:
Well, obviously first you must buy. The B in BRRRR is you must buy, you must acquire. You must go and obtain a property that you feel, obviously, has an added value component that you can bring to the table. Next, you must rehab. That is the first R in the BRRRR analogy or in the BRRRR acronym. This is where you go, you fix it up, you get it ready. You add the value. You turn it from a diamond in the rough to just a sparkling diamond. You then go out and you rent it. Again, this could be short term rental, midterm rental, longterm rental. The more traditional approach here would be turning it into a 12 month rental.
And then you will take those rents and that lease agreement to a bank, and you’ll get it financed and refinanced. Sorry. Specifically refinanced. Sorry. I know we’re working in the acronym here. You get it refinanced to hopefully pull out most, if not all of your money out. Although leaving a little bit of money in every so often is not a loss, because you still have equity in the house and everything like that. And then the final and perhaps the most important for building your wealth. The final R, repeat. Where you go and you do this over and over and over again after you’ve read the BRRRR Bible.

David:
So here’s the best part about The BRRRR Method. If you can memorize what it stands for, you know how to do it. That’s what I love about it. Well, what am I supposed to do next? Well, what letter comes next? It kind of walks you right through it. And basically what I would like people to understand about The BRRRR Method is it’s a way of maximizing your capital. It’s a cool way of talking about real estate. I think it’s a good blueprint to use because it forces you to excel at each level of what an investor has to do. You want to buy a property right. You want to know how to rehab it. You want to be able to analyze it, so know what it rents for and maximize the income it makes. You want to be able to use equity. Or sorry. You want to be able to use leverage to increase your ROI as much as possible, which is the refinance. And then you want systems in place to make your job easier, which is repeat.
So in the BRRRR book I talk about, to become a black belt investor. You have to do something a lot. Just like to become a black belt at martial arts, you got to practice the same movements over and over and over. Well, real estate investing and life is no different. So The BRRRR Method, one, will kind of force you to invest in real estate the right way. But what it’s really doing is getting you more of your capital out of the deal and into your bank where you control it, where the market crashing can’t take it away from you, where it’s not useful to you. You can’t use it if you need money in reserves or you need to fix something up.
Basically, capital is how you make money with real estate. You spend money and you buy something that’s worth more than what you paid for it. You needed capital to do that. So if you can’t get capital in the bank, it’s very difficult to add value to real estate and to run a sustainable business. But when people lose real estate, it’s usually because they didn’t have enough capital to sustain it. And so, this is a way that will help you scale faster, scale more safely and invest better. It’s very hard for me. I’ve yet to hear a criticism of BRRRR that actually makes sense to me. When you’re doing it the way that we’re teaching it, it just forces you to invest in real estate the right way.

Rob:
Well, I’m a sucker for a good acronym here. And you mentioned something a little bit earlier. You said, oh the market crashing or this and that. So obviously, we’re in a pretty competitive market right now. Interest rates are obviously going way up right now. There’s a lot of people bidding on the same thing, overbidding. And it can be seemingly a bit of a discouraging market to a lot of people that are trying to break in. I’m kind of curious, just in your opinion, is a BRRRR still applicable in today’s real estate market?

David:
Here’s why I think it is receiving criticism as just being harder to do. The way we have typically described BRRRR would focus on adding value through the rehab. So we are usually looking for a fixer upper property. That’s really where it works the easiest. And because there are less fixer upper properties right now, it becomes more challenging to pull this off. So when I was first doing this, 5, 6, 7 years ago, nobody wanted the trash houses. They were just sitting there for a long time. People wanted a house that was move in ready, or that didn’t require a lot of work. So it’s pretty easy to go out there and find something that either you could add some square footage to, you could upgrade it. Just maybe you got rid of the trash that some hoarder had left in there, and bam, you’ve added some value and you’re on your way to executing a BRRRR.
Where in today’s market, even the worst houses tend to be selling relatively quickly. There’s not enough inventory. So it’s harder to earn money through the rehab. That doesn’t mean you can’t, as you guys are going to see on the deal that we’re going to show you at the end. This is a big value add. It’s a house that needs some work, quite a bit of work. And it’s going to be both cosmetic and functional, as in we’re adding some square footage to the property.
But the good thing about today’s market is that because there’s so much demand for these properties, they’re harder to get, you end up able to add equity simply just by owning it. So a lot of people that are using The BRRRR Method are watching their properties appreciate during a period of time before they refinance and after they buy it. It’s actually like this wind at your back that makes it a lot easier to get your value to go up. So while you lost something on, it’s harder to find the deals to do. You gained something on, when you do find it, it tends to be easier to add value than it ever was before.

Rob:
Okay. So I guess with that in mind, you’ve done this a few times. I don’t know. You’re no spring chicken as it pertains to The BRRRR Method. So kind of curious, my wife always says I use that phrase wrong. And I’m almost positive I used it wrong just now again.

David:
Spring chicken?

Rob:
Spring chicken. Well, she’s always like, well, spring chicken means it’s like a physical. [inaudible 00:12:51] a spring chicken in regards to a physical activity. But you could argue that a BRRRR is a very physical activity. So sidebar here.

David:
I love that you’re arguing with your wife in your head in the middle of the podcast right now. This is awesome.

Rob:
We’ve had this conversation more than you know. So as a no spring chicken in the BRRRR field, kind of curious here, what are some key elements to understand to perform a successful BRRRR? Is there anything that really stands out to you when you’re examining a deal or anything that you’re looking for specifically that is a very big indicator of, A, getting equity in the house simply by holding it, but, B, just being able to successfully execute?

David:
Well, there’s basically three ways that I see that you get equity. The first one is holding, if the market appreciates. We never know if it’s going to appreciate, but it has been. That’s one way you get equity. The other is by buying the equity, meaning you got it at less than what it’s worth. So you got a really good deal. And then the third way is by creating value through the rehab. So you can make a property worth more by fixing it up. But what you’re really doing, when we talk about this, is you’re trying to increase the after repair value. That’s all that the goal is. And I do just mentioned three different ways that you can do it.
And in this property I’m buying, I’m actually using a combination of all three. And we’re going to talk about how I got it at less than what it appraised for, how I’m adding value through a rehab, and how appreciation is also just shooting up. In fact, the house that I’m buying, man. There’s a house, it’s at the very top of like a street that goes up a hill. So it kind of ends in a cul-de-sac. And then from there, there’s a private drive going up to this property. Well, one of the houses before you get to the top sold for almost, actually probably more than what I paid for this one. It was listed for close to what I paid for this one, but I’m sure it would’ve sold for more than that, because it sold very quickly. And it’s about half as big.
So as I’m waiting, I got it at less than it appraised for. That one sale made it worth more than even what my appraisal was, right off the bat. So I’m seeing all three ways that are adding value to the property. Now, once you’ve done that, the BRRRR kind of takes care of itself. At that point, you’re just trying to manage a rehab, and you’re trying to keep your holding costs low as you get to the finish line when you can refinance it.

Rob:
So I’m kind of curious here, because you have done this a few times. And I know that you’re a really big fan of adding an extra room if there’s a way to slice a house this way, right? Is there ever a moment in a BRRRR, in your career, where it has made sense to add square footage to haul on additions to the house or anything like that?

David:
All the time? Yeah, that was actually one of my go-to ways when I was investing in Northern Florida five years ago. I would look for a sunroom that could easily be added into part of the house. So if I just ran electrical and plumbing, and if the kitchen was really close to it, I had all the infrastructure right there that I needed to put in. I would look for garages that were attached to the house, especially if they also had another detached garage, and I would convert the garage into part of the home.
A lot of houses have mud rooms, utility rooms, like different names for a structure that’s there, but it’s not included in the actual square footage of the house per the tax records. Maybe they did an addition and they didn’t have it added, or maybe it didn’t comply for whatever reason. And so, because we didn’t have to build it from scratch, we would just go in there, find existing space and then convert that into the home. And if you could take a house that’s 1,100 or 1,200 square feet and make it 1,500 or 1,600 square feet, you’re adding significant value just by making it bigger.

Rob:
So really, it makes a lot more sense to convert than to just newly construct square footage.

David:
Whenever you can. If they’ve already done some of the work, you want to hijack onto that and develop it rather and assume you have to build from the ground up. Now this is a side note, but this is one of the reasons that when people ask me the question of, “Should I build an ADU on my property?” The answer’s not always a quick yes. Because many times, you have to finance that ADU 100% with your own money, whether it’s cash in the bank or a refinance from something else. The point is, you can’t go to the bank and say, “Can you pay for 80% of my ADU, and I’ll take a loan on that money?”

Rob:
Yeah, that was me. I paid cash for mine.

David:
So let’s say you got to spend 100, 120 grand to build this ADU from the ground up. Would that have been better used as a down payment on a completely new property? And many cases, it can make more sense to do that. So that’s one of the, I guess I’m using this to highlight that ADUs are inefficient when you have to build them completely from the ground up. Now, if you’ve got prime real estate, it can make sense to do that. I’m not saying don’t do it. I hope you’re not hearing me. But you got to look at it a lot more close. The stuff that I was buying in Northern Florida was not really expensive real estate. It wouldn’t have made sense to spend $80,000 to build a new structure to make my existing home bigger when I could have spent $80,000 and bought a completely different property already constructed.

Rob:
Yeah actually, the reason I did it was because I was in LA. So it is like prime real estate out there. Land is at a shortage. And well, I was trying to do the supercharged house hack, if you will, where I was renting out a little studio under my house. And I was like, well, hey, if I do a little tiny house in my backyard, not only will I cover my mortgage, but I’ll make more. So it did make sense in that instance. But I definitely feel you what you’re saying, where, yes, I had to pay a private loan that was like 7.54% interest. I ran out of money halfway through. This was my first really, really big project. Honestly, very thankful that I did it, just from the learnings of it. But yeah, I totally see your points there.

David:
Yeah. I would say areas like Los Angeles, Miami, where I am in Northern California, The Bay Area, real estate’s very expensive. So adding an ADU can give you the return you want. Los Angeles, yes. Louisiana, no. If you can look at real estate that’s going to cost $70,000 to $90,000. You spending $50,000 to $60,000 to build additional square footage to that property isn’t going to make sense. There’s also situations where the property is 3,000 square feet. And adding another 500 square feet isn’t going to make a huge difference unless it’s prime real estate. So these are things you have to keep in mind. And I’m bringing this up because a lot of people hear this information and they say, “ADU, yes or no?” And they just want to simplify it to that degree. Where, as real estate investors, it’s a little more art than science a lot of the time.

Rob:
Especially on something like that. I mean, because there are definitely some instances where an ADU. And either way, building an ADU, did you think that concept alone, does that even fall under the BRRRR strategy?

David:
It would if the ADU’s adding value to the property. But that’s tricky. Because the way that you determine if it added value to the property is based on the appraisal of your refinance. And if there’s not many ADUs around for appraisers to use as reliable comparables, they’re not going to give you the value that you want. And because ADUs are a relatively new thing. I mean, they’ve been around for a while, but not en masse. It’s only a new thing that we’re starting to see them popping up because of the housing shortage. There’s a very good chance that you spend $100,000 to build an ADU and the appraiser gives you $10,000 or $20,000 of extra value in your property. And that would be a terrible investment.

Rob:
Oh man, I also can relate to that. Because I bought a house. Well, I was in escrow on a house in Destin. I was going to close. And then the appraisal came in and they valued the back house, which I think was an ADU officially. They value that at like 25% or 30% of the actual value of the home. And so I had to walk away. The appraisal came in $300,000 less. And then when I built my tiny house in LA, my ADU, I had to get an appraisal to come out to do a cash out refi. I was one of the first people to ever do an ADU in that regard, especially in my neighborhood. There were no comps. So I think the appraiser, it kind of threw him for a loop. I was able to get most of it back, thankfully. But you know, little bit of fighting there, I think.

David:
Oh, I’m sure you probably had to fight quite a bit. The average investor who’s new at this wouldn’t have known what to do. And that’s an example of why, whenever possible, we don’t want to build from the ground up. We want to take existing structure that isn’t being used efficiently and change it. So I’m a big proponent of garage convergence. If I buy a property, which I’ve done several times, and it’s got a big lot, there’s plenty of parking. I’d rather take a detached garage and turn that into an ADU, than build something from the ground up. And then instead of building from the ground up, I’ll just build like a new, I don’t know what you would call it, like a non-covered garage.

Rob:
Oh, like a carport?

David:
A carport. There you go.

Rob:
Yeah. Those are very popular in Joshua Tree, the carports. And then even in my neighborhood here, almost every single house. I’ve never really seen it before, the way it is in this neighborhood of where I’m at. But like every single house has a garage apartment. And so it shows you that a lot of the houses here were either fix and flips or some form of BRRRR because they came in and they fixed it. They flipped it. And then instead of just rehabbing the garage, they converted it into like a garage apartment.

David:
Very, very common to see in areas where the land itself is more higher value, because they’re going to do exactly what we’re talking about here. So for those that maybe want to know more about what a BRRRR would look like, or are confused about how to know if they should do it. You are in for a treat. We are actually going to walk you through a hypothetical BRRRR, and show you how BiggerPockets resources can do all the math for you and help you figure out if this is a deal that you should buy or not. So Rob, any questions before we jump into the BiggerPockets calculators here and we show somebody how to analyze a BRRRR deal.

Rob:
No. I’m excited. I’m excited to see my sensei at work. So before we jump into the calculator here, do you mind just walking me through this property? Maybe give me some of the nuts and bolts of the actual process or what you were planning on rehabbing here?

David:
Yeah. So a property like this is what will catch my eye. So as we can see from the main picture on the left, the front of the house, it’s not in terrible shape. The roof looks like it’s solid. There’s no reason to think it’s falling apart. You can’t see that this is actually a duplex and it has a downstairs from this angle. But I like that, because that means that other people that are looking at pictures on the MLS or whatever, they’re not going to see it either.
When we get into the actual interior photos here, we’re seeing that there’s not mold. There’s not anything like fire damage or smoke damage, water damage that would really scare me. But it’s also not updated. So your casual buyer’s going to skip right over this. So swipe it left. If this is housing dating apps, they don’t want anything to do with this. But there’s some good bones here. This is the one that other people are going to be passing up. I can tell from the street scene that it’s a good neighborhood, that the cars all look like they’re in pretty good condition. There’s not garbage or graffiti all over the streets. It actually looks like a nice area as well, which is very important.

Rob:
Yeah. I know. My test on that kind of stuff is, I mean, this is Google Maps, granted. But even better, every single yard that you can see here is pretty much mode, right? It’s all manicured. So curb appeal kind of checks the test there.

David:
And I’m seeing green. The grasses are green.

Rob:
That’s right. Hey, this isn’t a seeing green man. This is just a regular show.

David:
And we see here, in additional interior photos, it wasn’t-

David:
And we see here in additional interior photos, it wasn’t marketed well, so this is clearly a realtor who is probably getting a discounted commission and isn’t spending money on the photos. And in today’s, like I mentioned, real estate house dating apps, that’s how it works. There’s no list of properties that no one else has. Everybody’s looking at the same stuff. And so if your photos don’t look right, people are skipping them. These photos are dark. They look like they’re taken with an iPhone six. They show you what’s there, but it’s definitely not a flattering look, so a lot of my competition’s going to skip right over this. But what I’m seeing is outdated but good bones.
The bathroom looks like it’s in okay shape, it already has a shower. I don’t have to put a new shower in. It’s got a vanity. It’s just outdated and ugly. And then you can see the mudroom the kitchen are very outdated, looks like something out of That 70’s Show. So most buyers are going to be turned off when they see these pictures. You see that the two bedrooms there, the sun’s coming in from the drapes, giving it that golden look that I remember from being seven years old, and that’s what every single house looked like. This is not going to be catching attention on my competition, but I’m not seeing anything that scares me, and that’s … This house isn’t wearing makeup, but it doesn’t have any giant warts on it or something that you go, “I don’t think I can work with that.”

Rob:
Well, I mean, yeah. When I see this kind of stuff, especially whenever I’m shopping for short-term rentals or anything, or important comping out my competition, oh, man, I love seeing terrible photos. That is some of my favorite, favorite thing because I’m like, “Okay, great.” So many, 50% of people are going to walk away from this, not even click past the first three photos because they see these orange drapes right here. That creates just a great opportunity for people like us.

David:
Yeah. I’m drawn to this. This is what gets my attention. When I see really nice pictures, beautiful house, and everyone oohs and aahs, I click right past it. No money there, no opportunity there. When I see something like this, I get excited. It’s kind of funny, but this is what you want to be looking for.
All right, now this is where we get into the nitty gritty. As you can see from these pictures, now also, let me give you another tip. You won’t hear this anywhere else. When I’m looking at properties on the MLS, or if you’re using a portal like Zillow, or Realtor, one of those type of places, most people click on the initial picture and they click on the arrow to the right. N what happens is when I’m listing a house as a realtor, I put my best pictures first. I want the ooh and the aah stuff, the beautiful view, the amazing kitchen, or the master bathroom, I want you to see that. We put the worst pictures last. So I always click on the left arrow when I’m going to be looking at homes because that’s going to show me what the lots looks like and it’s going to show me stuff like this, the unfinished portions of the house that scare away the casual buyer, but someone like me is interested.
I get excited when I see exposed framing, rough in plumbing. Right? As you can see here, a lot of the expensive work has already been done in this basement, but it is not livable. Somebody could not live here, which turns off a lot of my competition, so I always click on the left button because I want to be seeing those ugly pictures first. So you can see the basement already has a bathroom. It’s ugly, but it’s got plumbing run to it, which is one of the most expensive things in a rehab. The bedroom just has this wood paneling wall that makes you look like you’re sort of in an underground bunker in World War II. But it’s already finished, you don’t have to do any work.
And then you can see that the mid basement has exposed framing, where somebody could just come in and put up some drywall right over the top, which it looks uglier than would actually be to finish this. And if you’re not experienced with rehabs, this would scare you. But somebody like me looks at this and says, “They’ve already done 90% of the work.” So it was these pictures that made me think this is the house that we should be going after. This is the one I want to use in the hypothetical BRRRR because it’s got everything you need, but it still looks ugly. Does that make sense, Rob?

Rob:
It’s got everything you need, but it still looks ugly. I’m going to frame that quote.

David:
And you’re going to put in on a T-shirt right next to my face. David Greene, bringing you everything you need, but still looking ugly since 1983.

Rob:
Yeah, I’ll get you that. I’m going to get those mass produced for BP Con.

David:
So we see here, this property, it has some potential. It’s got what we’re looking for. Now we need to figure out. Is it going to work if we rent it out by the number? So I’m going to show you just how Bigger Pockets can help you do that very thing easily, quickly, and without making mistakes. All right, everybody, so here are the deets. We’re going to be looking at a 1950s ranch up down duplex, so this is going to be a duplex with an upstairs and a downstairs. We’re looking at a purchase price of $220,000 because this place is in need of some repair, an estimated rehab of around $50,000, and ARV of $350,000. So in this case, one of the units of the duplex, the bottom one, is not finished. It actually has to be made into livable space, which is going to increase both the square footage and the value of the house, as well as the rents that it can bring in because in its current state, you’re only going to be able to rent out the top unit.
The rents would be about $1600 per unit, and we’re looking at property taxes of about $220 a month and homeowners insurance of $60 a month. So let’s say you have that information, which frankly shouldn’t be too hard to get if you listen to this podcast, you have a pulse, and you know how to use a computer. The question is: What do I do with these details to figure out if I should buy the house or not? So because Rob here has not done as many BRRRRs as me, we’re going to let him actually get a little bit of repetition in here. So Rob and I took a quick break and we entered in all of these details to the Bigger Pockets calculator. Now Bigger Pockets has several calculators you can find them at biggerpockets.com/calc. There’s a rental property calculator, a rehab estimator calculator, and this one, the BRRRR calculator. So Rob, will you show us just how easy it was to put this information in and what you inputted?

Rob:
Yeah. So this is obviously very, very quick here because kind of simple information to be entering. It’s very nice and easy to flow through here. So report title, you can name this anything. We’ll call this BP home test. All right, I probably could’ve thought of a catchier title than that. That’s all right. Property address, 123 Main Street, property city, Salt Lake City, property state, Utah. Zip code, and then for annual taxes here we put $2400. You can add a photo and add a property description. I probably would recommend doing that if you’re going to be doing a lot of these at a time. And then for purchase price, like you talked about, 220. We got our ARV in here that we entered in, $350,000.
You put your closing costs at $500, estimated repair costs at $50,000, and then really, it’s just a few drop downs here to just make sure that you’re tightening up some of these details, so you put in things like your down payment, your loan interest on the purchase loan details. Are you going to be wrapping in your loan fees, paying your loan fees? And then is the loan interest only? Does it include PMI, amortization over 30 years? And then how many months until you refinance it? And how long is it going to take you to actually rehab? So all very kind of straightforward information here. I think if you’ve done this a few times, again, this’ll probably take you five minutes.
And then it’ll ask you all of your refinance loan details, so what that loan amount’s going to be, interest, rate, and then really a lot of the same questions. Are you going to be wrapping your points into the loan, paying them out of pocket, interest only? Are you going to be amortizing it? That’s pretty much it.

David:
Now let me jump in. If someone doesn’t know what PMI is, or how to calculate their taxes, or what amortization means, there’s these little question mark bubbles that are right next to all those inputs that you could hover over, and Bigger Pockets will tell you this is what this means, and here’s where you can find this information. So it’s designed for people who don’t know what they’re doing, who haven’t done this before, and who are trying to learn. It kind of walks you through by, in a way, forcing you to get the information that you need to analyze the deal to teach you how to do it.

Rob:
Yeah, actually, that’s nifty. So right here it says, “Total gross monthly rent.” Obviously, we know what that is, but if you’re unsure, that little gray box that you’re talking about says, “How much rent will the property receive every month?” Enter a master number here, expand the section to break down the numbers into specific units. If unsure on rental price, consider using Craigslist, Zillow, Rent O Meter, rentometer I’m not really sure, I’ve never said that out loud.

David:
Well, have you ever called it a speed O meter? Or do you call it a speedometer?

Rob:
Well, a speed O meter is a whole different machine. Or as your landlord. So okay, well. Speed O meter, speedometer. Okay. Listen, I say rentometer, and then one time I said that on YouTube and I got a couple comments from people that’s like, “Did Rob seriously just call it rentometer?” And I was like, “I thought that was correct.”

David:
I got your back, man. Hit them with the speed O meter, speedometer test. It’ll shut down the haters.

Rob:
Okay, final thing on this. The way it spells it is rent, capital O, capital M, meter, so I think it’s understandable.

David:
So they’re purposely causing confusion. That’s why we use Bigger Pockets for this, because Bigger Pockets actually has a rental estimator tool that you can use, where you can put in your property address and it will tell you this is what it would rent for. So I use this all the time, we do it for our clients that want to come by with the David Green team. And they say, “Hey, we like this house. What do you think it’ll rent for?” I say, “Go right here. Here’s the link. Put it in and Bigger Pockets will give you what the estimate is.” And then we verify that once we’re actually in escrow with a property management company, or Craigslist, or some of these other things Bigger Pockets mentioned.

Rob:
Well, that’s nice. That’s one other thing I wanted to say because I was asking you before this. How do you personally, how do you do the rehabs? Or how do we know what the rehab’s going to come out to? And then I found out that there’s a rehab calculator, which is very nifty for those of you that don’t really know how to estimate things like roof, drywall, flooring, anything like that.

David:
As well as a very good book that Jay Scott wrote called Estimating Rehab Costs about exactly what its title is.

Rob:
So in 2022, do you just take that book and then double all the prices?

David:
It’s happening so fast that, that’s what the problem is. Right? It’s like when you talk to your grandparents. I used to be able to buy a scoop of ice for a nickel. And I’m over here like, “Why do we even have nickels anymore?” Just round it up.

Rob:
Hey, man, don’t you know that nickels are the new penny? All right, so kind of finishing up this calculator. It is going to ask you a few more little things like variable landlord expenses. This’ll be things like vacancy, repairs, and maintenance, cap X, management fees. And then future assumptions, if you want to really get into the nitty gritty of annual income growth, annual expenses growth, sales expenses, all that kind of stuff. So get to the very end here, there’s a little blue button here that says calculate results. And if it’s your first time using it, you’re going to get a fancy schmancy badge that says, “Congrats. You’ve just ran your first deal,” which we all saw off screen when we weren’t recording. And here it is. The final output I guess of this calculators is a very nicely organized and aesthetic and very clean set of data, I suppose would be the easiest way to describe it. It just kind of runs you through this entire investment as a whole.

David:
So there are several ways that you can use this final result. The first and most important is it will let you know if you should buy the deal or not, so we’re going to get into that in a second. The second is you can share it with somebody else and they can very easily read it. And because so many people use Bigger Pockets’ calculators to analyze deals, they’re already familiar with the format. It’s sort of the Microsoft Excel of analyzing rental properties. Everybody knows what an Excel spreadsheet looks like if they work in that world. Third, and often sort of dismissed value of this is that you can you can take it to other people who you want to borrow money from and show them this is how the deal is going to work out, and this is how I got my numbers. And because it’s clean and professional and clear, it’s different than writing it down on a greasy napkin and handing it to someone and saying, “Just trust me.”

Rob:
Hey, man, we can’t discredit the greasy napkin too much. I mean, a lot of good deals have been penned over a greasy pizza napkin.

David:
That’s how I got my start. Luckily, it’s not how I got my finish. This is how I got my finish. Now this is a sheet that cleans everything up for you very nicely, as we can see looking at this. The property will cashflow about $615 a month. That’s $3200 of monthly income, minus $2585 of monthly expenses. Now let’s talk about the capital that gets left in the deal. On the left hand column here, you see all of your expenses sort of summarized. We spent $220,000 on this property, which you could’ve paid cash for, but in this case, we talked about getting a loan for. So we have $5000 in closing costs, and then we spent $50,000 to fix it up. So if we add $220,000 to buy, $50,000 to fix it up, plus $500 in closing costs, and then another $5000 in closing costs after that to do the refinance, we end up with about $280,000 invested into this deal. And if it’s worth 350, and we get a loan for 80% of that you see, we get $280,000 back, which ends up being the same money that we put in the deal.

Rob:
Yeah. And then usually, it’ll calculate this cash on cash return metric here for you. In this particular instance, notate that cash on cash is actually infinite because you got all your money out of the deal.

David:
Yes. And that’s a home run. Now not every BRRRR deal is going to be exactly that. What if you left $10,000 in this deal, or $20,000 in this deal. That’s still a lot better than if you bought it traditionally, spending $44,000 of a down payment, plus $50,000 of a rehab. Now you’ve spent $94,000 of your capital plus your closing costs that are sunk into that, that means you can’t go buy more real estate with that same money. So the BRRRR method in this case helps you get your capital back that you put into the deal, so you can go get another one of these suckers and start building your portfolio.

Rob:
Yeah. So when you’re doing this, I mean, do you kind of expect to leave a little money in the deal? Or do you go in planning for, hey, perfect scenario, I get all my money back? You as someone who’s sort of perfected this, what’s your mindset here?

David:
That is such a good question. And it’s relevant because I’ve seen so many people do a great job, add a ton of equity to a property, get a property in a great area, and it cash flows, and they left maybe 8% of their money in the deal, and they’re hanging their head with their tail between their legs saying, “Oh, I’m a failure. I’ve screwed up my BRRRR.” And I’m like, “Your competition put 25% to 30% down and then sunk all their closing costs and got none of that back. And you ended up leaving 8% of your money in that deal, and you think you’re a failure.” Here’s the amazing thing. When you’re leaving 8% and it’s cash flowing, your ROI skyrockets. Those people are often getting a 65% ROI on their money because not much of it got left in that deal. So when I’m doing this, no, I do not expect to get all of the money back. I shoot for that sometimes.
There are other deals that I go into knowing I’m not going to get all my money back, but I like this deal so much, I would’ve bought it anyway. I’m just going to buy a better using the BRRRR method. So I’m glad you brought that up. It does not have to be perfect. As long as you left in less than you would have if you put the full down payment and the rehab, then you won. And in this case, that’s exactly how that looks. Now we’re shooting for the home run because you want to take your best shot. You’re hoping that it works out. But if you don’t get a home run, you get a triple or a double, man, that’s still a big win.

Rob:
Yeah. Especially if you’re … I mean, one thing I asked a buddy, who kind of was in a similar situation the other day. And he was kind of bummed out about not hitting his goals on this type of stuff. And I was like, “Who’s the best baseball player of all time?” And he was like, “I don’t know. I guess Ken Griffey Jr. I guess.” And I was like, “Okay. You know that when he stepped up to the plate, he hit a home run not that often.” I was like, “His career, his VIP, MVP status came from singles, doubles and triples.” So yeah, I totally agree.

David:
That’s a very, very good point.

Rob:
So David, when you’re looking to actually get into BRRRRs and get started in this journey, what are some financing options that one can execute to actually get into this niche of real estate?

David:
So that’s a really good question because part of using fixer uppers to build wealth is that you can’t or maybe shouldn’t all the time use traditional loans to buy. A lot of the time when I buy a property, it’s in such bad shape that it won’t qualify for conventional lending, so we have to find other options. And to help with this, I know no one better than my partner in the one brokerage, our broker, Christian Bachelder. So Christian and I have built the one brokerage, and it might be the fastest growing loan company in the country, and a lot of that is because he’s a bit of a computer that wears tennis shoes. And so I usually say, “Hey, Christian. This is what we need. We need a product that works this way.” And he goes and does whatever magic that Merlin does when King Arthur needs some help. And he comes back and says, “I got something for you.” So Christian, welcome to the show. If you don’t mind, can you share some of the more common options that people use on the front end when they’re buying a property they’re going to BRRRR? And then we’ll ask you about on the backend on the refinance.

Christian Bachelder:
Yeah, absolutely. First and foremost, thanks, guys, Rob and David, for having me. David and I have been through quite the journey on a couple of his deals personally as well. So yeah, I mean, there’s a number of options. Obviously, David mentioned conventional isn’t always the best route, and mainly it’s going to be the best rate and best terms, but typically you’re going to run into, when pursuing BRRRRs, you’re going to run into financing issues, maybe due to the quality of the house. Typically, a BRRRR is going to need some remodeling, some updating that conventional lenders may kind of take a second look at and decide it’s not a risk they’re willing to take on.
That’s where we can get into a lot of what I call kind of the shorter term financing, the hard money, the private money, mainly a lender who’s lending maybe on a three, six, at most maybe 12 month timeline. It’s going to be high rates. It’s going to be high closing costs. But the idea is that you’re not going to hold it for very long. Typically with experience, you can get even some of your renovation costs financed as well, which is a good alternative if you have a little bit lack of capital to start out. The problem is when you’re new or inexperienced, it can sometimes be more difficult to establish that relationship with a lender. Hard money and private money is very significantly relationship based. Once a lender lends to you once or twice, they like you, they want to lend to you again. And obviously, that’s where developing that relationship comes in very, very, very, handy, whether that’s with a broker or a lender.

David:
Yeah, that’s a really good point. So we’ll talk about that a little bit more just when a lot of people do the work of the brokers, they go shop and try to say, “What’s your rate? What’s your rate? What’s your rate? What’s your rate? What’s your rate?” And they try to find the lowest rate. And they typically end up with that Wal Mart strategy, finding the broker who, their value is in the fact that they are the cheapest. Right? It’s kind of like the flea market approach. It’s not Nike, it’s Bikey, but it looks like Nike, and it will make you think that you’ve got that. Versus someone like you, who knows my file intimately, probably more than you want to. It’s probably a broker’s nightmare.
But because you understand the strengths and weaknesses the different properties I have, the different ways I make income, you are able to go find a specific lender that will do something unusual, but in my best interest. And we’re going to talk about that later. So when it comes to buying the property, would you say that for the average person, if they don’t have the cash, probably taking a HELOC on either their primary, or an investment property, or a hard money loan, are going to be the two most efficient options?

Christian Bachelder:
Absolutely. If you have a portfolio to leverage, that’s always a benefit to utilize, whether that is via HELOC or a cash out refinance. Obviously, in markets that were … This is being recorded in April of 2022, obviously being in a market like we are in right now, with rising interest rates and the Fed doing what they’re doing to hedge inflation, I would advise a little more toward the cash out than a HELOC because HELOCs are adjustable in the significant amount of cases.

David:
Rates could go up.

Christian Bachelder:
Yeah. And that HELOC, you may have a 2000 monthly payment now that may go up to a 3000 monthly payment by the end of the year. And when you’re running your numbers, it’s sometimes hard to predict for that, whereas a cash out is fixed. If you can get a HELOC that is fixed, obviously that’s a different story. Typically, my experience, most are variable though. But absolutely, with that portfolio, people who don’t have a portfolio don’t have that option, but if you have it to leverage, absolutely a good call to … David and I talk a lot about that return on equity instead of the return on investment.
And if you got hundreds of thousands sitting in a portfolio, great job. You did a good job investing and taking advantage of appreciation. But at the end of the day, would you buy that same portfolio with hundreds of thousands of dollars down? Right? You’re still getting the same return on your equity as opposed to return on investment. And that’s where cashing out can help that velocity of money continue.

David:
And with the BRRRR when we talk about using HELOC, it’s because presumably you’re going to pay that HELOC back after you refinance, or at least the majority of it. So it takes some of the sting out. If you have to borrow 100 grand, and then you pay back 80 or 90 grand, you’re only left making interest payments that might be high on $10,000 or $20,000, which doesn’t hurt you nearly as much as if it was the full 100. But I do agree that an environment like this, the cash out refi is usually better because you lock in that lower rate. So there’s also options where you could borrow money from a friend, or you could borrow money from a partner and pay them interest on the money that is being borrowed. But that idea is once you’ve got a portfolio of properties yourself, you end up with more options, so it helps with the buying.
Now on the refinance at the end, that’s a little different. Right, Christian? At that point, you’re trying to get the better rate.

Christian Bachelder:
Absolutely. And that’s where you’re going to be leaning towards more of a 30 year fixed option, whereas the hard money or acquisition purchase is usually going to be a three or six month term. And obviously, that’s where our rental programs that you’ve discussed a lot on the podcast are a dead service product, where your personal income doesn’t count once you have maybe more than 10 properties, or don’t qualify conventionally. It could be a conventional loan. If you qualify, it could be your exit strategy loan.
Obviously, once that property is stabilized, you have a little more options on the forecast of what you can take advantage of. But you’re definitely going to be leaning more towards a long-term fixed rate stabilized rental loan.

Rob:
Can we just break down sort of what a hard money loan scenario would look like? What does a typical deal look like? Just because we’re talking concepts here, but I want people at home to sort of understand how this loan product could work. Do you think you could walk us through that, Christian?

Christian Bachelder:
Yeah, absolutely. And I know we’re going through David’s example shortly, but let’s just say a theoretical one. Say you’re buying a $400,000 house. You anticipate the exit value’s going to be worth 500, maybe you’re putting 30, 40 grand of repairs in. You’re going to hope to get 100 grand of increased value, maybe remodeling a kitchen, some bathrooms, or something. Typically, the idea is a hard money lender would go in as an equity position with you on a, let’s call it, you have to put 25% down. Right? So they’re going to be 75% loan to value. These rates, I mean, I’m sorry, these loan products are the most expensive in the industry, the highest rates, because like I said, they’re meant to be short-term. Right?
So this may cost two to three points to close in loan fees. That’s not including appraisals and everything else that comes along with it. And it’s going to be probably 8% to 12% interest maybe. Right? Typically, they are interest only to limit that monthly payment. And in some situations, especially if you show that you have experience with flipping or renovating, they would also be able to finance your renovation costs as well. So if you had, say you’re able to put 25% down on that 400,000 number, plus getting 100% …

Christian Bachelder:
… percent down on that 400,000 number plus getting a 100% of say your 40,000 remodeling budget. That’s actually a decent loan value. You’re getting more closer to that maybe 20, maybe 15% down ratio when you add in the renovation costs as well. With that though, there needs to be a solid understood, what we call ARV, after a repair value. Typically, the hard money lender would have their own in-house appraisal who is good at analyzing after repair values. And he’s the guy who would go in that say, “Hey, yeah. This property would be worth 500 or 550,000.” And they would only be lending in the event they know you can get to that exit strategy.

Rob:
What’s a common ratio on the ARV? Is it typically like they’ll loan, 70%, 65%, 80%? What’s that?

Christian Bachelder:
Yeah. A really good question. That’s where you get in if you have a really big renovation budget. What if you have a 100 to $300,000 renovation budget. Yes, and that’s going to vary by lender. Typically, they’re going to go up. They’ll go up above 80. In some cases they’ll go, maybe with the renovation they’d like to go to 85 maybe. But that is going to be different based on who your investor is. Some are more conservative, some are more liberal. It just depends on the strength of the property. Are there other comparables? How many comparables do we have? What’s your experience? For somebody like yourself or David, obviously they’d be much more flexible.
Somebody looking to do this for the first time. Absolutely. They’re going to cap you at maybe 75, 80% of that after repair value which is why you have to run your numbers really assertively. You got to know what you’re going to be going in for, because you don’t want to get $40,000 into a renovation budget and realize you still have 30,000 to go and you can’t get to that ARV with what the lender’s given you. And then you got to go start asking friends and family. Analysis is really important upfront and that comes from experience which is why lenders are more willing to lend more, to more experienced buyers.

Rob:
Well, awesome. Well, yeah. We can get into David’s nitty-gritty here in a little bit, but I appreciate you walking us through this.

Christian Bachelder:
Absolutely. Yeah. Happy to help.

David:
All right. Now, since I’ve taken over as the host of the BiggerPockets podcast, as opposed to the co-host, there’s been some changes around here. And one of the changes that we’ve really tried to make is we’re going deeper into individual real estate deals and the show in general. So rather than just interviewing guests and hearing their story, we’re trying to really pull back the curtain and show you what goes on behind the scenes, give you a lot more detail and a lot more practical help so you can understand this is what we’re actually doing when we’re investing.
And as you just saw, understanding how the numbers work on a deal is one of the fundamental things you have to understand. If you want to have confidence going into a deal, you have to know what you’re going to get on the other side of it when you come out, which means you have to be able to understand your numbers. Now I’m sharing my rehab numbers. I’m sharing the purchase price. We have our lender on here to talk about how we’re doing the financing. But none of that really helps if you don’t know what to enter into the calculator or the spreadsheet to figure out what you’re going to get when it’s done.
If you’re interested in taking your investing to a new level, if you want to make this year, the year where you actually make progress instead of just hanging out around the scene but not getting your foot into the water, I would encourage you to consider turning Pro at BiggerPockets. Now these calculators that we use, you get unlimited access to when you turn Pro, which means you can use them all the time. And there’s many uses for them. We’ve talked about how you can share.
Well, first off, there’s just the fact that you need to know what the numbers are going to be when you’re done on the deal. Is it going to get you money or is it going to lose you money? If the stuff’s going to lose you money you don’t want to be buying and the calculators can help save you if you find the wrong deal. But once you’ve run the numbers you can actually use these to share with other people that might want to let you borrow money, might want to invest with you, even might want to look over the deal you’re doing and see if they think that it would be worth it. So that’s one of the reasons that I went Pro, way back in my wee years where I was using calculators for that very same purpose.
But because you’re listening to this podcast, there’s a level of loyalty that you’re showing. You’re going to get more than what a normal BiggerPockets Pro member would get. If you decide that you want to upgrade after listening to today’s show, I’m going to give you my BRRRR book for free. In addition to the book, you’re also going to get the ultimate package. Now that’s some bonus content I made when the book came out, that’s BRRRR related. And I think one of the most important parts is an actual presentation that I’m giving of how you can explain how BRRR works to someone else to be able to raise money from them to help buy your deal.
You’re also going to get a workshop that Brandon and I did on how to buy deals with no or low money down because technically BRRRR is one of those strategies. I think this is some of the best work that we ever, ever did. This is a phenomenal workshop. You’ll get the, How to Find Great Deals class where Brandon is interviewing different investors that have off-market driving for dollars, different ways that they’re finding deals that would work for a BRRRR. And then you’ll get access to the online boot camps that BiggerPockets puts on which are only available to Pro members.
Now, the most important part is you’re putting a little bit of skin in the game to get yourself committed to this. You’re actually getting into the pool, not just sitting on the chairs on the outside looking in. If you’re someone who knows this is something you want to do but you’re not sure where to get started, I think this is a fantastic first step. Now, if you want to sign up and you want to save some money you just need to go to biggerpockets.com/proupgrade. There will be a section where you can put in a discount code. That discount code is repod21.
Now, in addition to all the bonuses I mentioned you’re also going to get 20% off the Pro annual membership, meaning you’re only having to pay $312 for the entire year. This is probably the biggest ROI that you’re ever going to get on anything investing in real estate. This is less than a home inspection would cost. Many people put houses under contract and then say, “Ah, I’m glad I spent that money on the home inspection because it revealed some things that I didn’t want when I bought the house.” Well, this does the same thing and that it reveals to you the houses that are not going to make sense financially to buy. So if you go to biggerpockets.com/pro upgrade and put in the discount code repod21, you can save 20% off as well as get all the bonuses.

Rob:
Yeah. Just run the math on this by the way. And it is less than a dollar a day to be a Pro member. Some of us, we do like to indulge in the finer things in life like Starbucks every so often, just don’t buy your Starbucks. Invest in your real estate. I really think for the most part on my end, sometimes it takes a little bit of a financial commitment to actually get started. And that’s what BP Pro was for me. I just did that and I was like, “Okay, I’m paying for this. I’m going to start utilizing these calculators. I’m going to start using all these different tools,” and start to realize once you have access to all the resources here, the master classes, the calculators, it really lights a fire under your butt. So I think it is very much well worth the cost, especially if you were going to buy it anyways, you probably were going to. You get 20% off. It’s a pretty decent discount I’d say.

David:
Yeah. I was just thinking, when I sign up for jujitsu, they have you buy a gi on your first day. You’re going to spend a couple hundred of bucks on this gi. But once you’ve got it, you’re not going to not use it at that point. You’re like, “Well, I better be going to class because I bought the stuff.” It’s an amazing investment to actually get your butt in there and start training. So this is just how human nature works. You want to have some form of skin in the game but you don’t want it to be tens and tens of thousands of dollars if you’re not at a very, very high level. So if you’re a beginner, this has everything you need. It’s the full arsenal of weapons that you need to get in there and start building wealth through real estate.
When we talk about this deal, it’s actually very simple. It’s the exact same principles on the deal that I’m doing at maybe higher price points, then it would be if you were working the same thing out on a 50 or $60,000 house, that the math is the same, but you need a way to determine what the math is going to be. So I’ll say one last time, if you want to save 20% off on a Pro membership and you want to get all those freebies that I mentioned, the BRRRR book, the bonus deal, the workshop with Brandon and I, the How to Find Great Deals class and access to online boot camps that BiggerPockets puts on, go to biggerpockets.com/proupgrade and use the discount code repod21.

Rob:
And actually I do want to point out one thing that we always forget to mention. There’s a 100% money back guarantee. So if you upgrade to BiggerPockets Pro and you don’t like it, you can get a full refund within 30 days. So you can literally go and you can buy it right now. You can use the heck out of the calculator to analyze a bunch of deals, you can get into your first deal. You can watch all the master classes and if you don’t like it, you can literally email, no questions asked, [email protected] and get a full refund. So legitimately you have nothing to lose.

David:
There you go. So if you’re ready to get that fire lit under your butt like Rob said, this is the best place to go get it done. And many of us got our start in exactly taking that first step.

Rob:
And now for the moment we’ve all been waiting for. We want to see the BRRRR machine himself, David Greene, walk us through a deal. Everything that he is going through, the mechanics, the deal, the remodels, straight from the man himself. So David let’s get into this deal, man.
I think it’s safe to say that we’ve covered BRRRR in excruciating detail. So now let’s talk about out the actual deal that you’ve been alluding to. Getting everyone all excited about this awesome deal that you’re working on right now in California. So can you walk us through some of the financial mechanics of the funding on this deal before we take a look at it?

David:
Yeah. So I originally was planning on using pretty a straightforward loan when I was going to buy this property. But like we said before, because I have a relationship with a mortgage broker and not a bank, or a direct lender, or somewhere where I run around looking for the cheapest rate, Christian here was actually able to find me something much better that we’re going to be using for the purchase. And then after that I’ll refinance into a different product. So Christian, could you share where we started and where we ended up with your help?

Christian Bachelder:
Yeah, absolutely. As David alluded to you, this is exactly the situation where your broker understanding your finances can lead to a complete game shifting change in your financing, which is what happened here. Typically, we would’ve financed this with our debt service loan as we talked about earlier that doesn’t qualify conventionally. However, David, over offered on this deal. As is required in this market, it seems David offered more than listing price. However, our appraisal came back extremely high. Since he got an appraisal that was significantly higher, 20% down of the appraised value actually lined up perfectly with 10% down of the purchase price. So we were able to leverage the property further because the appraised value came back so much higher.
And this is a situation where the appraisal came back couple hundreds of thousands of dollars higher. And because of the purchase price obviously some of you can expect what it would be in LA, I’m sorry, in California, we were able to do that. I think we landed at just about 11% down on David’s deal here. And it looks like we may possibly get some financing for the renovation cost as well. So in a position where David would’ve been required to put 25 or even 30% down, we wiped all that around and saved him what? Almost half of his down payment. With this purchase price, that was a very significant amount of money.

David:
As well as the rehab here we’ll see like if I want to borrow for that or if I want to pay out of pocket, but it’s nice to be able to have that option depending on what other deals come around. This was something that you brought to me at the 11th hour. You’re like, “Hey, I found a way that we could do this. Would you rather do 11% down instead of 20 or 25?” And I was like, “Tell me more.” That’s not something I would’ve known to go look at. I’ve become a firm believer that many investors focus on parts of the deal that other people should be specializing in. I get people messaging me asking questions that their real estate agent should 100% have asked them.
Many times they live near me and they use a different agent. Then they come ask me and they’re looking for answers that their agent should have been giving them so they shouldn’t have come to me. That’s always weird. Why do you guys do that? Why don’t you just come to me first, but that’s neither here nor there. Or they’ll ask me a question the title officer could have answered or their broker should have known. And what happens is they end up doing everyone else’s job instead of focusing on the part the investor should do, which is finding the deal, coming up with a plan and then executing on that plan.
Even property managers are often let off the hook because the buyer is trying to figure out how to do their job. I’m actually curious, I want to turn that around and ask each of you, Rob and then Christian. Where do you see this happening in our industry? Do you also see that you find yourself doing other people’s jobs or see other investors asking questions that they should be asking of the person who they’re paying?

Rob:
This is a tough one because yes, I find myself doing almost everyone’s job. It’s not necessarily their fault. It’s just more like, I just move very fast and I’m not patient enough to wait for answers. So I typically just go and find my own answers. Especially in this market, we don’t have time to wait. You don’t have time to really hear back from every party before you can move forward. And so a lot of the times I just empower myself to figure things out on myself. But yeah, I don’t know if I’m alone there or not. That tends to be my mindset. Just not a lot of people move at the speed of me. So I’m just going to keep rocking and rolling and I’ll ask questions as needed.

Christian Bachelder:
Yeah. I think Rob hit that right on the head. I work the same way, that speed is everything especially in our industry, in this market that we’re in. I regularly find myself and our team doing the job of title officers, of agents not on our team. Yeah, that happens more than I would like to admit but absolutely, especially in this market.

David:
I still think it’s better for the investor to go to the loan officer and say, “Hey, this needs to get done,” and let the loan officer go do the work instead of the actual buyer themselves. That’s more of what I’m getting at is when they’re like, “Hey, what do you do when this happens?” I’m like, “That is something I would have to go ask a title officer. So why don’t you ask your title officer?” They end up thinking that they have to know it all.
All right. So now Christian, on this particular deal, once the rehab has been done and you guys are going to see pictures of what this property looks like. The plan is to upgrade it, so fix the bathrooms, fix the showers. There’s a basement that we’re going to be including and then refinance it. Then after the refinance, actually look at splitting the property up into different units. So can you tell a little bit about what product we’re going to try to use when we want to refinance out?

Christian Bachelder:
Yeah. Once we refinance out, you’re going to have leases in place. Now, people who are familiar with lending guidelines will know that you probably will need a master lease. So everybody expecting in your exit strategy maybe to be renting out by the room or renting out to individual tenants. Typically, there’s one master lease that covers the entire house. And then each of the tenants will individually sub-lease off of that master lease. But yeah, once that lease is in place, we’ll refinance based on the debt serviceability of that master lease. Also, knowing that your ARV is going to be significantly higher because of the renovations you’re going to be doing and exactly just like we would for other rental property purchases, we’re going to refinance you into our debt service loan on a 30 year term fixed rate. That’s going to be much more competitive than your hard money.

David:
Speaking of people that need to do their job, I’ve got a contractor and he’s going to do a job. And as you guys are going to see, I’m going to show what a bid looks like that I’m getting from a contractor. This particular deal is very complicated. There’s going to be four or five different units we’re making out of this property. We have them listed as units, one through five, and then work that’s going to be done in every unit. A typical rehab is not going to be this complicated, so you can get more level of detail on the scope of work that we’re going to show when it’s just remodeling a kitchen, remodeling a bathroom.
This would be 10 documents if I tried to show that much detail. So it’s a little less detail than what I usually like to see, but I’ve worked with this contractor before and I’m very comfortable with the work that they do. We’re going to show you how I think you should be communicating with your contractor, how you should be getting a scope of work from them to work into your rehab bid. And after that, we’re going to get into some actual pictures and brass tacks of this deal itself.

Rob:
Okay. I have had the privilege or the, I don’t know if privilege is what I would call it to see photos of the before of this property. I’m going to grill David here a little bit on the property. But before we jump into roasting this house too badly, can you walk us through the contractor bid and how you got to this final budget for this house?

David:
This is not a typical rehab. Most rehabs are going to be classified by the portion of the home and what the contractor’s going to be doing. And I always like to get my bids as itemized as possible so I can know exactly what I’m paying for. In this particular case, what we have is one property being turned into four to five, maybe six units, depending on how I use the about 5,000 square footage of space that the property has. In this case, he’s taken units one, two, three, and he’s broken it down for me and said, “Hey, for unit one, it’s going to be this much money. And this is what I’m going to do. Same for unit two, same for unit three.”
We won’t go through the whole bid here. But you can see, this is the way. If you’re watching this on YouTube, you can see what we’re showing on the screen here. This is the way that we break down what work is going to be done so I know what I’m paying for and the contractor knows what they need to do.

Rob:
So yeah. This is not a light renovation. This is really quite extensive based on the price tag here.

David:
Yeah. We’re changing quite a bit of the floor plan of the house, and then we’re doing some upgrades as well. And then the basement area and the garage is all being turned into a completely new additional unit. So the total rehab’s going to be a little over $186,000 on this deal. But as you can see it’s being turned into about four to five different units.

Rob:
Yeah. And then one thing I wanted to ask, because it seemed like there’s a few schools of thoughts. I don’t want to say it’s controversial or anything like that. But I do see on this bid here, there’s just the price per trade. It doesn’t break it out by materials or by labor. Is that something you care about? Do you care if it’s that itemized? Because you said you like it to be pretty itemized in that capacity.

David:
I do when it’s the first time I’m working with the contractor, I don’t know the person. This is someone I’ve worked with many, many times before. And they do a lot of the work for the people that work with my team. So I’m okay. We basically had to get this thing put together earlier than it normally would’ve been to do for the show. So that’s why you’re seeing it like this. There would be nothing wrong if you got a bid like this from a contractor and it showed plumbing $2,000 to have them put in there what they’re going to do for the plumbing. You actually want to have an idea of where they’re going to be running pipes, what you can expect.

Rob:
Okay. So it’s fair to ask for the scope of each trade, but you can leave it at that.

David:
But you also have to realize when they put the trade here, they’re talking about for that particular unit. For unit three, this is what the plumbing would be. For unit four, this is what the plumbing would be. Now, I also walked the house with the contractor several times and we had conversations that are recorded that says, “Hey, here’s what I want you to do.” And he said, “Yep, this is what I can do.” When he’s putting the information here into this spreadsheet for me, it’s done with the understanding that we’ve already talked about what’s going to be happening for unit three plumbing.

Rob:
That’s a little nugget there. Do you always record your conversations with your contractors?

David:
I do now.

Rob:
So, okay. Got it.

David:
Now I do it under the guise of, “Hey, this way we won’t forget everything we talked about.” It does come in very handy if they ever come back and say, “I never said I was going to do that.” Or they do it the way different than what they told you and then they say, “We never had that conversation.” When it’s recorded you don’t have to worry about it.

Rob:
Have they ever said to you, “Are you a cop? You got to tell me if you’re a cop.”

David:
That’s funny you ask that. At the end of this segment here, I’m going to share a story with you about cops that occurred on this property this weekend when I was there taking these pictures and making these videos.

Rob:
Wow, that was… Man, that’s very organic. I didn’t even know this. That was just a joke that led to the greatest little plug there for ending the story. So, okay. Let’s hop in, man. Let’s take a look at it. Walk us through this property, the vision for it.

David:
Okay. So one of the things that I loved about this property in addition to the location is that it’s very private. So you have to drive all the way up to the end of a road that ends in a cul-de-sac, but there’s no other houses on the cul-de-sac. It’s a private cul-de-sac with just nature surrounding it, just trees and bushes and flowers. And then you go up a private driveway, which is what we’re looking at here. I’m standing at the top of the driveway, shooting down. You have to drive all the way up around this little twisty private drive to get to the house so that nobody sees what’s actually happening in the property. And you have a ton of privacy.
Now you can see the picture on the right here, that’s the property. And you see that, it looks like the garage is open. There is a garage space that we’re looking into. And then if you’re standing closer to the garage looking into it you’ll see that there’s another door that leads you into the basement. That’s the downstairs unit that I mentioned is going to be remodeled and turned into livable square footage.

Rob:
I’m only really seeing a preview of this, but the outside actually, it’s very serene. This is just very enchanting. The trees are all curvy. I don’t know what kind of trees, willow trees. I like it though. It’s got some vibes.

David:
Yeah. This is a really nice area in the San Francisco East Bay. This is where, if you’re a professional athlete that plays in Oakland or San Francisco, you’d buy into these type of cities and all the houses actually have names. So this one is referred to as the Castle in the Sky, because it sits on the top of a hill and it’s got a lot of windows to give you a view out over the East Bay.

Rob:
Okay. So now we’ve got the serene outside. Let’s take a look at the inside here.

David:
All right. So this would be the picture that I mentioned. If you’re still standing in the covered garage looking forward, the one on the left here, that open door is going to be the basement that we’re going to be finishing and then converting this garage that I’m standing into, into square footage as well. The picture on the right is me standing in the garage, shooting down at the driveway that would be leading up to the unit.

Rob:
All right. And then is this a basement or a garage?

David:
Yep. This is the basement. So the picture on the left there is going to be where we’re going to be putting the dining room. The picture on the right is part of where the kitchen is going to be. This is all like, man, this is what sold me. When I saw this part of the house I’m like, “Oh, this is a really big space that’s not being used. I’m going to get an entire extra unit out of this property that’s pretty significantly big.” I got excited again, when we’re looking at this unused space, this is what gets investors like me really going.

Rob:
This is something that always possibly would stop me from a deal like this. In this photo there’s like a really big boiler or furnace or whatever this is, maybe AC unit. I see some ducting. How do you build around that to finish out the basement?

David:
We’re actually going to cover it. We’re going to use the type of material, I haven’t figured out exactly what we’re going to use. I’ve got the contractor working on it. Now, it’s not going to be full drywall, but something that aesthetically will wrap around that thing so that you don’t see it. And then the spin to the right of it will be turned into storage area. So we’ll put cabinets there. This is where people will keep their pots, their pans, their cooking utensils, stuff like that. And you can’t see in this picture but from where I’m standing if you look to the right, there’s going to be more cabinet space added there as well.

Rob:
Got it. You’re not necessarily moving these big items. You’re just closeting them in.

David:
There you go. So you can see in this picture here, you can’t see the whole thing but this is a bedroom. And then I’m standing outside of the stairs that you walk up from the basement to get to this bedroom. Next to this bedroom is another bedroom. Behind that is a bathroom.
Now what we’re going to do is we’re going to create an entrance of this house that doesn’t exist which I’ll show you in a different picture. I’m going to knock down the wall that I’m pointing at. So this window you can’t see it, but there’s a stairway that is on the other end of it that goes up the entire backside of the house. Now we’re going to…

David:
… other end of it, that goes up the entire backside of the house. Now we’re going to take out this window and put in a door. Now, this is the view that you’re going to be looking at when that door goes in. So this is a room that you’ll be able to see in other pictures better. And when you walk in this door, there’s going to be a split where if you turn to the right, you’re going to go into the room you’re looking at. And if you go to the left, you’re going to be walking up a set of stairs that would lead you to where I was in the first picture, where I’m pointing at the wall. That wall for that bedroom is going to be taken down. And that entire bedroom and the space I’m standing in the previous pictures is going to be made into a loft.
That’s where we’re going to put in the kitchenette and have like your TV, your living area, and then behind that will be another bedroom with a bathroom. So that will be its own unit. You’ll walk up the stairs and you’ll have a loft and a bedroom and a bathroom. So you saw unit one that will be the downstairs basement remodel. Unit two is the one we just talked about. In this picture I’m standing in the same place where the door is going to be made, but I’m taking a view of what will be unit three. So you see this fireplace, this is an entire big open space with a balcony leading to the outside, where I’m going to put in another kitchenette and this will be a living space. And you can kind of see that hallway on the left side of this picture.
There’s another bedroom with a bathroom that’s right down that hall. So unit three here will be this open space with a one bedroom and a one bathroom. So this right here is me standing near the fireplace we were just looking at pointing in the other direction at where the kitchenette is going to be. On the left side of the wall that I’m pointing at, that’s where the kitchen to the existing house is. So it’ll be very easy for us to tap into the electrical and the plumbing that’s right there. And just put a kitchen on this side for unit three. This is a better angle of unit two that I talked about, where we’re going to be knocking down the wall to make the loft. So this wall that we’re looking at in this picture is what walls off what is now a bedroom that’s what’s going to be taken out so that this is one big open area.
The staircase that you’re seeing here is what leads down to where unit one is, sort of the basement. Right now it’s the garage that’s going to be converted. So that’s going to turn this into unit one. Now that wall basically does nothing, but just have a closet and some framing to make off a bedroom. So this house doesn’t need another bedroom. It’s already got like seven bedrooms. So by taking this one out, we’re going to go create a completely new unit that we can rent out.
So unit four is going to have the house’s existing kitchen. It’s going to be probably the biggest of all the units. So it’s kind of hard to see from these pictures, but that stairway I told you about earlier, where we’re going to be putting a door in that’s right now a window. It goes to the left of this picture right here.
So you’d be walking in from just behind this oven, to the left of it, through a door that already exists, that go on the stairs from the back of the house. So people will be walking into this kitchen. The kitchen’s going to be remodeled before we refinance the property. So it’s got this kind of nice Spanish tile, but it just isn’t very trendy. So we’re going to be replacing the countertops with either granite or quartz. We’re going to be putting in a more modern back splash. Some of the appliances will stay, but the older ones will go and then we’re going to be painting this room as well. So it’s kind of got like, how would you describe the look of this kitchen, Rob? You’re better with this stuff.

Rob:
I would say it’s like very… It’s kind of antique Spanish. But this kind of stuff I always try to salvage on from a design perspective in a flip or in a renovation. But it’s not the kind that you want to salvage. I think you’re making the right call.

David:
Yeah. Especially because we’re going to be rehabbing this house and just giving the kitchen a more modern look is going to add value to the property. Now, some of the cabinets that we’re going to be taking out the area where the refrigerator is, if we see that part. I’ll probably move that to the downstairs unit one. To the kitchen we’re going to having to be building in the basement. Some of this stuff will go down there so I don’t have to buy all new things, but the kitchen here will be upgraded. And then unit four will have this big kitchen space. This is going to be the family room living area for unit four. So the kitchen will be on the other side of the fireplace. You can kind of see the door behind it. So you’d be walking out from the kitchen and into this living area.
I don’t know if we got the best pictures, but the view is spectacular from right here. A ton of light, really high ceilings. So where I’m standing is going to be basically the living area. And we’re going to be putting a bathroom in right where my feet are, which you can’t see because the front door is to the right of me. But we’re going to be walling that off and putting in a bathroom right here. So this area where I’m standing right now is looking in the same direction that the last picture was coming from. So those little stairs that are in the distance, that’s where I was standing shooting towards me now. And the kitchen is currently at my back.
This area where you can see that kind of pink, floral tile is a dining room. We’re going to be walling off and framing off this dining room to create a bedroom where I’m standing. To the right of this picture, just outside the frame is another existing bedroom with a bathroom. So this unit’s going to end up having two bedrooms. And it has one bathroom inside of a bedroom, but that bathroom is a half bath. It doesn’t have a shower. So that area that you can see in the foreground where the stairs are, or the background, I guess that’s going to be where we put in another bathroom with a shower. So that whoever’s living in this unit doesn’t have to walk into somebody’s bedroom to use the bathroom and they can actually have a full shower. That’ll turn out unit four.

Rob:
For what it’s worth. I like the tile right here. I guess if it’s going to be a bedroom, I probably wouldn’t necessarily keep it. But I think it’s really nice. That to me is something you’d want to save.

David:
I’m just going to put carpet down right over the top of it. I’m not going to demo that out.

Rob:
Okay. So the next owner can decide if they want to… They’re going to lift up the carpet and they’re going to be like, “Oh my gosh.”

David:
That’s it. K. Leaving them a little Easter egg.

Rob:
That’s right.

David:
So this is me standing on the stairway above unit four, looking out the window at the view I described. Again, it’s not the best shot of it. When I do some of my future content for this project, I’ll make sure I get a better view, but a lot of light comes in right here. And it’s a really cool view looking out over the drive that comes up to the house. Now, part of the reason I said it might be four units, it might be five, it might be six is because we’re not exactly sure how this is going to turn out.
But this photo shows where I want to get a loft put in. We have these really high ceilings and I’d like to add some square footage by putting in a loft at this section here. I have a structural engineer going over the details to see if it can be done, how safe it’s going to be, how much it’s going to cost. So if we can do that loft, that will be an additional unit. If not, then this is going to stay looking the way it is here.

Rob:
Yeah. So after hearing you talk about all of this, it starts to make a lot more sense why this bid was coming in a little bit higher than I was thinking it was going to be. Because yeah, you’re doing a lot. This is a full on renovation I’d say. And honestly, for the bid you got, it seems you’re getting a pretty good deal.

David:
Yeah, no, there’s a little bit more. I don’t think I got all the photos of it, but the last unit is going to be a two bedroom, two bathroom with a living area as well. And so there’s a lot of demo that’s being done in that one. The house currently has a sauna, we’re going to be converting that sauna into a kitchen for that upstairs unit. We’re also going to be knocking down a bunch of walls and then reframing to turn like this huge, expansive master bathroom into a bedroom that can be used by somebody else. And then the bathroom portion will be turned into like a communal bathroom. So part of the reason that the bid’s high is because we’re adding square footage. Part of it is because we’re actually adding a lot of living area to the property and knocking down walls while rebuilding stuff.
So it’s not your typical paint, carpet. Most of the time you’re putting lipstick on something that already exists. We’re actually changing the personality of this property to make it work in a different way so that it will end up cash flowing in one of these really nice areas. And those cash flow should go up every year, as well as the appreciation of the property. And I’m going to get grade A tenants. These are going to be like the best people that you could ever hope for or are going to be renting this property, which is why I’m willing to take on a bigger project. Because I’ll have less headache over the long term.

Rob:
So I really liked this property. I’m not sure if you mentioned it, but can you run us through like the purchase price and then maybe the ARE?

David:
So the purchase price is $2.25 million and I’ve got about $75,000 coming back to cover my closing cost because I have to buy down the rate and the closing costs on properties like this are pretty high. The rehab estimate as we’ve gone over is around $186,000. That could go up once we actually start working on the property and I may want to do some more stuff. The property is appraising at $2.65, and that’s one of the ways this is a good deal because it’s actually appraising for more than what I paid for it right off the bat. Now the appraiser told my agent, Johnny, who helped me get this house. We had him on the Bigger Pockets Podcast on episode 583. He said, “Hey, if this thing was upgraded some of the houses around it, you’re looking at 3.2.” And that’s before the basement has been finished.
So what we’re hoping for is once we do the initial rehab, before we split it into different units, we’re actually going to get it refinanced then. And we’re hoping that 3.2 is the bottom level of where it’s going to be coming in. So if it does appraise at 3.2 with the numbers that I have, I should be pulling out a little bit more than the 2.25 plus $186,000 that I’m going to have into it in the beginning, meaning that I’m going to pull out more money than I put in, and I’m going to have this cash flowing property. And it be even more than that once I add the square footage in the bottom and as the market continues to appreciate.

Rob:
So the quick math here, is the equity on this when you’re done with it going to be the 700, 800 mark?

David:
I’m thinking that it’s going to appraise at 3.2, I’m going to borrow at 2.56. That’s 80% of 3.2, the purchase price and the rehab together is going to equal about 2.496. If you add in $60,000 of holding costs, I end up being a little bit underneath the 2.56 that I think I’m going to pull out of it. So the equity there would be the difference of… What’s 2.496 to 3.2, which is yeah, right around $700,000.

Rob:
Man that was an emotional roller coaster for me because the more you math it out the more horribly wrong I thought I was. But hey, Rob’s still got it.

David:
Right on my brother.

Rob:
So on this property, man, is there anything else you want to tell us? Is there any particular that comes to mind about this? I think you alluded to a little something happening.

David:
So this weekend I went to the house to take some of the pictures and the video to show on the podcast because we knew everybody’s asking, can you still BRRR, does BRRR work? And we knew we wanted to do a show on it, but I wanted to be able to show you guys what I’m actually buying myself. Because I’m not just saying BRRR properties, I’m doing a BRRR. So I go to the property and we’re buying this from a family. The property is a probate sale. So their father had passed away and we’re dealing with two of the sisters. There’s no agents, we’re doing this directly. We told one of the sisters, I was going to be going to look at the property and not the other one. So while I’m there, property currently has security cameras that are recording it all the time because it’s in a really nice area. And I show up on the security camera with the sister that’s never met me.
So she calls the police thinking that there’s an intruder in this house while I’m walking around with my camera, taking videos and talking through what we’re going to be doing and talking to Johnny on my team that was on the Bigger Pockets podcast about, “Hey, tell the contractor, we want to do it this way instead of that way. And have them change the bid.” And going through that whole thing. I look out those windows that I was showing you guys where all the light comes from and I see four or five uniformed police officers with their guns out walking up this hill, tactically from different ways. They’re like approaching it they’re going to be taking the thing down. And I immediately realize, oh no they don’t know that I’m here.
They called the cops. The cops are going to walk into this house and see me not supposed to be here holding my big black iPhone in my hand that look just like a gun. So I told Johnny like, “Hey, I got to get off the phone.” I put it in my pocket. I open the front door. I come out really slow with my hands out. And immediately they all point their guns at me. And they’re like, “Freeze, stop right there. Are you in the house alone?” And they go through the whole thing and just word of caution for everybody don’t argue with police when they’re in that situation. They don’t know who you are. You know who you are. They don’t know who you are. They know that they were called by somebody else saying someone’s in the house that isn’t supposed to be there.
So they prone me out. They do their whole thing. Once everything’s calm I’m like, “Hey guys, I’m actually a former police officer myself, my ID’s in my pocket, check it out.” They run me out and one of them says, wait a minute, “Are you that cop guy that buys a bunch of real estate I’ve heard about” He goes, “David Green real estate, right?” And I’m like, “Yeah, you’ve heard of me?” And he goes, “Yeah man, all the cops think you’re really cool. What are you doing here all by yourself in the middle of a Sunday?” And I was like, “Well…” And I kind of explained what was happening. Orinda police department, shout out to you guys, thank you for being very professional with how you handled that and for staying calm in what could have been a very tense situation. And given me a really good story to share with the Bigger Pockets audience.

Rob:
Well, I hope you got a seller credit out of that, man. That’s very scary, but happy ending right there.

David:
Yeah. So what I would highlight about this deal is that instead of looking for something in saying, would it cashflow or would it not cash flow and then moving on. Is I found a property that I thought I could add value to this property. And then I said, “How could I make it cash flow?” Is there a way that I can make this thing work? And it looks at this point there is. And so that’s where the strategy came from.
And I just want to highlight that in today’s market, you are going to have to work harder than normal. I mean, I’ve got a team looking for people all the time, trying to find deals that will work. And so they came across this one that they thought would work for me. And that’s why I’m buying it. But you got to be dedicated. This is not a market where deals fall into your lap or people come to you and beg you to buy a property and you make up your mind if you want to do it. A lot of competition for these assets right now, they’re going up in value very quickly. Rents are going up just as fast. The stakes are higher than they have ever been. So now is the time to continue taking action.

Rob:
Well, I’m really jealous of this. This is a really… Well, first of all, I love the house. I mean, as much as I was giving you some grief about it earlier. It’s really cool. It’s got a lot of insane bones, a very magical outside, very expensive. So for someone walking into a deal like this, obviously what I want is for them to have the experience to be able to do so. But what are the actual, I guess you kind of talked about it earlier, the holding costs. Because if you’re going to buy a $2.2 million property, I got to imagine you’re doing hard money loan on something like this. So the cost on that, is that like a 10% interest on a total of like $2.4 million.

David:
Yeah. So as Christian mentioned, when we brought him in, he was able to find me a sort of a hybrid hard money type of a deal where my interest rates going to be 6.99%, which is going to sound higher than what most people are used to hearing. But I’m only having to come up with 12% of the purchase price and the rehab, they’re going to be able to fund the whole thing. So the higher rate makes more sense for me. And then, because it’s at 2.25, and I’m only having to put 12% down, it’s still at a pretty high loan amount. So you’re looking at about a 2 million note or so for the time that I’ll be holding this property as well as the property taxes and the insurance and whatever other expenses we’re going to incur, which is just why I keep saying you always have to have a lot of money in reserves. You have to plan for the worst case scenario and hope for the best.

Rob:
Man, I’d have to really look at those numbers. But top of my head that actually seems like a pretty sweet deal. A pretty good loan product for something this size, especially.

David:
Yeah. And that’s one of the reasons that he and I, and a lot of other people in this industry are banging the relationship drum. If we were just trying to find the cheapest rate you could possibly get, you usually end up getting the cheapest representation and your whole deal gets screwed up. But when you work with a broker that actually intimately knows your finances, knows what your profile looks like, and they can go look for someone that would work with you. It doesn’t always work out. K. Like on the deal you and I are buying we didn’t get anything incredibly special. We, instead of putting 30% down, I think we’re probably going to be doing, is it 20%?

Rob:
20, yeah?

David:
We were hoping for 15. But so you don’t always end up getting that home run, but more often than not, when you work with the same lender and you have a property that has options like the one you and I are buying just doesn’t have that many options. There’s not as many investors for a luxury property like that. But when you do work with someone who knows files, they can find you loan products like this that give you some creativity.

Rob:
All right. Well, I’ll be giving Christian a call right after we finish recording this.

David:
Yes, sir. Well, thank you, Rob. I appreciate you sitting here and kind of letting me put you up on game. When it comes to the BRRRR model, you’re asking the tough questions that everybody wants to know.

Rob:
I feel like I’m putting you up on game.

David:
Well, I’m showing you kind of, this is how I’m approaching real estate. And I will admit this is not traditional stuff, but we’re just not in a traditional market. This is the craziest market I’ve ever seen in my lifetime. I’ve been telling people for as long as I’ve been hosting the podcast, the white walkers are coming. Inflation is coming. A crazy market is coming. When a lot of other people were sitting on the sidelines, I was still saying I think you should buy.
And people that have been buying and doing fundamentally smart moves are making a lot of money, but you got to have that creativity piece. This is no longer just the boring churn, rinse and repeat model that I was able to use before when I was stacking up properties. Now you got to see angles that other people aren’t seeing, you got to be willing to do work other people aren’t doing. You have to be thinking about how to run your property better than other people are running it. You got to be a better investor, but when you are, there is still a lot of money to be made.

Rob:
Well according to chapter seven of the BRRRR Bible you say… Well, I was hoping I would land on a really nice juicy nugget, but the whole book itself is a juicy nugget. It wasn’t going to work in this context, a bad ad lib, but it’s a good book. So as a reminder, if you guys sign up for Bigger Pockets Pro you guys are going to be getting a free copy of this. And you know what, as I mentioned, this has been the foundation for a lot of my real estate career. And I don’t even execute BRRRRs really in the same capacity that you do. It’s very applicable to short term rentals, to flipping to every niche within the real estate industry. So excited to get this in the hands of more people.

David:
Well, thank you, Rob. I’m excited to do this podcast with you. If people want to see more about what you’re about and where your amazing aesthetic insight comes from, how can they find you?

Rob:
They can always find me on YouTube at Robuilt, on Instagram at Robuilt =, on TikTok at Robuilto. And that is for all the crispy nuggets that I’m willing to unleash on the internet. What about you? If anybody wants to invest in a flip with you like this, or learn more about you work, can they find you?

David:
Great question. I actually am raising money to do more deals like this. I’m paying other people to use their money so they can go to investwithDavidgreen.com and you can invest in a deal with me, get yourself paid, not have to worry about making any mistakes or doing something the wrong way. And they can also follow me online at DavidGreen24, which I hope you do. Brandon Turner has stepped away from this podcast. He still has twice as many freaking followers as me. So I am not too proud to ask for a pity follow. Please have your mom, have your sister, have your aunts, all of them. I’ll take every pity follow that I can get. Follow me there and let me know what you thought about this show. All right. Anything else Rob, before we get out of here?

Rob:
No, man, that is all I’ve got for today. I’m on a mission now I’m going to go buy a $2.2 million house and I’m going to BRRR it. You mark my words. It’s going to happen on this podcast.

David:
All right, man. This is David Green for Rob, crispy nugget [inaudible 01:32:27] solo, signing off.

After years of record-breaking appreciation, property values are facing their first real test since 2019, as mortgage rates rapidly rise and put downward pressure on housing prices. As such, many real estate investors are rightfully wondering if they should invest now before rates rise, or if they should wait for a possible price correction. 

This is an important question for real estate investors, and luckily, we can answer it for ourselves with simple math. 

In this article, I will talk you through how returns would differ if you bought now versus waiting for a “crash”. I’ll also demonstrate how you can use calculators on BiggerPockets to do these calculations yourself.

The variables

The question I’m seeking to answer is — should I invest now before rates rise further? Or should I wait for a potential price correction? There are just two variables we need to consider to answer these: interest rates and home prices. 

Let’s create two scenarios. The first is buying now (mid-April 2022), where interest rates for an investor on a 30-year fixed-rate mortgage are about 5% and the median home price in the U.S. is $400,000. 

The second scenario is going to be a market crash scenario, where the median home price declines by 10% to $360,000, but that doesn’t happen until the end of 2022, at which interest rates for an investor increase to about 5.75%. 

To be clear, I am not saying that a crash is going to happen. I personally think the more likely scenario is that price growth starts to flatten out in the coming months, and perhaps even decline at some point within the next year or so. But, I don’t think a 10% contraction is likely. 

Overall, low inventory and demographic demand will likely put upward pressure on housing prices and counteract the effect of rising interest rates. However, we’re in strange times, and the direction of the housing market is unclear. 

For the purpose of this article, I am going to model what I would consider a true “crash” scenario – which is a 10% decline in home values. Of course, there are limitless scenarios we could run, but since I hear so many questions about the “crash” scenario I think it’s the most interesting one to model.

In both scenarios, I assumed rent prices of $2800/month and forecast an average of 3% appreciation post-purchase. I did this because even if prices do happen to decline a bit in the coming year or two, I expect strong appreciation in the housing market over the next 10 years. I recognize rent could go down in a “crash” scenario, but I want to limit the number of variables in the analysis, so I kept rent the same in both scenarios. 

Analysis

To make this analysis as easy as possible, I am going to plug in my assumptions to the BiggerPockets rental property calculator. 

Scenario 1: Buy now

Purchase Price : $400,000

Down Payment: $100,000 (25%)

Closing Costs: $7,000 closing costs 

Annual Appreciation: 3% 

Loan Details: 5% interest rate, 30-year fixed rate

Rent: $2800

View Full Calculator Report Here

In Scenario 1, if I owned the property for 10 years, the value of this fictional house would increase to $538,000, and I would be earning over $10k/year in cash flow after a decade of gradual rent increases. If I went to sell the property after 10 years, I would earn a profit of $265,000, which is good for a 13.28% annualized rate of return. Solid returns! 

Scenario 2: Wait for a price drop (10% price correction)

Purchase Price : $360,000

Down Payment: $90,000 (25%)

Closing Costs: $7,000 closing costs 

Annual Appreciation: 3% 

Loan Details: 5.5% interest rate, 30-year fixed rate

Rent: $2800

You can check out the full calculator report here. 

In Scenario 2, if I owned the property for 10 years, the value of this fictional house would increase to $484,000, and I would be earning almost $11k/year in cash flow. If you’re wondering why the value of the property is less, it’s due to the fact that in both scenarios I assume an average of 3% appreciation. In Scenario 2, we had a starting point of $360,000, as opposed to $400,000 for Scenario 1. 

If I went to sell the property after 10 years, I would earn a profit of $245,000, which is good for a 13.44% annualized rate of return, slightly higher than Scenario 1. 

Breakdown

As you can see from these two analyses, the difference between the two scenarios is not very considerable. The total profit is greater for Scenario 1 ($265,000 vs $245,000), but the rate of return is higher for Scenario 2 (13.44% vs. 13.28%). This is because you put $90,000 down to earn $245,000 in Scenario 2 whereas, in Scenario 1, you put down $100,000 to earn $265,000. 

If it feels like I doctored the inputs to make the results come up similar (which I do for the purpose of explanation sometimes), I didn’t. I just came up with a market crash scenario that is within reason and this is how it played out. 

Frankly, I was pretty surprised to see how similar these two scenarios worked out, and I found the results encouraging. It’s reasonable to be worried about the market and where we’re going over the next few months. 

Getting the results of this analysis and finding that “investing now or in a 10% correction is about the same” made me feel more confident in my own investing strategy. 

My thoughts on the market

Although this is a confusing market, I am still actively looking for deals, and here’s why. 

I personally believe the market will flatten out or even go slightly negative at some point in the coming year or two. But, it is incredibly difficult to time the market. I can easily see the market appreciating more in the coming months as well. Overall, I’m not trying to time that market because I’ve done that in the past and lost.

As I said at the beginning of this article, there are two variables in this equation: interest rates, and property values. One of these variables is unclear and the other is pretty certain. In terms of property values, I have personal hypotheses about what will happen in the coming years, but those are just my personal opinions. On the other hand, mortgage rates are almost guaranteed to increase. The Fed is insistent on controlling inflation and bond yields are rising rapidly – making mortgage rates go up. Because the direction of interest rates is predictable, but property value growth isn’t, I am trying to make decisions based on the variable I can better forecast. 

Even if the market does correct in the next year or two, I personally think something along the lines of a 5% correction is more likely than 10%, despite it still being a possibility. A 5% drop, which I’ll call Scenario 3, yields the worst returns of all: $244,000 in profit at a 13% annualized return. This happens because the decrease in prices is not enough to offset the rising interest rates. So, although the difference is negligible in the long run, buying now has a slight advantage over what I think most realistically will happen in the coming years. 

All of these scenarios are better than what I think alternative investments offer. With inflation eating away 8% of money’s value annually right now, I feel a strong imperative to invest my money. Cash is losing value rapidly and I don’t want to let my spending power slip away. Bonds have a negative real interest rate (they don’t even keep pace with inflation) and are unattractive. 

I do invest in the stock market, but I don’t think I’ll get a 13% annualized return over the next 10 years in the stock market, and I don’t know enough about crypto to put any significant portion of my net worth into that asset class. I’ll admit, I am biased toward real estate because I know it best, but I genuinely believe it will outperform all other asset classes over the next 10 years. 

Of course, these are just my assumptions and feelings about the market. At the end of the day, it’s up to each individual investor to make their own forecasts of the market. In fact, BiggerPockets launched its newest podcast, On The Market,  which is hosted by myself and is designed to help you form your own strategy based on changing market conditions.

Once you have a sense of where you think the market might go, run your own analyses! Use the BiggerPockets calculators like I did to determine for yourself if now is a good time to invest, or if you’re better off waiting, based on your own assumptions of where housing prices and interest rates are going. 

The calculators make it super easy! So don’t be stunted by fear – run the numbers for yourself and make a data-driven informed decision about your strategy. 

On The Market is presented by Fundrise

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With direct-access to high-quality real estate investments, Fundrise allows you to build, manage, and grow a portfolio at the touch of a button. Combining innovation with expertise, Fundrise maximizes your long-term return potential and has quickly become America’s largest direct-to-investor real estate investing platform.

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Dave:
Hi, I’m Dave Meyer, and you’re listening to the very first episode of On The Market, so welcome. We are so glad to have you here. Personally, I couldn’t be more excited to finally have this pilot episode air after months of dreaming up and working on this concept. If you don’t already know me, I’ve been investing in real estate for 12 years, and I am also the Vice President of Data & Analytics at BiggerPockets.
And in that role, my job is to give information a voice. I work with my teammates to connect the dots between data, trends, policy and world news, to help the organization make informed and confident decisions about our strategy. And through this role, it occurred to me that real estate investors could benefit from the same type of information gathering and analysis, so we designed this show with you in mind. In this show, we’re going to bring you the information and news that impacts your investing.
We’re going to undercover which markets we should be watching. What’s with the metaverse? Are 3D printed houses really the future? What strategies work best in 2022? Our mission is to consolidate all the sometimes chaotic information, headlines and stories out there while analyzing and making it simple. On The Market will be your source for everything you need to know about the real estate investing world. And we’re going to make this fun, actionable and easy to understand.
This is definitely not a boring news show where we’re going to read off a bunch of stats and data in a monitory voice. If there’s an opportunity to turn something into a game or make it goofy, I’m going to do that. With that being said, I have an amazing group of expert investors with me in-person here today to assist me with this endeavor all with different life experiences, viewpoints and takes. Let’s get to it. Today, for our very first episode ever, we’re going to be going deep on the 2022 housing market.
That brings us to our first segment of the show, Between the Headlines, where we do just that. We’re going to be looking between headlines to get to the point of every story. And we’re not just going to banter about this, we’re going to make this into a needlessly competitive game every week. And this week, our game is predict this, where the expert panel and I are going to be making predictions about the housing market.
I mean, I think you guys all agree, we all are very curious about what’s going to be going on the rest of this year in the housing market. I want to get all of your predictions about where you see the housing market, and then we’re going to come back to this at the end of the year and see how we all did. All right. But first, let me introduce our panelists this week.
We actually, we got a full house here. First, we have Kathy Fettke, who has been investing since 1997. But she says she’s not a boomer, not quite a Gen Xer, more of a millennial trapped in a grandma’s body. And just to be clear, these are Kathy’s words, not mine. I did not write this.
But she is the co-founder of Real Wealth, where she’s been helping thousands of busy professionals since 2003. Next, we have Henry Washington. You might know him from the real estate show in BiggerPockets. He’s a fairly new investor who bought his first house in 2018 after having a panic attack about being broke. And now he owns over 70 doors and is basically still just trying not to be broke.

Henry:
That’s right, man.

Dave:
All right, next, we have Jamil Damji, who is a Sagittarian wholesale genie, who also runs the nation’s largest wholesale real estate operation. And he’s occasionally on TV that’s very modesty. He is on the A&E show, Triple Digit Flip, which you should definitely check out as well. Lastly, we have James Dainard, who is a veteran real estate investor, who has fixed and flipped over 2,000 homes in the Pacific Northwest.
No house for him is too damaged, too dated, or simply too disgusting for him. We’re going to have to jump into that. From stepping into buckets full of human urine. Oh, we’re dumping right into that. Animal encounters to brushes with death, James put the real estate in … I can’t even get through this. James put the real in real estate investing. All right, I got to ask you about the human urine one later.

James:
Lots of life experiences.

Dave:
Okay guys, thank you guys all so much for joining me here. We are all here live in Denver for our very first show, which is super exciting. In this game, you all are going to make a prediction about some questions that I have prepared to you. I’m going to give you a little bit of context, a little bit of data, and share some news stories with you and then ask you how you see these trends going over the course of 2022.
And we are going to revisit this at the end of 2022 to see just how well we all do at predicting the future. The first question is about rent growth. It just came out that rent growth was up 15% year over year in February. And we’re seeing huge markets like Austin and Portland seeing 39% and 40% year over year rent growth. It’s absolutely insane.
And actually, only two of the biggest markets in the US declined, sorry to Milwaukee and Kansas city. They did see rent declines over the last year, which is pretty wild. Jamil, I’ll start with you. Where do you see rent growth going through the end of 2022?

Jamil:
I think we still have a lot of room. I know that people aren’t going to be happy to hear that, but there’s … I don’t think we’ve caught up to it yet. The housing prices have spiked. The cost of buying a house, if you’re going to have a rental or cash flowing rental, is increasing. I think rent growth is going to be at about 7%.

Dave:
All right, 7%. So just for context, we usually really see rent growth about 2% or 3% per year, so you’re seeing it away above average. What about you, James?

James:
I think it’s going to come in fairly heavy this year, around 10% to 12%. I mean, the fact that we’ve already had a 15% increase in the beginning of the year is getting us that big jump, where I think … And the reason being is, A, we weren’t able to raise rents for the last 12 to 24 months, so it’s backlogged. We got to get those rents up.
And at the same time, the cost of housing has gotten so expensive the metrics are all out of whack. Typically, in Seattle, it’s about 25% cheaper to rent than own, or it has been historically. And that gap has jumped so dramatically with housing prices. Now it’s like around 30% to 40%. So I’m seeing that gap’s going to get filled pretty quickly.

Dave:
All right, Kathy, what do you got?

Kathy:
Well, it obviously depends on the market, and some markets will see the lower growth and maybe even negative, and some will be double digit again. But if you were to average it, I’m going to go with half of what it was last year, because we’re still going to have tremendous demand. So many millennials and Gen Zers now looking for a place to live and many people priced out of the market. So half of … What was it?

Dave:
15%

Kathy:
Oh, so it’s 7.5%.

Dave:
7.5%. Very precise.

Kathy:
Yeah, thank you.

Dave:
All right, Henry.

Henry:
Yeah. I mean, I’m on the same train, man. I think it’s going up. I think you’re going to continue to see a rise. Similar to what James said, you’ve got plenty of people who kind of got on the boat early with raising rents to what these new market rates are and then you’ve got the late comers, the people who’s leases haven’t expired yet, right? And so they’re going to be coming up over the next year, and they’ve been watching and seeing everybody like, “Oh, you can get that much now in rent?”
So you’re going to see that influx of rent raises. As well as most landlords, if they’ve had somebody in for a long time, or if they’re going to do a big rent raise, they also want to do some sort of renovation or sort of upkeep to the property. And the cost of materials is higher now, and so that’s going to cost them more than it typically would so they’re going to try to make up for it on the rent raises. So I think you’re going to see somewhere around 10%.

Dave:
All right. I’m going to go high. I’m with you, James. I’m going to go with 12%. I just think that you’re going to see, with inflation, wages are going up, and I think double digit rent could growth is in our future. All right, James, we’ll start with you this time. What about housing price growth? This is on pretty much everyone’s mind, whether you’re a real estate investor or just a home buyer, maybe a real estate professional.
We’ve seen incredible price appreciation over the last couple of years. And actually recent data from Redfin shows that in February, we were 17% year over year, which is actually the highest it’s been since August. We were starting to see things starting to taper off a little bit over the winter 14%, which is still crazy in historical context. But now we’re seeing it start to accelerate again, which is wild. James, what do you see for house price appreciation in the rest of this year?

James:
I’m going to cheat a little bit and I’m going to answer this two ways. I think the homes that are above, the average above, the median home pricing, where the money is, I think those are going to appreciate continually fast. I think we’re still going to see that 10% growth in a lot of markets, 10% to 15%. I think the first half of the year we are seeing that 15% to 20% growth pretty rapidly, and it’s going to taper down towards the last three to four quarters.
I do think the first-time home buyer market in the more affordable markets, we saw this jump 10% to 15% in this first quarter, and I do think with interest rates rising that it’s going to cut little bit of a clawback, and it’s going to average out more like 5% to 8% in the first-time home buying sector with the rates adjusting. And then again, the luxury, I think it’s going to continue to go up.

Dave:
Yeah, it’s a really interesting point given that affordability that is declining due to increased interest rates is probably going to hit that first-time home buyer lower end of the market harder than the more luxury market. But do we have one number for you? Because we have to grade your scores. You have to give me a number.

James:
I’m going to blend the two together then. I think year over year for this year, we’re still going to see around a 10% to 12% growth. Because I mean, we’ve already seen 20 in the first quarter, so if it slows down, it’s going to average out.

Dave:
All right. Henry.

Henry:
Yeah, man. I’m on the boat it’s still going up, and I think it’s going to go up in all segments. The reason being like you’re the data guy, right? I don’t know a whole lot about data and analytics, but I know about supply and demand.

Dave:
You were just telling me you worked for Walmart doing data analytics for 10 years.

Henry:
I did do data analytics for 10 years, but this is a whole different ballgame, man. We’re talking real estate trends, and I mean, supply and demand. It’s just there’s way, way more demand than there is supply, and I think that’s because obviously there’s way more buyers. And so yes, there is a first-time home buyers pool who is going to be somewhat affected by higher interest rates, but still even these higher interest rates aren’t that high in comparison to where they were 10, 12 years ago.
And so yeah, some people that were kind of on the cusp of home ownership will probably get priced out through raised interest rates. But you’ve also got this pool of investors who want to put their money in tangible assets because the dollar is losing value you. And so you’ve got more investors, you’ve got people who are relocating all across the country because you’re not tied to living where you work as much anymore.
And so you’ve got this influx of buyers, you don’t have enough homes, and I think that’s just going to make the prices increase. Even with interest rates rising a little bit, they’d have to rise pretty drastically, I think, to have a hugely lasting impact. But all I had to say, at the end of the day, I think you’re still right around what James said about that 10% to 12%.

Dave:
Okay. Kathy.

Kathy:
I am going more conservative. Because last time we talked about this, I didn’t really think the fed was going to be as aggressive, now they’re really going for it. And I think they’ve really realized that they overshot, printed way too much money. Inflation is way out of hand. And the only way they know how to combat it is raising rates, and they’re going to go big. And that’s a little concerning.
I agree with all of you, supply and demand is just completely imbalanced. But people are living somewhere right now. And even if it’s a couch, if that’s what they can afford, they’re going to stay on that couch. So I’m going with prices I do believe will still continue to increase. But again, I’m going with half, and it’s my understanding that it was about 15% median.

Dave:
That’s right.

Kathy:
So I’m going with 7.5%.

Dave:
Okay, even.

Kathy:
Yes.

Dave:
All right, even odds. Jamil, what do you got?

Jamil:
I’m a little bit in the middle here. For me, I think that rising interest rates are going to do something, but we really have to pay attention to the other people at the table, right? And so if we look at real estate prices as a product or in relation to, let’s just say, a dinner table, right? You have normal people eating normal meals typically, and you can say, “Hey, if I cook this many chickens, I’ll be able to feed everybody.” But what if you invite a professional eater to the table, right?

Dave:
My dream job.

Jamil:
What if you have David Meyer eating, right, who can eat more than everybody, right? That’s what we have right now. We have a professional eater at the table, and they’re gobbling up all the houses and they’re … I mean, the secondary home buyer right now is crushing the average primary home buyer. You’re a fireman, you’re a school teacher, they’re not competing. They are not competing.
And when they do compete, they’re so emotional with what they’re doing that they’re driving prices ridiculously through the roof. I’m seeing it on my flips. I’m seeing it time and time again. I believe that we’re going to have aggressive appreciation, but I don’t believe it’s going to be as aggressive as you guys think. I’m going to go somewhere in the middle. I’m going to call it 9%.

Dave:
Okay, 9%. I like it. I’m actually with Kathy. I’m a little worried about rising interest rates right now. And I’m going to say that the year over year mark in December will be somewhere around 6%, so maybe I’m the most pessimistic. But I think what’s interesting is because I believe rent growth is going to go up so much and housing price a little bit less, that means that cash flow prospects could actually increase, something we’ll jump into later in the show.
Last question here is something that is on every American’s mind, whether you’re into real estate or not, which is of course inflation. The most recent CPI data showed 7.9% year over year growth, and that was led primarily by energy. We all know gas prices are up a lot. But prices were really up across the board.
Really, the only glimmer of hope is that car prices actually went down a little bit, but not in any significant way that’s really going to be helping anyone out. So inflation, really high right now, and is obviously a huge factor in the housing market and the broader economy in general. Kathy, where do you see inflation going in 2022?

Kathy:
Well, the fed is doing everything they can to slow it down. And generally when the fed wants something, they get it. I didn’t think that they could really raise rates as much as they’d like to because of the national debt. And can the US afford higher interest rates? But now, at least from what they’re saying, they’ve done a complete 180 from, “Oh, this is just transitory inflation,” to, “Oh, we got a problem here.”
And so with their aggressiveness and their intent to slow down inflation, I think they’re going to do what they can to make that happen. With that said, I think it’s probably going to go up. In the next few months, we’re going to see some crazy terrifying headlines in the double digits because of supply chain issues and all that. But maybe that will start to settle down as demand starts to go back, as people have less money to spend it. And so with that said, hmm, let me just see what comes and pops in my head. 7.5%

Dave:
Oh. All right.

Jamil:
That’s awesome.

Dave:
All right. Jamil, what do you got?

Jamil:
I think like Kathy said, the fed is going to get what they want, and they’re going to do it in the ungraceful fashion that we typically see the fed behave in. And so I think they’re going to be aggressively raising rates. I think that they will curb it. How much that’s the big answer, that’s the big ask. I think supply chain problems are going to start to settle down.
It can’t remain the way it is right now and be real. Right? Because at some point, everything’s got to come off the boat, right, or at some point people have to go back to work and start making things, I imagine. Right? So with that easing and with a fed policy, I think that we are still going to have upward pressure. But I don’t think it’s going to be in the double digits, so I’m going to temper it and say 6.19.

Dave:
Ooh.

Kathy:
Wow.

Dave:
Extreme accuracy.

Kathy:
Very accurate.

Dave:
All right. Henry, do you agree? Do you think the fed’s going to get this under control and we’re going to start to see this turn back around or are we in for worse numbers?

Henry:
Yeah. No, I think Jamil hit it on the head, right? And we’re starting to see it. Just as now, as we all traveled here, right, the world is opening back up, right? Things are starting to loop. When I was just on vacation in Hawaii, they lifted the mask mandate while we were there. Right? And people are starting to feel more “normal”. Right?
I still think we’re in a new normal. It won’t ever be exactly as it was, but we’re getting closer. And as we get closer, if interest rates are higher, supply and demand starts to balance out, and I think you’re going to … I’m in agree. I’m not 6.19 in agreeance with you, and I’m not 7.5. I’m right about 7%.

Dave:
Okay. All right. Everyone’s going the same. James, what about you? Do you see it differently?

James:
I think we made some major mistakes in the last 12 to 18 months that are going to take a lot longer than six to nine months to burn through. I mean, I know in my everyday purchasing of things, like construction, I mean, we’re up 20, 25% on costs. And I think we’re on the tip of the iceberg to having all these data points starting to come into the inflation real, and we’re going to see it jump to like 9%, 10%.
I think there’s other factors too, besides the world opening up. And I hear that a lot too, like, “Oh, the world’s opening up now. Things will come off the docks,” it’s like, “Well, we still don’t have enough things in the boats.” And I’m on the coast of California all the time, there is a lot of boats out there, but even if they unloaded all of them, we’re still going to be short on items.
And now we have this Russian-Ukraine conflict. There’s going to be other chain issues. The more supply chain issues, the more expensive things are going to go. And I do think the fed’s doing a good … They have the right plan, raising rates to get it under control, but this is not going to be a quick fix. This is going to be … I think it’s going to spike towards the end of the year, and then in about nine months, we’re going to start seeing it start taper down.
But this isn’t something where they just raise rates and it flips the other way. It’s we put way too much money in the market, the money’s been cheap for too long and it’s going to be kind of a settle down period. I’m predicting, unfortunately, and I don’t want it to be this way, I’m hoping it’s not, but more around 9%.

Dave:
All right. Yeah. I mean, I hope you’re wrong. But I do agree. I feel like we’re starting to trend in the right direction. And this Ukraine-Russia conflict, you started to see gas prices go up, you’re seeing wheat prices go up. And who knows what else can happen in the geopolitical sphere that could impact the US to some things that are completely out of the US control?

James:
They were talking about food shortages. I mean, that’s on the table. Things are getting expensive. I haven’t heard that ever in my lifetime.

Dave:
I do think we’re also going to go up and see it increase. I don’t think we’ve peaked yet. But I’m hoping we’ll peak towards the middle or the fall. And I’m going to just go with 6% and be optimistic, mostly because, I don’t know if you guys have heard this, but there’s this theory that expectations of inflation actually impact inflation.
If people believe there’s inflation, prices actually go up. They demand higher wages, which increases cost for businesses. I’m just going to put it out in the universe that inflation is going down and hopefully we’ll all collectively start believing that and then inflation will go down. We’ll we’re doing our part [crosstalk 00:20:10].

Henry:
So you’re going full on self-fulfilling [crosstalk 00:20:12].

Dave:
Yes, exactly.

Henry:
Got it.

Dave:
I have this-

Jamil:
Let’s just name this podcast Inflation Is Down.

Dave:
Yeah. If we say it enough times, maybe we could do it. Okay, I do want to jump into what all of this means, because obviously you guys have brought some really interesting insights to the table. And we’re going to spend most of the rest of the show talking about how take this information and craft a strategy for 2022, how to invest in this type of climate. But before that, I have to keep you guys honest. I don’t know if you guys have seen the goat who predicts March madness or the octopus who picks like World Cup winners better than all of the experts.
And so Kailyn and I, Kailyn is our producer, before this show we decided that we would just get a bingo ball to prick random numbers to see if it does better or worse than all of us supposed experts at picking these things. So-

Kathy:
This is harsh.

Dave:
Well, maybe everything’s going to come up 7.5%, Kathy, and you’ll have it perfectly. All right. For rent growth, which is what we started at … How do I do this?

Henry:
There’s probably only one 7.5 ball in there, Kathy.

Dave:
Yeah, I don’t think we have fractions there. Rent growth is going down 10%. I think we’re pretty safe at that. That’s a negative 10. Yeah, I also, I doctored the [inaudible 00:21:30] so there were some negatives in there, because we realized they were all positive. All right. Rent growth is at negative 10%. Home price appreciation, a modest 3%.

Kathy:
Wow.

Dave:
I would actually love to see that personally, the chart, have a healthier housing market. And then inflation, I’m worried about this one.

Henry:
Even fate.

Dave:
Negative 2%. Yikes. I don’t think anyone’s in danger.

Kathy:
That’s a little scary. All right.

Dave:
Yeah. I mean, deflation is even worse than inflation, so hopefully we don’t see that.

Henry:
You need to bring the goat out.

Dave:
Yeah, exactly. The octopus will do a lot better. We’ll be back right after this message. All right, everyone, welcome back to On The Market. We are now moving into our next segment, which is called Due Diligence. And this is the meat and potatoes of the episode. This is where we’re going to dive into a larger topic at length.
We’re going to discuss large philosophical questions, trends, data in this section. And today, to continue the theme that we’ve started with, we’re going to talk about how to craft a strategy in 2022. Because as we’ve all heard at the beginning of this show, things are pretty unusual in the housing market. And we’ve heard that everyone really thinks we’re going to see a bit more of the same, at least in 2022.
And I think for real estate investors, that brings up a lot of questions about how to invest in 2022. Kathy, let’s start with you. How are you approaching the 2022 housing market, and how are you adapting your investing strategy to this unique climate we’re in?

Kathy:
We’re kind of doing the same thing we’ve been doing for 20 years, which is kind of sounds really boring, I guess. We’re looking for those markets where there is growth, there’s the demographic movement. And well, I should say migration. Migration patterns, job growth and affordability. A lot of people are talking about affordability lacking, but now with so much movement, for some people, things are more affordable than ever.
If you’re moving out of New York City to Florida, you could buy a whole house, or rent a whole house for what you might have rented a studio for and had four roommates. And the same with San Francisco or LA, people are moving to Phoenix or to Arizona or to Las Vegas and Texas. This movement, we were already tracking that for years. We were helping investors buy in Dallas 15 years ago, when you get a house for $120,000 that was brand new and rented for 1,500.
People are still doing that, they’re just going more into the suburbs with lots more money. They’re armed with so much money, so much cash. People selling homes in high-priced markets, getting multiple offers and taking that cash and just going to buy somewhere cheaper. We’re following the trends. Where are the jobs going? Where are the people going and buying in those markets? Right now, the strongest migration is into the Southeast. We love Florida, Jacksonville, Cape Coral, St. Pete. I’m telling all my secret. St. Pete is-

Dave:
It’s too late. We got you on camera.

Kathy:
… Oh, man.

Dave:
You can’t go back now.

Kathy:
Okay. Well, forget about St. Pete. And then we’re building. We’ve been building homes in places like Bozeman, Montana, which a few years ago people were like, “Why would you do that?” And the reason we did it was the land was cheap and there were no other builders. We were the only game in town. And now, well, Bozeman, I mean, thanks a lot to Yellowstone. You guys, tell me you watched it.

James:
Great show. Great show.

Kathy:
Well, we’re like the evil developer in that show. But we got the land sheep and we’re providing affordable housing in Bozeman. So just kind of staying where the big institutional investors aren’t necessarily going, but kind of going near them or buying things that they’re not interested in. And just areas where we could see there was growth. Again, Bozeman, there’s a huge university there and there was just not a affordable housing. So it was a great opportunity. There’s going to be opportunities, but it’s just kind of getting under the radar, finding where people are moving, but nobody else knows that they’re moving there.

Jamil:
They do now.

Dave:
Yeah, it’s not too late. Henry, what about you? I assume you’re just going to stop buying and pack up shop.

Henry:
Yeah, I’m done. I’m out. No, man. Absolutely the opposite. We talked a little bit about this prior to the episode, right? Real estate investing is like any other investment strategy, right? The general concepts are pretty simple, right? Buy low, sell high, or in the case of most real estate investors, buy low, rent, keep them forever, right? Because the reason real estate investors keep their property forever is because appreciation always wins out, right?
The appreciation is coming if you hang onto your property in the long term. And so are we changing our strategy? No. We’re still in the market of finding undervalue homes. And then we add value to them, and then we make a profit on them by renting them or selling them, right? And the market does shift from time to time. In very few cases, it’ll shift so rapidly that you have to pivot pretty quickly.
But I mean, this isn’t 2008, right? We’re not playing the same game right now. And so even if the market starts to head a different direction, if you’re good at identifying opportunities, right, and then purchasing those opportunities and adding value to them, you’re going to have some time if things start to shift for you to change your strategy. And so our strategy has always been buy a property that you can monetize in more than one way. Or said differently, buy property with more than one exit strategy, right?
If I buy a property, a single family, a small multifamily, I’m looking to make money on it as a rental, but I can also make money on it as a short-term rental, or I can make money on it as a flip, or typically I can sometimes just make money on it by calling another investor saying, “Hey, do you want to take this off my hands?” Right?
And so it’s more about getting good at finding those opportunities. And in this game, opportunity comes where you’re helping someone out of difficult situations. If you can eyeball and find those opportunities and buy those opportunities, you’re always going to be fine. I would say the thing that’s going to be a little different now is maybe how to find the money to buy those opportunities. Right?
Because if the interest rates are rising aggressively, then bank money is going to be a little more difficult to get. It’s going to cost you more. And so you just need to weigh your options. Bank money has never been the only money out there to buy real estate with. Right? There’s tons of options. And so there’s always going to be private money out there. There’s going to be hard money out there. There’s always going to be bank money out there on some level.
And so you just need to weigh your options, maybe how you go about finding the money to buy the deals changes. But for us right now, we’re staying the course. I love the small multifamily and single family space. And you’re always able to identify opportunities to buy at a discount. And if you can do that, you’re usually pretty safe.

Dave:
That’s great advice. I think given interest rates being so low over the last couple years, people assume that bank money is the only money. And frankly it has been the best money over the last couple years when you’re seeing interest rate at 3%. But people have been buying real estate when interest rates were at 15% or at 20%, or even in the ’90s it was between 5% and 10%. It definitely can still be done. James, you said that you were a little worried about the lower end of the housing market. You see inflation going up really high. Is that changing what you’re doing in your strategy?

James:
Yeah, there’s been two major shifts that we’re making for this next year. One is we are focusing on a little bit more expensive areas. We want to focus in the areas where the jobs are, where the money are. The one lesson I really learned in 2008 was we got our teeth kicked in 2008. And the reason being there wasn’t access to financing. The money wasn’t there. People had lost a lot of wealth at that time.
And because of what we’ve done over the last 18 months, 18, 24 months, I’ve seen this huge gap in wealth, right? People with money have made a lot of money, whether it’s stocks, Bitcoin, real estate, assets in general, and those people continue to have it. And so as I’m looking at my short-term projects, I’m going, “Okay, where is the money not going to dry up?”
The first-time home buyer pool is very financing independent. And the higher that rate goes, if it goes up a point, that can bring 10% down in affordability. That’s going to throw a lot of weird metrics when you’re throwing performance on deals.
And so we’re going where the money is. I’m doing more luxury flips. We’ve also targeted. We’re a heavy tech space in Washington. What do they make? We know that the average Amazon person, there’s two types. There’s the single Amazon employee. They buy 750 to 900. That’s the sweet spot. And then when two Amazon employees fall in love and they get married, which happens now all the time-

Dave:
Your dream as a real estate agent, to get the Amazon couple.

James:
… Yeah, maybe we get a little Apple, little Microsoft mix. I mean, those are even better due incomes. The sweet spot is 1.5 to 1.8. We know exactly where the money is, and so we’re actually building more town homes now because it’s falling in play to that space. The other thing that I am avoiding right now, we’re heavy construction guys. We do a lot of serious, studs-down renovations, manipulate buildings.
But as inflation’s soaring, and it’s harder to track, you don’t know exactly what your renovations cost is going to be. So we want to put less materials in. Hedge that bet to where we’re doing less work there. And in addition to, the value ads are great because you get huge discounts, but a lot of times you’re not going permanent financing on that. With hard money or soft money, you’re not getting your actual financing until 12 to 18 months down the road.
If I’m looking at a deal, the rates are right now at like 5%, which is way up from where it was. And it jumps to six, that’s going to throw all of my off. As we’re going into a frothy market, I’m trying to hedge against different variables, inflation, interest rates rising into shrinking the timeframes. So go where the money is and then staying in a manageable timeframe to kind of mitigate any kind of risk.

Dave:
That’s great advice. Jamil, I wanted to ask you, because something I hear constantly is that there are no deals right now.

Jamil:
Lies.

Dave:
And it sounds like it’s all lies. All right, well, you already answered my question. I mean, it seems like all four of you are fairly bullish, maybe with some caveat shifting your strategy a little bit and wanting to be cognizant of the market. But if you’re excited to invest in real estate, how are you finding deals? And how do you recommend people listening to this should find deals in this kind of market?

Jamil:
Great question, Dave. And I think that’s very true, that there’s a gripe that people say there’s no deals out there, but that’s absolutely inaccurate. Because this whole concept of there being low inventory, we’re talking about a different type of inventory. We’re talking about retail product. We’re talking about the houses that people have already improved.
The kind of product that someone’s going to go get traditional financing on, move into, or a hedge fund’s going to buy and turn into a rental, whatever that is, it’s a different kind of product. The kind of product that we go after as wholesalers is distressed property, distressed situations, and life hasn’t changed. In fact, it’s gotten worse for a lot of people. And because it’s gotten worse for a lot of people, these opportunities still exist.
Now, I’m not talking about going in and being predatory. I think the thing is you go in and you do it in a way where you can pay homeowners 100% of as is value. But again, let’s look at this. If there is a house that’s been renovated five doors down that had $80,000 or $90,000 put into it, there has to be a gap between what I’m buying your house for and what I’m going to be able to sell that house for.
All the players in that space, they understand the product that we’re trading in. And so we’re going after ,again, just the pre-foreclosures are back, right? They’re definitely there. The tired landlord exists. And even though they’ve gotten all this equity, they are not interested in possibly raising rents. They don’t want to do this cashflow. They don’t want to do the capital improvement that they’re going to require to increase rents. They’re willing to sell at the height of their market based off of the product that they’ve got. And I’ve seen opportunities in multifamily right now.
I just did a deal where I made $450,000 on one transaction, one six-plex, where all I did was I had one vacant unit. I had five units rented at $1,200 a month that were basically month to month. One vacant unit that I was able to rent out at 1,700. And then I flipped that six-plex to a buyer and made $450,000 on that. And I literally sold that days after closing. And I just put another one under contract. So these landlords exist. These opportunities to spot potential exist.
And that’s all we’re doing as real estate investors guys. You’re looking for potential. Don’t let anybody fool you out there. When you’re looking for a deal, you’re looking for a potential, so how do you do this properly? Learn how to underwrite. Learn how to underwrite. Learn how to underwrite. Understand if you can figure out how much something should cost based off the condition it’s in right now, you’ll spot potential.
If you can spot potential, you can avoid the frothiness that James is talking about. As a wholesaler, I’m in and out of a transaction. I very rarely take title. Think about that. If I’m making money without ever having to hedge risk, I’m in a good place. And I made money as a wholesaler when the market sucked. I made money as a wholesaler when the market’s great. And I’ll make money as a wholesaler when the market sucks again. That’s why I think that, that as a strategy will never, ever end.

Dave:
Are you investing and are you wholesaling, I should say, because you think there’s risk in the market right now, or is this what you just do in any market?

Jamil:
I think I wholesale because I have PTSD from my first go around. I have done well in real estate multiple times. And the first time I did well, I was more in the development phase. I was condo converting. I was taking old apartments, converting them into condominiums. I had a lot of leverage. And because I had a lot of leverage, and I didn’t understand on how to mitigate that well, I got hurt.
As a wholesaler, I hold a lot of cash. Now, of course I’m losing value in my cash because of inflation and whatnot, but I’m still very well positioned for any black swan event. And we are seeing this. 2020 showed us that we never know what’s going to happen. Right? The octopus will very likely win.

Dave:
Randomness [inaudible 00:36:22], right?

Jamil:
Randomness. It’s just the way the universe works, right? It’s entropy. Things are random. And random things are always going to mix stuff up. And if we can count on the randomness of things getting mixed up, then I can just say, as a wholesaler, I’m always going to be there to cash in on the randomness.

James:
Wholesalers are also getting paid right now. It is. I’ve been wholesaling for 20 years, never been paid like this before. So you get no risk and you get all reward.

Dave:
Is that just because it’s so hard to find a deal on the MLS?

James:
Yeah. And it’s also just the perception that everyone thinks that there’s not a lot of deals. It’s put the new pairs of glasses on. I buy better deals on market than I do off, but people want that off-market deal. It’s like I got this thing that no one else has, and they lose their minds over it. But if you put the right pair of glasses on, you can look at different spots and you can find all sorts of different opportunities. But wholesaling is a great business to be in right now. Low risk, getting paid, and people are making a lot of money on it.

Jamil:
Yeah. Dave, I shared with you earlier just our stats, right? February we did 66 transactions, near a million dollars in assignment fees. This month we’ll probably hit somewhere close to 60 transactions. This is just our corporate stores, not our franchises. And we’ll do over $1.4 million in assignment fees.

Kathy:
Wow.

Jamil:
I can’t get that in a rental.

Kathy:
I want to be you in my next real estate life. But I really want to emphasize something that’s so important that you said, that we are in a changing market. The tides are shifting. You’ve got to be aware and you need to be more careful. And one of the ways to be more careful is not over-leveraging.
And so many people are just going wild and crazy out there with their leverage. Anything can happen, so just be wise about that. Short-term loans, be careful of those. Because we don’t know where we’re going to be in a few years. And if you’ve got a refi, you don’t know if the money’s going to be there. What we know is the money’s going out of market right now. That’s the tide.
It was flooded over the last few years and now it’s being pulled out and that will affect us. So be careful of that leverage, get low LTVs, at least not 100%, 80% or lower. Be very, very careful, and get long-term debt when you can. Because even with rates going up, they’re still low. They’re still incredible.

Dave:
Super. I mean, if you look, before The Great Recession, mortgage rates, at least as far back as I’ve seen data, were never below 5%. Now everyone expects that. You expect, oh, 4% is so high. It used to be 3%. Because people have this fear that they’ve missed out on something. But it is still really low. But Kathy, could you explain for people who might be newer to real estate investing what it means to be over-leveraged, and why perhaps using less leverage is a more conservative or safer strategy going into this market where we all agree is somewhat uncertain.

Kathy:
Well, I came into the industry as a mortgage broker years ago, and boy, was it easy to get loans. Those were the good old days. Oh. There was unlimited investor loans that you could get with no money down. How about that? How about that? That was great, until it all fell apart, right? Because people didn’t actually qualify. I love leverage. I love borrowing at low interest rates. It’s a wonderful thing. You get in trouble when you don’t have reserves.
If you have very little reserves, and you get a high leverage situation and you can’t make those payments, that’s the problem. So just make sure you have plenty of reserves. And expect that if you’re holding rentals like we do, have six to 12 months reserves set aside in case there’s vacancies. Things happen to tenants. Just make sure you’ve got … Again, the reserves is most important.
And then that short-term debt back in 2007, I thought I was really great at investing because we’d bought so many good deals in Dallas. And then I tried it somewhere else. We went to Tennessee and we got construction loans on three homes. And they were ballooning in a year once the homes were built. They were great deals. Everything was fine. The problem was the market fell apart and there was no loans to get.
They changed the rules. The rules can change. The laws are enacted. And in this case, now it went from unlimited investor loans to 10, and we were way beyond that. We had no loans to get into, even though we had these fabulous deals. The construction loan was due, it was a balloon note and we couldn’t pay it. And we had to give those properties back to the bank and we lost all our money on those.
Again, it’s the short-term loans that can get you in trouble. If you’re going to do construction, try to get a construction-to-perm loan, where you lock it in now, you get the construction loan and it converts into a long-term debt. There’s still ways to play the game. Just be careful, and know that what exists today may not be there tomorrow or next year.

Dave:
Henry, I’d like to get back to something you said about this earlier, that there’s other types of financing out there other than bank loans. Are you continuing to use bank loans, and how are you applying leverage in this market?

Henry:
Yeah, absolutely. We are still using bank loans because typically it’s still cheaper money. It was just way cheaper money before they were raising rates. But it’s still pretty competitive. Yeah. But have started looking at and are shopping out over several hard money lenders, and then I’ve recently brought on two different private lenders. And they all kind of have their different lending niche and their different percentages that they want as far as interest rates go.
And so I look at lending, it’s just another tool in the tool belt. A bank loan is one tool. It just so happened that, that hammer worked on all the projects because the money was so cheap. Now you’re going to have to get a little more crafty with your money and with the tool that you use to take down your deals. And so the more relationships you can build, and that’s truly what this is, is people want to know that their money is safe with you, right?
They are concerned about the deal, but they’re mostly investing in you. And so if you can focus on building good, strong relationships, you obviously need to do good projects in order to give people confidence. But they’re getting the confidence in you, not in your projects. And so if you can build strong relationships with people who have money, whether they’ll be hard money or private money. And the difference between hard and private money for folks is people who have hard money are people with lots of money who are in the business of lending the money.
Private money are people who aren’t in the business of lending money, they’re just willing to lend you some of their money, and so the rates and terms can be a little different. But real estate has been an investment vehicle for people. You heard Jamil say it. He’s made money in up markets and down markets. Most wealthy people who understand real estate understand that they want their money in that space, no matter the market, which means somebody’s there that’s going to be willing to lend to trustworthy people who they feel like is going to get them a return on their money.
If you can focus on finding those quality deals, and Kathy was right, you can buy a good deal, you want to couple that with a loan product that’s not going to fall out underneath you in 12 months. Right? Safety net is your cash reserves and your equity, right? Because if the market shifts, and it starts to shift and you can see it coming, and you’ve got equity, you’ve got time to sell and still make a profit. You’ve got time to change your strategy. Your equity and your cash reserves are your safety net.
If you’re going to go out there and pay over asking price for something, because you’re like, “Airbnb is killing it. I’m about to go buy this $5 million mansion with four of my buddies. We’re going to turn it into an Airbnb and we’re going to make a whole bunch of money,” and then the market turns on you, you’ve got no other excess strategies, you don’t have any cash reserves, you’re in a short term loan, you’re in a world of hurt, right?
You just have to be careful of your strategy. Make sure you’re buying with some equity and use a product that’s not going to fall from underneath you in 12 months. And I think you can get out if you need to.

Dave:
That’s great advice. One thing I keep hearing about is that with rising interest rates, it always leads to negative home appreciation. And there were times when that was true. But before The Great Recession, we did see a really strong correlation between interest rates going up and housing prices going down. We all know that interest rates are going up.
I don’t think anyone thinks that’s going to taper off anytime in the next couple months. But at the same time, all five of us said that we think that the housing market is going to continue to go up. James, can you tell us a little bit why you think that’s going to happen? Why is it different now? And why do you think that despite rising interest rates, we are still going to see home prices appreciate?

James:
It comes back to money again. Interest rates are rising, but the amount of capital and what employee wages are in Washington and that are growing, the wage increase is offsetting a lot of this home pricing increase. Now, if you’re in a market that doesn’t have that same job growth and income growth, that’s where you might see that negative appreciation.
But what we know in Washington is the reason we think it’s going to keep going up is we have Amazon come out and they said that they want their … They doubled their execs max salaries. It went from 175,000 to 350,000.

Dave:
What? Are you serious?

Henry:
Holy bowly.

James:
That’s where I’ll double down in that market. I think it’s still going up. The money-

Dave:
I mean, I’m going to quit right now and go apply for a job at Amazon.

James:
… We’re trying to hire. And I got jobs up for EAs, accountants. And these are well paying jobs because we’ve had to make them pretty well paying. I can’t even get people to apply because these tech companies eat up the market. And so depending on where you are, there are these juggernauts in the market to where it won’t affect things as much.
In our local market, I don’t think … The interest rates will rise, but it’s kind of like gas right now. For some population, the cost of fuel is annoying. For some population, it’s detrimental. And so depending on the geographical location in, where you’re investing in, what the demographic in, you’re still going to see that appreciation.
I’m doing it more based on a Pacific Northwest. I think we’re going to look pretty strong. And a lot of these other markets, Austin, I mean, these growing cities with growing jobs, it’s still going to offset the interest rates.

Dave:
I have a question for all of you guys. Do you guys see a lot of people, experienced real estate investors sitting out in this kind of market?

James:
No.

Kathy:
No.

Dave:
What would you say, Jamil, to people who are sitting out? It seems like every experienced investor is continuing to buy right now. I think we all agree. There are some warning signs in the market. We all think it’s going to go up, but things are a little weird. No doubt. Why do you think that everyone who knows real estate really well is bullish on this market?

Jamil:
I think because, again, they’re seeing who’s sitting at the table. It’s when you have different players at the table, things change. Historically, look, if you look at housing prices from the 1930s to today, housing prices have gone up. And there’s been hurt in between. There’s been moments of depression. There’s been things that have happened, but they’ve still gone up. So no matter what you look at for temporary blips, housing will go up.
Now, knowing that, and then knowing that you have a professional eater at the table who’s gobbling up all the houses, that is changing the demand. It’s just changing the game. And the professional investor is looking at the landscape and they’re saying, “I’ve never seen this big guy eat all these hot dogs. I’ve never seen this before, but now I’m sitting at this table with him and I’ve got to do what I’ve got to do to get my hands on as much as I can to at least compete,” because we are heading towards a housing crisis.
I believe we’re heading towards a housing crisis. We are not building enough homes. We don’t have enough inventory. We will always be needing houses. We will always need them. Look, if you’re sitting right now waiting for the housing market to crash, there’s a deeper a problem here. Okay? You have a fear problem. You don’t have an investing problem. And so what I would suggest is do your research, understand.
If you can learn how to underwrite, if you can learn how to value property, and you understand the consequences of overpaying, you understand the consequences of getting a good deal and how you can leverage that to make and grow your wealth, you will do well. How do you move forward? I think first and foremost, learn. Learn, learn, learn. Listening to a podcast like you’re listening to right now, this is key.
This is key because you’re getting insights from people who are doing this at a high level, from different aspects and perspectives of the housing market. Right? Learn from them, see what they’re doing, understand how they’re underwriting and follow their bets. Follow their bets.
And if you’re not following their bets, at least understand why you’re not, rather than just having this overarching idea that, “Well, it’s gone up now. It’s going to go down.” Because I’m sorry. I’m sorry. But yes, things like that, we’ve seen this cyclical nature of the house market, but as cyclical as it is, it’s still up to the right.

Dave:
And when you talk about a professional eater, are you talking about like the Blackstone’s, the BlackRock’s-

Jamil:
Of course. Yes, yes.

Dave:
… whatever those companies are called of the world?

Jamil:
Yeah, I should have called them. I should have given them a name. But yes, that’s exactly what I’m talking about. I think that’s the professional eater at the table right now, and they’re gobbling, gobbling, gobbling, gobbling all the hot dogs.

Dave:
One of my claim to fame is I actually got to be a judge at the Nathan’s Hot Dog Eating Contest at Coney Island. Yeah. I counted for a guy, Pat Bertoletti. He ate 44 hotdog in 12 minutes.

Jamil:
So now that you’ve seen that, you understand my analogy, right?

Dave:
Yes, absolutely.

Jamil:
And when you-

Henry:
You’ve got to buy more hotdogs.

Jamil:
… You’ve got to buy … Yes. When you have the professional hotdog eater there, he’s not the person putting just relish on a hotdog and enjoying it bite by bite, right? That’s not what Blackstone is doing. They’re not looking into a primary bedroom and being like, “Oh, I can see myself of living here.” That’s not the decision that’s being made, right? It’s a completely different decision.
And when you have people making decisions that are taking up near 19% of the housing volume, and they’re not making decisions the way that your primary home buyer would be making decisions, you’ve got a different animal.

Dave:
Absolutely. They’re just trying to capture as much market share as possible right now, and that is going to have long-lasting implications, probably worth a whole show. We’d probably do a whole show on that in the upcoming future. I do want to shift gears a little bit here. Kathy, I’m curious, how do you see the general economy and investing situation with the stock market? Everything else that’s going on in the economy, how is that impacting the housing market right now?

Kathy:
Well, I’m not a stock expert, but the ones I listen to are basically moving into stocks that go with inflation. So food, gas, and of course housing. These are things that inflate, and we know we’re in an inflationary time. Will there be stocks that don’t do well? Sure. But that’s at least the guys that I’m listening to are talking about it that way.
We have so much money circulating, trillions of trillions of dollars. And it wasn’t just the US that printed trillions of dollars. The whole world is addicted to this modern monetary theory that is really just a really bad theory. I sometimes wonder how people think that makes sense. I’ve talked about this before. It’s like we’re all sitting here playing Monopoly, and we’re having a good game. And there’s all these apartments and houses on the table and we’re bidding for them.
And then all of a sudden, the bank comes in and brings another box and passes it around. And now we all have more money, but the same number of assets on the table. What are we going to do? We’re going to bid more. We’re going to spend more, because there’s more money. It doesn’t mean the values necessarily went up, it meant that there’s just more money circulating and the value of the money has gone down.
That’s the situation we’re in right now. And so the economy’s already slowing down. We already see that happening. GDP has been declining and there’s projections that it’s not going to be as robust as expected simply because that’s the fed’s effort, is to slow it down and they’re going to do that. But when it comes to our industry in real estate, kind of coming back to what you said, it’s mathematically impossible.
In my opinion, you can call me on this a year for prices to go down, because we’re not in the same world that we’ve been in before. We’ve never been here. This is unique and unusual with trillions of … We’re in a modern monetary policy that has not been tested.

Dave:
Okay. Guys, thank you so much. That was our first due diligence section. That was awesome. Great job to all of you. I hope for everyone listening out there that this was helpful for you in understanding the 2022 housing market and how this group of incredible experts doing all sorts of strategies are handling this market.
Let’s go to our final section of the show, this is called Crowdsource. And this is where we engage with all of you, our listeners. We’re going to be doing all sorts of fun stuff in this last section. We’re going to be taking questions, or we’ll maybe even bringing people onto the show. We’ll be doing polls. We’ll be gathering data from all you. But as Kailyn and I were planning out the Crowdsource section today, we realized we don’t yet have a crowd.
This is our first episode. We can’t really ask anyone for anything because we don’t have any listeners yet. What we’re going to do is give you, one, a challenge and two, a gift for being a listener on our first show. First, we’re going to give you all a challenge and that is to join our community. And the best way that you can do that is to subscribe to our YouTube channel.
We will have a forum just for On The Market. And so go on there, post your own thoughts about the 2022 housing market. Let all of us know how you are going to handle or approach the 2022 market. And please, we do ask, we would love it if you told your friends and help grow the On The Market community. And in exchange for that, we have our first ever data drop.
The data drop is something that we came up with and it is a gift for our listeners. From time to time, I’m going to prepare a unique data set and you can go on BiggerPockets. You can go to www.biggerpockets.com/datadrop, and you can download the first file that I’ve created for all you, and it is a super valuable data set. Basically what I did was take the biggest hundred markets in the US and I analyzed all of the rent data.
If you want to know what markets have rent growing the fastest, if you already earn a market like Denver, and you’re curious, “Should I buy a one bedroom, or two bedroom or three bedroom? Where are rents growing the fastest? What segments of the housing stock are best to invest in?” this data set is going to be super helpful for you and I hope it is useful for everyone. So hope you enjoy that as a gift for being a listener on the very first On The Market. All right, guys. Anything else you want to say before we wrap up our first ever episode?

Henry:
Dude, you’re giving that away for free?

Dave:
Yeah.

Henry:
That’s incredible, man.

Dave:
Maybe I shouldn’t tell people this. I should be selling this.

Henry:
I don’t think people understand how valuable of a tool just that one data drop is. For you to be able to get that analyze-

Dave:
You can get that.

Henry:
… Right. If somebody wanted to do that, they’d be hunting for months.

Jamil:
Well, they’d have to hire the vice president of data analytics at BiggerPockets.

Henry:
Right, absolutely.

Jamil:
And he’s expensive.

Henry:
Right. And to be able to quickly jump on a tool and be able to know where your money is best spent in your market from a rent perspective, that’s phenomenal. I don’t want to gloss over how incredible of a free giveaway that is. You see free giveaways all the time on the internet, right? “Get my free book,” and it’s just some … This is huge. That’s huge, man.

Jamil:
It’s just pictures of Henry.

Henry:
Yeah. That is [inaudible 00:57:03]

Jamil:
Who says you can’t buy friends?

Henry:
No, that’s a phenomenal, phenomenal thing by the way.

Kathy:
Yeah. We get access to it first, right?

Dave:
Yeah, absolutely. Yeah. Well, we do have a week before this comes out, so you can scour through that data.

Jamil:
And then come to our reseller website at-

Dave:
But really guys, this is what we’re going to be. We’re not going to do this every single week, so you do have to pay attention and watch the show. But we’re going to be leaving these little Easter eggs value for you. In On The Market, this is what we’re all about here at this new show, is giving you the tools and information you need to make wise and confident investing decisions. So to all of you guys, thank you so much for joining me here in Denver. It’s so awesome to do this in-person. It is so much fun, and I’m really looking forward to growing the show with all of you.

Henry:
All right, thanks for having us, man. It’s amazing.

Kathy:
Love it.

Dave:
On The Market is created by Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, edited by Joel Esparza, copywriting by [inaudible 00:58:00]. Special thanks to Lisa Shroyer, Eric Knutson, Danielle Daly, and Nathan Winston. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions and investment strategies.