Richard

Daniel Lacalle, chief economist at Tressis Gestión, says investors should be diligent in considering which sectors in China to invest in, and adds that “it’s not going to be a year of looking at an index” or of “being passive.”

Ashley Kehr:
This is Real Estate Rookie, Episode 238.

Ashley Hamilton:
If you are new and you’re just wanting to get started and you want that cash flow, it’s not a situation where if you make a mistake and fail that you could lose your shirt. Obviously nobody wants to lose money, but I’d rather lose a couple thousand then a $100,000 or something like that. But again, with Detroit, we’re very cash flow heavy. There’s a lot of demand and especially in Section 8, so I feel like it’s a great market for rookies to infiltrate because it’s so low risk with the guarantee rents and things like that.

Ashley Kehr:
My name is Ashley Kerr, and I’m here with my co-host Tony Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, information, stories you need to hear to kickstart your investing journey. I want to start this podcast by shouting out some folks in the Rookie audience. Today we have a podcast review from someone with the username Owen Warren. Owen says, “Total game changer!!! I started out listening to the OG Bigger Pockets Podcast which gave me a plethora of information, but sometimes so much that it can lead to analysis paralysis.” I know we’ve all been there. “While I still enjoy the OG Podcast, my focus has shifted more so to the Real Estate Rookie Podcast, due to the fact that I’m still relatively new to real estate investing and have only completed a handful of deals. So whether you’re brand new or have a well-balanced real estate portfolio, I believe Tony and Ashley, along with their guests, have great content to share with you guys. Thank you all for everything.”
Man, that’s one of the nicer reviews I think we’ve got in a while. If you haven’t yet, please leave us an honest rating and review on whatever platform that you’re listening to. The more reviews we get, the more folks we can help. And that’s always our goal here. So Ashley Kerr, what’s up? How you doing today?

Ashley Kehr:
Good, good. I got a child sick from school today. Sick or skipping school, still not sure yet what the consensus is. Yeah, it’s been pretty busy. The end of the year is coming, and we actually have an episode coming up for you guys in the next couple weeks that’s going to be about goal setting. So how did Tony and I do on our goals last year? What are our goals going to be for 2023? Now is the time to start thinking about that and kind of putting your action steps and your most important next steps in place.

Tony:
Yeah, I think a lot of people almost wait too long to start having that discussion, so I am excited to get into that. Yesterday I had an hour and a half long call with my CPA, just kind of like game planning for next year. We’re in October right now, so I think it is helpful to start thinking about the next year before the next year actually gets here, that way you’re kind of one step ahead of the game. We’re doing the same thing in our business as well. We’re already now trying to identify what some of the blockers and the obstacles might be for our real estate business next year as well. So for all of our Rookies that are listening, if you guys haven’t taken some time to start thinking about the oncoming year and what it looks like for you, you should definitely, definitely set aside a day to start putting that game plan in place.

Ashley Kehr:
And a great point, too, with talking to your CPA is even reviewing the past year, and see if there’s anything you need to do before the end of the year hit.

Tony:
Yeah, totally.

Ashley Kehr:
Because you can only write off things in 2022 for this year. So you can’t wait until the year is over and then talk to your accountant and be like, “Oh man, I should have done this differently, or maybe I should have bought this,” blah, blah, blah.

Tony:
I just want to share something that I learned in that conversation with my CPA. Cost segregation is one of the big benefits of buying real estate, and I always thought that you could only perform a cost segregation in the year that you purchased the property. So if I buy a property in 2022, I have to complete the cost segregation in 2022. But she corrected me and told me that you’re not limited to the year that you purchased it.
So if I purchased a property in 2022, as long as I put it into service in 2022, I can still get all of the cost segregation benefits that come along with buying that property in 2022. So for example, at the end of this year, bonus depreciation goes from 100% in the first year to 80% in the first year, and then the last 20% is spread out over five years. So before, if I have a, I don’t know, $160,000 cost segregation depreciation I was able to use, I could use all of that in one year in 2022. But moving forward, I only get 80% of that in the first year, and then a decrease every year there afterwards. So I was like, “Man, I got to do a bunch of cost segregation this year to get all of that benefit.” She’s like, “Well, Tony, not necessarily.” She’s like, “Any property that you put into service in 2022 will still have the ability to use 100% bonus appreciation even if you do that cost segregation a year from now or two years from now.” That was something that was news to me that honestly made me pretty happy, because we put quite a few properties into service this year.

Ashley Kehr:
Yeah, and to kind of spread it out so that you’re not taking it all in one year when maybe you don’t even need it. So you could transfer that, do a little the next year, and then some the following year too. Yeah, that’s really interesting. I didn’t know that either that you could do it later on.

Tony:
Yeah.

Ashley Kehr:
Well, today we have another special Rookie Reply format for you guys. We have Ashley Hamilton with us. She is a Detroit investor. You may have seen her on Instagram or the Bigger Pockets Podcast. She just had her second debut on there. Her first episode I think was one of the best performing episodes ever on the OG podcast, so you guys will have to check it out. But Ashley comes on with us live at BPCON. Yes, that’s right. Me and Tony are still giving you guys interviews that we did in the basement of the hotel at BPCON. We want to bring Ashley on and we’re going to talk a little bit about her, but she’s also going to walk us through how she invests in properties, and as a Rookie what is the best way that you can get started that she thinks of. She kind of goes through these steps that she implements and thinks that will be beneficial to you guys to help you get started. Before we bring Ashley on though, we are going to do an actual Rookie Reply.

Tony:
This week’s Ricky Reply comes from Cullen Lewis. Cullen’s question is, “Real estate rookie here. My wife and I are really wanting to buy real estate properties, but the market where we live is currently too expensive for us. Is it a bad idea to invest in properties out of state where the housing market is cheaper and more affordable for us? Or, would it be better to save more money and just invest in the market we are currently living in?”
I’ll take a stab at this first, Ashley, and then I’ll pass it over to you. I think a lot of it depends on what your goals are, Cullen. If your goals are to maximize your tax benefits and appreciation, then maybe investing in a market that’s more expensive might actually be a good thing, right? Because historically markets that are more expensive, like California, parts of New York, they tend to appreciate more than some of the more Midwestern or more affordable states. If the appreciation is a big motivating factor for you, then maybe investing in your own market does make sense.
If cash flow is what’s most important to you, then yes, there might be a benefit to going into a market that’s less expensive and can probably give you a better cash on cash return.
I think there are some things to balance there, but if you do decide to go out of state first, read David Greene’s book on out of state investing. It’s a great, great resource for both new and seasoned investors on how to build the team to invest out of state. But second, I think, don’t just chase the markets that are super, super inexpensive, because sometimes you can find yourself in the wrong neighborhood. If you don’t know that state, you don’t know that city, you can find yourself with a property that’s difficult to manage. We’ll bring Ashley on here in a second, Ashley Hamilton, and she’ll talk a little bit about how she’s been able to invest in Detroit, but it’s because she knows that area and she knows how to find the right tenants in that market. So I think if you do go into a market that’s historically less expensive, you really want to do your homework to make sure you’re investing in the right part of town.

Ashley Kehr:
Yeah, and I think a great way to find another one of those markets is to look where other people are investing, and then do your own research from there. Because how many markets are there across the US? There’s a lot. So look where other people are investing, and then go and do your market research from there. Like Tony had said, what is your goal? Is it cash flow? Are these cash flow performing assets? Are you going to be buying properties that are super old on the east coast? We just had a guest on who was buying houses in the early 1900s, late 1800s, and those may come with a lot of continuous repairs or updates because they’re just such old properties. Or, would you rather buy something new and that’s more turnkey? There’s a lot of factors to look at when you’re analyzing a market. I think that it’s 100% doable to go ahead and invest out of the area that you live in. There’s millions of people doing it every day.
Go into to the Bigger Pockets forums and just ask people, “Who is the first person you connected with in a market to start on your team?” It’s most likely going to be maybe a real estate agent, or a handyman, or a property manager that can help you through the process. That’s going to be a crucial part of it is finding your boots on the ground too to build that team for this.
Let’s bring on Ashley Hamilton though, who’s actually going to have a lot to say towards this question, too. I think we’ll provide a lot of valuable information for you guys. Ashley, welcome to the Real Estate Rookie Podcast. Thank you so much for joining us here at BPCON. We’re super excited to have you. You have one of the most amazing episodes on the Bigger Pockets OG Podcast, and you were just recently back on again with that podcast. For anyone who doesn’t know who you are, please tell a little bit about yourself and how you got started in real estate.

Ashley Hamilton:
Absolutely. My name is Ashley Hamilton from Detroit, Michigan, as if nobody knows, right? Because it’s always blasted everywhere. I really got my start I feel like in a very common way, where a lot of real estate professionals are people that want to get started in real estate where they’re at. Obviously a lot of us don’t have a six figure job or corporate America or a rich family we can borrow money to, so I was one of those people that really had to get in really creative. I literally started purchasing real estate using my tax return. I was fortunate enough to be in a market that was more affordable and easy to get into, where if I took a big risk because I didn’t know anything, if I did have a loss or make a mistake, it would’ve been easier to bounce back from because the capital requirements were so low. I chose Detroit as my market, and I started using my tax return to purchase properties.

Tony:
That’s amazing. Because most people, they get that tax return, and it’s like, “What are we buying? What are we shopping for?” And instead, you use it as a way to build your financial future. Can you just give us a quick overview of what your portfolio looks like today?

Ashley Hamilton:
Yes, absolutely. So today I’m super blessed to be a proud owner of 35 doors. They’re all located in the city of Detroit, but because the capital requirements are so low, I have a ton of deals that I purchase all cash. So I was able to have a lot of equity in my properties, and when I started to leverage that, that helped me almost tripled my portfolio in one year. So I’m at 35 doors right now, and cash is always my number one. There’s no wrong or right way to invest. Some people might invest for appreciation. But I really wanted the cash flow because I really wanted to spend time with my children. So that’s where I’m at right now and I’m excited.

Tony:
A lot of investors, they hear Detroit, they think that, “Is it the right place to invest? Is it the best place to invest?” What has your experience been, and why do you think it might be a good place for new investors to get started?

Ashley Hamilton:
Absolutely. My answer’s always yes, it definitely is. So one thing, I know a lot of people when they talk bad about Detroit, they was like, “Oh, you can buy a property there for $5,000,” and they kind of played it as if it was a negative. So even if I lived in California, if somebody got on the news and said, “You can buy a property for $5,000,” I’m going to instantly do some research.
But yes, it’s a great place to invest. We always had the automotive industry, so the big three auto companies, so they’re still there. Now there’s a lot of tech companies coming there, so that’s really improving. But the best thing about Detroit is it’s still affordable. So even now after the big COVID boom and all that inflation, you can still purchase a property all in for about $80,000, and that property will still generate at least $1,300 to $1,400 a month in rent.
The reason I feel like it’s so important, especially for rookies, is because obviously there’s no rule book or a way to do real estate. So if you are new and you’re just wanting to get started and you want that cash flow, it’s not a situation where if you make a mistake and fail that you could lose your shirt. Obviously nobody wants to lose money, but I’d rather lose a couple thousand than $100,000 or something like that. But again, with Detroit, we’re very cash flow heavy. There’s a lot of demand, and especially in Section 8. So I feel like it’s a great market for rookies to infiltrate because it’s so low risk with the guarantee rents and things like that.

Ashley Kehr:
Let’s walk through that process kind of. So you’re recommending that a rookie investor start out with more affordable housing, so these properties. What are kind of the action steps someone can take to identify a market? Maybe they’re looking at other markets besides Detroit. What are some of the things that you looked for to find these $80,000 houses that were generating that amount of rental income?

Ashley Hamilton:
Yes, absolutely. I do have a four step process. But before I go into that, I want to talk to the listeners about, step away from the business a little bit and think about your customer. I feel like as a business owner, even though real estate is a property, it’s still a business, and we kind of go technical. But I always think about my customer. So if you’re servicing an affordable market like Detroit or a lower income market, I’m thinking about who’s going to going to live in this property? So nine times out of 10, it’s going to be a single mother like I was, or a small young family, maybe a husband and wife and one small child.
When I was growing up, my parents always said, “Hey, stay where I can see you. Don’t be running up and down the block, just stay where I can see you.” When I look for a property, the first thing I do is look at the street view. As long as the seven adjacent properties to my subject property is good, that’s one step off my checklist. And again, my logic behind that is the kids, they’re not going to be all the way down the street. So if there is a smaller or a vacant property down the street, as long as the surrounding areas is good, that’s going to be safe for my family, and they’ll have neighbors and things like that.
So number one, when you’re looking in Detroit, the first thing you want to do is look at the street view and try to eliminate properties that have blighted, burnt down, or vacant properties directly next to it. The next thing is you want to check to see what the rental amount is. That’s also going to tell you what the neighborhood supports. On average in Detroit, even the worst houses you can get about a thousand dollars a month. If I’m looking at the average rents, and I do use Bigger Pockets all the time, they have a great rental estimator and it’s really accurate. It’s hard because Detroit normally is not accurate, but I give props to Bigger Pockets for that. So if I can look and see that the rent in that area is going to be $1,000, that’s letting me know it’s a greater area.
Next you want to just check and see, make sure that there’s comps. If you’re going to be all in for $80,000, as long as you can identify one property that’s sold in the last six months for $80,000, that would be the fourth step. After that, I would just reach out to real estate agents, making sure that property managers is readily available in that area.

Ashley Kehr:
That’s great advice, and those four steps you can do in any market.

Ashley Hamilton:
Absolutely.

Ashley Kehr:
So building out your buy box, building out your criteria. If your budget is at $80,000, you’re going to be looking for that. If you have a certain rent to price ratio that you want to meet, then you’re going to look, “Do the rents meet what you’re purchasing the property for?” Then doing the Google Street view, that’s also a great tip, especially if you’re investing out of state and you can’t physically go and drive and actually view these neighborhoods to do that. So that’s awesome.
After you’ve identified the neighborhood you want to be in, what kind of happens next when you’re ready to make an offer on a property? Are most of your deals through the MLS?

Ashley Hamilton:
Yeah, so to be honest, I feel like I’ve been an investor that’s capitalized on the people saying what you can’t do. So you can’t find good deals on the MLS. During my one explosive year where I purchase 11 properties, nine of them were straight off the MLS. I don’t know if it was people weren’t checking there, the flippers weren’t, if that’s how. So for sure you can use MLS, but I’m a firm believer in networking, especially with wholesalers. And if you are really savvy, or if you’re really interested in really exponential growth and profit, really look at properties that need a little work. Doesn’t have to be a full rehab, but if you’re willing to do the work, that’s going to force the appreciation and give you a bigger outcome, especially in a city like Detroit. Because if it’s 90% complete, obviously there’s not going to be any savings on the offer. So for sure, that would be a couple things that I would look for as well.

Ashley Kehr:
Okay. So then what’s your process after you’ve put the offer in and you’re under contract? Are you doing inspections on these properties?

Ashley Hamilton:
Yeah. So to be honest, for sure, I always recommend that every investor get an inspection, but my philosophy is I buy neighborhoods, so just always considering my customer. And just also, if you pick a market, you want to know the statistics. So in Michigan, I know that there’s 30,000 voucher holders that don’t have a place to live because there’s a housing shortage. So I know, okay, great, that could be a market I can service with a Section 8 and guaranteed rent, so that’s why I’m putting my mind in the consumer again. Once I buy the property, I start to look at and analyze properties similar to that to make sure that I’m doing repairs that’s going to make a Section 8 tenant want the property and feel lucky for it. Sorry.

Ashley Kehr:
With that Section 8, I want to go into this because I don’t think we’ve really talked about this before, is what are some of the things that you do to your properties that’s attractive for somebody with a voucher, or even the housing authority likes to see? Because they kind of walk through, because they do an inspection too of the property, correct?

Ashley Hamilton:
Yes, absolutely. So for sure, so to be honest, they do do an inspection, but it’s a really basic inspection. You don’t have to have the nicest property; they just want to make sure that it’s safe. But for me, I want to stand out in my market. I know all the requirements that they ask, and you can easily do that by just reaching out to your local agencies. But I like to go a step over and beyond, because my philosophy is cash flow helps you quit your job, and tenant turnovers kills cash flow. So my goal is to eliminate tenant turnovers. So I know that if every property in my neighborhood is Section 8 and they just have the basic Formica Home Depot countertops, I might go in there and put a granite in there. I might spend $1,400 more, but I have a tenant that’s going to stay three more years, and that’s guaranteed rent. Those are some of the things that I do now.
And then also the cheapest way, if you guys don’t want to commit to the granite, there is these faucets at Home Depot. They’re literally $60. You can also get them on Amazon. And literally when you turn them on, it lights up. I run all the kids when I’m doing a showing to the bathroom and show them that. That $60 faucet has literally made so many Section 8 people pick my properties over other, and it’s not even that expensive.
When you think, always think of the consumer in mind. And me being someone that was on Section 8 when I was younger, and I saw how people treated me and my family. We had the basic minimum. We were never excited to show people our homes. I really want my tenants, whether it’s Section 8 or not, to be excited to show people their homes. And again, that’s going to make them want to stay longer and keeping my cash flow alive. So that’s just some philosophies and a quick cheap tip. Like I said, it doesn’t have to be the granite of $1,400. It can be a $60 faucet that you can put in there that really make an impact and really help your rentals occupy.

Tony:
Ashley, you talked a little bit about your experience as someone who lived in subsidized housing and some of the, I guess, stigma, or maybe the mindset the landlords had about their tenants. I think that is something that happens for a lot of new investors is that there is a stigma around investing in Section 8 or in lower income neighborhoods. Have you found any of those misconceptions to be true or those ideas to be true? Or maybe, what challenges have you seen, and how have you overcome those?

Ashley Hamilton:
Yeah, absolutely. I haven’t found any of those to be true, because I truly believe that no matter if you make a $100,000 a year or $100,000,000, or $10,000 a year, because I’ve probably been a little bit of both of those, you’re still human. At the end of the day, I’ve had people that work at making $100,000 a year at a factory that won’t pay me rent at all. So it’s really the judgment of character, and just giving people the benefit of the doubt. So for sure, even if you’re having Section 8, a lot of landlords, they’ll skim on their criteria or their screening process because they’re thinking it’s the guaranteed rent, and they just overlook that there was already red flags. So now when they get the tenant, they’re like, “Oh, these tenants are bad. All Section 8 is bad.” But no, you didn’t do your proper screening because you just automatically assumed now that would’ve just happened regardless if it was the government assistant or a regular paying.
It’s definitely important to do screening no matter where your tenant is coming from. Just some of my obstacles, again, it’s just showing that my prospects that, “Hey, I’m human. I’ve been there before.” I think that really resonates with them and let them support me more, and kind of remove me from the big old evil landlord like I guess some people would think of it, because they know I’ve been there before and things like that. So that’s really helped me.
But again, I feel like just kind of removing the business like straight and narrow, and being understanding and say, “Hey, listen, I know you’re a single mother, but don’t worry. If you stay here three or four years, I have connections with a great realtor, and maybe I can refer you to a home buying program.” So letting them know that, “Hey, as long as the communication is good, I’m here to help you,” that really has helped me in my journey as well.

Tony:
Yeah, I think it’s kind of an unfair characterization to say just because someone makes less money that they’re less of a qualified person to rent your property, right?

Ashley Hamilton:
Yes.

Tony:
A lot of times, someone on a voucher program, Section 8 or otherwise, they might be your best tenants because they know that there’s a long line of people waiting behind them to get that unit. So it’s like, “If I know if I disrespect this place, or if I’m not a good tenant and I lose this voucher, where am I going to go?” They’re almost incentivized to be your best tenants because of the value that comes along with that voucher program.

Ashley Hamilton:
Yes, absolutely. I agree. And they stay longer too, typically. And especially if it’s a nice place where they’re just bragging to their whole family they never want to leave. I feel like also what I’ve noticed is the nicer I make my rentals and the care that I show, the tenants reciprocate that as well. I mean, some of my tenants have better grasp than me. They’re hiring companies, and I’m like, “Wow.” But they saw the care and respect that I put into the property, and they see me grinding and in the business. They reciprocate that with the property.

Tony:
You talked a little bit about your screening process. Can you elaborate on what that looks like?

Ashley Hamilton:
Yes, absolutely. This just is based off experience; obviously every market is a little different. But early on what I would get, the people that worked at the Big Three and the automotive that I just thought, “Oh, they’re so successful.” They would come in and they were the worst payers. I don’t always just shoot for the income situation. My number one criteria is previous rental history. I feel like if you’ve been renting a property for five years and you move into my properties, chances are you’re going to continue to do right. If you don’t have that rental history, that’s when I kind of look deeper into your credit to try to build up that, see how your payment history is. But my number one is previous rental history. Obviously you want to make sure they can afford it because you’ll be doing them a disservice just as much as yourself if every dime they get has to go to rent. I also make sure that their income is three times the rent amount. And then also, I really don’t like people that had evictions in the last three years.
That’s typically my biggest criteria. So no evictions in the last three years, must make three times the rent in income, and have previous rental history. Now, if it’s a Section 8 tenant, then the income aspect, it’ll just be three times whatever your allotment is. Some people, their rent might be $1,600, but they’re only paying $300. So as long as they make $900 a month, then that would be a good candidate.
But if you all can notice, I didn’t really say credit. And again, obviously if you don’t have rental history, then I look at the credit. But I do realize that even though credit is good, but if these people had a 700 credit score, a perfect employment history, they’ll probably be buying a house. They wouldn’t be looking. So I always wanted to be a little bit lenient on people who didn’t have the best credit, but as long as they have demonstrated positive pay history with their previous landlords, that’s the biggest referral I can get.

Ashley Kehr:
What kind of software are you using, if any, to manage these properties?

Ashley Hamilton:
Yeah, so if I told you guys what I do, you all would think I’m a crazy person. I’m definitely blessed. I’m hoping to be able to use software and stuff, but it slows me down. So to be honest, I’ve been running my businesses on spreadsheets. But for the last six months, I have been using Building, the property management software. I’m going to sit here and say it live publicly. Don’t use spreadsheets, just invest. It took so much time to set it up. I’m not going to lie, it did take three weeks of me really getting in there. But now that it’s going, it’s literally the best thing. If it’s just one or two units, you can do it on spreadsheets, but I highly recommend you using a property management software.

Ashley Kehr:
Yeah, I was in the same boat too. With anything really, my businesses, I waited too long to implement it.

Ashley Hamilton:
Yes.

Ashley Kehr:
Do it now while you’re a rookie investor, and put it in place and build your systems up. You can change them as you move along, but starting from the beginning, instead of when you have, how many doors do you have now?

Ashley Hamilton:
35.

Ashley Kehr:
Yeah, trying to onboard 35 units does take a long time and it’s time consuming.

Ashley Hamilton:
Yes, for sure.

Ashley Kehr:
What last piece of advice do you have for us for rookie investors? What would be your number one thing?

Ashley Hamilton:
I know it maybe sound cliche or maybe something that you guys would never thought, but to be honest, it’s really getting crystal clear on what you want. I can’t say that enough. I know it seems easy, but it’s really important. Because I’ll get people that call me up and say, “Hey, I want to be an investor. I want to quit my job in three years, so show me how to flip properties.” That right there says you’re clearly not clear on what you want. Because even though I love flipping, flipping is not a means to quit your job, right? Because you are using that $40,000 in profit, which really turns into $30,000 once you have to pay Uncle Sam that everybody forgets about. That profit, you’re going to use that to sustain your life. So just really getting crystal clear.
Now, maybe you do want to be a flipper, and that’s totally fine because you’ll get the experience. But if you want to quit your job, you’re going to want to look for cash flow. I feel like that’s the number one thing, is getting crystal clear on what you want. Because a lot of us think like, “Oh, we want a hundred doors,” or, “We want 20 units.” But if that’s not your goal and your goal is just to quit your job and have a better cash flow, then that’s probably what you want to go after.

Ashley Kehr:
Ashley, thank you so much for joining us. Can you let everyone know where they can reach out to you and find out some more information about you?

Ashley Hamilton:
Absolutely. They can reach me on Instagram at @Detroit_Investor. I share tips and show a lot of my rehabs right there, and truly just here to help and give back. I’ve been so grateful for the Bigger Pockets family and literally just this whole community. I’m so passionate about giving back because you can do this, guys. It doesn’t have to be complicated. It really is simple. You just want to figure out what you really want and find people that are doing it. Shoot them a DM, right? Instagram is so good. Or just social media in general, because you have opportunities to DM and email your mentors and people that you might want to seek guidance from. Instagram is definitely the best place, @Detroit_Investor.

Ashley Kehr:
Well, thank you so much for joining us live from BPCON. I’m Ashley @wealthfromrentals. He’s Tony @TonyJRobinson. Thank you guys so much for listening, and we’ll be back on Wednesday with a guest.

Speaker 4:
(Singing).

David:
This is the BiggerPockets Podcast, show 693 buying equity. This is when you buy below market value and when you combine all this together, you start getting home runs, go after properties that you can buy equity in. So you bought up the low market value, you then added equity too through some form of rehab. You then change the way that you used it, which increased the value as well, changing it into a short-term rental, something like that. And you do that in an area that’s growing. Then you watch your return on equity and once you’ve accumulated a decent amount of equity like that, sell it and 1031 into something that cash flows naturally like an apartment complex. What’s going on everyone? This is David Greene, your host of the BiggerPockets Podcast. And I just realized I’m getting much better at these numbers that we flash up every time we do this that used to be a pretty hard part of the show.
But with everything else, the more you practice it, the better you become. And I want to help you guys practice getting better at building wealth through real estate because it’s freaking and fun. Today’s episode is Seeing Greene episode where you get to look at real estate through my eyes, but not just mine because I brought in some help, several other different BiggerPockets personalities and authors are here to help answer questions from the people like you that are listening, give their advice on how to build wealth. And I chime in with that. So what can you expect from today’s show? Well, an amazing topic was the time value of money that Dave Meyers gets into. And I throw my two cents onto how a dollar invested today is worth significantly more than that same dollar invested 10, 15, 20 years from now.
You definitely are going to enjoy that. We clarify what a HELOC is, how to use it when it’s good, and what’s actually happening as far as the type of loan that you’re getting. We talk about buying for equity and then converting that money into cash flow as opposed to buying for cash and then trying to store up all the wealth that comes from that is actually much easier to create equity and then turn it into cash flow than to just start off trying to get cash flow, which is a thing that many experienced investors figure out later in their career. And I’d like to introduce you to that earlier in the career. All that and more. We also have a live guess with the unique situation and you’re really going to enjoy hearing the problems that they’re having and the advice that they are giving.
Today’s quick tip, the sale is almost over BiggerPockets Cyber Monday Sale is November 28th and everything is up to 60% off. This includes the not yet released book, the Real Estate Rookie: 90 Days to Your First Investment, which is available for pre-order until tomorrow. Please note the author name codes that you are hearing on this and other episodes will work for every other time of the year, but they don’t work during this sale because the discounts are way bigger than 10%. And if you’d like to get your hands on a copy of the Real Estate Rookie: 90 Days to Your First Investment, which is a book that has not yet been released written by Ashley Kehr, you can also pre-order that by going to biggerpockets.com/store.
All right. We’re going to get to our first caller, but before we do, I’d like to ask, if you’re listening to this on YouTube, please open the comment section and have your thumbs and fingers ready to type something out for me. Let me know what you’re thinking. If you were to want another book from me or another, couple books, tell me what you would want them to be written about. What would you want the title to be? What would you want the topic to be? What do you want to hear more of from me? And I’ll work on writing a book on those topics. All right. Let’s get to our first caller. Okay, I have no idea what we’re going to be talking about. So do you have your question lined up or do you…

Erin:
Yeah, so I had sent, so basically a year ago I bought a triplex in Savannah in Georgia, and I had been listening to the podcast for a couple of years. And originally, I was planning on buying in Florida and then the pandemic happened, and all the prices went crazy with everyone moving to Florida, buying everything up. A girlfriend of mine was buying in Savannah, and she said, here meet my realtor. And she was awesome. So I started looking at places. I checked out three or four and we settled on this triplex. So I closed on that last year.
So it’ll be a year in December, which is amazing. It’s got long-term tenants, its cash flowing for me nicely. But being a foreigner, I had to put down 25%, which was $110,000 plus closing costs. So it’s a fairly decent chunk of money and I think as a foreigner, from what I’m understanding from the lenders that I’ve been speaking to since then, speaking to a couple at the moment, trying to see what the different requirements are going to be, everyone’s more or less still going to want 20 to 25 to 30% from me.
And I’m wondering if there’s ever going to be any circumstances where that’s not going to be the case. At some point in time in my journey, if I buy a few more properties and I prove myself with my longevity and paying everything in the correct manner, that they’ll say, okay, well you are proven and we’re going to expect less of a deposit for you. Or if there’s any other foreign friendly lenders out there that I’d be able to get in touch with that wouldn’t require so much. I have plenty of reserves in Australia. I do meet all the requirements. The mortgage that I got is here in the US through my own industry, through the marine accountants. They hooked me up with someone here, so that was all great. I’m just wondering what to do next as well. Do I keep saving until I can put down another $110,000 and then go with your sort of stacking method and do another triplex or a quad or a couple of duplexes or something like that?
Because I want to keep building, my primary goal is to create as much cash flow for myself because I eventually want to be able to supplement my income. I want to be able to step back from working as much as I do. I work 16-hour days for months at a time, sometimes long periods away from my family. I want more family time, I want more time for myself to have a personal life and I’m just trying to figure out what my next best move is. And I’m trying to figure it out by myself, and I so appreciate your time. I didn’t expect to hear back from BiggerPockets. This was special.

David:
Well, I’m glad to hear that and this is a very cool story. It sounds like your biggest challenge is how do I continue buying real estate without having to put a $100,000 down every time? Is that the gist of what your problem is right now?

Erin:
Yeah, because I like small multifamily that makes sense for me. So do I do keep doing that saving so much or… I listen to an episode today and he’s talking about creative financing, so I need to maybe learn more about that.

David:
Well, everybody talks about creative financing. It’s always like, “Oh, you don’t have money, go do this.” In practice, it’s much more difficult than how it sounds when you hear someone talking about it. Let me ask you before we get too deep into this, what are you doing for work?

Erin:
I work as a stewardess. I’m the chief stewardess on a private motor yacht that’s based here in the US, and I’ve been traveling a lot this past year. We’ve just gotten back from Alaska. I’ve been at sea since August. It’s October now. So I’ve been working in and out on this vessel for the past six years and I’m just trying to figure out how to supplement my income or how to increase my income with rental properties so then I can keep putting down more money and eventually be able to step away from this and have a life again.

David:
Okay, so here is my personal take on the situation you’re in. This is probably the biggest hurdle for the average stereotypical American investor. It’s the down payment. You got to figure out a way to make more money or put less money down. At a certain point you will start to see this, your properties will be producing more equity, which becomes the down payment for future properties. It’s very slow going at first and then you hit a rhythm where you don’t have to worry about capital because it’s coming from stuff you bought eight, nine years ago. It takes a long time to get to that point. So at that stage in your investing journey is kind of where we’re starting right now. The short answer is there’s not going to be a lender who lets you put down less than 20% just because you have a good track record.
In fact, 20% is like the least you could probably ever expect to pay. My company had a period of time where we were getting 15% down for investment property. It’s kind of nice. It doesn’t last forever. It comes and it goes 20% usually your minimum and 25 to 30 becomes what they actually want. So the question is how do we get to the point where that isn’t a problem? Because you’re not going to do better than that and in other countries it’s actually worse.
One solution is if you become a good enough investor, you can borrow money from other individuals. That’s a form of creative finance. We would call that private money lending where you go to someone else, another person you work with who’s got 75,000 sitting in the bank and is doing nothing for them and you say, I’ll pay 8% on that money. And you take it and that becomes the lion’s share of your down payment. Once you have a track record and you feel very comfortable with the specific market, that’s one option you can use. Another one is going to be called house hacking. You familiar with that phrase?

Erin:
I think I’ve been listening to all of the strategies, and I think that would work I suppose except for I live on board this yacht and I don’t pay any rent. It covers all my expenses. I suppose I could set it up, so it was going to be my house and I was living in it, but I’m still living on the boat. But then renting out the other spaces.

David:
That’s exactly how we would do it. So I’d have you reach out to us, we would figure out which area. Where are you currently making home? Do you have a city?

Erin:
I spend quite a lot of time in Florida because we are loosely based here. I’m in Fort Lauderdale at the moment, but Savannah-

David:
That’s where I’ve been buying real estate. That’s funny.

Erin:
Nice. Well, I’m just getting ready for the boat show. So it’s going to be a busy week. But I bought in Savannah, Georgia and I love Savannah for lots of reasons for, like short-term rentals for medium term rentals, traveling professionals, film and TV crew, yacht crew. I think it’s a great market for that. So I’m wondering if I should be trying to get into short-term rentals and single family or something and then perhaps just generating cash flow like that to make myself my money for my next deposits.

David:
Well, the reason I ask is because the city that you make, your hometown will dictate where you’re allowed to buy with a primary residence loan. The reason we want to get you a primary residence loan is you can put three and a half percent down, 5% down. You have options that are not this 20%, a $100,000 you’re struggling with. If you could get by putting $20,000 down, you could buy a lot more real estate. You could start to build that equity that you could then tap into later to put towards these bigger deals you’re used to. So let’s say for instance that you bought something in Fort Lauderdale. There’s a lot of travel that’s going there. That’s why I’ve been investing there. We get you a loan as a primary residence loan, you buy a property, you rent it on Airbnb when you’re on the boat, you manage it remotely or you find another person that will manage it and then when you’re going to be staying in town, you just don’t book it.
You live in the house, then you’re leaving again. You put it right out there. I think this is a fantastic way of balancing… It has to be my primary residence, but I also want to make income off of it because nobody’s like someone like you, you’re not home very often. So why have it sitting there vacant? You rent it out. Now obviously there’s things you’d have to do, you’d keep a separate owner’s closet with separate linens and stuff so that you’ve got your own things there. There’s also properties you could buy where what I do in Fort Lauderdale is I buy a really nice property that has a garage because as you know, not every property out there has a garage. I will convert the garage into a separate, like a one bedroom or a studio apartment. You could stay in that, and you could rent out the main house.
They would never know that’s your primary residence. You wouldn’t have to share space with any of those people. It’s not that expensive compared to putting a 100,000 down on something. That’s a strategy I would recommend you look into. And the last one would just be the BRRRR strategy. That’s one of the ways that you don’t have to keep dumping a $100,000 into deal after deal. If you can go find a fixer upper in Fort Lauderdale, convert the garage, make it worth more, maybe you got it at a really good price because right now you’re seeing that the prices are coming down in a lot of areas. Like I was at an Imperial Point, that neighborhood a couple, couple weeks ago, looking at properties out there. You do that, you make it worth more, you refinance it into a primary residence loan, you get a big chunk of your capital back.
You’ve got a place you can rent as a short-term rental, and you can live in the studio by combining all of these methods together. You can make this work. You’ve got the primary residence loan, you’ve got the BRRRR method, you’ve got converting the garage to make it worth more. And now you don’t have to share space with somebody else. If there are people that you trust, other stewardesses that you work with, maybe that they’re on a separate, maybe they miss this trip, they’re stay at home. You can rent it out to them while you’re, you’re out there. And then this is nice to repeat because you can do it every year.
I think this is just my opinion here. Erin, this is the future of investing for that amount of demand we have in the real estate market in the United States and the lack of supply. People have to get used to the fact that they’re going to need to buy a house as a primary residence and make it work as an investment property. Gone are the days that just go buy a triplex and never have to think about it. They’re so expensive, there’s so much competition for them. You have to be able to think creatively. So what are you thinking after hearing that?

Erin:
I mean I think that’s fantastic. I didn’t realize, I suppose that I would qualify for anything like that. Being a foreign, I thought that those sorts of loans just wouldn’t be available to me because so far all I’ve discussed I suppose is real estate investing properties for rentals. And these were the terms that I needed to meet, and I just assumed that that was going to be across the board always. But if I could qualify for something like that, that’s definitely a strategy that I would be so into doing. And I know that I could run an Airbnb. I mean I run a super yacht. So for me, I write checklists all day long. I have daily weekly task list. I manage a team of cleaners and guest interaction and high-end service. So that’s something for me, that’s my skillset, that’s where I live.

David:
And that’s why I asked about your job because literally the way that you invest should be a reflection of the skill you have. And most people’s skill set was developed at their job. So you just telling me what you did, answered so many questions that I would’ve had. It tells me that you’re organized. It tells me you’re not afraid of a challenge. It tells me you’re used to having to think ahead and anticipate what could go wrong. It tells me you’re not unfamiliar with a schedule. All of those things are like you said, exactly what it takes to manage a short-term rental.
To you this will be easy. To the person listening to this who’s never done a job like that, it would seem daunting to have to try to manage a short-term rental. And so the advice I’m giving you is going to be geared towards what I think you’d be good at. And in fact, I think that you might be someone who could manage properties for somebody else in the future. You may be managing my short-term rentals because I think you’re just going to be like, “Yeah, this is so easy.”

Erin:
I would love to mean eventually-

David:
Prepare to be in on a super yacht, right?

Erin:
I love it. It’s been such an incredible adventure. But event, I do want to step back from it at some point in time and beyond that life, what is there for me? And I feel like that is the natural transition for me into managing rental properties, having my own and I want to set myself up for the future so I can actually afford to travel I want to and not on someone else’s time. And I can go home and see my family more often than every two years or so.

David:
Yeah. So here’s what you got to keep in mind. That is a worthy goal. Don’t buy in any hype that it’s easy to get there. That if you just buy someone’s course in six months, your goal will be completed because that’s a worthy goal. It’s going to take a lot of effort, a lot of sweat equity, a lot of challenge, a lot of emotional sacrifice to get to that goal. But once you get past that first maybe six, seven, eight-year period of time where you’re grinding stuff just starts to fall in the place and becomes so easy. It’s not a linear progression, it’s an exponential. It will feel like you’re not getting anywhere. And then you hit this inflection point and it starts to take off. So I would recommend first off, reach out to us. We will figure out how you could get a primary residence loan as a foreign national, which lenders are offering that, what programs are available?
Then we’ll come up with a strategy like what we just said by a short-term rental that you can live in when you’re there. You’re not there very often, so you’re going to be renting it out, you’re going to be making some money from that and then scale that every year. Every year you get to buy another one of these primary residences. And then in addition to that, once you get pretty good at it, you can probably start borrowing money from other people who don’t know what to do with their money. They’re getting 2% interest on it, maybe they start lending it to you. You pay them 8%, 10%. Now you’ve got your down payments figured out and you can start to scale pretty good.

Erin:
That all sounds so good. I love it.

David:
All right, well thank you Erin. We appreciate you being here and bring in this question. We’ll make sure we stay in touch.

Erin:
Yeah, thank you so much for your time. It was an honor. Enjoy the rest of your day. Thank you, David.

David:
All right. On this segment of this show, we review comments left by people who have commented on the BiggerPockets YouTube channel from previous shows. Our first comment comes from Randy Robinson Knight. I absolutely love this market. I have agents sending invites for brunch, champagne, and gift card offers. That is hilarious. It’s absolutely true. When the market gets tough, you start seeing agents and loan officers spoiling you a little bit. Take advantage of that. Our next comment comes from DDREI mentor. When I’m finding in Chicago is a lot of agents are removing listings and re-listing somehow removing the old price. You can’t easily see how long it’s been on the market, and you can’t see how much they lowered the price. I just keep seeing new listings of stuff I saw in May, and it will say that’s been on the market for two days with a listing history that has all blank prices.
All right, so DDREI mentor. Here’s what’s going on with that. When a listing agent puts a house in the MLS, there is a timer that starts that we call days on market. Houses have the most leverage possible when they first go on the market and then every day that they sit there that don’t get a buyer, they slowly lose leverage. It’s very rare you will ever find a house that’s been on the market a 100 days that’s going to get an over asking price offer. But it’s very likely if someone writes an offer two days in that they’re going to get an over asking price offer. So agents have figured out some kind of sneaky ways they can make it look like this house hasn’t been on the market for a long time and it’s not stale product. Like every good homicide detective knows your chances of solving a murder significantly decrease after the first 48 hours.
So real estate agents have just learned, let’s keep restarting a new 48 hours by taking it completely off the market, waiting a predetermined period of time and putting it back on the market. They’re making it look like it’s a new listing and that will help their clients in several ways. For one, it gets rid of that timer that was counting, making it look like it’s a house that nobody wants for. Two, it hits all the buyer’s email lists again as a new listing. So once you’ve seen all the new listings, the MLS stops sending you the stuff you’ve already seen by taking it off and putting it back on. It gets in everybody’s inbox again as a new property. And it also allows a listing agent to say, oh no, no, no, that offer’s not nearly good enough. We’ve only been on the market five days.
You’re going to have to do better. Here’s my advice to you. Who cares what the cumulative days on market or the days on market says or what the listing agent says? Write the offer. You’re willing to pay for the house, follow up with the agents to see if they’re willing to take it and continue that follow up eventually when no one’s buying this house, the sellers are going to take the offer that they don’t like because it’s not about the offer that they want. It’s about the best offer they can get. And every one of them eventually gets to the point where they realize this is the best offer I’m going to get, so I might as well take it. You want to be the first person in line when that happens.
All right, next comment comes from New Way Home. Excellent chat guys. I can almost imagine home buyers dancing and excitement with watching this keep up the good work. Well, I hope so, because home buyers for a very long time have not been able to dance about anything. They basically just had to take a deal that they didn’t like and pay way more than they wanted to and sort of put their tail between their legs when they got the keys to their new home, and they couldn’t be excited and just eat it. Well, that’s how it started. At least until three or four years later when they have over a $100,000 in equity in that property that they didn’t do anything to earn other than just wait. It’s one of the ways that the market cycle works. When you’re very rough to get the deal you like, you usually end up really liking that deal three, four, five years later when you love the deal you got right away, you probably aren’t going to have the same upsides so that yes, buyers right now are dancing in excitement.
It doesn’t mean that they’re going to be just as happy in five years if the market continues to stay where it’s at. There’s no right or wrong way to do real estate. There’s just the way that it’s working based on supply and demand and we hear a BiggerPockets want to give you the information to play the game based of what the defense has given you. Our last comment comes from Charles Granger. This video seems dishonest and geared towards bulls. I don’t think they’re appropriately displaying risk to investors. Additionally, you comment about your deals to display authenticity slash authority, but you have a different means of acquisition than the traditional investor. All right. Charles let’s start with different means of acquisition. I’m still using money just like everybody else is, so that’s not any different. I’m not buying properties, I’m not like finding properties off market.
I think that there’s some people that are doing that and they’re like, I just got this million-dollar house for $500,000 because they spent two years and a bunch of money sending out letters to find the deal of century. I’m not doing that. Almost everything that I buy comes right off the MLS just like anyone else. If what you meant that I have different means of acquisition is that I have more money than other investors, that could be true. I mean I definitely have don’t have more money than all of them. I have more money than what you’re calling a traditional investor. If you’re assuming it’s a person who’s just getting started. But I don’t think that’s a traditional investor that’s a newbie trying to crack into the game.
Most of the money that I have comes from properties I bought previously that I refinanced or pulled equity out of to buy the next round, which meant I bought and waited, which nobody wants to do or from businesses I started where I helped other people build wealth through real estate representing them as a real estate agent or a loan officer, which other people don’t want to do.
So rather than being mad about it, why don’t you just take my advice and do the same thing for yourself. Start a business in real estate or buy some real estate and wait and then pull that money out to buy more properties. Regarding the part where you’re saying you don’t think that I’m appropriately displaying risk to investors. I don’t know how to, because there’s two kinds of risk. There’s the risk of buying a property and then losing it because you couldn’t make the payment or there’s the risk of not doing anything and missing out on all the money you could have made. I want to just bring up a point that nobody really likes to talk about, but it’s very important. Let’s go back in time to 2014. Everyone’s telling you that the market is too hot. Now let’s even go forward. Let’s go 2016. The market’s even hotter and everyone’s saying don’t buy.
There’s no way that this can continue. The prices have to come back down. We just had a crash. Another one is coming, and you don’t buy a house. The money you lost from not buying in 2016 to 2022 is so much more than the money that you could have lost if you bought and then the market went down some. One of the cool things about real estate is that even if the market does go down, we still continue to collect rent, so we don’t lose the property. So there’s risk on both sides. We just only tend to focus on the part of risk that would lose something we already have. I’ll give you a little example of this. Let’s say I said to you, there’s an opportunity for you to make $200. It’s just about guaranteed. You got to drive four hours in that direction, pick up your $200 and then drive back home.
And it might be a little bit difficult. They’re going to ask you to do some pushups when you get there, but other than that, the money’s yours. And then I said, on a scale of one to 10, how urgent are you looking for that opportunity to go get that $200? Would you be like, whatever it takes, man, I’m going to fight through a hungry cage of tigers to get to my car so I can go get that money. Probably not. Most people would consider it, but they wouldn’t jump at the chance. Now in this same example say hey, there’s somebody in your office right now stealing $20 out of your wallet. You’d probably do anything in the world to get there and fight like hell to keep that $20 from being stolen from you. Why do we put so much effort into saving $20 but not into gaining $200?
I don’t know myself, it’s a thing of human nature. I don’t work any different than that, but I do want to call attention to it because oftentimes when we talk about risk, we’re only talking about what could go wrong. We’re not talking about missing out on what could go right. Think about this advice and anything else in life. Don’t go talk to that girl, man. She might not like you. It might hurt really bad. There’s risk involved in putting yourself out there. Don’t go tell her how you feel. Well yeah, there’s some risk you could get rejected, but consider the risk of spending your whole life never being with someone that you really, really love and always wondering what that person did. Which of those things is riskier? The last part is when you’re saying it’s dishonest and geared towards bulls. No one knows if this is a bull or a bear market.
I’m very, very clear with explaining to you guys why I think what I do, not just what I think. Do I think the market’s going to continue to go down? Yes. Do I think it’s going to be long-term? No. Do I think it’s natural? No, I think it’s artificial. I think we’ve raised rates artificially to slow down the market. It has worked, it’s pushed prices down, but it hasn’t necessarily pushed affordability down because the Fed isn’t doing this for real estate investors or for real estate. They’re doing it for the economy as a whole. And lastly, I do believe very deeply that when rates come back down, the prices are going to shoot back up and I don’t want people to miss out on that. So I hope you guys don’t think that there’s anything dishonest about the information that we’re giving you here. I do tend to have a bullish outlook on real estate long-term because when I look back for 500 years, that’s all it’s been.
Is this been going up constantly when I see all the money that’s being printed, I think it’s going to continue even more. Only time will tell, but I will say this, in order to protect against your downside, I’ve said it a million times, I’ll say it again. Keep more money in reserves than you need. Do not quit your job right now. Continue to work and continue to save and by smart cash flowing deals. All right, we love it, and we appreciate the engagement, even the negativity. I love that stuff guys. If you have something negative to say, if you’re sitting there grumbling saying, David always says to buyer, David says not to buy these markets, but I like these markets. Whatever it is, it’s okay. I’m not mad. I want to hear what you have to say. It actually leads to a better discussion and more depth being shared as to the inner workings of what makes wealth being built. And I want more people to hear it.
So please get on YouTube right now and tell me what you like and what you don’t like. Tell me what you don’t agree with. Tell me what questions you have that are not getting answered and we will do our best to address those on a future Seeing Greene episode. All right, our next question comes from Dave Meyer answering Travis in South Carolina.

Dave:
Hey, what’s going on everyone? My name’s Dave Meyer. I’m the host of the BiggerPockets Podcast on the market and I am the author of the new book Real Estate by the Numbers that teaches you to analyze deals like a pro. Today I’m going to be answering a question from Travis who invests in South Carolina and his question is about the time value of money. Travis writes, I am in the process of rehabbing a two bed, one bath home that I plan on renting out after this rehab. I’ll be totally out of funds making me unable to purchase another property that could come across my radar, thus losing money, which is why I bring up the time value of money. So my question is, should I free up funds now in case some great opportunity presents itself in the future? I generally don’t know that I want to do a cash out refinance because of rates going up.
And what if the deal never comes? It took me nine months of searching, waiting to get hold of this property and it’s hard to justify doing a refinance when there’s no guarantee I will find a property to invest in anytime soon. But at the same time, the house I’m rehabbing now has a 6.5% interest rate. So I suppose it’s definitely a possibility of burring this one and getting my cash out and keeping a relatively similar interest rate. What do you recommend? So Travis is basically in a BRRRR right now and is facing two options. He can either take the equity that he has generated by improving the property and leave it in the current deal, earning him some cash flow, or he can take the option of doing a refinance where he takes the money out and then hopefully invest in another deal. But as Travis says, he doesn’t know if he’s going to be able to invest in a good deal right away.
And he asks about the time value of money and how you analyze this question through the lens of the time value of money. And if you’ve never heard of this concept, it’s a little bit complicated, but the easiest way to think of the time value of money is that money that you generate now or that you have now is worth more than money that you have in the future because you can reinvest it. So as investors, we shouldn’t just be thinking about how much money can we generate by a deal. You want to think about how much money can you generate as quickly as possible. You want to get those returns and pull them up as close to now as you can so that you can reinvest them at a high rate of return. And so with this question, you basically have to determine which option between keeping your money in the deal or refinancing is going to generate you more cash faster.
And there are metrics that take the time value of money into account. You can do a discounted cash flow analysis, you can do a net present value or IRR, which is a very popular metric for real estate investors. And you can measure which one of these options is going to earn you the better return with the time value of money factored in. But just as with the math aside, just logically, what I would recommend doing here, Travis, is you should go out and see what kind of deals you can get right now. I’m sure you have a real estate agent, contact them and go run the numbers on five or 10 deals and figure out if you were to even before, don’t do the refinance, but just pretend that you’re doing the refinance and go run the numbers on five to 10 deals and see if that option would earn you a better return than keeping your money in the deal.
Because I generally don’t recommend pulling money out, especially at a higher interest rate to just sit on it because you don’t know if you’re going to get a deal. So the only reason I would refinance if I were in your position is if you knew that you were going to be able to reinvest that money at a higher rate of return than you’re earning with your current deal. Hopefully that helps Travis appreciate the question. Now I’ll throw it back to David.

David:
Man, that was some good stuff. I want to make sure we don’t gloss over. This idea of time value of money is very important. There was a lot of big words that were used there. Dave Meyer is obviously a data guy, so I want to make sure that people who are not data people don’t just have their eyes gloss over and say, I’m going to wait for something to be said that makes more sense to me. Here’s another way of looking at time value of money. We’ve all heard the story of would you rather be given a million dollars or a penny every day that doubles. So you get one penny the next day it’s two pennies and it’s four cents, then eight, then 16, then 32 and it goes on and on and on. And basically, right around the time you hit like day 30, it’s a whole bunch more money than a million dollars.
That is a story to illustrate the power of compound interest. When you invest money, and it compounds, and you reinvest the money that was added and that gets invested even more comes back and it grows at an exponential rate. Albert Einstein was once quoted as calling compound interest the eighth wonder of the world. To be fair, I think Albert Einstein is credited for saying a bunch of things that who knows if he ever said, but it’s still true that it’s a pretty impressive thing. If you want to understand the time value of money, here’s a good way to look at it. If I was to give you a penny on day one, would that be worth significantly more than a penny on day 27 of this 30-day compounding slide, right? Obviously, the penny is worth a lot more the further back you go and that’s what the time value of money is really trying to demonstrate.
If you invest your money at 15 years old, 20 years old, and it keeps doubling, that’s massively more powerful than doing the same thing at 80 years old because you’re going to die before the money has time to keep growing. And that’s all that the time value of money is really getting at. So from a overall perspective, that’s what I want you to take out of this video. Now, from a tactical perspective with the person saying, “Hey, I don’t buy deals very often. I really, really, really look for the perfect deal. It took me nine years to find the house I have.” If I do a cash out refi, the downside is I lose my good rate, so the property becomes more expensive. The upside is I have more money to invest, but the upside isn’t worth anything to me or it’s not worth much because it takes me nine years to buy a property.
So I see that the dilemma that this person’s in, here’s the advice that I would give. Put a HELOC on the property that has the equity but don’t pull the money out. Okay? Start looking for properties. Hopefully it doesn’t take you nine years to find the next one. Maybe you’re more comfortable. So it only takes four and a half this time find the property and then buy it with the money from the HELOC. Put that as your down payment to buy this new property. Now, you’ve got two properties, okay? Once you’ve got the second property bought, now refinance the first property that has the HELOC on it to pay off the HELOC. So do your cash out refi, pay off the HELOC and your original note, get the money back that compensates you for the money that you took out on the HELOC that you put into the next house.
This way the money doesn’t sit in the bank doing nothing for you while you’re spending nine years looking for your next house. You have access to it but you’re not paying for it because you don’t pay money on a HELOC until you pull the money out, which you won’t have to do till you find the next property. I hope that makes sense. That’s a way that you can avoid the situation that you’re in, where you don’t have to pick your poison. You’ve got an option that is not poisonous.
All right. I just was contacted by the producer of the podcast, Eric, here with a question that I want to include in the show. So Eric sort of jumped in. He is like, I don’t quite understand exactly how the HELOC works When you’re borrowing money off a property as a HELOC, I know you can get access to the equity, but how is that recorded?
So here’s the simplicity. A HELOC is really just a fancy word for a second position note. So you buy a property worth a million dollars and you put say $600,000 down. So you have a first position lien or a note in first position for $600,000, which means if there was a foreclosure, the first position person gets paid back first a HELOC, let’s say you took out another $200,000 on a HELOC. So you’ve got a first position for 600,000. A HELOC is just a second position note for $200,000. So you’ve got a total of $800,000 of debt against your million-dollar property. You’re still at an 80% loan to value when you go refinance and you say, “Hey, I want to do a cash out refinance.” And they say, “Great, we’ll let you take out 80% of the value of the home.” The money they give you on the refinance goes to pay off your first position note, which was in this case 600,000 at the lower rate and it pays off the HELOC, which was your second position note.
And now you just have one new first position note for $800,000 on your million-dollar property. And the $200,000 that you had taken out originally on that HELOC was the down payment for the second property that you went to go buy, which has now been paid off on your cash out refi. Thank you, Eric for asking for some question there and for helping me bring some clarity. Anytime we say HELOC, that’s just a fancy phrase. For a second position lien with an adjustable-rate mortgage by doing a cash out refinance, you’re turning first position, fixed rate, and a second position adjustable and replacing it with is one loan at a fixed rate that is no longer having the adjustable component. That’s the downside of a HELOC. Our next question comes from, Will and is answered by Pat and I will give my two cents on that.

Pat:
All right. Got a question here from a Will in California. How do I determine the correct amount of equity keyword equity here in this question? How do I determine the correct amount of equity needed to replace my W-2 income so that I can invest in real estate full-time? And how would I restructure my real estate portfolio to provide the cash flow I need in the most tax efficient man manner while preserving as much capital as possible to continue scaling up? And he goes on to say he’s got a duplex, one single family and one duplex both in Texas and he bought both of them with negative cash flow. Rents have increased since he’s bought them, but he’s barely getting any monthly income at this point. He says, I am getting a slight monthly positive on the single and the duplex is still a negative. So this is a great question and I’m seeing this more and more. It’s quite fascinating.
In the years past, people bought real estate based on cash flow and I don’t think that it’s smart to say that that has gone out of style. I think it’s interesting to see that some people stopped buying based on cash flow. I have never bought anything with negative cash flow or break even. I don’t understand the logic behind that, but I’m the one not answer asking the question, I’m answering it. So my answer is you need to get into things that cash flow. You’re in things that don’t cash flow, so get out of them. And here’s a rule for when you know should get out of an investment. If you could sell the property today and make more than seven times what your yearly cash flow is, you need to get out. So what that means is if your yearly cash flow is, let’s say it’s 500 a month and your yearly cash flow is $6,000, if you can sell the property and make more than $42,000, you need to get out because that’s around 10 or 11% return that you’re getting on equity.
And you need to be able to do better than that. When you’re buying these things new, you really should be shooting for 15% cash on cash. Worst case, 10% cash on cash. And what that means is if you’re spending, let’s say a $100,000 as a down payment on a property and you’re making $10,000 a year cash flow, that means you’re getting 10% cash on your cash that you put in. So you’re getting 10,000 out of a 100, you’re getting 10% cash on cash. That’s kind of like your bare minimum. Will, you’re way below bare minimum. You don’t even start above line. I think that you’re never going to be able to quit your job buying houses like this, never the next couple of years. Most likely they’re not going to give you any sort of appreciation like you’ve seen in the last five years.
Matter of fact, you might lose as the next year, two years, go on. If something’s worth 300 for you now, it could be worth 270 this time next year. I mean it’s possible. So you really got to look at this number, the seven X number and that’s going to be the case in both of these because you don’t make enough money on them. I would suggest you selling them and then getting into something that does cash flow. It might not be as close to your house as you want it to be. Might not be in as comfortable as a neighborhood as you want it to be. It might be uncomfortable for you. But first and foremost, most important thing, in my opinion in investing and trust, we have done this for over 30 years now. I have lots of investment is cash flow. That’s what you buy for first and foremost.

David:
Well, that was a journey down at Intellectual Highway, wasn’t it? Lots of good stuff to chew on with that one. That might be one you want to go back and rewind and listen to again. So let’s see. Pat gave some really insightful information about metrics you can use when trying to hit cash flow. Hitting a 15% ROI is very difficult to do in a market like this. My guess is Pat’s got access to some business opportunities and some bigger apartment complexes that are getting him a 15% return based on the internal rate of return. That’s probably not cash flow right off the bat. Now I don’t want to take too much time to answer this question, but I kind of see what’s going on here. Pat’s looking at, hey, if I invest my money in an apartment or something like that, that we’re going to buy hold for five years and sell.
And he’s incorporating all the ways that money are made through that investment, which is what the IRR does, the cash flows, the loan pay down, the selling at the end, the revenue that’s generated from the capital raising, whatever that would be, 15% possible. But most of our listeners are sitting here as you’re hearing this, you’re like, you’re only looking at the cash-on-cash return in year one to determine your ROI. There’s almost nothing out there that’s hitting 15% cash on cash return year one. So don’t get confused by what’s being said here. If you said, “Hey, I’m going to buy a property that rents are going to go up every year, there’s a big value add component to it, I’m going to add equity to it’s going to go up in value and rents are going to go up and at the end of five years I’m going to sell it.”
And you looked at the entire money you made from every single component I mentioned, 15% totally doable. You could do better than that with single family residential property. Like I’m getting over a 100% returns on a lot of the stuff that I’m buying when you look at the internal rate of return. Okay, that being said, that wasn’t exactly the question that was being asked by the caller. The caller was saying, look, I’ve got a W-2 job that makes good money. I want to replace it with investment income. You’re on the right place so far. How much cash flow or what’s the best way to build up cash flow to replace my job? And I think the subtlety that might have been missed was the person asking the question here, Will. Will, understood that it’s very difficult to build cash flow.
It’s much easier to build equity. So I think what will was getting at is what can I buy that will build equity that can be converted into cash flow that can be used to replace my W-2 income. He’s sort of breaking this into a couple steps and I do like that approach. Now, Will mentioned that his properties are not cash flowing really solid. And Pat heard that, and he said that’s not good. You shouldn’t be buying stuff that doesn’t cash. What Will didn’t say is how much equity is in those properties. Pat’s advice might have been different if Will had said they’re only making a little bit of money every month, but I’ve got $200,000 in equity because I waited three years. Rents just haven’t kept up with the value increasing. You see how this changes the scenario that we’re looking at here. So, Will here’s my advice to you.
This is the same strategy that I use for investing myself. Of course, I want cash flow, but I get cash flow, not by focusing on cash flow. You go after equity. There’s several ways you can do it. One is you invest in the right area, which you’re probably onto investing in Texas. So keep doing that by an area that’s going to grow. Number two, buy something that you can add equity to. You can rehab it, you can add square footage, you can improve it cosmetically, you can turn it from a long term into a short-term rental. Anything that will make the property worth more. That’s step number two, three. It’s what I call buying equity. This is when you buy below market value and when you combine all this together, you start getting home runs, go after properties that you can buy equity in. So you bought it below market value, you then added equity to through some form of rehab.
You then change the way that you used it, which increased the value as well, changing it into a short-term rental, something like that. And you do that in an area that’s growing. Then you watch your return on equity and once you’ve accumulated a decent amount of equity like that, sell it and 1031 into something that cash flows naturally like an apartment complex, okay? That’s my advice for you for how to get from, I have a job and I want to replace my income. You’re not going to get it by buying $110,000 duplexes in the Midwest. You’ll be doing that for a 100 years before you get the income that you’re getting from your job. You do it by adding value and equity in properties that still at least break even like you’re doing. And then exchanging the equity for cash flow in the future. So you want to be having both things going on.
You’re doing a 1031 exchange from existing equity into a cash flowing asset like an apartment complex, a triple net complex, a big short-term rental that’s going to make you more cash. And at the same time, you’re buying new properties and you’re adding value to them. And if you do it the way that I’m describing, you will never run out of capital, which was one of the concerns that you expressed. So first off, thank you Will for asking a good question. And second off, thank you Pat for bringing up some really good information that will help everybody else. All right, we have time for one more question and this one comes from J Scott reading a question from Cheryl.

J:
Hey everybody, I am J Scott. I currently own about 50 single family houses all around the country, including in the sunshine state of Florida, which is good because today’s question comes from Cheryl who is asking about buying rental properties in Florida. Specifically, she wants to know about how rising insurance costs in the state along with things like hurricanes and the potential for global warming are likely to impact investors who are looking to buy and hold in various parts of the state. Now, she specifically mentions Tampa, which is on the East Coast, or I’m sorry, the West Coast of Florida and Orlando, which is in the center of the state. Now, why I don’t have a crystal ball to know exactly what might happen in the future, I do agree with her that rising insurance rates over the past few years is making it really difficult to find good cash flowing properties in many parts of the state.
And there’s certainly risk, both short term risk from other storms and long-term risk from things like global warming that Florida might become a really expensive and a really difficult place to invest at some point in the future. Now, that said, Florida also has a lot of things going for it. There’s large population growth coming into the state, which is likely to push rents higher over the next few years, and there’s a lot of building going on in many parts of the state, which means that a lot more housing supply could keep prices reasonable for the next few years. Not to mention that while hurricane damage is horrendous and really has impacted tens of thousands of families, honestly, it does provide some opportunities for investors, especially those investors who are willing and able to do renovations. Now, all in all as a Florida investor myself, my recommendations are the following.
First, ensure that your flood risk before buying any property in the state and make sure that the insurance costs still makes sense given that flood risk. Second, if you’re going to buy in Florida, I would suggest diversifying across different parts of the state so that you face less risk from any single storm or any single weather event. And third, I would highly consider looking at property in the middle of the state off the coasts, which will help reduce the likelihood of storms and reduce your insurance risk. All in all, I believe that there’s a lot of opportunity left in Florida, but I don’t recommend putting all your eggs in one Florida basket. Anyway, thanks so much, everybody. I’m going to hand it back to David now.

David:
All right, thank you, Jay for that very insightful commentary. I’m going to second a lot of what you said and maybe just expand on some of your points a little bit. There’s pros and cons of investing everywhere, everywhere, and it… I get a little bit of a bee in my bonnet if you will, that people tend to ask questions that insinuate that they’re looking for an area to invest in that has all pros and no cons. It doesn’t exist. In fact, if you had the perfect area that had all pros and no, everyone else would be investing there, it’d be very hard to get a deal and that would become a con, right? So a lot of people look for areas with the lowest price point homes that they think are going to get them the highest cash on cash return and there’s no other investor competition.
They end up in areas that have no long-term growth and don’t build any kind of wealth. That’s what I’m trying to get at is you’re always balancing pros and cons. You don’t make wealth by trying to avoid cons. Now, let’s talk about some of the Florida pros and cons. J mentioned several of these things, the pros, massive population growth. Everyone’s moving there. I’ve said it before, if you just took like a table of the United States and you shifted it down into the right, that’s where all the population tends to be going towards right now and I think they will continue to for the future. Long-term population growth means you can expect increasing rents. You can expect a increasing tenant pool. You should have more people to choose from. When picking your tenants, you’ll have an overall better experience. Another pro is that businesses are moving into Florida.
I’m a Florida investor and this is one of the reasons that I’m putting money into that market is I’m watching a lot of businesses leaving New York and going into South Florida and that’s going to lead to increased rents in the future because people make more money and they have better jobs so they can pay more rent, they can pay more for a house, which both drives the price of my home and the rent that I can get for that home up. What else is good about Florida overall? It’s pretty good weather. You get a lot of rain and you do get hurricanes, but you don’t have the snow and the freezing cold issues like pipes bursting that can cause you some problems investing in real estate now, that’s why everyone wants to invest there. This is why so many people are talking about they like the pros, but you got to look at the cons too that Cheryl brought up and J highlighted.
Number one, insurance is ridiculous. It is insane. I’m getting hammered on insurance that is over three to four times as much as what my highest guess what it could be was the hurricanes have absolutely changed the way that homes are insured there. In fact, I have one house that I bought there during a 1031 exchange that blew me away. I didn’t even think this was possible. The lowest quote I could get on homeowner’s insurance for this property. Now it’s a big nice house, it’s near the beach, it’s over a million dollars. It’s 5,000, 6,000 square feet home. But still the premium to insure it as a short-term rental was $26,000 a year. That’s a down payment on a house in some places. So this insurance thing is legit. That’s a pretty big con. Another con, the actual hurricanes that cause these high insurance premiums are real and they do happen.
And that’s why J is saying consider investing in the middle of the state because you get less of that type of activity going on. Now, there’s a con to investing in the middle and you tend to make more money on the coastlines. That’s why we’re looking to want to buy there. We want to be near the beach. So you have to factor that into your choices. Another con for investing in Florida is that it’s very competitive in the best areas. There’s a lot of other people that are trying to buy now, let’s say for Orlando for instance, that is in the middle of the state. It’s going to be safer. Hurricanes don’t tend to hit that part as hard. You do have a good economy, but it’s very dependent on Disneyland. That’s why most people are buying short-term rentals or houses in Orlando. They don’t have a ton of industry outside of Disneyland.
And that makes me nervous. I’m not saying don’t do it, I’m probably overthinking it, okay. But part of my long-distance investing strategy is to not have too much of your assets in any area that’s dependent on one thing for its economic base. Most of the people that are living in Orlando are going to be like Disneyland employees. The people that are visiting it have something to do with Disneyland. Of course, there’s other businesses there, but Disneyland’s the biggest one. What happens if, God forbid there’s some scandal that comes out from Disney executives, knock on wood, right? And it gets canceled, it’s canceled Disney and nobody goes there because now it’s politically unpopular to go visit Disney World. I think I’ve been saying Disneyland, I meant Disney World. You see what I’m getting at? If that park shuts down or people stop visiting there, you now have an investment that no one is trying to use.
No one’s going to our Orlando to visit the swamp. They were going there to visit Disney World. So I get very nervous. I don’t think anyone saw Detroit collapsing the way that it did until it happened. So I’m not saying don’t invest in those areas. I’m saying be aware of the pros and the cons. I think a lot of good ones were highlighted in J’s response. I just want to bring a couple more, but the bigger point I want to make here is don’t get stuck only looking at cons. There always is going to be a con in any area. You’re going to just make sure that the pros outweigh them. All right. That is our show for today and I really hope you enjoyed it. We had another show where I brought in some backup to help answer questions because what’s important is that you guys get the knowledge and the experience that in our heads into yours.
If you’d like to buy one of the BiggerPockets books, simply head over to biggerpockets.com/store and use the discount code DAVID, and you can get 10% off any book that you’re buying there. I’ve got a couple in there to check out and new ones that should be coming. But more important than that, tell me what you think about the show. Go to YouTube and leave us a comment, subscribe to the page while you’re there, make sure you like the video, so the YouTube algorithm knows to keep showing you something along those lines. And if you want to follow me, you can do that @davidgreene24. I’m most active on Instagram, but you can follow me on Facebook, on LinkedIn, on TikTok, I think I’m officialdavidgreene and at YouTube I’m @davidgreene24. And I forgot to mention that tomorrow is Cyber Monday. So that 10% discount code that I worked will work at any time except for Cyber Monday because you’re going to get a bigger discount tomorrow up to 60% off on many BiggerPockets books.
Go check that out. If you’re listening to this after Cyber Monday, that 10% code will work. As I mentioned, follow me on social media, let me know what you thought of the shows and what I can do to help you build well through real estate. If you live near me in California, I definitely want to know about you because we put on meetups where we teach people about real estate investing and I’d like to invite you to them. Do me a favor, go leave a review, a five-star review on Apple Podcast, on Spotify and Stitcher, wherever you’re listening to this. And when you come to the meetup, show me the phone with your review because you deserve a high five. All right, everybody that wraps up our show for today. Please check out another BiggerPockets video, keep learning and keep making money through real estate.

CNBC’s Diana Olick joins ‘Squawk on the Street’ to discuss the impact of rising interest rates on home sale prices, drops in investor home purchases and what regions are seeing the biggest investor pullbacks.

Mindy:
Welcome to the BiggerPockets Money Podcast, Finance Friday edition where we interview Zoe and talk about how to invest for the future.

Scott:
The tool I would recommend there for you is a one page investment philosophy, and I think that to put that together, you have a lot of homework to do because the investment philosophy follows you for a long period of time and you’ve got to make some hard choices when you get into that. If you had come in and said, I believe in Google, Amazon, Facebook for these reasons, and I have these stocks, I think that over 30 years they’re going to do phenomenally well and I’m ready to ride the ups and downs that come with investing in tech stocks in good times and bad, that’d be totally fine. That’s not your viewpoint. You’re like, I invested in them because they’re the type of list in Robinhood and now that they’re down, I want to pull out. That means that that philosophy is not yet developed.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my forward thinking co-host Scott Trench.

Scott:
That was an introduction for the future, Mindy. That was terrible. Whatever. We’ll just keep going.

Mindy:
They can’t all be winners, Scott. Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments and assets like real estate, start your own business or come up with an investment philosophy. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I am excited to talk to Zoe today because I think she’s facing something that a lot of people are facing for the first time, a downward trending market. And I really want to hammer home the thought that just because your stocks are down, just because your portfolio total value is down doesn’t mean you have lost money unless you sell the stocks. And yes, you have sort of lost money. Help me figure this out, Scott, help me enunciate this correctly. Because you haven’t lost money unless you sold, you still own X number of shares of this individual stock or that index fund. It’s just not worth as much as it was last month.

Scott:
At least in the accumulation phase of building wealth, you never spend the principle, so if I invest a hundred bucks, I’m never going to spend it. It’s just not part of my life. It’s not something I consider as part of my wealth or that I that I’m able to access. I’d only ever spend the returns generated by that hundred dollars. So the dividends for example, or the appreciation over the long term, but I’m going to stick with that investment for 30 years or maybe forever.
I may never sell the index funds that I purchase, and so, am I going to lose money? Sometimes the paper value of that will go up or down, but I just keep buying, right? Who we interview Nick Maggiulli a few weeks ago, he wrote a book called Just Keep Buying. That’s literally the title of the book and it tells you all you need to know about my index fund strategy and my real estate strategy. Now, real estate, you do have to sell at some point because you lose the depreciation benefits and there are tax reasons, so you can’t hold it for more than 27 and a half years. But if that didn’t exist, I would literally hold my properties until they fell down as well, because that’s my investment philosophy.

Mindy:
You can hold them if it’s a great performing cash flowing property, you don’t have to just sell it because you can’t appreciate it anymore, Scott.

Scott:
That’s true. Yes, but I will probably sell it because the ROI does get compressed when you have to start paying a lot more in taxes.

Mindy:
Yes, but the way you phrased it made it sound like you have to sell after 27 and a half years.

Scott:
That’s true. Yeah. Anyways, yeah, and that’s the big piece here and I think that’s hard to accept until you’ve really internalized your investment philosophy and that takes dozens, maybe hundreds, maybe thousands of hours of reinforcement of your investment philosophy through books, read different perspectives. I told Zoe our guest today to read books on how to pick stocks and books on why index funds are so valuable because that will help solidify whichever approach she chooses to take.
I’ve read them both and I’ve decided that index funds are the approach that are best for me. And because I have that perspective and because I believe I have at least a journeyman’s baseline understanding of how to pick stocks, I’ve decided to invest in index funds and that allows me to stick with my approach for the long run without having to be fearful in a market like 2022.

Mindy:
Yep. I think that your investment philosophy sheet is really helpful or will be really helpful for people who are experiencing their first down market. If you don’t know what you’re investing for, if you don’t know what your philosophy is, you’re going to have a hard time weathering the storm. Also, if you are having a hard time weathering the storm and you are a buy and hold investor and you don’t plan on selling your stocks, stop looking at your portfolio. If you’re not going to sell it anyway, what does it matter if it’s down a dollar today or up $2 tomorrow, stop looking at it until the market evens out.
Before we get into today’s show, let’s take a quick break and we are back. Before we bring in Zoe, let’s remind you what my attorneys make me say. The contents of this podcast are informational nature and are not legal or tax advice and neither Scott nor I nor BiggerPockets is engage in the provision of legal tax or any other advice. You should seek advice from professional advisors such as CPAs and accountants and attorneys before making any financial decisions. I think I did that pretty good for memory.
All right, let’s welcome Zoe to the show. Zoe is our guest today. She’s single and looking for steady income to cover her expenses and also help with her parents’ retirement. She’d like to live in a big city, which means a higher cost of living, but she lost money in the stock market due to inexperience and lack of research, which is something that happens all the time. So I hope she hasn’t beat herself up over that. Before we chat with her today, let’s look at her money snapshot. Here is a general view of where her finances are. We’ve got a salary of 5,100, yay Zoe, plus additional income of $1,400 a month from her house hacking roommates and $200 additional for utilities.
She’s projecting a 10% bonus from work and she has a side hustle that brought in $2,500 in October that is lumped together to bring us a nice great big total. Now, she sent in her expenses, but honestly they total up to $3,300 and I don’t see this as being a big problem for Zoe. If these expenses are accurate, this is a great amount of expenses for her in her situation. Of course you can always cut out expenses and you can always reduce expenses, but Zoe has a delta of $1,800 before the 1650 from her roommates for their portion of the housing expenses. So again, I don’t think spending is her problem. My advice here would be just to make sure that these are your true expenses and that if you do have approximately $1,800 left over at the end of the month, then these are your true expenses. If you have significantly less than it’s time to start looking at where your money is actually going.

Scott:
And I’ll just point out a few things there as well to follow up on what you said, Mindy, we have 1450 a month coming from house hacking roommates and a mortgage of 1630. So you’re paying $200 to live plus your share of utilities essentially, and that leaves all the other expenses that are adding up to the 3,300. So I mean you’re spending less than what, $1,700 a month on everything besides housing and 200 a month on housing. It’s phenomenal situation. So I think we’re going to have a lot of fun today. You’re going to have a lot of really good options.

Mindy:
Yeah, I think we have a lot of fun today. Zoe did send in a detailed spreadsheet, so I am fairly certain of her numbers here, more of a comment to those who are listening. Something I see frequently is people think that they’re spending X, but then they also don’t have any money left over at the end of the month. And if this is the situation you find yourself in, I encourage you to track your spending as granularly as you possibly can to make sure that you are in fact spending that much. What we find frequently is people forget about, oh yeah, I’ve got that one expense and that one expense and all of a sudden there’s where all the extra money is being eaten up.
Zoe’s also doing really good on the investment front. She has a current 401K of $1,500, but that’s because she just started a new job. She has Roth IRA of $15,000, Roth 401K of 2,900 ESPP employee stock purchase plan of $200 right now. But again, brand new in this, a previous Roth 401K of $15,000 two after tax brokerage accounts that are approximately $20,000 and cash savings of $31,000. So she’s sitting really pretty.

Scott:
Plus the house hack.

Mindy:
Plus the house hack. I mean, yeah, we didn’t even include that and we don’t have equity in that investment. We have equity, we don’t have it listed here. So Zoe, let’s look at your money story really quickly. How did you get to this phenomenal position and what on earth can Scott and I help you with today?

Zoe:
Yeah, so I grew up, I would say below the poverty line and so expenses and money problems was always prevalent in my early life. And so seeing my family struggle and pinch pennies and not having a clear goal or idea where they want to be really resonated with me. So I guess early on I was always really careful with what I spent my money on, always negotiating expenses and so as a result I’ve kind of really put myself in a position where I’m always thinking about how can I make sure I will never go in reverse, essentially. Make sure that I will never be in a position that I was growing up and making sure building wealth for I guess future generations to come in my family.

Scott:
Awesome. How long has the current situation been going on? Could you give us an overview of the recent past you you’re saving $3000, $4,000 a month it seems like when your side hustles are kicking in and has that been continuing for a long time or is that a relatively new phenomena?

Zoe:
So the side hustle started in September. So before that I wasn’t saving as much. I was closer probably to the 2K mark, but now with this additional income, I’m really struggling to decide where should I put my money and can I move on to better things, move to a bigger city like Mindy spoke to. When I graduated in 2019, I only had 5K to my name and I think 3000 of it was in a CD account so I couldn’t even touch it.
And my first position that I had a career-wise, they had us go to essentially a convention for onboarding and you’re supposed to pay for your own expenses and they would reimburse you in the next pay period. So I remember being scared because I had almost three grand on my credit card and I was like, how am I going to pay this off? How am I going to last until I get reimbursed for everything, like the plane ticket, the stay, the hotel expense, the food? And so that was kind of a wake up call, like okay, this is what it’s like to go out into the corporate world, you know, really got to focus on how you’re going to be able to give yourself that cushion. So I’m never going to be in that position again of fear.

Mindy:
I like your mindset, I want to call out all the employers that make you do this. This is so stupid. If you are hiring fresh out of high school or fresh out of college graduates, don’t make them buy their own plane tickets. That’s just mean. Okay, sorry.

Scott:
From the employer perspective, I’ll just say that sometimes employees prefer that because they get to rack up, all the credit card points and they’re getting reimbursed. So yeah, I think it’s wise to provide the option either way.

Mindy:
Yes, the option, I prefer it and I’m kind of miffed that BiggerPockets took that away recently. However, I also am not right out of college. I know it’s hard to tell, but I graduated from college a couple years ago.

Scott:
So your employer wasn’t evil, it just scared you in that situation. But that’s a really good reason to be like, you know what, I’m never going to have to worry about that again. I don’t think you will have to ever worry about that again, by the way, as we get into your numbers here, I think that’s immediately clear from the financial profile you’ve shown us so far.

Zoe:
That’s what I like to hear. Yeah.

Mindy:
Okay, well let’s talk about that initial Robinhood and E-Trade investment that you think you lost money on. Did you sell the stocks or did the stocks just go down? Because right now everybody’s losing money and it’s losing money in air quotes you still own X number of shares, it’s just worth less than it was a year ago or six months ago or whatever, but you don’t lose money until you sell. So did you sell or what were you doing with this investment?

Zoe:
That’s a good question. So I’m a buy and hold kind of investor, so I have not sold and that’s one of the questions I was going to ask. Like hey, these are all losing money, should I sell and try to invest in something safer like an index fund versus the kind of ignorant decisions I made early on with my investments. So yeah, haven’t, I’m just holding onto them.

Scott:
What are your investments? Can you give us a very quick overview of what got you into those investments, why you chose them?

Zoe:
So I think the breakdown is I have 91% in stocks, 4% bonds and 5% in crypto. So Bitcoin.

Scott:
Which Stocks?

Zoe:
So I would say the majority is in ETFs and then I would say the Robinhood amount is in individual stocks. So big names like Google, Amazon, and then when I first started, I think Robinhood has a list of top stocks to invest in were most popular and that’s kind of what I looked at and I would briefly look at the profile and Yahoo Finance and oh think this is a great investment and buy some of that stock and that’s kind of the early mistakes that I made.

Scott:
So most of your loss, so you had previously $14,000, $15,000 in Robinhood, now you have $8,500 because of a big drop in Google, Amazon, other of these name brand tech stocks, is that right?
Yeah.

Zoe:
Okay. And then the E-trade portfolio, you lost less, you had 15,000, now you have 12 and a half, 15, 16, now you have 12 and a half and that’s because those were largely an ETFs and index funds.
Only ETFs. I think only my Roth IRA has mutual funds because that’s the first thing I opened when I graduated was my own personal Roth. But all my recent investments have only been in ETFs.

Scott:
Awesome. If you were to assess what is the total number of hours that you’ve spent learning about investing?

Zoe:
I’ve been listening to BiggerPockets for the past two years, so once a week, that’s probably less than two hours a week.

Scott:
But you spent about a hundred hours learning about money but not really. How about specific to stock investing?

Zoe:
Oh, so I went to school for finance and so I kind of have an idea of how to read the numbers on Fidelity, understand what that means and some YouTube as well. So just watching some general videos and just my experience from school and what I learned in class and that’s just kind of how I did it. Also, when I first started, when I first got my 401k, I looked at Fidelity and they have ratings, so I ignorantly kind of trusted those ratings. Okay, this is rated really high so it would be in good, a good investment. But looking back I should have done further research into those, not just like what is just rated as popular or as a good investment, but really understand what historically has been the best investing strategy and what performs the best historically versus a short term period.

Scott:
Well I think there’s two issues here with this and I think again, your personal situation is fantastic because you’re spending so much less than you earn, you’ve got a great income, your house hacking, you have the side hustle that’s adding up to it, you’re going to get rich. You just need to figure out where you want to put that money from an investment standpoint. And that’s what I think you’re struggling with at the highest level is you don’t know where you want to allocate all of these funds. I think that your first issue you brought to us was asset allocation, which is exactly right. And the tool I would recommend there for you is this one page investment philosophy and I think that to put that together, you have a lot of homework to do because the investment philosophy follows you for a long period of time and you’ve got to make some hard choices when you get into that.
It’s not just like, oh, I’m going to buy some Google, that’s great, that’s what Robinhood says, that could work, but it’s not something that I think you’re able to live with. If you had come in and said, I believe in Google, Amazon, Facebook for these reasons and I have these stocks and I think that over 30 years they’re going to do phenomenally well and I’m ready to ride the ups and downs that come with investing in tech stocks in good times and bad, that’d be totally fine.
That’s not your viewpoint. You’re like, I invested in them because they were the top of the list in Robinhood and now that they’re down I want to pull out. That means that philosophy is not yet developed. So I would recommend that first you start with the framework, I’m going to get started and I’m not going to diversify, right?
I’m going to pick one asset class and I’m going to go heavy in that asset class for the first few hundred thousand dollars in net worth. Why is that? Because diversification is a great, great way to protect wealth, but I think it’s a less good way to build wealth. Now people will disagree with me, but I really like the real estate house hacking that you’re doing. I personally like index funds with that. That gives me heavy exposure into real estate and stocks, very little exposure in other markets. I don’t bother to pick stocks personally, but you could. So if you were to look at my investment philosophy and I actually posted a template which we can put in the show notes here and I’ll send to you after this. It says in five years I want to have multiple asset classes, stocks, real estate, private businesses, BiggerPockets.
I do want to get into lending at some point, but I did these one by one heavy, heavy real estate for the first 5, 6, 7 years because I felt that house hacking multiple times was a really powerful way to build wealth. But I’m 95% real estate while I’m doing that slowly moving into other investments. But I think that you need to build to frame something like that and that’s going to take some research. So I have four books to recommend to you on that topic and I’ll send you all four of these books, the titles with them. One Up on Wall Street by Peter Lynch, The Intelligent Investor by Ben Graham. If you studied finance, that book was very, very dry, but very, very important. Those books will tell you how to pick stocks, which I don’t recommend, but I think you need to learn that in order to feel comfortable with your investment philosophy, you need to see what the experts who have advice on that have to say.
And then I think that the other two books I recommend are a Simple Path to Wealth by J. L. Collins and a Random Walk Down Wall Street by Burton Malkiel. And I think that those four books will help you get a really strong grounding. And if you read those four like I did, you might come to the conclusion that index fund investing and putting all the that into Vanguard or Fidelity in one of their total market index funds is the right approach. But that at least give you the framework to approach the problem from a position, a belief set that you can actually invest with for many, many years.

Mindy:
So I have a slightly different approach. I still believe in real estate like Scott does. I still believe in index funds very much, but my husband and I invest in individual stocks heavy in the tech sector. All of the ones that you listed, some of the ones that we have, we have others as well. But here’s the difference, my husband wakes up in the morning and reads every article that came out yesterday about every stock that we own and every company that he finds interesting, he reads, and let me tell you how much, I don’t want to hear more about Tesla, I talk about this a lot because he talks about it a lot, but I would not feel comfortable investing in individual stocks if I was the one driving the boat 100% because I’m not willing to do the research, I don’t have the time, I don’t have the inclination, I would just set it and forget it with index funds.
He is fascinated by this. He wants to invest in the individual companies, he does the research. So another thing to think about is I don’t think you’re doing a bad job picking individual stocks, but I think you need to have, like Scott said, I think you need to have a reason for picking them. So I’ve been invested in Google since their IPO and it’s been a great, mostly up, but every once in a while it goes down stock, it’s a tech stock and they’re volatile more so than your blue chip stocks.
But another thing to think about is we’ve had what a 12 year run up and there’s been some downs but it’s been up, up, up this is a more, I don’t want to say more normal market, but the market moves up and down a lot and if you’re in it for the long term, stop looking at your stocks, that’ll give you a lot more peace of mind.
Just you want to hold onto this stock for a long time, then buy it and then don’t look at it again and then buy more and don’t look at it again. I mean even index funds are going to be volatile, but if you believe in the long term strength of the United States economy, which I do, then you will see it go up. I truly believe that the stock market will go up again and past performance is not indicative of future gains, but I do believe that the stock market will go up in the future.

Zoe:
Yeah, that’s helpful. I think going off of that, I have some mutual funds and I bought them early on and I didn’t really look at the expense ratios. I was thinking like oh 0.9%, that’s nothing. But then now I’m switching over to ETFs and the expense ratios are much lower like 0.03. So I’m thinking I would like to buy and hold, but is this to a point where I should sell now and reinvest what I can recoup into lower index funds because as I’m waiting for the market to recover, I’m paying these expense ratios over that period of time.

Scott:
So first we need a long-term plan in three to five years online portfolio to look like this, not like this. You need to be able to articulate that and that’s where the investment philosophy comes in. And starting with the end in mind. You’re already doing half of this right. I’m almost all of it. You have a strong cash position, you’ve got Roth, you’ve got a heavy Roth allocation, you’ve got after tax stocks, you’re building a position that’s going to support financial freedom if you continue what you’re doing with this because your asset allocation, you need to pick the investments that you’re comfortable with.
If you decide that index funds, for example are the way you want to go, then yes, I like the idea of taking the opportunity now to sell these high fee actively managed mutual funds and move that into passively managed index funds because you’re probably not going to have a big capital gain problem from them going up in value. If you’ve been doing this for 10 years, you might have to harvest $200,000 in capital gains and move it over. I don’t think you’ll have that problem, although you should do the math and check. You’ll have some homework there.

Mindy:
Yeah, I just downloaded Scott’s investment philosophy one page template and I think this is going to be really helpful for you to go through and fill out and it’ll help guide you when you are choosing your investments in the future.

Zoe:
Yeah, I think if I could start over, I would just dump all my money in index funds for long-term goals. I can change all the mistakes I’ve made in the past. And so I guess that’s kind of what my issue is now is like do I take action now or do I wait to see before I can change my portfolio to match what my goals are?

Scott:
I think now’s a great time. I think you probably have a loss, so sell, take the loss if you have one, do that homework first and move it into the investment that you believe in, right? Only don’t do that if there’s some sort of barrier, like a large capital gain you have to harvest and think about from a tax perspective, which I doubt will be the case in this situation. So I think you could easily do that now and you’ll have a benefit tax benefit if you do it correctly. That might play out in future years.

Zoe:
To offset, like the loss to offset the gains.

Scott:
You came to us with three questions, asset allocation and then the second one was around maximizing your revenue streams and the third was around reducing taxes. Let’s talk about the revenue streams. Tell us a little bit about your job, your real estate, your and your site hustles.

Zoe:
Yeah, so I work as a financial analyst for an exchange operator and I love my job. I have no intention of really leaving. I’m interested in moving up in the company and it’s a really great company to work for. I have a pretty flexible schedule and it allows me to pursue interests outside of my nine to five. And as a result I attended a lot of networking events like local real estate events, meeting, even people who have been on the BiggerPockets podcast will come to Kansas City and have a speaking engagement.
So all of those activities have inspired me to essentially pursue real estate. I started with my owner occupied home that I’m house hacking and the reason I have such a large cash reserve was because I was trying to buy an investment property and I kind of backed out of that deal because I just trusted my gut, ran the numbers as a long term rental and it just didn’t work out out.
So I kind of exited that opportunity and at this point I’m not really pursuing it unless something falls in my lap and so I doubt that’s going to happen. And now trying to understand what should I do with such a large cash reserve because it definitely covers my expenses for up to a year and just trying to understand what I should do with excess.
As far as my side hustle, I work for real estate syndication, it’s a team here in Kansas City, so essentially I’m their intern. I work about 10 to 15 hours a week, sometimes more, sometimes less, just doing it outside of my normal hours for my W2. And it’s been a really an eyeopening process to deal with tenants and to deal with underwriting and sourcing deals. I think these were all issues I had on my own. How do I understand the numbers of this property?
If I see something I like on MLS, how do I know if it’s going to work? And so that deal analysis was something that I kind of struggled with and that’s kind of why I do regret this home purchase. It wasn’t the best purchase line of numbers now that I look back at. Initially wanted to buy duplex with an FHA but there was just none on the market and I didn’t really understand how to look for off market deals or how to pursue those.
So I just feel like I kind of settled with the home that I bought. I pay HOA and they have restrictions, so definitely would not want to pursue another real estate investment inside an HOA. And with my roommates I looked at just market rents for my area and just kind of settled on a number and it’s been good so far. It pays for most of my mortgage. I think my total monthly payment for both my mortgage and utilities on my end is around 600 to 700, 700 being the max I’ll ever have to pay just from what I look at utilities and such. And I do pay a little bit more principle for my monthly payment. I’m just wondering if I should contribute more.

Scott:
Walk us through the numbers on this deal because I think that a lot of folks, myself and Mindy included are going, what is she talking about? This sounds like a great housing choice and house hack move. What are the numbers and why do you think it’s not ideal?

Zoe:
So I would say I kind of bought towards the end of when interest rates are great, I have a 4.875% and if I would’ve started earlier or maybe if I should have waited and held all my cash on hand to even have a larger cash reserve to contribute to something more like cash flowing or higher appreciation just because I feel like I kind of overpaid. I think I went 20K over and it’s technically a town home, so it’s not a single family, it’s not going to appreciate as much and there’s so many rules with the HOA, so it’s more a little bit both. I would’ve ideally liked a situation where roommates covering my entire mortgage, not just some of it.
And also the area, it’s a very good school district is what I found, but that’s not kind of what I’m looking for. I don’t have kids, I don’t need to be in a good school district. Instead I can buy the beat up house on the Missouri side and be able to put more money into it and get a higher return or build even more equity for that home.

Scott:
Your mortgage payment’s? $1,630, right?

Zoe:
It’s $1,630, my HOA is 10 and I pay an additional $46 to even it out to 1800 a month.

Scott:
Interesting. And what would the rents be if you moved out?

Zoe:
It really, I think depends. If I were to rent out each room individually versus the whole house, I think I would definitely get more if I were to rent out each room by itself versus into an entire family. I think market rents are 1,900 to 2,100 and I have three bedrooms and two nonconforming. So other goals to finish the basement. But there is a rule in the county that I live in that you can’t have more than four unrelated persons living inside a home. So there’s that to be aware of as well.

Scott:
What do you think you’ll get for rent by the room?

Zoe:
If I were to move out, my room is the largest, it’s the master and I have a master bath and it’s furnished, so I’m thinking I could probably get 1100 to 1200 a month for.

Scott:
So you bring in 2,500 without even finishing the basement.

Zoe:
Actually one of my roommates does live in the basement. She has cats, so she’s nervous that they’re going to scratch up the carpet in the upstairs bedroom. So I have a guest bed. So it’s not being used.

Scott:
You have, in my opinion, a very satisfactory investment. I don’t know if it’s going to be a home run or not. A lot of folks are scared. Everyone’s scared about their first purchase in 2022. You’ve got a good interest rate. Not the fantastic one we had two years ago, but a good one, not one that’s as high as currently. You have the ability to cash flow this. If you were to move out in a substantial way without having to finish the basement, you have more opportunity if you do finish the basement and you are sitting real pretty, in my opinion, in this particular investment you bought with a position of financial strength, I would not be fretting over this decision. If you keep making mistakes like this, you’re going to become a millionaire pretty quick.

Zoe:
In hindsight, I wish I would’ve bought earlier. I wanted to get my credit score to 740 to get the lowest rate, but because I waited for the six months that it took to get to that 740 mark, I lost out on a 2% interest rate. So in hindsight, I wish I would’ve started looking earlier even though I had an apartment lease and I would’ve had to break it, but it would’ve been worth it.

Scott:
I think we all wish we bought more earlier.

Zoe:
Yeah.

Mindy:
Yes. But you are learning by doing. Scott says maybe this isn’t a home run. I think this is at least a double and probably a triple. This is a good investment and yes, your interest rate is higher than 2%. Well so is mine and I work here. Don’t beat yourself up about this, but you are doing so you’re learning how to be a landlord. You are learning how to be a property owner and then now you know what you want and what you don’t want. Oh, you know what? I wish I would’ve done this. So the next time do that. When did you buy this property?

Zoe:
Around my birthday. So I think May 12th.

Mindy:
Of this year?

Zoe:
Yeah.

Mindy:
Okay. So you can start looking again for a property when the new year turns, maybe in February

Zoe:
Counting down days.

Mindy:
Start looking and see what you can find. You wanted a duplex and you bought a townhouse in an HOA. So don’t look for townhouses in HOAs, look for properties that are duplexes and just wait for that to pop up or keep an eye on single family homes that have the ability to finish off the basement and then you can rent it out to four unrelated people and make so much money that you are living for free and also making money as you are living there for free. I mean you’re doing a really great job on this property and you, you’re too hard on yourself. Be nice to Zoe.

Scott:
Yeah. So Zoe, a couple more questions about this property. You got three bedrooms upstairs and one of your roommates uses the basement for their cats is what I’m hearing.

Zoe:
Well there’s two nonconforming bedrooms in the basement and so she has both of those rooms. One’s for her cats and one’s for her. They’re nonconforming because they don’t have the egress window.

Scott:
How much does it cost to put an egress window into one of those bedrooms?

Zoe:
3K to 5k.

Scott:
3K to 5k. And how much more rent will you get or how much rent would you get if you rented out four rooms, the three upstairs and the two at the bottom as a suite with one conforming bedroom?

Zoe:
I think that’s a personal preference that I don’t want another roommate. I’m happy with two and I think-

Scott:
You’re going to move in February.

Mindy:
She’s going to move in May because she has to honor her one year owner occupancy agreement.

Scott:
You’re going to move in May. So forget about your personal preference right now and treat this as a coldblooded mathematical house ROI decision. You’re gone in May, you have three bedrooms upstairs and you have a suite downstairs. You can’t have five bedrooms because there’s no point in having five bedrooms to rent by the room because the statute prevents you from having more than four unrelated people on the lease. So my thoughts are one bedroom, one, two, and three upstairs, get rented, basement gets finished and becomes a suite with one conforming bedroom on there. How much would you get for rent in that scenario? Does that sound possible or practical given the setup at your house?

Zoe:
Well the two full bathrooms are all on the top floor. So one’s connected to the master bedroom and one is just a hall. So if there were three roommates outside the master, they would all share one bathroom. Essentially there is a half bath, but as long as there’s three roommates who are okay with sharing one full bath, then it would be possible. I think I could probably get 2,800 and just charge a little more for the larger bedrooms to make it even.

Scott:
2,800 for those three units plus more for the master.

Zoe:
Yeah.

Scott:
So that would give you 3,900.

Zoe:
I would say 2,800 in total with the master and then having to reduce the rents for the other three tenants just because they’re all sharing a bathroom.

Scott:
Okay, that’s close. I don’t know how much of a cost to finish the basement and put in that it may not be worth it in that scenario.

Zoe:
I think it’s 15K to 20K I think it was what I was quoted already looked into.

Scott:
Nice.

Mindy:
Are there any rough ins in the basement to make a bathroom down there?

Zoe:
So it is possible to put a bathroom in the basement, but it would be a 10K to 15K investment. It’s a small basement, so there’s not much room to work with. There’s already two bedrooms in there and then just the area where the laundry is. And so there’s not really practical layout, so I don’t think I would put a bathroom down there.

Mindy:
So then in your future properties. Keep that in mind, how can I expand this property so that I can get three roommates in here for one year and then I can move out into my next property and expand that one to get three roommates in for one year and then you’ve maximizing the four roommates in each one to maximize the amount of money that you’re making on each property. And then when you decide that you don’t want to have roommates anymore, you can find your last property and that’ll be whatever you want.

Scott:
Okay, so at the highest level I’m seeing you made a solid investment here from position of financial strength. I’m sure you have some things you would’ve changed about it, but again, this is not a disaster. This isn’t even a mistake. This is going to be I think a reasonable investment for you based on the numbers you shared with us. After you move out, you’re going to have 2,500 give or take in income on 1700 in expenses if you can charge the utilities through to your tenants. So that’s really good. I like that. I would invest that personally. So that sounds pretty good.

Zoe:
I was told that I can’t do a duplex situation unless I have 25% equity in my current home. So if I were to like come May, I wanted to buy a duplex, I would have to have 25%.

Scott:
Who told you this?

Zoe:
A lender.

Scott:
How many lenders have you talked to?

Zoe:
Four.

Scott:
And they all said the same thing.

Zoe:
I really only asked two of them and they said, I believe only one of them said about the 25% if I wanted to do an FHA with 3.5% down in May. And so with my current home I only put 5% down.

Scott:
And what type of loan product did you use?

Zoe:
I used conventional.

Scott:
Okay, so FHA is going to require you to put 25% down in May.

Zoe:
Yeah.

Scott:
That doesn’t smell right to me.

Zoe:
Well like 25% equity stake in my current home, I have to have a 25% equity position in my current home in order to use an FHA loan to purchase a duplex in May.

Scott:
Interesting. Mindy, have you heard of this?

Mindy:
I haven’t, but I think this is a research opportunity right now. Lenders are real open with their time, so I would call up your favorite lender and ask them to explain this to you. Why do I need 25% down? They could be an FHA rule, it could be what this lender specifically wants if only one of them is telling you this. But that is an interesting question. Also, if there’s a lender listening, if you want to reach out to me, [email protected] and explain what’s going on, or we can go over to the Facebook group and at facebook.com/groups/bpmoney and we can chat about this there as well.

Scott:
I am skeptical that that will be the case after you talk to more lenders and we get some feedback. But let’s presume that lender is correct and we have to use 25% down. How much does a duplex in your area cost you?

Zoe:
Oh, I meant like 25% in my current home. So if I wanted to put 3.5% down duplex, I could just need a 25% equity and I only have like 5%.

Scott:
But our other option is for you to put 25% down on the next property and avoid that entirely.

Zoe:
I would say like it’s 3.50, size of a duplex.

Scott:
So that’d be like $75,000 down. So 80,000, am I doing that right? 75,000 to a 100,000. You are saving $4,000 or $5,000 a month now that we have your side hustle in place between all of that. So 5,000 times six is another $30,000. You’re not going to be far away from being able to put 25% down in May. So you’re looking at August to be able to do that just based on the way your cash position is. You could do it sooner if you’re willing to take some of your investments out. So you have opportunities here if you would like to, I mean you have a decision at the strategic level for asset allocation first to make, do I want to be in real estate this heavy or do I want to go into stocks in something more passive?
But if you chose to do real estate, you would have the option to do this with a traditional down payment relatively soon within the next year. So then that’s a luxury of the fact that you have such a strong personal financial position and such a strong savings rate. So you have really good options here is kind of what we’re highlighting and you’ll either be able to do it with another low down payment loan or with a traditional down payment.

Mindy:
I would talk to lenders about all of your options. You are bringing up the FHA loan several times. Is that because it has such a low down payment? I would talk to them about other options that are available to you. I don’t know if there are any USDA locations near where you’re at, but the USDA loan is up to 0% down or down to 0% down. I don’t know how you say that right. That’s the only 0% down loan that I know of that isn’t the VA loan.
The FHA loan is an consumable loan. So somebody who got an FHA loan in that 2% and then needs to sell. You could assume that loan. There’s a lot of ins and outs with regards to that. If anybody is looking to assume an FHA loan, definitely talk to a lender. I need to talk to a lender about this as well so that we can get the information out there correct. But the FHA product is an consumable loan. You do have to bring money to closing to cover the delta between what they had left on their loan and the amount that you’re paying for it. That’s an option.

Scott:
I really like what Mindy’s saying there as an option for you. We’ve had other folks, and I don’t want to get people excited about assuming mortgages in a general sense because there’s risks and creativity things and all that other stuff that you really need to be smart with. But you Zoe are in a strong financial position, save a lot of money, have a good investment property, currently have plenty of cash and are piling up savings on a monthly basis.
You are in position where if you wanted to researching how to assume mortgages for folks and making your next house hack one where you just take over somebody else’s mortgage that maybe that was in that low low rate may be a great option for you to think about if you can be opportunistic in the next year. So I really like that a lot, but I don’t want to get other people too excited about that. If you have don’t have a strong financial position, then you’re just assuming hundreds of thousands of dollars more in risk that you maybe shouldn’t from that, but it’s a good option for you potentially.
Let’s talk about the other income streams for the last few minutes here. Walk us through your part-time hustle with the fund and then your photography side hustle.

Zoe:
My photography side hustle is literally like nonexistent. I stopped doing it earlier this year just because it’s slowly become more work and less more of a passion. I just started it because I wanted to capture family memories and occasionally a friend would ask me to take their photos and that’s what I did. But I’m not pursuing it as a legit side hustle, if you will. As far as the real estate syndication, actually I do enjoy that. There is some difficult parts to doing some of the property management, but it’s been very worthwhile of my time and that’s something I definitely want to pursue if my W2 will allow it.

Scott:
You made $2,500 last month from this activity, right?

Zoe:
It’s kind of like a paid position hourly. So that 2,500 was from September 15th to October 31st. That was the check for that. So normally it is around 1600 a month.

Scott:
Great. And what is the hourly rate?

Zoe:
17.

Scott:
And what do you earn at your day job?

Zoe:
I don’t know what the hourly is.

Scott:
What’s the annual

Zoe:
85.

Scott:
Okay, so your hourly rate at your day job is 42.50. You can just divide the annual by 2000 and that will give you that but that’s assuming you’re working 40 hours so that there’s not a great arbitrage on this, but you’re probably learning a good skill while you’re doing this side hustle. So I like it a lot but I do think that there would be opportunity over time to figure out how do I try to make sure that if I’m going to earn side hustle income dollars, that it’s around the same rate as my W2.

Zoe:
And it’s more of an internship position. So I just started and we’ve already had discussions of increasing my, increasing my scope of responsibilities. So that’s definitely something I’m very aware of and we’ll keep in mind moving forward.

Mindy:
With regards to that. I’m going to say that everybody and their mother wants to invest in syndications right now and you working for a syndication gives you so much educational opportunity while they are paying you to learn about syndications that I really hate to disagree with Scott, but I think it’s just fine to make less than what you’re making at your W2 because this is an educational experience in a field that you want to learn more about. If you were working at the gas station for $17 an hour, I would agree with Scott, but you are learning more about real estate and how to find deals, how to analyze deals, how to do property management, how to do a lot of different things. I think it’s a great use of your time, especially given your age and the fact that you are not married, you don’t have kids, you have the time right now to put into learning about this investment strategy, which you want to do anyway so you’re getting paid to learn. I think that’s great.

Zoe:
And to me it’s not like a job, it’s more of an interest I’m pursuing. So that kind of makes it worthwhile. I think when I was thinking of the pay, I did look at market rates and that’s kind of aligns with the market rate here in Kansas City and so there’s no really no leverage to give or negotiation. So pretty content with it and it will increase.

Mindy:
Yeah, I think that’s great. The last thing you wanted to talk about was reducing taxes. I don’t have a lot of really helpful tips for reducing taxes contributing to your 401k as much as possible.

Zoe:
Since I submitted those numbers, I did talk to a CPA and just to see how can I reduce my taxable income because my side hustle income is pretax. I’m like I’m going to have a fat tax bill at the end of the year if I don’t plan and budget for owing taxes. And that’s one of the questions that I’ve been thinking about is how do I track my expenses? I’ve just taken pictures of every receipt expense that I’ve had and is there a more efficient way of doing it? If there’s the app, I know you guys are really great at recommending finance tools. I’ve utilized like Mint and I tried, you need a budget as well. I prefer using my own spreadsheet for budgeting, but just trying to figure out the best way to consolidate all of my expenses and have a clear idea of where I’m going to land at the end of the year.

Scott:
The easiest way to do it would be to open up another bank account for that business. So just, hey, I am an intern here for this and I’m going to just put everything on the debit card for that business and then it’s all in that one bank account. You don’t have to worry about it. It’ll be super clean that way. So that would be my recommendation is the easy button to resolve that problem.

Mindy:
I think that’s great. Either a bank account or a credit card depending on what sort of expenses you have for there. I like the credit card to get miles, but if the debit card works better for you, then that’s one that I would do. I actually write on my credit card, I do have a credit card for my house investment purchases and I just write the address right on the card so that I don’t forget to use that card for just that one thing.

Scott:
I got three credit cards in my pocket or three cards. One is my personal one. One is BiggerPockets credit card when you purchase things for the company and third is my rental property debit card, which I just spent out of the bank account. I could get a credit card for the company but that would just create another complication point for me. So I do it on a debit card.

Zoe:
I do have five credit cards and each one has its own purpose. So the six too much or I actually thought about getting rid of one or two just because I do try to keep track of all five of them, but sometimes I think it might be easier to reduce the number of credit cards I have, but I kind of went credit card crazy at one point and trying to see if it’s a good idea to reduce that.

Mindy:
I would say make sure that you keep the first credit card that you ever opened open forever. It is your length of credit history and the credit giving institutions really care about that. Every other card you can look at and see is this really giving me the benefit that I thought it was when I first opened it. I have a bunch of different credit cards. One, I have for hotels, one I have, it’s the Costco card and I get cash back when I shop at Costco and cash back, back on gas one I have for airlines. So there’s a purpose for each one of them, but if they also all have zero annual fees, if there were annual fees, I would have a different outlook on them.

Zoe:
So you would not recommend getting the Chase Sapphire or?

Mindy:
It depends on how much you travel. I had the Sapphire and then we got rid of it and because of the annual fee and I think that my husband and I should have had a bigger conversation about that instead of just saying, okay, because it’s a $300 annual fee, but then you get $300 back or a $400 annual fee and you get $300 in travel benefits back every year.

Scott:
I think the fee is $95 for the preferred card and that’s the one I have. So I keep it simple with that. But I think the reserve with 495, you got to use those benefits if you’re going to pay that much.

Mindy:
Exactly, yeah, it’s not worth it if you’re not going to use the benefits.

Scott:
I want to just kind of frame a couple of things as we get ready to wrap up here. You are doing great. You’re house hacking, you make a great income. You said you’re 26.

Zoe:
24.

Scott:
24. Yeah, you’re completely crushing it. So you got a hundred thousand dollars net worth. Not even counting your real estate. That’s 75,000 net worth.

Zoe:
Got like 5K in equity in my house now.

Scott:
But great, you’re paying off a mortgage and you’re living for close to free, so you’re absolutely crushing it with this. You have not made a mistake with the rental property, even if you had the worst timing in the world and prices do come down. If that does happen, you still made a smart investment from a position of financial strength if you hold long enough and operate well based on the numbers you provided. So you’ve done fine there. What you’re missing is two things here. You’re missing a structure for how to get rich over the next 5 to 10 years. First, you need to think about the end in mind. What does that portfolio look like? I like what you’re doing right now. You have a strong cash position and most of your wealth, or a big percentage of it is outside of those retirement accounts.
If you’re in 10 years, all that wealth is trapped in retirement accounts and home equity. You’re not financially free. You have a big net worth on paper, but no actual freedom. If you keep doing what you’re doing at the highest level, you’re going to be have freedom and the ability to use those assets to live a life that you want. So keep doing that, but put together an investment philosophy that enables you to get there, whether it’s index funds, real estate or something else. So that’s a formula piece. You’re missing the formula that you’ve committed to mentally to build wealth over the long run. And your big buckets with your massive sets of asset allocation. That’s some homework for you to do. The other part is the pot shots. You have different side hustles. You have your real estate, you have these things.
What I’d recommend there is that you spend 90 days and focus on one of them at a time. I think we’ve ruled out real estate for the next 90 days. It doesn’t sound like there’s a lot of value to be added by finishing the basement or doing additional work with your property. So I like the fact that you’re doing this side hustle for this indication. I think that’s perfect. Go all in on that. Make sure that whatever you’re trying to get out of this job, this internship actually comes to fruition or begin thinking about switching it some point in the new year, right? Some sort of education, some sort of increased earning power, some sort of opportunity should materialize from this bet that you’re making with a significant chunk of your time. And if you do this 10 times over two and a half years, that’s 10 quarters.
10 90 days chunks, something will materialize for you. So opportunities will blossom, right? One of those 90 days could be buying your next property. One of them could be the next stage of the… you could just take the internship for three quarters because a new opportunity roll each time you could bring back your photography business. But if you do that 10 times and each quarter set out intentionally to make use of this extra time, you’re going to hit a winner at some point that’s going to produce a couple hundred or maybe even a thousand dollars a month in cash flow or produce a chance at significant wealth. So I like doing that, but think about it as a formula and build a system or architect a program that’s going to automatically get you wealthy with where you deposit your cash, and then that is actually scientific about taking these shots with your opportunities. Is that helpful framing?

Zoe:
Yes. I think that kind of answers some of my biggest questions that I have to take that initiative to decide what I want, and there’s not one fits all kind of a solution. Before this, I thought I had a good idea of what I wanted to invest in and just kind of reaffirming, just put everything in index funds. But I do want some short term gains. I don’t want to wait three to five years to see the money. So I think that’s my biggest hurdle to overcome is that it’s not a quick solution. It’s going to take some time.

Scott:
I agree. You could be a millionaire in three to five years if you play your cards right and have a little bit of luck on that and make a couple of big plays, probably more realistically, seven to 10 years at your current pace, given how early you are in your career and the likely future income potentially you have. I would sit back and I would say, what do I want that million dollar portfolio to look like when I get there? That’s the freedom point. It’s going to be a grind until you get there. So grind it out and be ready to do that, but don’t grind your way towards a portfolio that’s not going to actually get you what you want in the end state.
Make sure that that’s designed intentionally right now. So you’re backing into that and you’re rounding that out and it’s the three properties in the same corner that are really easy to manage in all of the same thing. Instead of a property in Kansas City, a property in Denver and a property in Seattle, whatever. It’s an intentional portfolio that is exactly what you want. Make sure you’re backing into that and you’re going to be fine. You just need to do that work and your fundamentals are so strong, it’ll probably carry you to a great outcome somewhere in that timeframe, in my opinion. Hopefully that’s good news.

Zoe:
Hopefully. Yeah, we’ll see.

Mindy:
The only thing that I would add is, Scott is saying that real estate isn’t the right thing to focus on in the next 90 days. And I agree with that to a certain extent, but I would like to see you talk to a lender now during their very slow time to see what are the options that are there. And one of the guys that works at BiggerPockets, Austin had a really interesting journey to buying his house. And he would talk to a lender and they would give him a little bit of information and then he would talk to a different lender and they’d give him another little snippet of something and he was able to piece things together and then he could start asking questions and they’re like, oh yeah, there’s this too.
So ask all the questions you can think of to ask what are some plans? What are some loan products that I can get into as a young person, as a second time home buyer, as a landlord, as all these different options. Maybe there’s something available that they don’t think that you would be interested in until you share with them what your plans are. Oh, there’s this plan, there’s this product, there’s this opportunity. Sometimes they’re just not aware of what your intentions are. So right now they have a lot of time to talk, so call them up and have a big chat.

Zoe:
Yeah, definitely.

Mindy:
Okay, well, Zoe, this was a lot of fun and I really appreciate your time today. Thank you so much for coming on this show, and we’ll talk to you soon.

Zoe:
Thanks so much for having me. Take care.

Mindy:
All right, Scott, that was Zoe. And that was, I think some very great advice for her. I think some very great advice for a lot of people listening, we are in a squidgy market and it’s going to go up, it’s going to go down, it’s going to go down some more. It’s going to go down some more and then it’ll go up a little bit and then it might go down again. And for those of you who are in it for the long haul, just buckle up and enjoy the ride. And if your investment philosophy says, I’m going to keep buying every single week, then buy every single week or month or quarter or whatever. And if your investment philosophy says, I’m going to buy when the stock reaches this price, then buy then, but have an investment philosophy and be investing for specific reasons, not on a whim.

Scott:
And after the recording was over, we asked, hey, was this helpful? We always do that because folks always say one thing on the recording and then you know, always went with the opinion. And she said, yes, of course. But what she wanted really was specific, what exactly should I do in this situation? And we’re really not supposed to do that, but I’m the CEO, so I’m going to go ahead and break that rule. And I’m going to say, what I did is my situation mirrored Zoe’s almost in an eerie fashion, right? She’s 24. When I was 24, I was making less than her, but I had a house hack. I had around that same level of savings. I had lost money by investing in stocks that I had picked, a Chinese fruit juice company that reported their financials inappropriately, all those kinds of things.
It was a very similar set of circumstances there. And what I did is I tried to maintain that cash position of $25,000, $30,000. I took my 401K match, I maxed out my Roth, I dumped everything else into after tax brokerage savings, and I serial house hacked for a few years. And then I took pot shots every 90 days on various items that would advance my career, like getting my agent’s license, like buying a property.
I started, I floated the idea at least of a winter tire rentals business, which would be a horrible plan to a local mastermind group. But I did exactly what I told Zoe there. And my portfolio today is these five rental properties, a large portfolio that is essentially all index funds, Vanguard index funds, and then my position here at BiggerPockets. That’s it. Like that’s the portfolio. And it’s that simple from that perspective.
And you just every week get a little better at your job or a little better with the side hustles or move that next project forward. And you let that compound for eight years and it’s this feeling of monotony or grind, and you look up every couple of months, you’re like, whoa, I came a long way with that by waking up every day and going a little bit further forward. So there’s nothing to be afraid of. It’s a long term investment. It could start with a plan about where you want your portfolio to be in a future state. Work the plan, make the formula work for you in a very simple way, and then allow yourself the opportunity to get lucky by taking the chances that you think are roll around, but don’t say yes to everything. Say yes to one thing at a time and move forward with it.
And that’s what you do in order to do this. And I think she’s got that all, she’s so strong in every part of her financial position, in her framework. She just hasn’t completely solidified it into a crystal clear plan yet. And so I think that’s giving her a lack of confidence in a couple of things. She’s making very minor mistakes that are almost irrelevant in the scheme of the overall story of her personal finance journey when she looks back in 10 years. But she’s perseverating over them because she just hasn’t quite solidified all that into one cohesive philosophy and framework. She’s very close though, and I will not be shocked if she’s not a millionaire within seven years, let’s call it.

Mindy:
I agree 100%. I will be shocked if she is not a millionaire in 7 to 10 years, depending on what the stock market does. But yeah, I think you need a plan. I think anybody listening needs a plan and the investment philosophy document will be in the show notes for this episode. The link to it will be in the show notes for this episode. So if you are struggling with your investment philosophy, Scott’s document can help you out.
All right. That wraps up this episode of the BiggerPockets Money Podcast. Thank you for listening. We really appreciate you. He is Scott Trench, and I am Mindy Jensen saying, got to go Buffalo.

Dave:
Hey, what’s going on, everyone? Welcome to On The Market. I’m your host, Dave Meyer. I hope you all had a great Thanksgiving, and had the opportunity to spend some time with friends and family, hopefully eat some amazing food, and take some time to reflect on all the things that all of us have to be grateful for. I have so many things that I am thankful for, friends, family, getting to work at BiggerPockets. But one of the things that came up this year for me when I was thinking about the things I am thankful for is all of you. We started On The Market just seven months ago. We’ve already surpassed 50 episodes.
We have more than a million downloads already, and it’s all because of all of you. So, thank you all so much for being a part of our community, for listening, for sharing the episodes, for writing us great reviews. We greatly appreciate everything that you do to be a part of On the Market community. Today, we have a great episode for you. It’s just going to be me today. We gave the rest of the panel the holidays off, but I have some really important updates about the two biggest topics of 2022, which is inflation and interest rates. If you’ve been paying attention over the last couple of weeks, some big news has come out about both inflation and interest rates.
I actually think there’s a lot of evidence that inflation has peaked, which I’m going to talk a lot about. We’ve seen mortgage rates go down in the last few weeks, then they’re back up. They’re all over the place, and we’ve seen the Fed come out with some additional guidance on what they’re thinking for the next couple of years. Get ready for a great episode. I do have one suggestion for you if you are going to listen to this episode, and that is to take this opportunity on the day after Thanksgiving to make what is possibly the greatest sandwich of the entire year.
If you follow me on Instagram, my handle is called the data deli. the reason I do that is because two things I really love are data and sandwiches. I love the day after Thanksgiving, which is the day this episode comes out, because it gives you the only opportunity of the year to make the Thanksgiving leftover sandwich, which is basically you take everything you got in your fridge from the day before, and stick it on some bread. I like going and getting a huge Italian loaf of bread, throw in some Turkey. You got stuffing, mashed potatoes.
You got carrots. Whatever you got, throw it on there. Drizzle some grazing on it. Have yourself a sandwich. Sit down and listen to this episode of On The Market about inflation and interest rates, which we’ll get to in just a second. But first, we’re going to take a quick break.
So first things first, back on November 10th, we got new inflation data. Inflation data comes out once per month in terms of the CPI at least. On November 10th, we got data for October. The news was very, very encouraging. This is one of the best, most encouraging inflation reports that we’ve seen in quite a while. The top line consumer price index, which is measured on a year over year basis fell from 8.2%. That’s what it was back in September to 7.7% in October. Now, make no mistake about it. 7.7% inflation is still incredibly unacceptably high. It is way, way, way too high.
Remember, the target for the Fed is about 2%, so 7.7% is nuts. But this is really encouraging, because it’s the lowest it’s been since January of 2022, and was a pretty significant beat for what people were expecting. A lot of experts were thinking that inflation would go down just a little bit, and having it go down from 8.2% to 7.7% in just one month is very, very encouraging. The other thing I love to see is that the core CPI, which is basically a subsection of the consumer price index, but it removes food prices and energy prices like gasoline and electricity, because it’s really volatile.
Those go up and down a lot, and so just to understand what core prices are doing, they have this number called the Core CPI. That is really, I think, what the Fed cares the most about. The Core CPI also fell. It had gone up in September, and it fell in October from 6.6% to 6.3%, so both very encouraging things. But just remember, I just want to be very clear that 7.7 is still very, very unacceptably high. No one should be cheering about 7.7% inflation, but we can be cheering the fact that inflation seems to be on a downward trend, and it is quite possible that the worst of inflation is behind us.
I’m going to take a few minutes now just to explain that, because I think a lot of people are probably wondering what am I basing that off of. There’s three things, but the biggest thing is just math. I’m not projecting any policy changes, that anything in the political climate or economic climate is really even going to change. I’m just going to explain the math behind how the consumer price index is calculated, and why it is probably going to go down in 2023. First, let’s talk about the first two things. I said there are three reasons why I think inflation has peaked and is going to start to come down.
The first is, of course, interest rate hikes. Back in March, we saw the Federal Reserve start to raise interest rates. They’ve been doing it really, really rapidly, and it went from a federal funds rate, which is what the Federal Reserve controls. The federal funds rate went from 0% up to 4% where it is now. That is one of the fastest rate hikes in history, but the truth is that rate hikes, which are designed to help curb inflation, take a little bit of time to ripple through the economy. The whole idea about raising interest rates to cool inflation is that it slows down demand.
When money is cheap, when interest rates are low, people want to buy, right? If you can borrow money at almost no interest, it makes a lot of sense to buy a new car that you’re financing, or to buy a house, or if you’re a business to expand and hire people, and acquire a new company, whatever it is. There’s a lot of demand when interest rates are low. When interest rates go up, that dissuades people from buying things, and that lowers demand, but demand doesn’t just turn off overnight. It’s not like all of a sudden, “Oh, the Fed raises interest rates 75 basis points. We’re no longer spending money.”
That takes time, and it usually takes at least six months or even longer for the impact of interest rate hikes to hit the demand side of the economy, and cool inflation. Now, we are probably now, because rates started rising back in March, just starting to see the first effects of the first rate hikes. Now going forward, we’re going to continue to see the impact of more and more rate hikes. They’re still raising rates. They raised rates two weeks ago in the beginning of November. The impact of that most recent rate hike is not going to be felt until probably the second quarter of 2023.
So, we should expect demand to continue to taper off in a lot of areas, particularly for leveraged assets, so things that you use a loan to buy is a leveraged asset like real estate or a car or for businesses if they’re going to take on a small business loan to expand or whatever. Demand for those leveraged assets should continue to decline for the foreseeable future as long as the Fed keeps raising interest rate. When there’s less demand, that cools inflation. We’re also starting to see the effect of these rate hikes in the labor market. This is a really important thing, because having really tight labor market like we have right now is one of the core drivers of inflation.
The Fed has stated that they basically want the unemployment rate to go up. I know that sounds terrible, because no one really wants people to lose their jobs, but the Fed believes economically that it is important. It is so important to lower inflation that they are willing to accept job losses, and they are going to keep pushing the boundary of how much they can raise rates until the labor market starts to crack, and we see significant job losses. They’ll tolerate a bit of job losses, but probably not a lot. The data that we’ve seen so far is that the labor market is still really, really strong.
I know there have been a lot of media headlines about some high-profile layoffs. Companies like Meta, and Amazon, Twitter, Stripe, really big tech companies, banks, are laying off a lot of people. Those are big high-profile things,` but in the aggregate in the country, the labor market is still really strong. The last numbers that came out showed that there is still 1.9 jobs available for everyone who is looking for a job. The labor market still has a long way to go, but the sign that we’re starting to see high profile layoffs and specifically in the tech industry might be a sign of things to come.
That could mean that we’re going to see more layoffs tick up in the unemployment rate, probably not anytime in the next one or two months, but maybe in 2023, and that could further cool inflation. That’s the first reason why I think inflation has peaked is that the impact of interest rate hikes have only just started to be felt, and it’s probably going to keep intensifying the impact of those interest rate hikes over the next at least six months. The second reason has to do with supply shock. Now, inflation goes up for a few reasons, but it’s often described as too much money chasing too few goods.
What the Fed is doing in raising interest rates is trying to address the too much money part. By lowering demand, they’re pulling money out of the system, and that will help inflation, but there’s a whole other side of this equation, which is the supply side, right? Too much money chasing too few goods. A big part of why inflation has been so high over the last year is that too few goods part, right? Everyone’s experienced this, right? We’ve had back orders on everything from garage doors to appliances to just regular everyday items like baby formula or all sorts of different things.
A lot of this is really nothing to do with America. Yes, we had shut downs in the United States that caused lags in manufacturing, but so much of American goods are manufactured overseas in places like China, which has continued to have a no-COVID policy, and they’ve continued with lockdowns well beyond much, much longer than the United States has. That means that China and their manufacturing, which supplies a lot of the United States, has continued to have supply side shock, which means we have fewer goods in the U.S. than we would want that would meet demand. That has continued, but is tapering off.
We’re seeing the cost of goods to ship stuff from China to the U.S. has gone down. We’re seeing a lot more output from China so we’re going to see an easing of the supply side shocks. The second thing about supply side shocks is the Russian invasion of Ukraine created havoc, particularly on the energy and food markets. Ukraine and Russia are huge exporters of wheat in particular and a lot of other food products. With the sanctions that the U.S. and western country and NATO basically have put on to Russia, we no longer have access to those large markets, and so that creates more supply shock.
Just at the time back in February when we were starting to see some supply shock start to ease, then Russia invaded Ukraine. Now, we’re seeing huge supply issues both in food and energy, which is a big reason why the CPI spiked up so much in the second quarter, third quarter of 2022. Those are not going away right away, but the world and the economy eventually adjusts to that. The other manufacturers, other producers start to produce more when there’s a supply shock. Now that the Russian invasion is nine months old, we’re starting to see the world react. Other producers are producing more, and so across the board supply shock is starting to come down.
Those are the first two reasons why I think inflation has peaked. One is, again, the Fed raising interest rates, the effects are starting to be felt. The second is that supply side shocks are starting to come down. Now, the third and perhaps most important reason is because of what is known as the base effect. This is just basically math, right? It’s regardless of policy, geopolitical situations like what’s going on in Russia and China. This doesn’t even factor in any of that. It’s just basically the way that the consumer price index is measured, and how the numbers work out.
Let me just explain this quickly, because this is super important and, I think, is perhaps the most compelling of any of the reasons why I think inflation has peaked. When we talk about inflation, when I say that inflation was at 7.7%, what I’m really saying is that inflation went up 7.7% year over year. Year over year basically just means comparing the same month for two years. What happened is in October of 2022, the prices in the United States as measured by the consumer price index were higher by 7.7% than they were the previous year in October 2021. They went up 7.7 over the course of a year.
Because of that, it doesn’t just matter what inflation is right now, right? That’s one part of the equation. What’s inflation in October 2022? It also matters what inflation was a year ago. What happened in October of 2021? In 2021, inflation started to tick up, and it was starting to go up, then it started to go crazy. Prices really started to get insane towards the second half of 2021. So for most of 2022, so most of this year, when we were comparing this year to last year from inflation, we were comparing really high numbers for 2022 to relatively low numbers in 2021.
They weren’t super low. They were well above what they should be, but they were relatively lower. That makes the gap, the difference really high. Now as we’ve gotten into later 2022, we’re comparing high numbers in October of 2022 to numbers in October of 2021 that were already high. That makes the comparison relatively lower. Hopefully that makes sense to you guys. Basically, we were comparing a high number to a low number. Now, we’re comparing a high number to a high number, and so the difference between the two numbers, which is how we measure inflation, is going down. It’s important to note that what I’m not saying, I am not saying that prices are going to go down, and that’s not actually what we’re expecting.
It’s not what you want. Inflation is not a good thing for an economy. You don’t want prices across the board to go down. If it goes down for housing, or it goes down for cars in an individual sector of the economy, that’s fine, but you don’t want widespread deflation. We could talk about that in another time. The Fed actually wants 2% inflation. That’s what we’re trying to get to is 2% year over year inflation. What I’m saying is that if we continue at the pace that we are at right now, year over year inflation is going to keep going down because we’re already at these high numbers, and the rate of inflation, of price increases is not going up.
I actually did the math to figure out what this looks like over the next year or so. Let me explain to you why I believe so strongly that inflation has peaked is because the math really checks out. Over the last month, just this past month, inflation, prices went up. Not year over year, I’m talking about month over month. Now, they went up 0.4%. Just in a month from September to October, prices in the CPI went up 0.4%, right? If we continue at that monthly trajectory, the CPI, the year over year CPI will get down to about 4.9% by this time next year.
I want to be clear about what I’m saying here. If we continue at the same rate of price increases as we are doing right now, we will be at a 4.8 inflation rate a year from now. Remember, we’re at 7.7% right now. As long as we stay even, we’re going down to 4.8, 4.9%. That is why I think it’s going to decline, because it would actually take inflation to accelerate on a monthly basis for inflation on a year over year basis to go up above where we are right now. Now, that .4% month over month inflation that I’m talking about is high. Over the last couple of months, we’ve actually averaged closer to 0.3%.
I did the math for that too. If we averaged 0.3% like we have for the last quarter, if we average that going forward for a year, a year from now, we’ll have inflation of 3.66%. That is still higher than the Fed’s target of about two to 3%, but way, way, way better than where we are today. Now, if inflation actually starts to fall, which is what people are expecting due to the supply side fixes and the interest rate hikes that I was just talking about, if they fall 2.2%, which is not that crazy, we’re at 0.4% right now. If it goes down to 0.2%, then year over year inflation will get down to 2.4% next year.
That’s right in the Fed’s target rate. All that really needs to happen is if we stay at current inflation rates, or go slightly lower than we are right now, we should expect that inflation ends somewhere between the 2% to 4.5% by the end of next year. Now, that’s not saying necessarily we’re going to get to the Fed’s target rate. In fact, we would have to see inflation month over month go to about 0.15% to get to the Fed’s target rate next year. But over the course of 2023, we should expect inflation to go down. That is just simple math. It has nothing to do with anything else.
Just to summarize why I think inflation is going down or has peaked is, one, it has actually peaked because it hit its highest point year over year back in June where it was about 9%. Now, it’s at 7.7%, and the math and all of the major indicators are showing that it’s going to continue to go down. That’s our inflation update. But next, let’s move on to mortgage rates and interest rates, because what everyone wants to know is, “Are mortgage rates going up or down?” We all know that the housing market is in a correction. The reason the housing market is in a correction is because mortgage rates continue to skyrocket. That lowers demand. That lowers affordability, and that sends housing prices down.
Now, I personally believe that this housing correction will last as long as mortgage rates continue to go up or stay above 6% or 7%. If they start to come back down, that will probably end the housing correction. That’s just my opinion. But the question is, “What is going to happen to mortgage rates next year?” Now ,the prevailing logic, the prevailing belief is that mortgage rates are going to go up, because interest rates for the Fed are going up. We’ve seen the Fed started raising rates in March, and since then, interest rates have more than doubled. There are 3.1% was the average 30-year fixed rate loan back in January.
Now, we’re at some time… I’m recording this on November 16th. The average 30-year fixed rate today is about 6.7%, which is down from where it was a few weeks ago, which was 7.1% or 7.2%. Most people believe that the interest rates will at least stay this high or keep going up. There’s definitely logic to that, right? It seems to make sense. The Fed has said they’re going to keep raising interest rates, and so perhaps mortgage rates will stay where they are right now, or continue to go up. The idea there is that as the Fed raise interest rates, bond yields tend to go up.
Mortgage rates are based off bond yields, and so over time, if the Fed keeps raising rates, bond yields will actually continue to increase, and therefore mortgage rates will go up. Now, a lot of people think that mortgage rates will go up to 9% or 10%. I personally don’t. I think that if they continue to go up, they’ll probably go somewhere around… They could surpass 8%, maybe get somewhere between 8% and 8.5%, but based on what the Fed has said, and where they intend to pause interest rate hikes, it makes more sense that it will peak somewhere around 8%, presuming bond yields continue to go up.
Now, that’s the prevailing logic, and a lot of people think that, but over the last couple of weeks, there’s actually been more and more economists and housing market analysts who believe that mortgage rates are actually going to go down next year. I know that’s super confusing, because I just said the Fed was raising interest rates well into next year. But there is actually some very sound economic logic to this, and let me just take a couple minutes to explain it, because I think it’s super important and could really impact prices in the housing market next year. Let me just quickly recap how mortgage rates are set. The Fed does not control mortgage rates.
They control the federal funds rate, which is the interest rate at which banks lend to each other. It’s wonky. It doesn’t matter, but right now, it’s up to 4%. That 4% is not dictating mortgage rates or car loans or student loans or whatever. It basically sets the baseline for interest rates across the entire economy. So if the federal funds rate is at 4%, it is almost impossible to find a loan less than 4%. That’s just how it works. Now, mortgage rates are correlated to the federal funds rate. When the federal funds rate goes up, mortgage rates tend to go up too, but they’re actually not directly tied together.
In fact, mortgage rates are much more closely tied to the yield on a 10 year treasury. A 10 year treasury is a U.S. government bond, and a U.S. government bond is basically you or an investor lending money to the U.S. Government. A 10 year treasury specifically is you’re lending the U.S. government money for 10 years. Now, mortgage rates and the yield, which is the interest rate, the profit that you earn on a 10-year bond are almost exactly correlated. They have a 0.98 correlation. That means they move together. When bond yields go up, so do mortgage rates. When bond yields go down, so do mortgage rates. They work in lockstep.
It’s pretty incredible how closely tied they are to each other. This happens for a very logical reason. It’s basically because of the way that banks make their money. Imagine for a second that you’re a bank. Imagine you have billions and billions and billions and billions of dollars to lend out. It must be very nice. You choose who to lend it to. That’s how you make your money. Now, the bank is sitting there thinking, “All right, I can lend my money to the government, the U.S. government, at 4% interest.” Remember, the yield on a 10 year treasury right now is 4%. I can earn 4% with basically no risks.
Lending to the U.S. government in the form of treasury bills is basically the safest investment in the world. Generally speaking, the U.S. has never defaulted on its loan. It’s the most creditworthy entity in the entire world according to all the credit rating agencies. Therefore, a bank can say, “I’m going to lend my money to the U.S. government for 4% interest.” Now, they want to earn more than 4%, don’t we all? So, they take riskier loans. They’re going to also make riskier loans, but to make a riskier loan, they’re going to charge more in interest. They have to have more potential for reward to take on that risk. That’s how risk and reward work.
So when someone goes and applies for a mortgage, let’s just say me, Dave goes and applies to a mortgage, the bank is thinking, “I can lend…” Let’s say I want a mortgage for $500,000.” I can lend Dave $500,000, or I can lend the government $500,000, and earn 4% interest. I know the government’s going to pay me back 4% every single… 4% a year. That’s locked in. That is guaranteed. Dave, even though he has a good credit score, and he’s paid his mortgage rate every single month that he’s had a mortgage, which is a long time, I still think he’s just a normal dude.
He could default on his mortgage. So because of that increased risk, we’re going to charge him more. This is why they move in lockstep. Basically, when the opportunity to lend to the government goes up, banks are like, “Well, that’s great. We can earn 4% lending to the government. Now, we have to raise interest rates on mortgages to compensate for the additional risk on top of that 4%.” That’s why the 10 year treasury and mortgage rates are almost directly correlated with one another. There is typically a spread, right? Yields are 4% right now.
Normally, the difference between a 10 year yield and a mortgage rate is about 1.9%. So if you had a yield of 4% like we have now, you would expect mortgage rates to be 5.9%, but they’re at 6.7% or 7% right now. That’s because there’s all sorts of uncertainty. This difference between the yield and mortgages are due to uncertainty. When there is a lot of uncertainty in the economy, banks are basically saying, “We have to charge even more than normal for that risk premium. We don’t know what’s going to happen to the economy. Are people going to lose their jobs? Is there going to be more inflation?
To cover our asses, instead of charging 1.9% above yields, we’re going to charge 2.5, or we’re going to charge 3%. Actually right now, the spread between a yield and a mortgage rate is the highest it has been since 1986. Normally, remember, it is 1.9%. Right now, it is about 2.9%, so significantly, significantly higher. That’s how mortgage rates are basically set. Now, remember at the beginning of this rant than I am on, I said that there are two reasons why interest rates might actually fall this year. Now that I’ve explained that, you should be able to understand this.
The first scenario where interest rates fall in 2023 is because of a global recession. We don’t know if we’re in a recession right now. The National Bureau of Economic Research gets to decide that. A lot of people believe we were in a recession, because we had two consecutive quarters of GDP decline. Now, GDP went up. It’s all very confusing. Honestly, I don’t really know what to even say about it at this point, but the idea here, and the reason that a lot of prominent economists and analysts are saying that mortgage rates can go down next year is because we enter a global recession where the entire global economy takes a big dip, and that will have these serious impacts on interest rates.
Here’s how it works. When there is a recession, investors from across the globe tend to seek really safe assets. Remember, I just said that treasuries, government bonds are the safest investment in the entire World. So when there is a global recession, there tends to be this flock, this huge increase in demand for bonds. Everyone around the world wants to get into bonds because they can earn 4% guaranteed when no one knows what’s going to happen with the stock market, the real estate market, the crypto market, whatever. When there is an increase in demand, just like for anything else, it actually sends up prices. When demand goes up, prices go up.
The thing about bonds, which I’m not going to get into, is when prices go up, the yield goes down. Just in short, basically, more people want the bonds, so the government’s like, “Great. Everyone wants these magical bonds that we’re giving out. We’re going to give you less interest rate. We’re going to pay you less to borrow the money from you,” and people still want it, so they’re like, “Okay,” and they’ll take a lower yield, and yields tend to go down. Just to recap, recession means there’s more demand for bonds. When more demand for bonds, yields go down. Now remember when I said when yields go down, so do mortgage rates, right?
The Fed does not control mortgage rates. What controls mortgage rates almost directly is the yield on a 10 year treasury. So, that’s scenario number one. There’s a global recession. People from around the world are like, “Give me some of that safe, safe bond yield from the U.S. government that drives up demand, sends down yields, and takes down mortgage rates with it.” That’s scenario number one. Scenario number two is that the spread declines. Remember, I just said that the spread between bond yield and mortgage rates are at the highest they have been since 1986, and that is because we’re in this period of extreme economic uncertainty.
The spread between these two things between yields and mortgage rates really spiked during uncertainty. There have actually been only three times in the last 22 years since the year 2000 where the spread is above 2%. That’s during the great recession, the first few months of COVID, and right now. So, hopefully, let’s all hope that over the course of 2023, the economic picture, the economic outlook becomes a bit more clear. That means the spread could come down. This could come from the Fed deciding to pause their interest rate hikes. It could come from inflation continuing to trend downward or perhaps the end to the war in Russia or something like that.
Any of these reasons, if for any reason over the course of 2023, the economic picture becomes more clear, and banks have a better sense of what’s going to happen over the next couple of year, the spread might start to come down. Although I’m not saying interest rates are going to come down next year, I think it’s important for everyone listening to understand that there are two very, very plausible scenarios where mortgage rates do come down next year. That’s because a recession comes, and then bond yields fall, or because the uncertainty in the economy starts to be mitigated, and the spread between bond yields and mortgage rates comes down.
Now, make no mistake about this. I am not saying that any of this means that the Fed is going to pause raising interest rates anytime soon. They have been very, very clear that they are going to keep raising interest rates. And for that reason, mortgage rates could go up. I just want to explain that it is not as cut and dry as people are saying. A lot of people say, “See, interest rates… The Fed raising their federal funds rate,” and say, “oh my God, the mortgage rates are going up to 8%, 9%, 10%.” It is not clear. That, personally, I don’t see them hitting 9%, nevermind 10%. I could see them hitting 8%, but I could also see them going down to 6%.
It is really unclear. If you want to follow this, I highly recommend you keep an eye on the yield on a 10 year treasury and what is going on there. That is one of the most important things you can do to understand what’s going to happen in the housing market over the next couple of years. Because if the yield on 10 years stays where they are or starts to decline, mortgage rates will probably go down, and that will really help us end the housing correction, and maybe send prices the other way. If bond yields continue to rise, we will see mortgage rates continue to rise, and that will put more downward pressure on housing prices, and deepen the housing correction, so really important thing to watch.
Now, another thing to watch is the Fed is going to meet, again, in December just a couple weeks from now, and most analysts expect a 50 basis points hike rather than the 75 basis point hikes we’ve seen over the last couple of months. That’s nice. It’s cool, whatever, but it doesn’t really matter, right? To me, what really matters is where the federal funds rate ultimately settles, and where bond yields ultimately settle in the next year. That is going to dictate mortgage rates, and that is going to dictate bond yields. What happens with bond yields is going to dictate mortgage rates.
So, just pay attention to this stuff, guys. I know everyone wants to know what’s going to happen, and you want just someone to tell you. Unfortunately, no one really knows, but you can look at some of these lead indicators that will help you predict what’s going to happen over the next couple months. To me, the two things that you need to be looking at are inflation, which we talked about, and the yield on a 10 year treasury, because that is going to dictate what happens to mortgage rates and affordability in the housing market.
All right, that is the end of my rant. I hope you all learn something. Hopefully you ate a delicious Thanksgiving sandwich while we were listening to this, and you learned something, filled your belly, had a great time off from work, hopefully. Thank you all so much for listening to this. If you have any questions about this… I know this is a wonky, complicated topic. If you have any questions about it, you can hit me up on BiggerPockets, or you can find me on Instagram where I’m @thedatadeli. If you like this episode, please share it with a friend, or give us a five-star review on Apple or Spotify. We really appreciate it. Thank you so much for listening, and we’ll see you next week for more episodes of On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, by Joel Esparza and Onyx Media, research by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Speaker 2:
Come on.

David:
This is the BiggerPockets Podcast, Show 692.

Josh:
I think the biggest fear was trusting people that I didn’t really know. I was meeting these people through Facebook groups, or through different online platforms, and it’s hard to trust, especially when you’ve never done a deal before, what they’re saying. And so, I think being able to verify, and again, in your book you kind of give resources on how to double check things, and how to circle back. I think that helped so much, in terms of my trust in them.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with my co-host, Henry Washington, as we interview Josh Goldstein, an out-of-state investor who has a pretty amazing story, and a very simple solution to problems we all have. We want to make money in a way that we like more than our job, and we want to be to travel, and have freedom, and not be stuck in one location doing things that we don’t like. Today’s episode is awesome, and you’re going to learn a ton about long distance investing, overcoming problems, analyzing properties, decorating them to maximize your return, and more. Henry, I know I probably just took the big stuff, but was there anything I didn’t mention that you liked about today’s show?

Henry:
Yeah, no, you did take the big stuff. My favorite part of the show is just, honestly, I love hearing stories of people that are doing things that a lot of folks would say is difficult, or impossible to do. So, being able to stay positive when you get bad news, and then giving… Not just saying, “Hey, I remain positive,” but giving some practical steps on how he does that, which is super cool. And then, just changing your life, deciding to invest, and then doing it when everybody thinks you can’t. You live inexpensive market? Okay, I’ll go buy a property somewhere else. And then putting the action behind those steps to actually do that in a way that is financially beneficial. So I love it.

David:
Absolutely. This is a very easy to listen to episode. Josh has a really cool story. I don’t want to give it all the way, but make sure that you check this one out, because you’re going to love it. Before we get into the interview with Josh, today’s quick tip is, consider things to be grateful for. It’s so easy to focus on things that are going wrong, and no one knows this more than me. In business, I am frequently, as the leader, the person that has to deal with all the problems that nobody else wanted to, or chose to deal with, and it’s easy to get upset. But there’s always a solution to these problems, and if you take the stance of, “I will look for the answer, or the solution,” instead of, “I will look for the reason to not have to solve it,” you will often find that most of the problems, or the obstacles that are stopping you from making progress, are not nearly as significant as you think. Henry, any last words before we bring in Josh?

Henry:
Yeah, I just kind of want to add into that. When I get in the same situation as you were just talking about, I sometimes have to remember to be grateful for the problems that I do have. Because yes, even though they may be infuriating, there are loads of people who would trade places with me in a heartbeat, who would love to have the problems that I have. And so, I just try to keep that in mind, and it helps me stay focused.

David:
I bet you that you 10 years ago would’ve loved to have the problems that you today has, versus the problems you had 10 years ago, right?

Henry:
You’re right, buddy.

David:
Isn’t that funny? If you went back 10 years and said, “Hey, I can give you the life you have right now,” then, they’d be like, “I hit the lottery. This is everything I wanted.” But we get used to it, and every day we wake up, and we’re like, “Oh, another problem I got to solve. My life sucks.”

Henry:
Right.

David:
That’s exactly right.

Henry:
That’s right.

David:
Love that perspective. All right, let’s bring in Josh. Josh Goldstein, welcome to the BiggerPockets Podcast. How are you today?

Josh:
I’m doing great. How about yourself?

David:
I am doing very good. I appreciate you waiting. I had to take a last minute phone call there before we started recording, so you’re very gracious, and I appreciate that. And Henry stayed awake the entire time, so I also appreciate that from you, Henry. I know listening to me talk can be very boring. But today we want to hear about Josh. So Josh, I understand you have a very interesting story of how you got started in real estate, so we’re going to ask you about your first deal, but before I do, take me back to where you were emotionally, and what was happening in your life, before you got that deal.

Josh:
I started in the entertainment industry, and I went along working. As I rose up and made more money, I was spending more money, I was kind of doing it, now that I know, wrong. And I got to a point where I was making decent money. I love what I did. I didn’t see anything changing until in 2015 I was diagnosed with pancreatic cancer, and obviously everything changed from there.
I, at the time was renovating our dream house that I’m living in right now, and the doctor said, “You’re not going to be able to work for a while.” They didn’t say a timeline. And basically, I was in debt going in, renovating this house, and I kind of freaked out, and I didn’t know what I was going to do. I did have a great support system. My family, and friends kind of rose up and helped me financially while I battled this thing, and I changed my mindset. I knew at a certain point I had to make a change, and make money elsewhere, and not just rely on my actual job.

David:
Okay. So, I mean, life hit, and the comfort level, the routine, the way you’d always known, isn’t going to work anymore. You may not be able to work those hours you were working, those opportunities might not be there. I mean, if you think about it, most jobs in American Works is within the framework of a W2 environment, which means in general, you are servicing a lead, or a revenue source that somebody else has created.
So, if you’re an actor in a movie, somebody else has secured the revenue for that movie. They’ve written a script, they’ve done all this stuff. They just need a person to play a role in the bigger picture. And that’s every job. If you’re working at Walmart, if you’re working at a landscaping company, in general, not many people work in sales. They’re servicing sales somebody else has done, which means you’ve got to serve at the pleasure of whoever your boss is. That’s how this thing works.
And when something happens to you like it did, you physically can’t meet the demands that this person would have, and you’ve got to be creative with finding a way to make money. So, I love hearing these stories of someone who didn’t just give up and say, “Well, I guess that’s it. I’m just going to be a burden on everyone else.” You found another way to do it. So what were some of the concerns or fears you had as you started to realize, “Okay, I think I can make money investing in real estate, but obviously there’s no safety net here in a W2 job?”

Josh:
The one thing I should say is I was actually freelance. So that was the big difference, is I had a background in maybe not having the most secure amount of money, but as I worked in production for a long time, I’d felt like I was secure, because jobs kept coming, and I knew enough people, that I was pretty sure in getting jobs over and over again.
The one problem, even outside of me getting sick, was it was hard to take time off. I mean, if I was taking time off to go on vacation with my family, I’d have to turn down a big job, lose that money, and then spend the money on going on vacation. And mentally that was really tough for me. And I always felt like if I turn down jobs, what if it’s a big commercial campaign, and I lose multiple jobs from that? Which I know does happen. So, there was definitely fear based in that.
So, during that year, I read Rich Dad, Poor Dad as many investors have, and it was kind of like a brick to the head. I mean, it’s something where, I was always interested in real estate, I was always interested in properties, and values, and looking at it, but I just never realized that I could make money off of it. I don’t know, I thought maybe you needed to have a top hat, and a monocle to be a real estate investor.
I don’t know. I still might buy that, just so I have it. But, during that year, after I read it, I was very focused on healing, and getting through the treatments, so mentally I couldn’t really do much more than that, but I knew once I recovered, that I needed to make a plan and actually change things. During that time, I mean, I think it was the smart move. It takes so much time, and effort, and energy on healing, and focusing on my family, and getting through this, and that’s basically all I was able to do that year, that I went through it.

Henry:
Man, I am smiling as I’m hearing you tell this story, because it is very similar to my story, outside of the illness. It’s not an illness, that wasn’t my wake up moment. Well, nothing near what you had. My wake up moment was I had a panic attack, similar thought processes as you prior to that, is that I was starting to realize some life events were happening that were making me realize that the traditional way I was making money wasn’t going to be enough to even live a reasonable life, nonetheless an extraordinary life.
And I had a wake up call after a panic attack, and I like that you mentioned you had this mindset shift once you got sick, that you needed to find a way to make money. But, I would imagine that that mindset shift was around… Because you have to have a mindset shift about healing, and getting better, as well as a mindset shift around what I need to do to change my financial landscape. Can you talk a little bit about, were those two different mindset shifts? Or did your positive outlook on healing help you change your mind about investing, and how actually achievable it is? Because I think a lot of people are in a place where they know they want to invest, but just saying, “Change your mindset,” it’s hard for them to grasp that. What about these mindset shifts made that easier for you?

Josh:
Yeah, I mean I guess I should start… I am naturally a positive person, but I have to say my wife is even way above me in that scale. So, when I got diagnosed, I was actually in the hospital, she was home with the kids, and I woke up from some painkillers, and there are two doctors sitting there, and they told me that I had pancreatic cancer. And I think this actually relates a little bit towards my job as a producer, where problems come to me all the time. Obviously this is a different problem that I never thought in a million years I’d have to deal with. But, I took a breath, and I paused, and I said, “Okay.” And the doctors looked at me again and said, “Do you understand what we’re saying?” And I said, “Yes.”
And so, I said I wanted to call my wife and I did. And her response from the get go was, “Okay, let’s figure this out.” So that was the baseline of our mindset going into this. I feel like it is something that I did in my production career, whereas when problems come instead of freaking out screaming, whatever, take a breath, figure out how to solve it, because screaming isn’t going to actually solve it. So, throughout that year we kept that going, and I feel like that mindset helped tremendously, because it relates to so many things in life, but real estate is one of them. Problems come up all the time. It’s how you deal with it, how you solve it.

Henry:
100%. And I love that you’re saying like, she said, “Okay, let’s figure this thing out.” And you’re right, the mindset is very similar, because I feel like success in investing, especially if you’ve never done a deal, or if you’ve only done a couple of deals, you may not know the exact steps, or have them all laid out in front of you, to know exactly the play that you’re going to run. “I’m going to do step A, that’s going to lead me to step B, and step C.” And you don’t know them all ahead of time.
One of the things that helped me be successful when I started off investing, was that I just decided I was going to figure it out. I didn’t decide I was going to go learn every single step, and then figure, and then take some action. I just decided I was going to figure this out. It’s a similar mindset to what you had about be getting healthy again. You said, “Okay, we will figure this out. I have no idea what the next step is, but I know I’m going to stay positive about it, and I know that I’m going to figure out all the things that I need to do.” And you solved the problem that’s in front of you. Man, that’s super inspiring.

Josh:
Well, and it’s funny, I’ve heard not just from you, that similar things have happened in people’s lives that change their mindset. And obviously, pancreatic cancer is an extreme version, but that thing, whatever it is, can relate to so many people, because it could be something little, it could be something big, it doesn’t matter. It’s just that little switch, making you think, “I need to do this differently.” And I think that helps a ton, and it relates to a lot of people.

David:
Did you have any nagging little thoughts, or ideas before the diagnosis came, where you were kind of like, “Yeah, probably this isn’t going to work forever?” Or like you mentioned, that’s such a good point. “If I want to take a vacation, I actually have to pay for it twice, because I have to pay for the vacation, but then I lose the money that I would’ve made at work.” We call that opportunity cost in economics, and it’s something that people don’t factor into their financial picture, is when you have a job that you have to be in a location to earn money, when you take a vacation, you also lose the money you would’ve made working. So there was some inner just ideas that were in your head saying, “Hey, this isn’t great.” Do you feel like the diagnosis was the spark that jump started this? Do you think you’d have got there eventually? Or was it just you had no idea at all until this news hit?

Josh:
I think there was something in me that knew something. I mean, in terms of research for real estate, I watched HGTV, and the flip shows, and stuff like that. But again, it’s more entertainment. But like I said, I’d always been drawn to real estate and design, and locations, and values and stuff like that. I just never, stupidly, realized that I could make money off of it.

David:
No, I appreciate you saying that.

Josh:
Yeah, no, so I just feel like I knew I needed something. I just didn’t know what that was until I had my diagnosis, and read Rich Dad, Poor Dad, and everything came way more clear.

David:
Yeah, I mean that book is the portal from one world to another for so many people. And it’s funny, it’s good to hear this, because there was a time I didn’t know you could make money investing in real estate. And when I got into it, it was 2009, late 2009, it was not considered a thing you did to make money. It was considered a thing you did to lose money. That’s all everybody talked about, is, “You’re a real estate investor? That’s the dumbest thing ever. Why would you?” It was almost mocked at the time. So, it’s good to hear this. We have a big listener base that’s new. They’re like, “What? You could buy a duplex and get $500 a month?” It’s not known to everyone out there. So, I appreciate you sharing that part of the story. Now, how did your first deal work out? Did you know what you were going to do? Did you fall into it bass ackwards? How did you end up buying your first property?

Josh:
So, I was definitely in analysis paralysis for a couple years, and after I healed, and was working like crazy to get out of debt, I really dove into BiggerPockets with the podcast, webinars, books, everything. I just lived and breathed that as much as I could. But, the one thing that I did, is this is all theoretical. So I know didn’t know any of this actually worked. It was all in theory.
So, I looked at different markets, I tried different… I actually made some offers on properties, and backed out of them over as little as $500, which I’m embarrassed to say right now. But, I thought in my head, “I’m sticking to my guns, these are my numbers, and I am not going to waiver one bit.” And so, when I first started, I thought that was the right thing.
I think that what really changed that, is I actually listened to one of your guys’ episodes with Whitney Hutton, and she was talking about turnkey rentals, and it was something that I had never really wanted to do because I wanted to capture everything. I wanted the equity, I wanted the whole shebang. I wanted it all. But I realized as she broke it down, at least starting off, this is such a good… It’s like training wheels. I had purchased a house, or two houses before just to live in, so I kind of knew the process of that, but the investing side of it, it was still so foreign to me, and this was just a very low barrier to entry. And so, that’s what really got me into it. I actually reached out to her, and she gave me a property management recommendation, and they started sending me turnkey deals.

Henry:
I think that’s super cool, because this whole story is starting to piece together, and it’s… Because what happens a lot of the time is people say, “Well, I want to be an investor.” And they start looking and researching, and they get overwhelmed in analysis paralysis, and then they never actually take any action. A couple of things that you did, which were super cool, is you made some offers. Even though you backed out of the offers, actually analyzing the property, and making the offer is a form of action. And so, you’re training your mind to say, “All right, we’re doing this.” You were double Dutching your way in, and back out.
But the super cool part is, you made a decision when you got sick, that you were going to figure a way out. And when we make decisions like that, we tell our brain, “Hey, I’m going to figure this thing out.” And that doesn’t mean you’re going to know exactly what to do next once you make the decision, but you’ve told your brain to listen for it. And then what happened was, as you started to research, or listen to other podcasts, you heard someone say something, and you went, “Hey, that’s the thing. I think this is what I can do.”
And then you dive into the research on that part and then you take the action. And I think that’s what a lot of new investors need to hear. It’s not that you’re just going to start investing and the plan’s going to perfectly unfold, It’s okay. But if you can truly make that decision and mean it, you’ll start to hear and see the things that are going to guide you down the path, that will get you started. I think that’s a good, realistic way for people to think about investing. Make the decision, even if you don’t know how, even if you don’t know how… I don’t have the down payment, or whatever the obstacle may be, just tell yourself, you will figure it out, and be sincere about it, and then immerse yourself in the information, in the culture around other investors, and how starts to reveal itself. Man, that’s just really cool.

Josh:
I think also within those two years of me being in analysis paralysis, things did shift, because when you’re first starting to learn, I was like, “Okay, let’s say I buy a single family rental, and I start cash flowing 150 bucks, 200 bucks after all expenses.” It’s not a ton of money. And then it’s really overwhelming to think about, “Gosh, how many of these houses do I actually need to make a dent in my life?”
And my question was, “Well, how am I going to get money over, and over, and over again to buy these houses?” And then I found Burr method, and really do dove into that, and that really sparked some interest, and made so much sense to me. And so, from that, I moved into researching that. That’s when I started making some more offers, and backing out over minuscule amounts. But I feel like where I was going just was shifting as I was learning more. I was adding more tools to the belt, so that even though without the practice of it, I just knew more, and was able to talk the talk, and kind of progress from there.

David:
All right. So, you had several deals you backed out of, you mentioned. Now was this to buy your first deal, or was this later in your career that was happening?

Josh:
First? Yeah.

David:
Okay.

Josh:
The very first one.

David:
And that was basically just a defense mechanism, right? “I don’t want to get taken advantage of, so if anything’s wrong…” And when you’re new, that’s normal. We all have things that we look back on our first day of school, or your first time doing something, where you were ultra hyper aware, and you look back, you’re like, “Okay, I was overacting. But that’s just how life is. You don’t know what to expect. So, eventually you did buy one. Tell us about the deal you bought, why you liked it, and how you decided to move forward.

Josh:
So, it was a turnkey deal, but it actually… I call it my accidental Burr. It was a three bedroom house in Kansas City, Missouri. It was $70,000. They sent it out in December, 2019, and it said, “Holiday special.” And they said that the comps were around $90,000. And so, I looked on my own, and I agreed, I’m like, “Yeah, it does look like it’s around 90,000.”
So I went forward, already had a renter in there for $800 a month, and they fixed some things through the inspection, and by the time we closed, I just started getting checks. And one thing that did happen, is my lender actually backed out two weeks into the process. And so, I had a choice of backing out, or using a line of credit to actually pay for it in cash. And so, I decided to move forward, and I basically paid cash with someone else’s money. And a month afterwards, I went to go refinance, and without doing anything to it, it appraised for I think $116,000, and I pulled out $74,000, which was my initial amount, plus closing costs.

David:
What was the reason that the lender backed out?

Josh:
Because it was through a property management company. They said that the underwriter didn’t feel like it was a traditional deal, and so they felt not comfortable about it. And so, I didn’t question it that much. I mean, the property management company did have a real estate license. So, in retrospect, I probably could have pushed back and said, “Well, here’s their license here. This is the reasons why it’s legit.” But, I felt like it was all happening so fast that I just needed to react, and luckily I did have that cushion to be able to still make it, and move forward.

Henry:
So there’s a lot to unpack there. First of all, having the wherewithal, after you’ve made a couple offers and backed out over $500, and then boom, you do your first deal and your lender backs out two weeks into it, and you’re stuck with that deal, man. So I’d assume you felt more committed then, right? You felt more trusting of those numbers. But, I think there’s a lot of people that may be interested in turnkey as an option. You’d mentioned that you did your own research, right? So, tell us a little bit about how you felt comfortable buying it, by doing your own research. What did your own research look like? Because a lot of these turnkey companies will tell you what the value is, but if you’re brand new, how do you then take that information, and go try to discern that for yourself, so that you feel like you’re actually buying a good deal?

Josh:
Yeah, I mean I basically looked at the neighborhood. I even walked on Google Streets, to kind of see what it was like. I looked at Zillow, I looked at recent sales, I looked at listings that were active, and tried to compare to my house, and the square footage, and the bed count, and the bathroom count, just to see what it looked like. And it seemed like it was really solid. And yeah, it is a funny one, that I felt like I was committed, and didn’t back out, and pulled out a much larger chunk, versus I thought I was going to be putting $14,000 into this as a down payment.
And it was kind of a blessing in disguise, because I was able to refinance much quicker because of it. But yeah, I think it goes to me looking at the numbers, and seeing how good of a deal this actually was. And especially for a first deal, I just felt like… I had looked at other deals that they had sent, and nothing was close to this.

Henry:
Also, and I think that’s great, 100% totally agree. That’s a phenomenal way to do it. It used the resources you have access to. We all have access to Zillow, we have access to Realtor, we have access to be able to look at some of these things. There’s valid information in there to be able to do some level of your own analysis. The other thing to think about is, you don’t live in St. Louis, right? You said you did the walking on Google Maps. And so, what made you… I’m sorry, Yes, I’m sorry. You don’t live in Kansas City, right?

Josh:
Kansas City. Yeah.

Henry:
So, what made you comfortable with Kansas City as a market overall, to then go ahead and buy a property there?

Josh:
Well, someone that we might know wrote a book about long distance real estate investing, and that book really broke down any fears that you have. And to this day, I’ve actually never been to Kansas City, Missouri, and I feel like the only reason for me to go at this point, is maybe to meet the people that I’m working with, and just to get more of a personal feel for that. But other than that, I felt like at a certain point when I was starting to make these relationships with local people, the boots on the ground, I needed to trust them. Because if I wasn’t able to trust them, then this wasn’t going to work at all. And so, of course, I would do what I can to verify the things that they were saying, like the comps, going on Zillow, walking through the neighborhood virtually, stuff like that. But, it just kind of solidified what they said, and kind of proved that they were being truthful.

David:
So, were you nervous about doing this before the book? Did the book help get over some of the hurdles? Or were you already committed to doing it, and the book maybe just provided a framework for the right way to go about it?

Josh:
I mean, that was during my analysis paralysis time period. But it was another one of those notches that solidified… Because I live in the Los Angeles area, everything’s very expensive, and maybe that was part of the reason why I never knew that I could be a real estate investor, is because I felt like, “Oh, well I have to buy it down the street, and I can’t afford that, so I just won’t do it.” But it’s like the book was great at just breaking down every concern, and how to walk through, and actually make a deal happen, without ever going to a place. So, I think that it was invaluable in that sense.

David:
All right. So, when it comes to long distance investing, what was something that you maybe were afraid was going to be the case, or you thought was going to make it difficult, and then once you did it, you look back and you’re like, “Oh, that wasn’t that big of a deal, or it’s different than what I thought it would be?”

Josh:
I think the biggest fear was trusting people that I didn’t really know. I was meeting these people through Facebook groups, or through different online platforms, and it’s hard to trust, especially when you’ve never done a deal before, what they’re saying. And so, I think being able to verify, and again, in your book, you kind of give resources on how to double check things, and how to circle back. I think that helped so much, in terms of my trust in them.

David:
There needs to be a word in the English language for this concept. I don’t know why it’s such a hard thing. But frequently, when you’re a business owner, which you are if you’re buying a property, it’s just a… You mentioned the word mindset. Mindset comes up so much. When you’re the person in charge of the endeavor, and you have to solve the problems, you think differently than when you’re the W2 person in the business and you’re like, “It’s my job to just do a thing.”
Frequently people will come up to me, and they’ll say, “We have a problem. This just happened, we can’t do it.” I mean literally, we’re going through, in my own portfolio… I created a spreadsheet to track all the properties I have, what I owe on those properties, what the payment is. I’m systemizing everything so I can ultimately share this spreadsheet with other investors, and it tracks like, “Hey, these are all the properties you have, these are the offers that you’ve written, these are the ones you have in contract.”
And somebody on my team was saying, “For months we’ve been trying to find your login information for this bank on these properties you bought eight years ago. Can’t be done. And it’s literally been four months I’ve been waiting.” And so, I get on the website, and there’s a chat option, and I click the chat option, and I talk to a person, and within 30 seconds I’m in there. And I was like, “I am not the smartest person on this team.” I’m looking at it, “How can I do it?” And they’re looking at it like, “Oh, I can’t do it, so it’s not my job, I don’t have to do it anymore.”
There’s some magic that happens when you get shifted into this position of, “I have to figure this out,” and you become a superhero. I’m not saying I’m a superhero. In this case, the superpower was thinking to use the chat option, instead of just trying to reset a password when it’s not working. Can you talk a little bit, Josh, about, when you’re afraid to invest long distance, you can think of all the reasons that it’s a bad idea, and you don’t take action, you get analysis process. But when it has to happen, you start finding solutions, you start living this empowered life, you start to feel good about yourself. You start to gain confidence, because stuff that to other people seems impossible, to you, isn’t really that difficult. Do you feel like almost a different person now that you’re investing in real estate, and you’re having to come up with solutions where others are just seeing impossibilities?

Josh:
Absolutely. I mean, people that I know that are not in real estate, they don’t understand how I own a handful of units in a state that I’ve never been to, or a city that I’ve never been to. And I feel like my production background, my producer background is about solving problems. And every job that I do in that world, people come up with an idea, a script, a commercial, whatever it is. Problems are different every single time.
So I feel like because of that, me being able to solve those problems, and I’ve been doing it for a long enough time that I usually know someone that can pull something off. But sometimes they surprise me and they’re like, “Look, we want to do this,” and I nod my head, take a breath, and then think about it, and figure out how to solve it. And so I think that skill really relates to any issues that do come up with real estate as well. And I think taking a breath, and looking at it logically, and like you said, you did the chat button.
I mean, it triggered me a little bit because I’m going through and organizing all my logins as well. But, I’ve done that. Sometimes I’m like, “Well, I’m not going to be able to recover this password, but how can I get a new one?” Because they obviously want me to have access to this. They’re not cutting me off in that sense, because they want me to keep paying, and I have auto pay. So, if my banking information changes or something, they want me to have this. So, it’s just a matter of figuring out how to get there.

David:
Yeah, and the way I’ve tended to look at this is, your heart will be the rudder that steers the decisions that you make. If there’s fear in your heart, you will find the reasons to say, “This is impossible, this can’t be done. I’m not going to take action.” If there’s a drive, and ambition in your heart, you’ll probably find the answers. For you, being diagnosed with pancreatic cancer, with your family’s future on the line, you’re getting over the fear that at one point kept you stuck in analysis paralysis. And all of a sudden thinking, like clicking the chat button, I don’t need to be Elon Musk to think of a solution like that. I just had a strong drive to get logged in, whereas the people on my team had a strong drive to get that off their plate, say, “Ah, it can’t be done. I’ll go do the next thing that I would rather be doing.”
And so, I’m frequently talking to people who are having a hard time getting started, or scaling, or whatever they’re doing, and asking, “What’s in your heart? Is this not for you? Are you terrified, you don’t want to do it? Are you looking for an answer to solving life’s problems that real estate was never meant to solve?” If you’re not good at your job, or you’re not good with money, man, you’re going to get worse with money when you get into real estate, because things go wrong, like you’ve mentioned. There may be some other things you got to fix before you jump into this. The older I get, not that I’m an old man or anything, but I’m starting to recognize, the position of your heart, what is in there plays such a big role in where things end up. Henry, you’re smiling right now like you’ve got something you want to add onto this. Do you want to elaborate there?

Henry:
Nah, I 100% agree. I’m smiling because you’re right. It’s what’s in your heart, and that drives your decisions. And not only does it drive your decisions, but when you think about putting yourself in a position to… Because that’s essentially what you’re doing. When you’re leading with your heart, you may not know what the next exactly step it is that you need to take. But you know in the grand scheme, “This is the direction that I’m looking to go.” And so, you will start to think of creative ways to push yourself in that direction. And I’m just a big proponent of, you steer the ship with the heart, and you’re 100% right man. So, that’s always going to make me happy.

David:
Now, can you tell us, Josh, we see how you got that first deal. What does your portfolio look like now? Where have you scaled to?

Josh:
I’m up to 20 doors. 11 of them are short-term rentals, and the other are long-term rentals. Of those 11, six of them I am renovating. So, only five are live right now. And then the other six are major renovations.

David:
And how are you managing this many properties, especially nine short term rental doors?

Josh:
So, on the long term, I do have a property management company for that. So, once I get it stabilized and set, it’s quite easy to just answer some emails to them every once in a while. All the short term rentals, I am managing myself. I have systems in place where, automated messaging, price strategies, et cetera, et cetera. I did just recently hire a virtual assistant to help me with messaging, so that when these renovations are done, and I more than double my short term rental portfolio, I don’t drive it into the ground without having enough help.

Henry:
That’s awesome man. Tell us too, where in the country the short term rentals are, and versus your long term rentals, and what made you go, “This is the market where I want to do short term, versus long term?”

Josh:
Well, the majority of them are in Smokey Mountains, Tennessee. And so I think what spawned me to that was listening to Avery Carl on BiggerPockets, and I reached out to her, and we had a great conversation. Everything she said just made so much sense. And so, I jumped in, and found a deal that was two cabins on two acres of land. It was way more expensive than my Kansas City place, but it was $635,000, and I wound up using my HELOC for the down payment. We closed March of 2020, the day that everything shut down.
And so, it forced me to do several things. I was planning… I went out there for the inspection. That was the first time I’d ever been to Smokey Mountains. But I was planning on going back as soon as I closed, to help set it up, change the linens, swap out a couple things here and there, whatever. And the day that I was signing, I didn’t even know if I was going to be able to get to a notary. I didn’t know what was going to be open.
So, I did close, and took my time interviewing cleaners, prop maintenance people, stuff like that. And what it did, was it forced me to use them to set up my property remotely. And I thought I had to be there, but it worked, and bookings started coming in. And so I went pretty heavy in the Smokey Mountains. I have nine units there, six of them are the ones that are being renovated. But I did invest one cabin in Idyllwild, California. And the reason why we did that is because we wanted something that maybe we could use every once in a while. It’s a couple hour drive from where I live, and then another one at Big Bear, California. And that for the same kind of reason, it’s good market, but we wanted to potentially use it every once in a while as well.

Henry:
So, it sounds like you’re picking short term rental locations that have a long standing history of being short-term rental locations, even prior to Airbnb being a thing, which I think is a smart move when you’re looking to get into the short term rental game. And your long terms, where… Are most of those in the Kansas City market?

Josh:
Yeah, they’re in Kansas City. I mean, I do have two mobile homes that are on a property that I own in Smokey Mountains, Tennessee. So, I count those as a couple doors, because I have two tenants in there. But yeah, the majority of my units are in Kansas, Missouri, for long term.

David:
What are your concerns with the short term rental market becoming oversaturated? This is something we hear a lot of people talk about. It speaks to that fear thing like, “Ah, everybody’s getting into short term rentals, I’m not going to be able to get the bookings I’ve been getting.” It’s obviously a volatile market. You get changes with municipalities, you get regulation that comes in, Airbnb changes their algorithm, the whole thing gets turned on its head.
It’s clearly a market that has not set it and forget it, which is… I bring it up because for so long we’ve hyped real estate investing as passive income. The idea is it’s just money that comes to you. And at some point in life, that might have been partially true, but with the level of competition that we have now, there’s nothing passive about this. I was working this job, and now I’m working this job. And it’s better, I think all of us would agree, it’s a better way to work and it’s more freedom to it, and it involves more creativity, but it’s still a form of work, and there is still some risk. So, what are some of the things that concern you about the short term rentals that you have, and how are you mitigating that risk?

Josh:
Yeah, this is actually coming from someone who just purchased what, 15 short-term rentals in how short of a time, David?

David:
Well yeah, that’s exactly why we’re talking about this.

Josh:
I think it still comes down to the core basics of real estate, and if you buy it right. And my strategy with short-term rentals is improving them. I like the value add strategy. I love design. It actually gave my wife an excuse to buy some really cool design furniture, and decor that we don’t even have at our house, and put it in a place that we could make money off of it. Yeah, I mean there are going to be ups and downs with short-term rentals, in terms of occupancy, and rates, and whatnot.
I think people still need to go on vacation. So, whether it’s a lot of people are going on vacation, or less people are going on vacation, if you buy it and you analyze it right, conservatively, you’re going to be okay. Now, how much you’re actually making from that is going to vary. But to me, if I could cover my costs, and then make some profit off of it, that’s really the main goal. And then hopefully over time, all of this stuff is going to appreciate anyways.

David:
Henry, what about you? You’re involved in several different kinds of real estate endeavors out there in Arkansas, a bit of a connoisseur of real estate, kind of dabbling in many different things here. What concerns do you have with the short term rental market specifically?

Henry:
Yeah, I mean the normal concerns everybody has. My main concern is… Well, speaking specifically, so I have short term rentals, but they’re all here in my local market. Well, I say I have them, I have three of them. And my concern, or the thing that I’m keeping an eye on is, the reason I bought in the market, or turned the properties into short-term rentals that are in the market that I’m doing it in, is because it is a travel destination for both corporate, and for leisure, but there’s not a lot of hotel options. There’s just a shortage of places for people to stay, in conjunction with the amount of people that come here, and need a place to stay for a short period of time.
And so it’s currently what I would call a safe option, but I am paying attention to what’s happening in the future. And so, if you stay connected to your local cities, and municipalities, and you are connected to the people in the city council meetings, and following them on social media, people think you got to do a lot of… There’s so much technology now, you don’t have to be in city council meetings to understand what’s going on in your local market. You can follow the cities and municipalities on social media, on Facebook, on Instagram. They post a lot of what’s coming through those channels.
And so, you can stay connected that way, and I am starting to see that a lot of the families, and institutions that have money around here are building hotels to solve for that issue. And so, my concern, or the thing I’m keeping an eye on is, when are these hotels supposed to be completed? How many are they building? How many rooms are going to be in them? So that I can try to understand if it makes sense for me to continue to grow a short-term rental portfolio in this market, because my 2 cents, or my thought process goes to, if I am a wealthy person, or persons, and I want to build hotels, and I have that kind of money, I probably have influence as well over the city, and maybe some of the rules, and laws. And so, I would assume there may be some sort of regulation that comes down the pike once those hotels are up. So, those are some of the market specific things I’m concerned about, and keeping an eye on.

David:
Josh, what about the future? Where do you see yourself investing from this point going forward, and what types of asset classes?

Josh:
I do like the hospitality area, which is short-term rentals, and I’ve actually joined with several other investors, and we are creating a fund to buy short-term rentals, and small boutique hotels. And so, this is new to me, but some of the people in the group have done several boutique hotel deals. I guess five of the six cabins that I’m renovating, that was my first commercial deal, because it was five cabins at one time, and the renovation costs were built into that. So, that’s my limited knowledge about commercial loans, and that kind of world. But, I’m learning a ton, and the people that I partner with are great at what they do, and what I could bring to it is finding where that market is, and what the experiences that people are looking for, and what we could put into those short-term rentals, or hotels, to make the guest experience great.

David:
The last question I want to ask you about is with your story, with the Nest lock that ran out of batteries. Tell us what happened in that situation with your tenant.

Josh:
Yeah, so I am in California, which is three hours behind Smokey Mountains, Tennessee, but this guest for some reason didn’t arrive till 2:00 AM, or 3:00 AM, which even for me that’s past my bed time. I go to sleep early. But for some reason I was up, and I was about to go to bed, and I get this message saying, “We can’t get in.” Which is never something that you want to hear, especially that late, in a market. “How am I going to solve this?”
And I had to call a maintenance person that I was using quite regularly, so I felt like we became pretty friendly about five times to wake him up, and have him go over there. What I realized, and something that I have in my process now is, first of all, I have someone checking my batteries once a month, because I never want to be in that situation again. Second of all, it was a Nest lock. So, what I realized is you could take a nine volt battery, put it at the bottom, and it gives it enough power to unlock it, and then you could solve the problem later. So, I actually have lock boxes on all of my cabins that I keep a nine volt battery in. And in an emergency I could give the guest that code to get the nine volt, to get in temporarily, and then actually fix it when it’s working hours, and not have to wake up a poor maintenance man that was dead asleep at three in the morning.

Henry:
That is the physical manifestation of, “Never again. Never again is that going to happen.”

Josh:
I learned my lesson.

Henry:
Awesome. Before we transition to the next part of our show, I heard you mention a few times you kept saying, “Hey, you just need to breathe,” or, “I just had to breathe, and give this some space, and think about the problem.” And I interpret that as taking a step back, removing your personal feelings out of it, and looking at the situation logically. Can you talk to us a little bit about some of these steps that you’ve implemented into your life to deal with both real estate, and health, and how that’s helped you?

Josh:
Yeah. Especially being in the short term rental business, I’d say the majority of my guests are great, but there are those guests that really can get to you. And so, when they write those messages, or send you something that your immediate response is infuriating, and you want to just strike back right away, I’ve learned through production really, because so many problems do come up, that before I send that message back, before I send that text back, whatever it is, I take a beat.
I might have to walk away from my phone for a couple minutes, until I get control of myself. I mean, this is something I even implement into my children, where I say, “Go get control of yourself, and come back, and then we’ll talk.” And sometimes I do it myself, in my family. It’s like I feel myself getting worked up, I say, “I have to give myself a minute,” and I walk away, and then come back, and then you can actually deal with the actual problem, and be a little more logical about it. And that goes for anything, any part of life. It’s like just take a beat. Don’t be so reactionary, don’t be so emotional, because that’s not always the best response that you could do to solve the problem.

Henry:
You know how many times… I allow myself to write the message. I’ve just got to bang on the keyboard for a minute, and give the keyboard a piece in my mind, and then I delete all the stuff, and then come back a little later. But, that is a wise approach.

Josh:
Instead of banging on the computer, I think I’m in my head going through all those responses, and that’s like part of my minute or two that I’m like, “Okay, I got those out, now let’s actually deal with this, and what’s going to solve this? And how should I actually respond?”

David:
All right. Well this has been fantastic Josh. I love hearing your story. I’ve loved hearing about how you’re taking on the challenges that are coming your way. When you were talking about that nine volt thing, it brought up the whole W2 versus 1099, “I’ve got to figure this out,” mindset. I can absolutely see somebody who doesn’t care about finding the solution saying, “Oh, the battery’s dead, there’s nothing that we can do, the guests can’t get in. I guess they’ve got to sleep in their car. There’s nothing that can be done.”
Versus you probably went and Googled how to open a Nest lock when the batteries are dead, and there’s something on there about this nine volt battery trick, and then you could have looked up the closest place to go buy a nine volt battery, and texted the guests, and been super apologetic like, “Look, go do this. We’ll get you in there.” There’s always a solution. It’s just, are you looking for the solution, or are you looking for the reason to not have to look for the solution? It just depends where your heart’s at. So, thank you for sharing that. That’s been great.
The next segment of our show is the Deal Deep Dive. At this segment of the show, Henry and I are going to take turns firing questions at you as we dive deep into one particular deal that you’ve done. Question number one, what kind of property is this?

Josh:
This is an A-Frame cabin.

Henry:
How did you find it?

Josh:
It was actually on… I found it originally, someone posted it on Instagram, and then I looked up the listing, so it was on the MLS, but there is a community of A-frame lovers all over the world, and I do follow some of those accounts, and this popped up in a market couple hours away from me, and that’s what spawned me to go check it out, and have something a little bit closer that I could use.

David:
Those A-frames are very cool. I bought one of them myself in the Smokey Mountains, and the pictures just really stand out for some reason when you’re looking at that A frame cabin.

Josh:
Absolutely.

David:
All right, question number three. How much was it?

Josh:
So it was listed for $300,000. This was June of 2020, where everyone was still very unsure about the real estate market. It had been sitting there. I offered 250, they came back at 275, and that’s where we closed.

Henry:
Whoa, fantastic. You are a savant, because the next question was, how did you negotiate it?

Josh:
Yeah, I think it’s just because it was sitting there, and being still the beginnings of COVID, no one knew where the real estate market was going to go. I at least had those Smokey Mountains cabins that were up and running, and I saw how valuable it was. So, I just wanted to jump on, and get as many as I possibly could. So yeah, I think it worked my advantage for sure, when we made that offer, low ball offer.

David:
Okay. And how did you fund it?

Josh:
So I use my HELOC, actually purchase the whole thing, and do renovations. Because again, I had another lender back out on me. It was something where I got the lender from my real estate agent, and I thought that there was just something off, and it was something where they would ask me for a certain document, and I would send it within an hour or so, and then two days later, they would ask me for the same document. So, I would send it again.
I just felt like there’s something that’s going to be missed. And we got down to the wire, and so in my head I needed a backup plan, got down to the wire and they’re like, “Well this isn’t going to work.” And they basically pulled the rug from under me, or we had to go back, extend the contract even more, and potentially lose it, and provide way more paperwork. So, I used my HELOC to buy the whole thing cash.

David:
Now do you refinance after that?

Josh:
I did. So, that one we actually put $80,000 on top of it, into renovations, and that was building a bigger deck for the view, adding a deck for the hot tub, adding a hot tub, air conditioning, and then décor, and stuff like that. So, yeah, so afterwards we did raise the value quite a bit, and then we refinanced to pull the money out.

Henry:
Awesome. Well, we know what you did with it, but we assume you did a short term rental, but the next question is what did you do with it?

Josh:
Yeah, so we did make it a short-term rental. I think the first year it grossed $100,000, which is tremendous for… I mean, I was all in at $355, and after the refinance, we pulled out about $330,000. So, I was maybe in it for $20,000 total, and grossed about a $100,000 the first year, which was pretty phenomenal.

Henry:
That’s a good cash for cash return.

David:
Yeah. Remind us where we are?

Josh:
I closed June, 2020.

David:
2020. Holy cow, man. You made a hundred grand in the first year on a $20,000 investment.

Henry:
I’d take that ROI.

Josh:
It wasn’t too bad.

David:
Yeah, what’s funny is there was a lot of people in 2020 saying, “Oh the market’s going to crash, it’s too hot, these prices.” Can you believe that someone’s paying $250,000 for a cabin? And that cabin’s probably… What do you think it’s worth right now? I mean, I’m skipping ahead, but…

Josh:
I would maybe say 500-ish, I would imagine.

David:
How big is it?

Josh:
It’s a little smaller than a thousand square feet.

David:
Okay.

Josh:
So it’s pretty small. It’s a two one, but it’s an A-frame that, the top level is is a really nice bedroom loft, A frame area.

David:
That’s what’s tricky about short-term rentals, is like you might look at the traditional metrics like size, and sleep count, and not expect it to perform well, but it’s got something unique about it that makes it stand out on Airbnb, and it’s at the top of the list, and everyone books that little sucker.

Josh:
Well, part of the reason why I loved that cabin in particular, besides it being an A-frame, and we kind of fell in love with the style of it, is it seems like it’s remote. We are at the end of a dirt road. When you’re there, you feel like you’re completely alone. So, it’s really for couples, and small families, and us as a small family, we went up there, and we would just have a blast, and you just feel at such a peace. And we decorated it with pretty high end furnishings, so because of that, I think we attract people from Los Angeles that want better style, and are willing to pay for it a little bit more.

David:
I look for that as well, especially when I’m in buying cabins. I don’t like it when you look out your window, and there’s another cabin right next to you. You’re sitting in the hot tub, and you’re looking at the other person sitting in their hot tub. I always skew towards the ones at the end of the road, or the elevation’s different, so you’re sitting above the other cabin, there’s trees in the way. You’ve got to look a little bit harder, but I absolutely feel like if you’re going to the woods, you want to feel like you’re isolated. You don’t want to feel like you’re in a HOA.

Josh:
It’s part of that experience.

David:
Some of them literally are like track houses, but they’re just cabins. They just have wood everywhere, and a little bear figurine.

Josh:
Absolutely.

David:
But they’re sitting on a concrete pad that a bunch of other ones are built on, all next to each other. It’s the most bizarre thing. I always think this is like what a ghost town’s going to look like. At some point they’re all going to be vacant. People are going to like, “Here’s a community of homes that no one’s lived in for 30 years.”

Henry:
Is it a requirement?

Josh:
Well, and I know this only from production cause I’ve scouted it a couple times, and I don’t know if it still exists or is like this, but right by LAX, there was a community of track homes that was abandoned. And so, literally, it’s all these houses. You go to this neighborhood and it’s completely empty, and you can walk around, and it’s this weird kind of vibe, and a lot of people do wind up shooting there, filming there. But yeah, it kind of exists. Maybe, this was a while ago.

David:
All right, my last question that Henry’s got one more. What lessons did you learn from this deal?

Josh:
I learned that this was a new market for me, in short term rentals, and what I learned was how to look at the market as an individual market, and what to bring to that market, versus the other markets. Because people that visit those markets are different than that visit the Smokey Mountains. And so what I really focused on was making a cabin an experience that really calls towards those guests.

Henry:
And the last question is, who was the hero on your team for this deal?

Josh:
It’s got to be my wife on this one. I mean, she helped design the cabin, and we get so many compliments, and people just love it. I mean, it’s so comfortable, and it looks great.

David:
Awesome. That’s very cool to hear. Remember, you too can find the hero for your next deal, and maybe through BiggerPockets. Head on over to the BiggerPockets nav bar on biggerpockets.com, and find all the ways that the BiggerPockets marketplace can help you. All right, Josh. Moving on to the last segment of our show. This is the Famous Four. I’m sure you’ve heard this before, pardon the pun.

Speaker 4:
Famous Four.

David:
In this segment of the show, we ask every guest the same four questions every episode. Question number one, what is your favorite real estate book?

Josh:
Not to blow you up too much, but I’m going to have to say Long Distance Real Estate Investing by David Greene.

David:
First time anyone’s ever said that. I love it.

Josh:
I know that’s not true, but yes, sure.

Henry:
Awesome. And what is your favorite business book? I haven’t written one, so you can’t flatter me.

Josh:
I was trying. I looked, looked, I’d have to say a Shoe Dog by Phil Knight. I just feel like it’s really inspiring, and to see a company, how big it is now, and where they started and how they struggled and how they built up to where they are was really fun to read.

Henry:
Awesome, thanks. And tell us a little bit about what are your hobbies?

Josh:
I love playing tennis, and I’ve gotten my whole family into it. The kids started learning, my wife felt like she was going to be left out, so she started learning. So, all four of us play a lot of tennis. And other than that, we like to travel together.

Henry:
Do you play a little mixed doubles as a family?

Josh:
Sometimes. She’s a little more… I grew up playing in high school, and before, so she’s a little more self-conscious. We’ve done it. I keep telling her that she’s 100% in her games, because we’ve beaten all the couples that we’ve played against, but we’ve only played maybe three nights. So, she wants to keep that 100% statistic going.

David:
She picks opponents very carefully.

Josh:
She does. They’re not very good.

David:
Tennis hustlers. All right.

Josh:
Exactly.

David:
Next question. In your opinion, what sets apart successful investors from those who give up, fail, or never get started?

Josh:
I think it’s taking action. I’ve heard so many times while I was learning, that your first deal’s the most important, and it’s hard to understand theoretically when you’re just learning, but when you put your learnings into action, everything becomes clear, and you start to see, “Oh, this actually works. This isn’t just a theory.” So I think you have to take action.

Henry:
So, tell us where people can find out more about you.

Josh:
Well, I’m on BiggerPockets, obviously. You could follow me on Instagram at Bunk House Worldwide, and we show some of the deals that we’re going through, and some of our cabins, and struggles that we go through when we’re renovating, maybe. And you could DM me there. Also you could reach out to me at [email protected], is my email address, and yeah.

David:
All right, Henry, where can people find out more about you?

Henry:
Best place to find me is on Instagram. I’m @theHenryWashington on Instagram.

David:
All right, Josh, this has been fantastic. I appreciate you sharing some time with us. Do you have any last words that you want to share before we get you out of here?

Josh:
I would just say go out there and do it. What you’ve learned works, and just trust your instincts, trust the numbers, and go, go, go.

David:
That is great advice. Thank you very much, Josh. And also thank you for sharing your story with us. Everybody likes to talk about the success points in their struggle. They don’t always like to share the parts that were not as good, but those are very important to hear. So, props to you for sharing that. I appreciate it. We’re going to get you out of here. If you guys would like to follow me, I am DavidGreene24 on social media, and that is the same on YouTube. You can now put @DavidGreene24. You should find me there. All right. This is David Greene for Henry the Hulk Washington, signing off.