Richard

Ashley:
This is Real Estate Rookie episode 235.

Amy:
I think we strategically try and price our rentals a little bit higher. This isn’t just like a super cheap rental you can move into and mess it up. We’re also extremely transparent when people are toying the houses. Like, “Look, we actively live here right now. We’ve spent an entire year, every single night, every weekend renovating this house. This is our baby. We want to find people who are going to treat it the exact same that we will.” I think the tenants that we have in our houses are exactly that. They’re extremely kind, nice people who really value what the historic aspect of the homes.

Ashley:
My name is Ashley Kehr and I’m here with my cohost Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey.
I want to start this episode by shouting out someone who recently left us review on Apple Podcasts. The username is Jen Detour. Hopefully I’m saying that the right way, but I love this review because it’s got some good stuff. So this review says, “Ashley and Tony, thank you so much for always bringing great guests to the show, bringing so much knowledge and expertise. Please keep sharing info about your projects and struggles every week. It’s so extremely valuable. Also, Ashley, your life is great and contagious. I find myself sometimes laughing like you and then I tell myself, ‘Ha ha ha, I’m laughing like Ashley. I listen to the show all the time and the knowledge from your show and the other BP podcast have allowed me to own now a rental and I’m currently house hacking. Thank you forever.”
So if you guys haven’t yet, please you leave us a honest rating review on Apple Podcasts, whatever platform it is you’re listening to. So Ash, how do you feel? You got fans out there that are-

Ashley:
For my laugh.

Tony:
… contagious. Yeah, your laugh is contagious.

Ashley:
I mean, I can’t help it. I can’t stop it. Even the other day I was with some friends having a fire and whoever built up the fire like, “Oh we would love to have you on Survivor, whatever.” We were joking about Survivor and he started pretending like he was being interviewed, like on Survivors one of the contestants talking about the other players and talking about how our other friend wasn’t good at this or whatever and he needed to step up his game. Then to me he is like, “Yeah, all she does is sit around and laugh all the time. This annoying laugh.” And I started laughing of course. And I was like, “I couldn’t even help it. It just came out.

Tony:
There you go. There you go. Yeah. Well what else is new? What’s going on?

Ashley:
Well, we haven’t recorded in a couple weeks because you are on that [inaudible 00:02:29]-

Tony:
I know. In Mexico.

Ashley:
I mean, the video is amazing. I looked. It’s so beautiful.

Tony:
Yeah. So we’ve gone to this resort now three times, it’s the third time going back. Every time we just fall more and more in love with the place. So it’s always good to rest and recharge a little bit. We’re always moving a thousand miles an hour. And as soon as we got back that very next day, we had a day filled with meetings. So it’s always good to get away. But I’m feeling ready now to take on the last quarter of the year. I have my fill of tacos and margaritas and tequila. So I’m back to the real world now.

Ashley:
Doesn’t it also almost make you even more eager to get back to work? After not working for a little while, being on that vacation, on that plane ride home, I always get like, “Oh my gosh, I can’t wait to do this. I want to do this. I want to dive into that.”

Tony:
Usually yes, but it was really weird. I think we’ve just been moving so fast for the last two years. We’re honestly having discussions around like, “Okay, how do we start to slow down a little bit?” Because a big goal of us building this business was for not just financial independence but time freedom. And I feel like our time freedom has suffered a bit because we do have so many different things that we’re working on right now. So I think a big realization coming out of this last vacation was that we needed a little bit more time back in our lives and how do we start to either delegate or delete some of the things that we’re doing so we can’t get that time freedom back.

Ashley:
And you know what? I’ve heard from a lot of investors, very successful large investors who scaled and grew so big and then they actually cut back, they cut employees. They’re like, “This is not actually what I wanted. This is way more work. I don’t have any time. I’m trying to oversee this. I’m managing all these people” and they cut it down. So it’s finding that boundary, that line. Where’s that gray area between scaling enough and not going too far where you’re even more overwhelmed and more busy than having that time freedom? It’s finding that perfect spot, which of course is hard to do.

Tony:
You know what might be a cool episode is if we got a business coach on here. Those are the kind of conversations you should be having like a business coach. It might be cool to get someone who’s talked to a lot of different investors and what those kind of ups and downs are and how to navigate those. So yeah, maybe we should do that. That might be a cool episode.

Ashley:
Once again, Tony and I using the podcast for our own personal gain. Well, today we brought on some amazing investors, which did add a ton of value to us and we’re super cool to listen to and talk to. So we have Amy and Mitch out of Philadelphia on. They are renovating how homes that are over 100 years old. The first house that I ever lived in, this old farmhouse that was my husband’s grandma’s house, that was I think 120 years old as of right now. That’s how old it is. Half of it was built in. I can’t even imagine going in and renovating this thing. I wouldn’t even know where to start. The floors are so uneven, just bad. So I give them tons of credit for going after these older homes and renovating them. So they talk about how they purchase the property as their primary. They live in it for a year, renovate it, and then they turn it into a rental property.
And before we did this interview, Tony and I were kind of stumped. Is there actually a coined phrase for this? It’s not a live-in BRRRR because they didn’t refinance the property, they kept their original financing on. So we need you guys to DM us or comment on the YouTube video and let us know what that term should be for, you’re going to buy something as your primary residence, live in it, renovate it, and then turn it into a rental.

Tony:
Maybe we can call it a PRR, so like P-R-R. So Primary Rehab Rent.

Ashley:
Sure.

Tony:
I’ll keep working on it.

Ashley:
Time to pitch that to BiggerPockets’ publishing.

Tony:
To the publishing team.

Ashley:
You better coin that coin that book.

Tony:
The PRR. Yeah. But no, Amy and Mitch, they were great. I think they shared a lot of insights around how they’re working together as a couple and what that dynamic looks like. They talk a lot about how they educated themselves. Neither one of them had any rehab construction experience prior to this and they’ve done three properties. They’re on their hunt for the fourth right now. So there’s a lot of insights. But I think what I enjoyed most out of Mitch and Amy’s story was the level of dedication and commitments that they have to their business and to not making excuses around why they can or can’t do something. There’s a story that Amy shares near the end about two flashlights and a pizza. I think that story is just really, it shows just who they are as investors and as people.

Ashley:
Well, before we bring Mitch and Amy onto the show, make sure you guys listen to the very beginning very carefully. And if you’re watching on YouTube, even more enjoyable as Tony makes it super uncomfortable for all of us during this interview. So if you want to see Tony make it real awkward real fast, I mean, take a look it at YouTube when you’re watching this podcast episode.

Tony:
Amy and Mitch, we were super excited to have you on the Real Estate Rookie podcast. We are obviously going to get into the nitty gritty of your real estate business. But before we do that, give us a quick backstory. Who are you guys? How’d you get started in real estate investing? Amy, we can start with you and then Mitch, you can lead in afterwards.

Amy:
Sure. Well thank you guys for having us. My name’s Amy and…

Mitch:
I’m Mitch.

Amy:
We actually grew up in the same small town together in South Jersey. We went to high school together and now we live in Philly. We’ve been living here for a little over… I’ve been here for four years.

Mitch:
Yeah, I’ve probably been here for about six or so in different boroughs of Philly.

Amy:
Yeah. And in terms of our real estate portfolio, we were lucky enough to become under contract with our first property right before COVID, right in February of 2020. And even before we closed on that property, we kind of had a goal in mind of getting one property per year to build our investment portfolio. And so we’re three years in and we have three properties and we’re currently looking for our fourth.

Tony:
Congratulations, guys. Now you said you guys met in high school. So are you guys in a relationship? Are you guys just business partners? What’s…

Mitch:
Yeah, we’re in a relationship right now and business partners.

Amy:
Yeah, a little bit of both.

Mitch:
A little bit of both.

Tony:
I love that.

Ashley:
Geez, Tony, way to make it awkward. [inaudible 00:09:17] figuring it out. Way to put pressure on him.

Mitch:
No. No. No. We’ve been together for almost four years now, but we’ve known each other growing up. Yep.

Tony:
I love that. So are you guys high school sweethearts? Is it that kind of deal?

Mitch:
Sort of.

Amy:
Yeah. I’ve known him since high school.

Mitch:
We found each other after college, you know?

Tony:
There you go. Okay. Now my wife and I, we’ve been dating since we were seniors in high school. So I always love when I hear stories that had the genesis early in life. And now we’re also business partners as well, so that’s a good time.

Mitch:
It’s awesome.

Tony:
Well, kudos you guys for having that goal of getting one property per year and sticking to that. Are all of those properties located in and around the Philly area?

Amy:
Yes, all three of them are in Philly. Two of them are in one neighborhood and then the third is about 20 minutes away but still within city limits.

Tony:
Got it. So you guys got one in February. Just give us a quick timeline for the other two. February 2020 was the first one. What was the timing for the other ones there?

Amy:
The second one we closed March 2021 and then the third one, February 2022.

Ashley:
What made you guys, and maybe Mitch you can take this question, what made you want to start investing in real estate? Who was the one that kind of brought up the idea of it?

Mitch:
Yeah, so for us, I mean for me actually, it was probably Amy and she could probably talk a little bit more about this, but her mom was a big mentor for us and has experience doing this kind of stuff. So she was a big reason why we got into it.

Amy:
Yeah, Mitch and I were renting an apartment together and we were spending $1,500 a month for a really, really tiny 400 square foot apartment. We were living on top of each other and my mom urged me to consider looking to buying. At first it was like, “How can we afford to buy?” But then really looked into it and saw that mortgage monthly payments were a lot cheaper than what we were paying in rent. So that really what catapulted us into looking in the first place. And here we are three years later. Of course we were obsessed with it.

Mitch:
Yeah.

Ashley:
With your first property, did you guys house hack or was it multifamily? What kind of made that first deal turn into an investment property?

Amy:
So going into it, since like Mitch said, my mom owns a couple of rental properties herself, I knew in the long term I would want to turn it into a rental one day. So before we were looking, our criteria for homes had to be conducive for tenants in the future. So we were just looking at single family homes within the neighborhood that we were living in at the time. The house that we ended up closing on was only a couple blocks away from our apartment. It was three bedroom and one bath so we knew it had rental potential since we ourselves were running in the city at the time. But that’s how we really settled on that first property, just a long term rental potential.

Tony:
So just to get some clarity around what your guys’ strategy looks like. So you set the goal to buy one per year. Are you guys moving into each one of these properties and then getting it stabilized to be a rental Then moving out to the next one? Give us the kind of 30,000 foot view of what your game plan looks like.

Mitch:
Yeah, so high level, we’re really kind of doing the live and flip. We’ll find a place that needs some work, move into it, take our time a little bit in terms of doing the renovations, it gives us a little bit of breathing room not having to hold two mortgages or rent in a mortgage. We live in it and then fix it up. And then by the end of that year or 12 months look to rent it out typically.

Amy:
When we first started I was fresh out of college, I had just turned 22 and we had no money so we really couldn’t buy an investment property with 20% down. We knew our only option was to buy a primary home to get those low percent down loans. So that’s how we settled on using an FHA loan first. We got a large amount of sellers assist so we only had to come to the closing table with just shy of $7,000. And then moving forward from there, we were able to put all of our renovations on a credit card throughout the 12 months and paying it off actively every single month. So that was a big priority for us since we really didn’t have that much cash to work with.

Ashley:
Amy, with the FHA loan, can you talk about some of the benefits as to why maybe somebody else would want to go that route for purchasing their first investment property or their first primary, I guess, to become investment?

Tony:
And Amy, if you can also just define what FHA is for the folks that aren’t familiar with that.

Amy:
Sure. So it’s a first time home buyer loan. I think the biggest benefit for us was the low money down. So we did three and a half percent down. And with an FHA loan you’re able to get a large amount of sellers assists as well. So when the seller pays money towards our closing costs, so that’s how we’re able to put so little down. I think another big benefit is they’re really, really strict. They have their own inspections so the sellers were forced to make a lot of fixes themselves before we even moved in since it had to be habitable for us to live there. So I think those are the two big benefits.

Ashley:
So how did you find a property that had value add and needed rehab? Were you looking more cosmetic since you still needed to meet those FHA requirements that it couldn’t be this huge fixer-upper that you had to do?

Amy:
Yes. We’ve looked at a lot of properties that were complete dumps and that we kind of knew we weren’t going to be able to get an FHA loan for. So we had to narrow it down to mostly cosmetic fixes. And for our first property, we thought it was just going to be cosmetic. And then we had the inspector go in and he found a lot more issues, some of which were handled by the seller such as the roof. Once we got in there we found even more issues because you can’t really see everything during an inspection.

Ashley:
What were some of those things? And looking back, could there have been red flags that maybe you could have found those things out just so maybe if somebody else is going through the same situation, things they should watch out for that might not come up in an inspection?

Mitch:
Yeah, for sure. I mean now looking back on it, we were renovating our kitchen for example. We started tearing up the floors and then tearing up… It ended up being seven layers of floors or whatever, something crazy because it’s super old home from the 1800s and it’s just been through years and years of rehab. We pulled up so many floors that we actually found out that there was a two inch gap between the kitchen and the living room and there was some structural damage under that last floor and that part of the house was actually sinking. So then that started spiraling. It quickly became not just cosmetic fixes.

Tony:
So I want to dig into that a little bit. These are really big rehab issues. So Mitch or Amy, did either of you have construction experience before this first property?

Mitch:
No, I mean going into that first property, honestly it took me a day to change the locks and figure out how to do that, let alone flip a kitchen to be honest.

Amy:
We could not do anything. Kind of a silver lining in a weird way was that COVID hit right after we closed. So even if we wanted to hire a contractor, we couldn’t because there was a stop work order on everything. So we were just forced to figure it out ourselves by watching YouTube and reaching out to Mitch’s family who’s really handy and just kind of figure it out as we go.

Mitch:
Yeah, my dad’s always been super handy fixing stuff. He doesn’t sit down. Every weekend he has a project fixing something in the house. So I was able to pick his brain, use some of his tools. I mean, he was super helpful throughout the whole process.

Tony:
So did you guys self perform all of the rehab for that first project? Was there anything you guys subbed out or was it literally all Mitch and Amy?

Mitch:
So I mean it was a good mix. I mean, I think now our goals trying to do 70 to 80% of the work ourselves. Nothing huge like plumbing or electrical. One of my best friend is electrician so that was super helpful when we were renovating the kitchen. He was able to rewire a lot of stuff. But yeah, I think a majority of the time we try and stick to us doing it.

Amy:
Yeah. Things that are best left to the professionals like window replacements, electrical, we subbed out, but everything else we did ourselves.

Tony:
So I just want to ask, sounds like you guys had some good people in your corner, maybe some parents in-laws, friends, but where did you guys go to build that foundation of knowledge to even start doing these things? Was it YouTube University? Was it trial and error? Just kind of walk us through that initial educational phase of building that confidence even get started.

Amy:
I think for a full year before we even started looking at houses, I was really invested in just kind of educating myself on real estate and investing in home ownership. I listened to million podcasts, watch a ton of YouTube videos, read a lot of books. So kind of going into it, I felt comfortable with the business aspect. And I know Mitch was learning a lot from his dad, kind of shadowing him in some of his work and watching YouTube videos on the renovations. So we had a little bit of knowledge. We just hadn’t actually performed it or put it to use.

Mitch:
Yeah. When we first started looking at houses, we kind of saw some trends in terms of like, “For our price range what’s the kitchens are looking like?” Like for example, what goes into installing new cabinets? So when we were looking at houses, in the back end I’d go home and I’d be like, “What really goes into putting new cabinets up or renovating a kitchen?” So just trying to build as much knowledge before we dove in as possible.

Ashley:
Now you guys are investing in Philadelphia, the northeast. So this typically tends to be an area with older homes. Are you guys going after older homes or are these newer builds that you’re going in then doing these cosmetic updates?

Amy:
All of the homes, all three of them are really old. The oldest built in 1870 and I think the newest in 1890. So they’re all extremely old. We could definitely look at one of the new builds because there’s so many in the area. But I personally love the history that Philadelphia has to offer. We kind of consider ourselves not really house flippers but restorers. We want to bring back the historic value that all these houses have because I think there’s such character that just flipping houses it just rips out. So I really pushed us to just look at these really, really old homes because there’s so many fun stories and things that you can learn while you’re renovating these houses just the fact that they’re almost 150 years old.

Tony:
Amy, I so love that you brought up that point of restoring houses versus flipping them. So for you, when step into this house that was built in 1870, what’s your thought process between deciding what to kind of keep, what to make new, what to just refurbish? How do you go through that process of still keeping the history of the house but making it functional for 2022?

Amy:
Yeah, there’s definitely an easy way to go of just laying carpet over the original hardwood floors or laying laminate flooring. But we wanted to invest the money and ripping up the carpet that was there and restoring all the original hardwoods just build a lot of character into the homes and just kind of figuring out what would be best without taking out that historic value that we found. Obviously I think when these homes were built, I don’t even know if there was indoor plumbing, but we had to take the bathrooms and the kitchens and just bring more life into them while keeping all of the charm that they have.

Mitch:
Yeah, we found houses… Our first house is a cold closet in the basement for when they used to have to heat the home that way. It’s crazy.

Amy:
It’s so cool.

Ashley:
Well along that note, you’re turning these properties into rentals. Do you ever have any fear that these hardwood floors are just going to get ruined? Because that was the first thing I thought of is that. Or do you have such a tenant base of great tenants that look for these homes that are more attractive than going and finding a modern day plain Jane apartment or something like that?

Amy:
Yeah, I think you’re spot on. I think we strategically try and price our rentals a little bit higher. This isn’t just a super cheap rental you can move into and mess it up. And we’re also extremely transparent when people are touring the houses. Like, “Look, we actively live here right now. We’ve spent an entire year every single night, every weekend renovating this house. This is our baby. We want to find people who are going to treat it the exact same that we will.” And I think the tenants that we have in our houses are exactly that. They’re extremely kind, nice people who really value what the historic aspect of the homes.

Tony:
So I want to talk a little bit about how you guys are splitting up those responsibilities because there’s a lot, I would assume, that goes into restoring a 100 year old house. So Mitch, I’ll ask you, is there a certain aspect of the rehab that you like to focus on and then you kind of pass the rest to Amy? Or how do you guys handle those responsibilities?

Mitch:
Yeah, I mean think there’s a good split. I feel like I probably take a brunt of the heavier lifts, but she’s always there for moral sports. She’s diving in where she can in terms of helping restore, whether it’s painting, putting on a new trim. I mean, you’ve helped a lot of stuff. I mean, I feel like I probably do take on most of that renovation responsibilities, but we help each other out.

Amy:
Yeah. And then I think I’m more so, I guess, the business aspect. I love running the numbers, touring houses and bringing them to Mitch and seeing what touch he can put on them to make them our vision come true.

Mitch:
Yeah. I don’t think there’s necessarily a weakness in terms of me with numbers or her with the renovations. I mean, I’ll be doing a project and she’ll be like, “Why don’t you do it this way?” I’m like, “Why aren’t I doing it that way?” There’s a good mix.

Tony:
Do you guys ever find yourselves maybe at odds with what you should be doing with any specific project?

Amy:
I would say absolutely, especially because we live there while we’re fixing it. So I have a tendency to want to over fix things and make them nicer than they need to be. Our long term goal is to rent them out and kind of build a real estate portfolio so we don’t need to renovate these to the nines. And Mitch really brings me back down to earth and he’s like, “What’s the point of getting this quartz countertop?”

Mitch:
Yeah. I mean, if we can make it as functional as possible and bring back some life to it with obviously doing the best supplies and materials we can use and putting our touch on it, but not over renovating because it’s not a forever home we’re looking for.

Ashley:
For your guys’ partnership, do you guys have an LLC or a company together? Are you taking turns as to whose house it goes into? What does the actual structure look like? And would you change anything about that for maybe somebody who is dating someone, they’re going to become business partners, what advice can you give them as to ways that they can protect themselves and what’s best for both of you?

Amy:
So we started out… I just bought the first property with an FHA loan. And then for the second property, Mitch and I went 50/50 with a conventional 5% down. And then the third property, back to myself, 5% conventional. And then the fourth property, Mitch will buy that just to split up our debt to income ratio there. And in terms of in LLC, we do not have one yet, but with our fourth property we’re really hoping to have that established before we close on that.

Ashley:
The next question I have about your guys’ partnership is the management piece of it. Are you guys self managing? Do you have a property management company? And if you’re self-managing, how are those roles kind of split up between the two of you?

Mitch:
So we don’t have a property management company. I think one benefit of the live and flip and doing a lot of the stuff ourselves is when we do have an issue come up at one of our properties that the tenants are in, I probably am already thinking about a fix because I had to fix it at one point or I know all the ins and outs of the houses. So if they have a leak, I know we’re had to shut off the water. Every spot I can direct them, I can run over there. That’s one other benefit of them all being in the same area. So we haven’t really looked into a management company yet. We haven’t had any issues. It’s just us.

Amy:
We have our tenants text me, no calls, just texting, so we can talk about it and kind of evaluate a plan before we either send Mitch in to do the fix or hire out someone to do it. But that’s how we’re going right now. But I think moving forward with our fourth property, it maybe a little bit much to handle. So we are thinking about property management and somewhere to put all of our maintenance requests into one place to make it a little bit more organized. But so far just the two of us has worked pretty well.

Ashley:
Yeah. Even if you guys kept doing what you’re doing, if it’s working and just putting in some property management software in place, are you using any of that?

Amy:
We’re actually in the process of signing up for Rent Ready. We we’re using-

Ashley:
Oh, awesome. We love Rent Ready.

Amy:
Yes, I heard about it from you guys. We were using the Zillow Rental Manager, but it’s a little disorganized. When you have three separate properties, you have to have three separate kind of profiles. We wanted some that we can put everything in one since we own them all ourselves. So we want everything in one cohesive place, so Rent Ready seemed perfect for that.

Tony:
Can we lead into how you guys are actually screening these tenants? You said you walk them through the property, you let them know that you put your blood, sweat and tears into this place. How are you making sure that you’re not going to get someone that’s going to go in there and just trash the place and not take care of it? What does your screening process look like?

Amy:
So everyone applies… Well, currently through the Zillow Rental Manager that we were using, which includes a background check, credit check, employment verification. We ask for previous landlord information and we’re calling for a referral. And then after that, for all the people that actually applied, we had everyone come over and we set up a 30 minute time period for everyone. We kind of held it like an open house on a Sunday but gave everyone their own time slot to also kind of follow COVID protocols. After we showed everyone the house, we sat down with them and just asked them, “Why are you looking to move?” anything we can get to know about these people and really interview them basically.

Mitch:
Yeah. And it’s not always like a formal sit down. Like, as we’re walking around the house, it will be a little bit of an interview like, “What are you guys looking for? Why are you moving into the area?” Things like that. So we can see what they’re looking for and I guess see how they’ll gel with us as landlords and them as tenants really.

Ashley:
Before you guys started doing your showing for your first property, how did you educate yourself on different landlord laws, like what are the questions you can and cannot ask and different things like that and even putting together your lease agreement? What are some steps you took to get that education and do that research?

Amy:
I think that goes back to my mom being such a great mentor for us. She has a couple of rental properties so she was able to help me with her real estate lawyer who helped us put together a lease and kind of briefed us on landlord tenant laws that are specific to Pennsylvania. There were a lot of things that we needed to know that kind of just flying by the state of our pants we had no idea about. But having people in our kind of network to lean on really gave us those things that we could educate ourselves on.

Ashley:
Amy, do you remember how much it cost for the attorney to put that together for you?

Amy:
I think we had an initial console and it was $250 for the hour.

Ashley:
I mean, well worth it. Or at least you can use over and over again. I think there’s often time this big fear of like, “Oh my gosh I have to hire an attorney to do this. It’s going to cost me so much money.” But oftentimes not really. Well worth $250 to make sure that you have that airtight lease agreement.
And BiggerPockets, if you’re a pro member you can get access to landlords leases too that are state specific for your state too. So if anyone’s a pro member, you can download those and then you just fill in the information. But going the other route and hiring attorney to create it directly to your property and to add in the things that you want in the lease too… You probably have in your lease or an addendum or some kind of rule that states like tax only and the different ways they have to pay you and things like that, which will vary depending on each landlord as to how they want that process done. But yeah, 250, I think well worth it to have a lease agreement. And you’ve been able to use it for your other properties, you just changed the information in it, correct?

Amy:
Yeah, exactly. I think the best thing that we put in was anything under $100 it’s responsibility of the tenant to fix themselves. So we’ve gotten quite a few calls of, “Hey, can you guys come out and we’ll ask some more details.” We’ll be like, “Sorry. The lease, it’s under $100. That’s an easy fix. You guys can do it yourselves.” And I do feel really bad saying that, but it makes the most a lot easier.

Mitch:
Yeah, you hear stories of people calling their landlords to change a light bulb. I mean, especially when we’re doing the property manager, like property management responsibilities, we don’t want to drive an hour to change a light bulb, you know?

Tony:
I think so many new investors, and this kind of tax on to what you were saying Ashley, they’re willing to go out and spend several hundred thousand dollars to purchase a property, maybe even more, tens of thousands of dollars to rehab this property but then they are appalled at the idea of spending another $200 to get this lease agreement created and think about, A, how much money you’ve saved by not having to goal change light bulbs and unclog toilets because it’s in your lease agreement but there’s also the protection side of it because now you guys have a binding agreement between you and that tenant. So if there’s ever an issue, you have this document you can fall back on.
And the value of that, you’re getting paid back 10 times over. If it can just save you one trip to replace a light bulb that’s paid for itself. And the fact that you can use that same agreement over and over and over and over and over again, it just drives me crazy when people aren’t willing to spend that extra little bit of money to really drive home all that money they’ve already invested into the property.

Ashley:
To add on to that too, when you said like, “$100, you have to cover it,” I’m sure there are some people listening that are taking them back, “Wait, what? You can’t do that. You’re the landlord. You have to take care of the maintenance.” You can put a lot of things into the lease. They are signing that lease. Obviously you want to disclose it to them and not try to bury it in the lease agreement that that’s the thing. But if they know upfront that, “If you want to rent this property, this is one of the conditions of it” and they sign the lease agreement, nobody should feel bad that you have to tell them, “Oh it’s under $100, it’s for you to cover it.” They signed that lease agreement for a while.
So starting out, I’d always had appliances include. And then just the repairs and maintenance on them I just didn’t want to handle anymore. So what we did was going forward, any new units didn’t have appliances supplied. But any ones that still had the appliance in them, we put into the lease agreement that these appliances are included. But any repairs or maintenance or if they completely break is on the tenant to repair or replace them. They were just provided as a courtesy because they were still in the unit from when we did supply the appliances. So really there’s tons of ways that you can put different things into a lease agreement.

Tony:
Yeah, as long as you’re not breaking the law, you can put whatever you want to. If you want to tell your tenants that every year for Christmas they have to put up a big Santa Claus, you could do that, right? It’s whatever you want it to be.

Ashley:
Actually, that might be discrimination if they don’t believe in Santa Claus.

Tony:
Yeah, Santa Clause, that’s true. Maybe that was a bad example but you get my point, right? As long as you’re not breaking any of the landlord tenant law, you can do whatever you want. So I think it’s really instructional for you guys to have that in there.

Mitch:
And Ashley, I really like that idea with appliances too, because in our experience I feel like when we have had some appliance issues, those are some of the things we can’t fix ourselves. I mean you need to be a specific repairman to fix those things and we would have to hire out somebody to fix the dishwasher or just buy a new dishwasher. So putting that on the tenants, I like that idea.

Ashley:
Yeah. Another one that we started doing too recently, and my business partner actually is the one started doing it in his own unit before I implemented it, was that the drains are all free and clear when you rent it. So if there is a drain that is clogged, it is from your hair, your grease, your whatever that went down the drains. Because that really has actually saved a lot of money. And a lot of time too is unclogging drains and you snake them and you pull out this big clump of hair. Well, obviously that’s not my fault or the apartment’s fault that that is stuck in there. So that’s another one that we’ve been using too.

Tony:
It’ll be a really weird conversation if it was your hair, Ashley that’s stuck. Ashley’s like sneaking in the middle of the night showering in their [inaudible 00:34:20].

Amy:
That’s just scary.

Mitch:
They want a DNA test on the hair.

Tony:
Yeah.

Ashley:
Yeah.

Tony:
So Amy, Mitch, you guys have obviously learned a lot as you’ve gone through these three different properties. How has your maybe buying criteria shifted from property one as you now look for property number four?

Amy:
I think we started out a little naive saying we were just going to look for cosmetic fixes. We were really awaken once we started ripping out walls that cosmetic fixes are always possible. We thought we were just going to be able to rip off cabinets and put up new ones. But we found a slew of issues. So we were really looking deeper like, “Is this truly cosmetic?” We went through three different inspectors and we think we found the perfect one who can actually really help us identify a lot of issues. But we’ve also kind of created a do not buy box, this is what we’ve been calling it, that we’re looking for with our fourth property that we’ve learned from our previous three. One of the big ones is foundation issues. Anything with the foundation issues we’re staying away from, that’s not something we can DIY and fix ourselves. And it costs a lot of money to get an engineer, a specialist to come out and fix that.
The second one, and it sounds kind of silly, is a house without central air. That is on our do not buy list. A house must have central air. And the reason being is our first two properties did not have central air and we thought, “Oh we can easily add that throughout the years.” But we’ve gotten quotes and it’s upwards of $20,000 to add in central air because the homes don’t even have duct work. So it’s a huge renovation, but it’s kind of expected for tenants in this area. They all really want central air. And we found that the ROI in spending that money to put in central air, we don’t return. It’s not a return.

Mitch:
Part of that tenant criteria we were talking about earlier too, where we’re trying to price it a little bit higher than I guess people that would come in and potentially ruin it, those kind of tenants expect to have central air versus a window unit.

Tony:
I love, as you do more of these projects, you start to identify the things that you are okay with and the things that you aren’t okay with. And when you’re first starting out, you don’t know what you don’t know. So that kind of naturally happens with all new investors. But there’s something that you mentioned, Amy, that I want to circle back on. You said that you’ve gone through three or four inspectors, but now you feel like you finally found one that you want to stick with. What was unique about that inspector that the other previous three didn’t have?

Amy:
I think this inspector really valued us as kind of DIY renovators. The past inspectors didn’t really take us seriously. We wanted to follow the inspector around the house and learn as much as we could. And they kind of wanted to just get in and out, inspect the property, write up the report and email it to us. And the inspector we’ve most recently worked with, I think he was here for maybe three or four hours and walked us through every single piece of the house and we were taking detailed notes and he was saying, “I would recommend you use this to fix this” or, “This isn’t even worth your money to put your energy into.”

Mitch:
And he was a guy that really respected the old homes too. There is some really old doors in our house and he was like, “I have a hundred skeleton keys at my house. I can bring it over and we can try it out, see if it works.” He was a really cool guy. He liked the older homes that we were looking at. So it was a cool perspective in having him along the journey with us.

Tony:
How did you guys find that inspector?

Amy:
Through our amazing real estate agent. We’ve gone through a lot of inspectors and lenders. Our real estate agent has been our main constant and she knows exactly what we’re looking for and what we need in terms of our team. So she’s the one who recommended him based on what we are looking for.

Ashley:
Do you guys have a deal in mind that you’d want to take us through and we can talk about your real estate agent helping you find it and go through the whole process with the inspection and everything?

Amy:
Yeah, we can talk about our second deal.

Mitch:
I think so.

Ashley:
Yeah, I’ll just ask you a couple rapid fire questions just to kind of get a basis of it and then you can kind of go into the story of it. So where is this property located?

Amy:
It’s in Philadelphia

Ashley:
And single family?

Amy:
Yes, it’s a town home, but it’s single family.

Ashley:
Okay. And what was the purchase price?

Amy:
300,000.

Ashley:
Okay. And how did you find it?

Amy:
We found it on the MLS. Our real estate agent set us up there and we found that it was coming soon to market.

Ashley:
Do you want to lead us into maybe when you saw the property up until when you closed on it and then into renovations?

Amy:
Sure. So we saw that it was coming soon to market. It wasn’t going to hit the market for a week. So we texted our real estate agent and we were able to view it the very next day. We knew this was going to be a home run. I think I had a really strong gut feeling about it. It was the perfect location, perfect size for rental property. So we put in an offer at full price right before it even hit the market. But we weren’t exactly strong offer because we were conventional 5% down. We also wanted a little bit of seller’s assist. So we had to go back and forth, but we ended up being under contact at $300,000 with 3% sellers assist prior to the home even being on the market. So that kind of gave us more money in our pocket thanks to the sellers assist before closing day.

Ashley:
Okay. So you’ve made your offer, you’d negotiated on the property, you had an inspection done on the property. Did anything come up during the inspection and did you have the sellers remediate any of that?

Amy:
Yes. So the home was listed as is, which was a little scary for us since our first property wasn’t. But once the inspection happened, we saw that there was knob-and-tube electrical. We were kind of panicking because we knew that our mortgage company wasn’t going to grant us a mortgage because we weren’t going to be able to get insurance with knob-and-tube. So our real estate agent went back and said, “My clients have to walk away unless the knob-and-tube is remediated.” And I guess we just got extremely lucky and they didn’t want to list it again. So they agreed to update the knob-and-tube, which was something that saved us almost $10,000.

Mitch:
Yeah, that’s awesome.

Tony:
Wow. So the seller paid $10,000 to remediate the knob-and-tube and in addition to that, they also gave you the 3% seller assist?

Amy:
Exactly.

Mitch:
Yep.

Amy:
It was a home run. And like we mentioned, it was early on in 2020 and the market was extremely hot. I think we just got extremely lucky and thanks to our real estate agent who’s just a rockstar.

Tony:
So how did you guys negotiate that seller assist for this deal specifically? Because like you said, you feel like you didn’t have a necessarily strong offer because of the lower down payment, the seller care that you guys were asking for. What do you think you guys did to still be able to get this deal closed? How was that negotiation process?

Amy:
I think we leveraged the fact that it was as is originally. And kind of walking through the home, you can tell it needed a lot of work. So we told our real estate agent to say that they need 3% sellers assist to have a little bit more cash in their pockets at closing because there’s obviously a lot of work that needs to be done. The sellers just agreed like, “Look, we don’t want to pay for any of these fixes, so we’ll give you guys a little bit of money back so you guys can do it on your own.” And then of course we found knob-and-tube after they agreed to that so we just got extremely lucky.

Tony:
I think that goes to show that each seller is motivated by something different. It sounds like what your seller was most concerned with was convenience to sell, right? Some sellers are just most concerned with, “How much money am I getting at the end of the day?” Some sellers are concerned with speed, but it sounds like what was important to your seller is that they didn’t want to have to do anything to sell this property. They didn’t want to have to fix anything. They didn’t want to have to invest a single ounce of energy to get this property sold. And if you as the buyer could make it easy for them to sell without doing any work, then they would be more willing to negotiate and give you the kind of terms you were looking for.
So I think it’s a really good example for all of our rookies that are listening that the better you understand your seller and what their motivations are, the easier chance you have at making it a win-win situation for both of you. Because I’m sure that seller walked away happy because they sold their property without doing any work. You two were obviously happy because you got an amazing deal, right? You got this scary back, you got the knob-and-tube remediated. So it was a win-win for everybody, but it only happened because you guys took the time to really understand what that seller wanted from the situation.

Amy:
Yeah, exactly. I think we are very fortunate because we had an agent who spent a lot of time calling the seller’s agent and kind of learning more about them and then educating us on our options because we didn’t know too much about sellers assist. We used it with an FHA loan, but it’s a little bit different with a conventional loan. So she was able to help us maximize our offer.

Ashley:
And then when you guys did the renovations, you had mentioned briefly before that you had use credit cards before to pay for the renovations. What was the cost of the renovations for this property and how did you cover them?

Mitch:
This one was 10,000. Around 10,000, 15,000.

Amy:
It was just shy of 15,000.

Mitch:
Okay.

Amy:
But that was in just in pure materials since we did all the labor ourselves. So we spread the 15,000 over 12 months. So it’s really not a heavy lift. We were able to pay our credit cards off in full every month, not carry any debt, but thankfully we saved a ton of money by not really hiring out too much work.

Ashley:
And then after the renovation is done, you probably didn’t have an appraisal since you haven’t gotten in refinanced, correct? But what do you think the ARV is after you have done those repairs?

Amy:
So we’ve had our agent run a market analysis against the comps in the area. So we bought it for 300,000 and she thinks it’s worth around 425,000 to 435,000. So added about $130,000, which is crazy to say.

Ashley:
Yeah, that’s amazing. And then how much does it currently rent for and what is your expenses on it? How much does it cash flow?

Amy:
So our current payments for principal taxes and interests are 1,600 a month and it rents for 2,750 a month. So we have a profit of 1,150 every month.

Ashley:
Congrats guys. That’s so awesome.

Tony:
Yeah, it’s amazing.

Ashley:
Yeah. Well thank you so much for sharing that deal for us and giving us the numbers and the breakdown of it.

Tony:
Yeah. But before we go into the next segment, I just want to comment. I think every rookie, when they hear that $1,100 in cash flow, their ears are going to perk up. But we also can’t get lost in the fact that you guys lived in this property, rehabbed it yourselves, did all the work, educated, YouTube University, talking to people. You guys, grinded it out for a while to make this deal happen. And so often we can look at Amy and Mitch and say, “You guys are overnight successes” when really there was so much that went in to be being able to get to that point. So I feel like it’s important to remind our Ricky listeners of all the hard work that went into it before you guys started cashing that check.

Mitch:
Yeah, and just to piggyback off that, I mean, the first one, anybody can look into it right on their first one, but being able to do it twice and getting a cash flow like that on the second one, I mean, it kind of just shows the hard work paid off and we didn’t really just luck into it. We’re doing it.

Amy:
It was a lot of sleepless nights and not seeing friends and families on the weekends and kind of dragging ourselves to renovate. It was a long two years, but we made it worked.

Tony:
But it’s worth it. Awesome guys. Well, I want to take us into our next segment, which is the Rookie Request Line. So for our rookies that are listening, if you guys want to get your question featured on the show, give us a call at 888-5-ROOKIE and we just might pick your question for the show. So Amy, Mitch, are you guys ready for today’s question?

Amy:
Yes.

Mitch:
Yep.

Tony:
All right. So today’s question comes from Ethan. Ethan says, “I’m 18 years old and I’m interested in getting into real estate. I really don’t want to go to school, meaning I don’t want to go to college. I figured I have about $20,000 saved up and I want to invest in real estate. My initial thought was to purchase a rental property, but as I said, I’m 18, I have no credit built up. I’m wondering what is the first step for me. How do I navigate getting started at a young age? Love the podcasting so much.” So what would your guys’ advice be for Ethan at 18 years old trying to break into this real estate game?

Amy:
I would say first things first, get a credit card and start building your credit responsibly, paying off everything in full and then maybe asking someone to team up with them. Maybe it’s one of their parents or friends who already has established credit and can go in on the house together. He clearly has a lot of liquid assets he can use, so it’d be a great option to ask maybe their mom or dad or another family member to go on the loan with him and kind of split it with him. And that’s going to be another great way to build credit. And then from there, the possibilities are endless. You could house hack and kind of get a roommate and reduce your expenses that way too.

Ashley:
Yeah, I think another great option would be, we actually have this episode coming up this Saturday in the Rookie Reply with Pace Morby. He’s talking about ways to do creative financing, like seller financing or sub two deals. So maybe even looking into something like that where you’re not even going to a bank where they’re going to run your credit and check your credit can definitely be an option too and you have that amount to put some or all of that as a down payment too.

Tony:
Yeah, I love that advice, Ashley. The one thing I think I’d add to that is if I were, I were 18 and I was trying to decide if I were going to college or not going to college and I decided that I didn’t want to go to college and go full time in real estate with limited capital, limited credit, I feel like I would put the majority of my energy into getting really good at finding deals. I’m going to be the world’s best door knocker. I’m going to be cold calling. I’m going to try maybe direct mail. Direct mail’s a little bit more expensive, but do door knocking, driving for dollars and cold calling or things you can do with your car and your smartphone. And Ethan, if you can get really, really good at finding deals at 18, 19 years old, that will give you the foundation of pretty much branch out into every other type of real estate investing that exists. So my advice to you, Ethan.

Mitch:
Yeah, just to also piggyback off that too, we’ve done a little bit of that ourselves too. Like, just driving around our neighborhoods, houses that we love that we think aren’t getting enough love. We’ve sent letters to the owners before, looked at their addresses and said, “Hey, we’d love to purchase your property.” We’ve actually heard back and they’ve said, “Just not at this time, but when we will, we’ll keep your number in email if something comes up.” So I mean, yeah, reaching out as much as possible and becoming a better deal maker for sure.

Ashley:
Well, Amy and Mitch, it is time for the Rookie Exam. So we have three questions for this exam and we’ll direct each question to one of you. So Mitch, you can take the first question. What is one actionable thing a rookie should do after listening to this episode?

Mitch:
I think trying to find a good mentor or partner if you’re interested in getting into it. Whether that is somebody that you can talk numbers with, somebody that you can talk renovations with, just somebody that you can bounce ideas off of and learn. I mean, there’s plenty of forums out there, there’s YouTube channels if you aren’t able to find somebody specifically. But I mean there’s Facebook groups and everything. So I try and find a mentor or start to build a support system.

Tony:
Love that advice, Mitch. Most definitely. All right. Question number two. Amy, this one’s for you. What is one tool, software app or system that you use in your business?

Amy:
Well, I already mentioned we were currently using the Zillow Rental Manager, but we’re kind of pivoting into Rent Ready to make it a little bit more easy for us and keep everything in one space where all of our tenants can put in their maintenance requests, they can pay through Rent Ready. And also it reports to the credit bureaus too, so that we can help our tenants build their credit, which we know is really important. A lot of our tenants want to buy their own houses one day too.

Ashley:
And then Mitch and Amy, this one is kind of for both of you. Where do you plan on being in five years?

Amy:
I hope we-

Ashley:
The same place or different?

Amy:
We will definitely not be living in the same place. We’re going to keep moving. We were kind of on a path, currently one house every year. Hopefully we can start to make that a little bit faster and kind of scale our business a lot faster now. We’re kind of at the point where our rental income profit allows us to buy one home a year. So as we keep growing and growing and get more and more profit from our rentals, hopefully we’ll be able to buy a couple every year.

Mitch:
Yeah. And we both have W2 jobs too, so maybe in five years one of us could maybe leave that and focus 100% of the time on real estate. Whether that’s property managing or looking for deals, that’d be awesome.

Ashley:
You know, we didn’t touch on that at all, your guys’ W2 jobs. What do you guys do and how much time does that take up where you’re still able to renovate these homes and have a W2 job?

Mitch:
So I am in marketing in the pharmaceutical industry, like 40 hours a week, 9:00 to 5:00, Monday through Friday. But I mean it’s like we were saying earlier, it’s a lot of those sleepless nights. Luckily we had a lot of downtime in COVID with the first one. We were able to do some of the renovations. But yeah, I mean just finding time. Lunch breaks, after work, before work. Whenever you get a chance.

Amy:
And I’m in pharmaceutical sales. Same thing. 40 hours a week. Don’t really get time away from the field. So every single night and weekend we renovate. And that’s kind of one of the good and bad parts about living in a renovation. We are just living in a complete dust zone, so we’re forced to renovate. It’s not like we can really relax, so we have to get it done.

Mitch:
Yeah. Exactly.

Tony:
Love that. Just random question just for my own knowledge. So when you guys are demoing the kitchen, how are you guys eating? Are you just Post-mating and Ubering every night or like Uber Eats?

Amy:
A lot of takeout. At one point, both of our kitchens at our past two houses, you didn’t even want to walk in there it felt like unless you were in a hazmat suit, I wouldn’t even want to heat up a meal in there. So a lot of Uber Eats, pizza.

Mitch:
Yeah. There’s that time where it was like buy a gift card from your restaurant to help them during COVID. We did a lot of that.

Tony:
I love that.

Amy:
Yeah, there was this funny time I remember. When the knob-and-tube was getting updated, the house did not have any electricity at all, but we still had to go and renovate because we were on a time crunch. So we were going there every night in the dark with our flashlights. I vividly remember one night we were sitting in the living room in the pitch black with two flashlights and a pizza. And we’re just sitting on the ground eating and we’re like, “How did we get here? How is our life like this?”

Tony:
I love those stories. I absolutely love those stories because it’s those things that will lead to your guys’ future success. And I’m sure it’ll help you guys get to those goals you’re thinking of because you’re willing to do those things. There are so many people who are listening to this podcast that have the desire, have the dreams of maybe one day doing this full time, but they’re not willing to sit in the living room with two flashlights and a box of pizza while they renovate the house. So I’m glad to see you guys doing that.
So before we wrap up here, I want to give a quick shout out to this week’s Rookie Rockstar. And today we like to shout out Melissa Yee. And Melissa says, “We closed on our second live-in flip a week ago, and we can’t wait to get started.” Their plan is to turn this into a modern mid-century house. Melissa purchased a property for $430,000, got $10,000 in seller credits, and they’re expecting to do about $45,000 in renovation costs with them doing about 95% of the work themselves. And they’re looking for an ARV of about 55,000 bucks and they’re expecting to profit about 85,000. So Melissa, congrats to you on getting that second live-in flip and we cannot wait to see what it looks like once it’s all done.

Amy:
That’s awesome. Congrats.

Ashley:
Well, Amy and Mitchell, thank you so much for joining us today. It was really awesome to have you guys share your story and some knowledge on how to get started in investing. Can you tell everyone where they can reach out to you guys and find out some more information?

Amy:
Yeah, I think our best place is on Instagram. Our handle is @phillyfixerupper, kind of a nod to the legends, Chip and Joanna. But yeah, that’s the best place to reach out to us.

Ashley:
Well you guys, thank you so much for joining us. We really appreciate it. I’m Ashley, @wealthfromrentals. He is Tony, @tonyjrobinson. And we will be back on Saturday with a Rookie Reply. And this Rookie Reply is special because we will have an expert on creative financing, breaking it down for you rookie listeners as to how you can do it too. We’ll see you guys on Saturday.

You’ve heard about the blue pill and the red pill. But have you heard about the blue line and the green line?  

You should. Because they recently crossed. Which could be disastrous for some real estate investors. And no, I’m not talking about an inverted yield curve.

I recently wrote an article about the strange time we are in. There is a predictable disconnect between sellers and buyers, and I warned that it could worsen before it improves. 

When that article was published, BiggerPockets CEO, Scott Trench, made the following insightful comment: 

This was a great insight, and my hat’s off to you, Scott (and I’m certainly not buttering you up as the BiggerPockets boss. Certainly not). 

We Are In The Negative Equity Zone

Green Street is a premier data provider and analyst for the commercial real estate space in the U.S. and Europe. Green Street did a webinar in September called “Navigating the ‘Upside Down’ in Commercial Real Estate.” If you’ve seen Stranger Things, you know this is a strange time indeed. 

In this webinar, they made a lot of comments about the current strange environment. Similar to what I said in my article in August. The following graph jumped out at me: 

First, the graph on the left shows a significant decline in the projected levered returns. Commercial real estate investors should expect lower returns if currently investing in conventional commercial real estate. Popular investments like multifamily are especially at risk. 

I’ve been sounding an alarm bell on this topic for years (even though I wrote a book called The Perfect Investment about multifamily investing in 2016). Multifamily investing is not perfect if you must overpay to get there! It’s just a fact of life. 

When interest rates go up, investors should expect lower ROIs unless purchase cap rates expand accordingly. That’s the situation we are in for syndicators and investors who are paying “full price” for multifamily and many other commercial assets. Be sure you don’t do this, especially right now. Why? 

I recently heard a multifamily syndicator lament that he had been outbid on a $20 million+ apartment deal in the Midwest. He said the winner outbid him by approximately $2 million and acquired this asset at a 3% cap rate! He said there was not that much value-add available. I can’t imagine how that will end up for their investors. It’s hard to imagine how that will end well. 

Look at the second graph. As I warned and Scott Trench clarified a few months ago, we are in a strange time where interest rates have gone up dramatically, but cap rates have yet to follow, at least not much. 

The blue line (interest rate) should never meet or exceed the green line (cap rate). For the most part, the cap rate should always exceed the interest rate by what I will refer to as a “risk premium.” In other words, the risk of investing in commercial real estate, or any real estate, is higher than investing at the risk-free rate (buying U.S. Treasuries). Therefore, it should significantly exceed the blue line (interest rate) here.  

It’s actually a little worse than that in this situation, however, because current commercial loans are priced with an additional premium reflecting the additional risk institutional investors see in the commercial space right now. 

The following graph shows what I mean. Note the spread from 0.93% to 1.67%, an increase of almost 80%. It’s just a fact that credit markets are tightening, and lenders want to get paid more than they did when “everyone was happy, and nothing could go wrong” over the past decade. 

So, interest rates have shot up from 3% to 5%. Cap rates have not followed yet. Why? 

I think part of the reason is that there’s been substantial training, coaching, and excitement in the syndication world over the last decade, especially in multifamily. All kinds of new players have thrown their hats in the ring. And many of them didn’t experience the pain of the last several recessions, while many of the more experienced cohorts remember those quite well.

Many syndicators and their investors are so excited to finally get a chance at a deal! They proceed to pay full asking price or thereabouts for suddenly overpriced commercial real estate assets. Instead of bidding against 60 other well-funded players, as before, perhaps they’re only duking it out with three or four others. After studying and courting investors and longing for a deal for years, they finally have their chance. 

But the question is, who is getting the short end of the stick? It may not even be the syndicator because they often charge hefty acquisition fees, asset management fees, property management fees, and more. 

Their investors could be victims. I’m writing today so that you don’t become one of them. 

These “newrus,” as I call them (new gurus), sometimes tell investors, “it’s different this time.” Unfortunately, they may believe that themselves. 

But trees don’t grow to the sky. And as economist Howard Stein wryly remarked, “If things can’t go on forever, they will eventually stop.” 

As I often say, the tide has risen for everyone over the past decade. But as Warren Buffett often says, “Someday the tide will go out, and we will see who is swimming naked.” 

We might be coming into a time like this.

Negative Leverage

Many commercial real estate deals and their investors have entered an era of “negative leverage.” Negative leverage is when an asset is acquired at a cap rate below the interest rate on the debt used to finance it. Our Wellings Capital Director of Investments, Troy Zsofka, explained this situation to me. 

In this case, leverage is no longer accretive to the return profile and becomes a burden that puts downward pressure on equity returns (hence the term “negative leverage”). Furthermore, increased debt service reduces the LTV at which lender-required Debt Debt Service Coverage Ratios (DSCRs) can be met, thereby requiring additional equity in the capital stack, further diluting investor returns.

One may ask how, then, it could ever make sense to purchase properties using negative leverage.

In my experience, one way these sponsors get the investment to pencil is to assume continued rent growth. This growth will eventually result in a “forward-looking cap rate,” if you will, that is higher than the interest rate on the debt. In other words, they grow their NOI out of the problem.

But this is clearly a risky endeavor when downside potential is governed by market forces outside an operator’s control. 

Another way to justify negative leverage, as Scott Trench said, is with a heavy value-add deal that relies on expeditious execution so that the upside potential mitigates the negative leverage position. 

Relying on execution to go exactly to plan to protect the downside is also a risky endeavor, especially for many less experienced syndicators, and it often doesn’t make sense from a risk-adjusted return perspective.

To the first point, I often see offerings that tout the market’s historical rent growth, highlighting that Phoenix or Austin, for example, have experienced 18%+ rent growth over the past two years. The inference is that this is somehow indicative of the future as if this growth rate will continue. This justifies using 8-10% rent growth in the pro forma underwriting assumptions and calling it conservative!

In my opinion, the fact that a market has experienced outsized rent growth in recent years is, if anything, indicative of the exact opposite—it can be unsustainable. Rent growth typically stagnates to some extent for equilibrium to be reached.

Decreasing housing affordability is a headwind to continuing in-migration to a market, and continued demand growth should, therefore, not be relied upon to sustain outsized rent growth.

How can you fail in this environment? Let me count the ways…

• Acquire a “market rate” (often brokered) deal with “typical” leverage at the current interest rate.  
• Make a bad situation worse by adding an extra layer of preferred equity to compensate for increased rates, lower allowable leverage, and falling return projections. 
• Drag a bunch of unsuspecting passive investors into the mix, promising them a great opportunity to create income and grow their wealth. These are known as victims. 
• Worst of all: be that unsuspecting victim. 

How can you succeed in this environment? 

• Acquire an off-market under-managed, underpriced deal with lots of predictable upside.
• Create that upside through your experienced team and well-honed process. 
• Acquire the above through preferable loan terms (like owner-financed or assumable debt). Or acquire for cash and refinance someday. Or hold in cash. 
• Invest with an experienced syndicator or fund manager who specializes in the above. 

A Final Word About Banks

Banks aren’t stupid. As the largest investors in most commercial real estate deals, banks are obviously wary of making bad deals and losing money. Many of their junior staff weren’t around for past downturns. Some are still eager to make loans, hit their quotas, etc. 

But most banks have some seasoned professionals who have been around the block. Many of them are tightening the commercial lending noose as we speak. So watch for a significant decrease in lenders willing to make commercial loans in the coming days. It has already started.  

Conservative bankers often overreact to cover their risk. So it is possible that many of these bad deals won’t even get to closing, which could protect some of you from a bad investment. 

But please don’t trust bankers to protect you from harm. Instead, do your own due diligence. Learn to be an intelligent investor and partner with others who have successfully weathered these storms in past decades. Pain + Years = Wisdom. At least in some cases. 

Are you tired of overpaying for single and multifamily properties in an overheated market? Investing in self-storage is an overlooked alternative that can accelerate your income and compound your wealth.

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

David:
This is the BiggerPockets Podcast Show 688.

Scott:
What I would tell people, through no fault of your own, the lobbyists who have fomented this notion that buying a house is the American dream, and there’s been such amazing regulatory capture that if I had it to do again from day one, I would probably be putting a disproportionate amount of my capital in real estate.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Podcast, the biggest, the best, the baddest real estate podcast in the world. Joined today by my co-host, Dave Meyer, as we interview Scott “Prof G” Galloway. Scott is a very intelligent and very successful man who teaches other people how to build wealth, has a lot of experience in the tech sector, has started and sold companies, writes a book a year, has a lot to say about a lot of different things and brings a very well thought out and nuanced perspective to the podcast. Dave, what were some of your favorite parts of our interview with Scott today?

Dave:
Man, he is, like you said, really knowledgeable about a lot of different topics. I think it was just interesting to hear from someone who’s an investor, a big investor, but not primarily a real estate investor, and just get their opinion and take on the economy, what’s going on in the American society, what’s going on in the American economy. He knew more about real estate than I thought he was going to, and I thought he had some really-

David:
Surprised us at the end there.

Dave:
Yeah, he was like, “I don’t invest in real estate,” but then he was dropping some bombs right at the end. So I thought it was really insightful to learn from a different type of guest than we have a lot of times on these shows.

David:
Well, I think it’s important to do that, right? You don’t want to end up in an echo chamber of your own, especially when you criticize other people for ending up in their echo chamber. So we typically talk about real estate and, more specifically, real estate success stories. This person house-hacked a million houses, this person bought 27 units working as a janitor, and we’re like, “Oh, this is so great.” But you don’t hear about the people that didn’t make it.
The same is true about people that built wealth in other ways that were not specifically real estate investing and the perspective that they have on how wealth creating works, what principles work, what people should focus on, the right path to take as you are looking to improve yourself and build your wealth in the process. It applies to real estate, absolutely. I think it’s healthy to get a perspective that’s not just the same thing we’ve had recycled by every single BiggerPockets guest that comes in. So, yeah, that’s exactly what we’re trying to do here-

Dave:
Totally.

David:
… is we’re trying to bring a more mature and nuanced perspective to what we know works with building wealth, which is real estate, and see if there’s ways we can accelerate the process, improve the process, or decrease our own risk in the process. That leads us to today’s quick dip, which would be follow some of the best advice that I ever heard Robert Kiyosaki say.
So I was listening to Robert speak at a GoBundance event and he said, “Look, most people are either a Republican or a Democrat. They see heads or they see tails, and they argue over if the coin is heads or if the coin’s tails and they do not want to acknowledge what the other side also sees. Well, there’s a third side of a coin that many people don’t realize, and that is the edge.”
Robert’s advice to us was don’t pick a side. Stand on the edge and you can look over each side and see what is happening on both sides, and then make your decision based on the information you’re presented, not the ideal that you identify with. I thought that that was brilliant advice.
So as you listen to today’s show, keep that in mind. It doesn’t really matter if you’re a heads person or a tails person. What matters is you see heads and tails. You know what’s going on around you and you make the right financial decision to put you in the best position possible. Dave, any last words before we bring in Scott?

Dave:
No, well said. I think I believe strongly in objectivity and trying to develop your own understanding of issues.

David:
That is right, because you love data, and data doesn’t lie.

Dave:
I sure do.

David:
Scott Galloway, welcome to the BiggerPockets Podcast. How are you today?

Scott:
I’m doing great. Thanks, David.

David:
I’m glad to hear that. I’ve got to say, your hair is looking fantastic.

Scott:
That’s right. Same barber.

David:
I’m actually considering copying you.

Scott:
Yeah, no. If we had Dave’s hair, we’d be the junior senator from Pennsylvania.

David:
Well, anyways, Scott, thanks for being here with us today. For those of our audience that are not familiar with you, can you give us a rundown of your background, what you’re known for, and then the contents of your new book?

Scott:
Sure. So good to be with you guys. I’m a professor of marketing at NYU Stern School of Business. I’m an entrepreneur turned academic. Born and raised in California. Brief stint in investment banking, then graduate school, and started several consulting eCommerce and business intelligence firms. Then started teaching at NYU about 20 years ago and now do a lot of media, write books, stuff like that.

David:
Awesome. If you had to say what you’re most passionate about right now, what’s on the front of your heart?

Scott:
I consider myself, at my core, a teacher, at least professionally. I think the only business card I think I’ll have, and I don’t have a business card, but metaphorically, will be that I think I’ll always teach. I have an online edtech company. I’m still on the faculty at NYU. But at the end of the day, I think of myself as a teacher.

Dave:
All right. Well, Scott, I’d love to get into the book Adrift, which I read over the weekend. Really, really fascinating topic. After reading it, I was just curious why you called it Adrift and not something like We’re (censored) or Everything is Terrible, because it paints a grim picture, right?

Scott:
Yeah. I force myself now in every presentation, and tried to do it in the book, to talk about solutions and silver linings. But Adrift was I don’t think we’re lost. I think all of these problems are of our own making, and that’s the bad news.
The good news is they can be unmade. I think we can see land. I think all of our issues are fixable. There’s nothing wrong with America that can’t be fixed with what’s right with America. I think we see land. I think we know what needs to be done. I think we have to row in unison, or whatever nautical metaphors I can come up with.
But I don’t think we’re lost. I don’t think we’re (censored). For lack of a better term, I just think we’re a bit adrift. Like I said, I’m actually quite hopeful because the incumbents and the what I’ll call the entrenched want to create this illusion of complexity and that these problems are intractable.
I don’t think there’s a single problem that ails us that can’t be fixed. We talk about teen depression at the hands of social media. They will claim it’s multidimensional and difficult. It is difficult, but they’re absolutely solvable.
There’s no reason we can’t age gate social media. There’s no reason we can’t hold these firms accountable when they are sending emails saying … Pinterest sends an email, saying to a 14-year-old girl, “Here’s a board with images on suicide you might be interested in.” There’s just no excuse for that. We can fix that. We can fix our tax structure. We can make investments in trade schools and junior colleges.
We’ve accomplished much bigger things. We’ve stared down much bigger problems before. So I don’t think we’re lost. I don’t think we’re (censored). I think we’re adrift.

Dave:
It’s a good way of saying it. Yeah, I’m mostly kidding. But I agree that acknowledging what the problems are is probably the first step towards coming up with some of those practical solutions. So for those of our audience who haven’t yet read your book, can you tell us just what are the big problems, some of the themes that you’re seeing that are impacting American society?

Scott:
Sure. So there’s several. I’ll start with some major ones, and then what I think is the profound one or the biggest one. We talk a lot about income inequality. That gets a lot of warranted attention. What we don’t talk about that I think needs more attention is what I’ll call age inequality. That is a 75-year-old is 72% wealthier than he or she was 40 years ago. Someone under the age of 40 is 22% less wealthy.
The percentage of wealth controlled by people under the age of 40 in the last 40 years has gone from 19% of GDP to 9%. In some, we have, from a legislative standpoint and a fiscal standpoint, decided to transfer money from young people to old people.
Again, the entrenched, the old wealthy generation will say, and I’m a part of that generation, is that these are big problems because of globalization and network effects, which is total (censored). These are concerted decisions.
Reagan taxed all income at the same rate and then we decided, “I know. Let’s have a lower tax rate for capital gains.” Then the second biggest tax deduction is mortgage interest rate. So who makes money off of stocks and bonds? Old people. Who makes money off of current income and salary? Young people. They pay a higher tax rate. Who owns homes? People my age. Who’s renting? People your age.
Social security is considered the third rail. I get attacked immediately when I say we should reconsider much harsher means testing for social security. The largest transfer of wealth that takes place every 12 months on the planet in history is young people transferring a trillion and a half dollars to the wealthiest cohort in the history of the planet, seniors, in the form of social security.
But because over a quarter of our elected representatives are over the age of 70, because the first two states that basically set the presidential primary are the oldest states in the Union, Iowa and Maine, we have massively overinvested in older people at the expense of younger people. Even if we get a chance with the bailouts from COVID to make rich people richer, we decide, okay, we’re not only going to (censored) younger people, we’re going to (censored) their kids and their grandkids with unsustainable levels of debt, so pop-pop and nana can upgrade from Carnival to Crystal Cruises.
So there’s been massive age inequality. There is also massive … I think a huge issue we’re going to talk more about is failing young men. The education system is highly biased against women, and people are afraid to talk about it. Richard Reeves from the Brookings Institute just wrote a wonderful book called Of Boys and Men. But the moment you start advocating for men, you’re labeled a misogynist. People see it as a zero-sum game.
When we decided to advance the interest of women when it was 40, 60 women to men in college, when you were in favor of affirmative action, people of color, which I am, I’m a huge advocate of affirmative action, you weren’t seen as being anti-white. So we don’t even want to have an open conversation around how young men are really struggling.
I think it’s changing. I think people, mainstream media is becoming much more open and accepting of saying that. You’re not immediately labeled a misogynist. But, look, three times more likely to commit suicide, four times more likely to be addicted, 12 times more likely to be incarcerated. Seven in 10 high school seniors are girls. In the next five years, for every one male graduate of college, we’re going to have two females. It’s going to be two to one. Two to one.
Then you have this war on what I’d call masculinity, or we’ve conflated toxicity with masculinity. We’ve decided that masculine attributes … Female attributes should be celebrated and protected and honored and male attributes should be starched out, that there’s something unhealthy or dangerous about them.
So I think failing young men is a huge one. Incredible age inequality. An emerging crisis, loneliness. People don’t speak to their neighbors. Church attendance is down. People aren’t joining the boy and the girl scouts. The number of kids that see their friends every day has been cut in half in the last 10 years.
We don’t go to work. We don’t go to the mall. We don’t go to the movie theaters. When we don’t touch and smell each other, we have less empathy from one another. We resent people. When there’s immigrants in your neighborhood you interact with, you’re pro-immigration. When there are no immigrants and you don’t see them, you become very anti-immigrant. Too many people, especially young men, are spending way too much time alone in their parents’ basement.
Then what I think is the biggest problem is if America’s problems were a horror movie, the call is coming from inside of the house. Now what do I mean by that? Geopolitically or relatively speaking America, I would argue, has never been stronger. We’re food independent. We’re energy independent. Smartest, brightest people in the world all have one thing in common. They all want to come here.
We’re the football team that gets every draft choice, the top hundred draft choices every year, but we don’t like each other. A third of each party views the other party as their mortal enemy. 54% of Democrats are worried their kid is going to marry a Republican. We have 20% of Americans would be fine with an autocrat as long as it’s his or her gal.
So it just strikes me there’s this falsehood, this dangerous falsehood, or a lack of recognition that Americans’ greatest allies will always be other Americans. We don’t like each other. People dislike our leaders on the other party more than they dislike Putin or Xi. That’s (censored) ridiculous.
Just to wrap up this word salad here, I’m a huge fan of World War II history, and there’s this wonderful photo generalist, I think her name’s Maria Amolo, and she’s been colorizing these World War II photos. I don’t know if you guys have seen this, but my favorite is a landing craft, in the invasion of Normandy, dumps its front doors and you see these men wading through the water, really boys. Average age was 26, average salary was $800, these GIs.
The most unskilled, expendable men were sent first because they knew that most of them were getting killed. They’re headed towards Omaha Beach, wading through this cold water. Two of three wouldn’t make it off the beach.
I can’t even imagine any of them at that idea, for the life of them, could have told you who was a Democrat and Republican wading towards that beach. Then I imagine them turning around and being able to suspend the time-space continuum, as we can looking at the past, and they could look and see us and go, okay, teen depression, election interference, polarization. They would go, “You can’t fix that? Jesus Christ, look what I’m facing. Look what I’m running into. But you can’t face that?”
So I’m motivated by history to believe that America can absolutely fix all of these issues. But I would say the biggest problem is Americans need more connective tissue and to start joining hands physically and metaphorically with other Americans and stop this nonsense and this polarization and just this vitriol towards each other.

David:
If I’m hearing you right, Scott, I’m picking up a pattern in what you’re proposing here, and I just want to get verification that this is the point you’re making. It’s that a lot of this is due to policies enacted that affect incentives. So we created policies that would incentivize women to attend college and now it’s out of whack. We’ve created policies that have allowed a certain generation to be able to hold onto and attract wealth at a faster rate than others, and it’s created something out of whack. Is that more or less your perspective?

Scott:
There’s some nuance there. So when it comes to education, what we found is when we leveled the field in education, girls blew by boys. Boys, biologically, are at a disadvantage. An 18-year-old girl and an 18-year-old boy, essentially when they’re competing for a college seat, the girl is competing against a 16-year-old. Boys’ prefrontal cortex doesn’t grow and mature as fast. The executive function that is gas, break, when to play FIFA, when to stop and study. Girls are one to two years ahead of boys, and school and college rewards that behavior, that discipline, that delaying of gratification.
I don’t know if you guys have kids or boys, but basically when you’re a dad, all you really are is the prefrontal cortex for your boy until he develops his own, right? You’re like, “Okay.”

David:
By proxy.

Scott:
Yeah. “Okay, stop playing video games. You have homework tomorrow.” “No, you can’t yell in a restaurant.” I mean you’re just sitting there going, okay, I’m the front part of your brain until it actually grows. Girls, theirs shows up sooner. It just shows up sooner.
Also just there are societal reasons. Two kids in the principal’s office, a boy and a girl, exact same behavior, cheating on a test, exact same test, exact same cheating. The boy is twice as likely to be suspended. Black boys five times as likely to be suspended. Once a kid is suspended two to three times, he’s not going to college.
80% of primary school teachers are women. Who are they going to champion? I don’t resent them for this. Who do they see themselves in? In that little girl who has the same colored hair that comes from the same background. Two-thirds of high school teachers are women. So there’s fewer male role models.
We also have 21% of US households are run by a single parent, which is Latin for mom. Girls actually have similar outcomes in single-parent homes. Boys come off the track. The moment there’s no longer a male role model living with a male, he becomes twice as likely to be incarcerated.
So the system, the educational system, is biased against boys. Now having said that, the labor market, there’s this moment of equality when men and women are young. They have about the same wage as girls, or women have closed the gap, which is a wonderful thing. Then the labor market turns against women about the time they have kids. Wages for women drops to $0.77 on the dollar once they start having kids. Anyway, so there’s biases everywhere.
In terms of school, I think it wasn’t policy as much. It was that we level the playing field and the behaviors that the educational systems value favors biologically women, both in terms of the norms of education and just straight biology.
Now on the age inequality stuff, or income inequality, this has been a concerted policy effort by a Congress and a Senate that increasingly looks like a mix between the Golden Girls and the Walking Dead. We’re just too goddamn old. It’s not surprising that one in five children are living in food-insecure households because none of these people have young kids at home. They just have trouble relating. And old people vote. So we effectively have a geriatric government that is supporting other old people.
That’s not to say people can’t represent people on like [inaudible 00:18:41]. We have the oldest leadership in the world. I mean think about the presidential race, the two leading candidates. If Biden or Trump win president in 2024, that means the last time Marine One leaves the West Lawn, we’re either going to have an 86-year-old or an obese 82-year-old. That is (censored) ridiculous.
We are so worried about being called an -ist, specifically an ageist, that we don’t want to acknowledge that you know who else is ageist? Biology. The majority of us have this uncomfortable conversation with one of our parents, taking their driver’s license away. It usually happens in the ’70s, but we’re going to have an 82 and an 86-year-old running the biggest economy and in charge of 11,000 nuclear weapons.
There’s a huge problem, I think, around a representative government that does not represent young people. And so, the policies you were talking about have been enacted that it just slant money, just the level the playing field that’s just taking more and more money from young people and sliding it down to the entrenched incumbents.

David:
So looking at this from the perspective you have, what are some of your recommendations for how younger people can navigate through this environment to put the odds in their favor to build wealth?

Scott:
Well, one, I think we should have one … Just from an economic standpoint, we need to reform the tax code and make it progressive again. Basically at about 99%, your taxes go down.
So I’m an entrepreneur. I sold my company, L2, for $160 million. The first $10 million is tax-free. That doesn’t make any sense. Why am I not paying any taxes? Why is FedEx and Nike not paying any taxes?
If you look, I would like to see taxes coming down. Government requires 23% of GDP. We’ve been deficit spending, so, arguably, tax rates should be, on average, 21%. If you had corporate taxes at 30% and you tax people making over a million dollars current income, just one income … There’s just income. I believe in what Reagan did. There’s just one income. And you tax people making over a million bucks 30%, that means everybody else would pay somewhere between 12% and 14% tax.
So you could cut taxes as long as you force everyone to pay taxes. As somebody who came into wealth later in life, you just see how the game is rigged. I have these incredibly intelligent people engaging in massive tax avoidance. It’s all legal, but it’s just striking. My tax rate is between 17% and 19%. When I was working my ass off making all my money in current income living in California, my tax rate was 46%.
So we’ve decided, we’ve made a concerted decision that if you get the gold medal, we’re going to give you the silver and the bronze. We’re not going to say, “Okay, you’re lucky you need to pay some tax and help get more people on the podium.” We need to redo our tax policy. We need to provide double the number of freshmen seats at colleges.
Me and my colleagues are so drunk on exclusivity that we’ve created artificial constriction of supply such that we can feel better and better about our degrees. We have a numbious rejectionist culture. Once I have a college degree, I want admission rates to go down. Once I have a house, I don’t want any new projects or development projects approved. Once I have a successful tech company, I’m going to weaponize government such that small companies can’t get merged because I engage in monopoly abuse.
The result is the gale forces of disruption never really get to blow, and there’s no churn. There’s fewer and fewer younger people who have access. We artificially suppress interest rates … Unless you have rich parents, how do you buy a house if you’re a young couple? How on earth do you buy a house?
Now that’s changing, I think, for the better. I’d love to see mortgage rates go to 9% and see housing prices crash, because I got to buy a house when I was young and I didn’t have parents that could help me. How the hell does a young couple buy a house right now?
Anyway, I think simplification of tax code, massive increase in freshmen seats, big investment in our junior colleges and vocational programs and stop fetishizing the traditional four-year degree in elite colleges. There’s a lot of job demand for cybersecurity, specialty construction, installation of solar panels. There’s a variety of two-year certification degrees, vocational degrees that would give kids $60,000 to $120,000 day one. But instead we have this weirdness in the US where if my kid doesn’t end up at MIT or Google or KKR, I failed as a parent.
33 out of every thousand workers in the UK and Germany have the term apprentice. In the US, it’s three. 50% of Germans have some sort of vocational certification. In the US, it’s five. So I’d like to see national service. I’d like to see similar to what they do in Israel and Northern Europe, mandatory conscription of one to two years. So you meet people from different backgrounds, different ethnicities, different income levels, different sexual orientations.
I think we need to establish connective tissue and have a generation of Americans that see themselves as Americans first, not as Republicans or Democrats, or college attendees or non-college attendees. So I think there’s a variety of social and fiscal initiatives that we could do to start investing, again, in the middle class, and specifically investing in our younger Americans.

Dave:
Scott, a lot of this advice is this societal-wide, macro ideas, and it’s really interesting, your thoughts there. What about some of the individuals … Because a lot of the people listening to this show are in the Gen Z or millennial age group. By the fact that they’re listening to this show, I’m going to presume that they’re very interested in getting ahead financially. What are some of the ideas or paths that you recommend to people who, despite these headwinds that they’re facing on the societal level, that they can take as individuals to try and improve their own financial position?

Scott:
Well, I mean there’s a few best practices. So very basic peanut butter and chocolate is certification and geography, and that is we live in a LinkedIn economy. What is on your LinkedIn profile is very important in terms of access to middle-class economy. So if you can have the opportunity to get to college … We all like to say college sucks and people don’t need college any longer. But that’s mostly a gag reflex because it’s become so unattainable for most people.
But if you have the opportunity to go to school, you should take it. I’m not suggesting you go to a mediocre school and pay $100,000 or issued a ton of debt. You need to be smart about it and make sure it’s worthwhile. But if you have access to a good certification at a reasonable price where you can afford it, it’s a good plan B.
Get to a city. Two-thirds of economic growth is going to happen in 20 super cities. It’s like I’m a mediocre surfer, but occasionally I get somewhere with a perfect offshore breeze and perfectly shaped waves and I believe that I’m a good surfer. Then I go back and surf in real waves and realize I can’t surf. You want to get to where the waves are great. In cities, the waves are just better.
It’s like when you play tennis, you play against someone better than you, your game elevates. When you get to a big city, you’re playing against the Federers of the world. You just have to be better, and you are better. You have to work harder. You have to get better skills. So the peanut butter and chocolate of early ascent is certification and getting to a city.
The algebra of wealth, and I think about this a lot, is, loosely speaking, focus on your talent, not your passion. So first thing is focus. Find something you think you’re good at. This is what you need to do in your 20s. Don’t try and figure out what your passion is. That’s dangerous. I’m super into sports and I like alcohol, so I should open a sports bar, or I love media. I would love to start a magazine. I would love to start a magazine.
You want to open a restaurant, go to work for Vogue, open a nightclub, or go to work in sports, you better get a ton of psychic income because it’s going to be (censored) return on investment, because those fields are overinvested. Just as Miami real estate, no one wanted in 2010 and the returns were huge. Now everybody wants Florida real estate and the returns have been starched out. The same is true of your own human capital.
So your job isn’t … Be a DJ on the weekends. Find something you’re really good at. Like I’m good at math, or I think I’d be really good selling soft … What can you do that you think you could be amazing at, like you have some natural inclination? You can’t hate it, but you don’t have to … When people say passion, people immediately go to, well, I’m really into art. Oh, okay, great. That’s a tough way to make a living.
Anyway, find your talent, investor requisite 10,000 hours, and becoming great at it. Then get to a certain level of stoicism. It sounds basic. Try and figure out a way to make more than you spend. When you’re young, before you have kids and dogs, live in a (censored) small apartment. Spend as little money as you can on your living situation because you don’t need to. If you’re young, you should be in your apartment max eight hours a day, and seven of that should be sleep, or six of that.
Try and start saving right away. Try and show a level of stoicism around being really disciplined. Try and work out five or six times a week. You should, before the age of 30, be able to walk into any room and know that if (censored) you got real, you could kill and eat everybody or outrun them.
I think being in great physical shape before the age of 30 makes you more confident, makes you more kind, gives you the stamina to work really hard. You bring very little to the workplace when you have no skills when you’re young.
I joined Morgan Stanley out of UCLA. I wasn’t as well-educated. I don’t think I was as smart as the majority of my classmates or peer group, my analyst class. So I decided, every Tuesday morning, I was going to go to work and I was going to stay till Wednesday at 5:00.
I would work the night through Tuesday night. I would work for 36 hours straight. And I could do it. I was an athlete in college. I didn’t have kids. I didn’t have dogs. I could go sleep-deprived. No problem. It sent a signal that I came to play. They were like, “Oh, yeah, that’s that kid that went to UCLA, who works through the night every Tuesday.” I got opportunities. People like that. I could not do that now. I’m not physically capable of it and I want to see my kids at night.
So go really hard. Be stoic. Try not to let emotions get in the way. Try to show real discipline around saving money. I’d say focus very much on work. I think there’s a lot of talk about balance. I get that a lot of people work to live. Good for you. You’re going to need to move to a lower cost neighborhood and you’re never going to get that economic security that most people want. I’m not saying my way’s the right way, but most of the people I talk to are very economically ambitious.
Then in terms of once you have a little bit of money, diversify. I think diversification is your Kevlar. It’s easy to think, oh, Solana’s going to the moon or Michael Saylor is a genius, and I think he is. He thinks Bitcoin’s going to $400,000, so I’m going to invest everything in Bitcoin. By the way, he might be right.
But diversification is your Kevlar and that is … I’ve lost everything twice, 2000 and 2008, because I was convinced and I was a genius. eCommerce was everything, and then tech was everything. The market is bigger than any individual, and you are putting yourself in a position where if you take a bullet, it can kill you financially.
So now I diversify, put money in all sorts of different unrelated things. That way if I take a bullet in my stock, a stock goes to zero, it hurts, but I survive.
Then time. Find things you want to invest in, where you don’t have to pay attention to them and ignore them. The best performing cohort of investors are dead people, and there’s research here, because they don’t trade their accounts.
So, anyways, find your talent, focus, a certain amount of stoicism, save more, spend less than you make, diversification, and then let time take over. You’re going to wake up … You guys are younger than me. I was 22 yesterday. I’m going to see my college buddies in LA. It’s like we’re seniors at UCLA. I literally can almost feel and smell the same things.
Now I’m 57, and just a little bit of money back then, just a little bit of money every month would be millions of dollars right now. Most young people don’t believe it because they can’t evaluate time. They can’t assess time correctly.

David:
Or inflation, the way that the actual value of the currency changes so dramatically over time.

Scott:
100%. Yeah. I’m always invested. I’m always in the market, because I don’t think you can time the market. I just try to diversify. I think the market’s going to absolutely throw up in the next 12 months. I’m still fully invested, because I don’t know. I mean I don’t know. I have a gut, but I don’t know.

David:
I heard a conversation on the Lex Fridman Podcast, where he was speaking with someone … I couldn’t pronounce the guy’s name, it was like Amadeus or something, that was talking about … He was a proponent of Bitcoin as well. He’s talking about the fiat standard versus the gold, or he was calling it the Bitcoin standard, and just discussing how in a fiat economy like we have, which basically means the government can manipulate the money supply, they can print the crap out of it … And print isn’t actually accurate, but it serves the same purpose … to fund wars that we’re fighting or interests that we have overseas or programs that we have here. Whatever it is that the government wants to do, instead of raising taxes on people, which is unpopular, they just print more money.
For some reason, none of us talk about it. To me, it’s amazing that we’ve done what we’ve done to our money supply. Maybe 80% of the entire money supply has been created in the last little over two years, probably. It hardly ever gets talked about at all. But we’ll talk about other things in the news nonstop.
Well, anyways, his point was savers are punished. If you’re just simply making money and saving money and setting it aside, you can never catch up to the rising tide. You are forced to become an investor if you’re in a fiat economy, almost just to stay even. Like you were just saying there, Scott, if you look back 30 years, there’s not a human alive who would say, “I wish I wouldn’t have bought that house,” “I wish I wouldn’t have invested in that stock,” “I wish I wouldn’t have invested my money in something prudent.”
But when we think forward, I don’t know, there’s a disconnect that the same will be true 30 years from now, and probably much more dramatic with the way that we’re printing money now. Are you of the same opinion that we should be telling people you have to be investing your money and you have to be holding onto it because you’re not going to get ahead if you’re just making some money, spending some money, and saving a meager amount?

Scott:
So in terms of … So let’s go here, fiat currencies. Every fiat currency throughout history has eventually failed because, to your point, the political temptation to spend more money such that you can provide a short-term sugar hit to the economy and not be fiscally responsible, which requires short-term pain and oftentimes means you’re going to be booted out of office, requires adults thinking about their kids and grandkids, and the political system doesn’t occur. So that’s long-term thinking. So, ultimately, over time, the temptation to print money becomes too great and the currency becomes inflated and goes to zero.
So by that standard, you probably always want to be in an asset. You don’t want to hold onto cash. Now having said that, treasury bills and bonds, for the first time, are giving a decent amount of reward relative to the risk. So I think there’s a decent argument. Older people would say it’s not a bad time to own treasuries because you can get 4% instead of 1%.
But I’m a big believer in always have your money in the market, diversify. But I would tell young people … Adidas, I’m fascinated with what’s going on with Kanye right now. Adidas is at $60. It’s off, I don’t know, $50 or $60. It’s been cut in half. Alibaba’s been cut by two-thirds. PayPal’s off. There’s just so many great companies.
I don’t want to say they’re on sale because their valuations got so high. But I think a decent strategy is looking at places where there’s dislocation and then buying stock, trying to be really disciplined. I’m going to try and save a thousand bucks a month, which is a lot for a young person, and I’m going to put it in names I like or I’m going to, better yet, put it in an index fund or an ETF, the natural trajectory the market is up, and then ignore it.
You know what is a low ROI? Buying crypto. The reason I don’t like kids buying crypto, it’s not that I don’t like the asset class. What I don’t like is that crypto usually means you’re staring at your (censored) phone all day. That’s an investment.

Dave:
Yeah.

David:
Well, that does remind me of the older folks that are like … They’re retired, they’re bored, they have nothing to do, and they sit at their computer and they watch the tickers. They tinker with their portfolio doing absolutely nothing to benefit. But it’s such like their brain needs something to do.
It does turn that into the 23-year-old that bought an NFT or some crypto, and now they’re doing the same thing. It gives you this dopamine release as if you accomplished something. But, like you said, Scott, it’s not building skills. It’s not putting your 10,000 hours into something. It’s not putting you on a path that’s going to improve your position. It’s like a substitute for it that many of us have just been hypnotized into.

Dave:
Yeah, there’s an inverse correlation between how often you check your portfolio and your returns. I think you mentioned that with dead people, Scott, like the less you look at your returns and the more you just allow your investments to compound over time, the better your returns actually become.

Scott:
Robinhood’s tagline, if it was honest, would be the more you trade, the more you lose. 80% to 95% of day traders lose money. If you owned any five stocks in the S&P and you own them for longer than a decade, no one has ever lost money.
So now I want to be clear, occasionally I trade. Occasionally I buy options or I usually write options, and I enjoy it. It’s like gambling for me. I take a little bit of money and I do it.
I love Vegas. I was in Vegas last week. I go with a group of guys. I put on a kilt, I get (censored) up. I go down, I take a thousand bucks. I assume I’m going to lose it all. So if you’re trading stocks or you’re trading options or doing weird stuff, realize, okay, it’s fun, it’s consumption, but you’re probably going to lose most or all of your money.
But don’t con yourself into thinking that you’re learning or investing. I’m not against it. I love to gamble. I love to drink. But neither of those things are going to create economic security for me and my family, their consumption. What makes wealth is the boring (censored) buy a REIT. You think the future is in eCommerce, buy Prologis and then don’t look at it for 10 years.

Dave:
Scott, what do you think about regular real estate, though, in addition to REITs? Buying rental properties. How do you view that in the spectrum of potential investments?

Scott:
So I’m now at the age where I think about what if I could do it all over again. If I could do it all over again, I’d be a Broadway dancer, a Navy Seal. So there’s still time. But I would also get into real estate.
Essentially, if you look at the most valuable companies in the world, they’re a thick layer of innovation based on enormous government investment. Google and Apple are built off of GPS and DARPA technologies. Tesla’s built off of massive subsidies for carbon credits. Moderna is built off of NIH investments and vaccine research at universities.
So the way to make a lot of money is to be a remora fish on massive investments by other people. The regulatory capture of the real estate industry is extraordinary. I don’t have any other investment. I wish I’d come into this later.
I bought some apartments. During 2010 or ’11 in Florida, the Palm Beach County Clerk’s Office was auctioning off repossessed condos. I was buying these things for $80,000 or $100,000, and I could get $12,000 a year in rent. I’m like I don’t know real estate, but I can do math. If I can get 12% cash-on-cash, this is just going to work out. If I can hold onto these things long enough, this is going to work out.
Then I find out, your industry, I can depreciate these things. I’m like, okay, they’re going up in value, but I can depreciate them? I can’t depreciate my Amazon or Apple stock.
Then if I get a call from an investor who says, “Oh, you own 30 apartments. I’d like to buy them,” I can then, within six months, not incur that gain and roll it into another asset? I mean you can’t do that anywhere else. You guys have figured it out. So here’s the thing. You can be good in real estate, and it’s as good as being great in any other asset class.

Dave:
That’s true.

Scott:
So what I would tell people, through no fault of your own, the lobbyists who have fomented this notion that buying a house is the American dream, there’s been such amazing regulatory capture that if I had it to do again from day one, I would probably be putting a disproportionate amount of my capital in real estate.
Now, having said that right now, I wouldn’t buy a house right now. I think there’s a standoff between buyers and sellers because the top is sticky. I love real estate. I’m one of those SNL skit where I look at real estate like a lot of people look at porn. I’m just fascinated what’s selling where and for how much. I don’t think sellers … Sellers anchor off the high. They go, “Okay, my house was worth $500,000.”

David:
That’s now their baseline.

Scott:
Yeah, that’s it. “Oh, that’s the normal market.” No, it wasn’t. That was the peak. Now your house is worth $380 and it’s probably going to be worth $340 in another six months. Eventually there’s capitulation, but capitulation usually takes 12 to 24 months. I wouldn’t want to buy a house right now, I think, with interest rates going up.

David:
What about an investment property that would cash flow positively?

Scott:
It’s all about cap rates and specifics and nuance. When I saw the hurricanes coming to Florida, I started looking at Fort Myers. I love these apartments that I bought and I’m like, “Oh, maybe there’s opportunity.” I also, and I’m in a position of privilege, I try to pay all equities so I’m not forced to buy insurance, which is a total (censored) scam.

David:
Oh, I’ve heard you talk about you’ve saved, what, $200,000 over four years or so of not paying for …

Scott:
Again, everything we do in our society is a transfer of wealth from the poor and the young to the old and the rich. Okay, let me give you a shocking statement. Me and my family do not have health insurance. Really? Bad dad, bad husband. Irresponsible citizen.
Here’s the thing, I’m a narcissist. So I think if I have health insurance, I have to have the best plan. So I got the best plan costing me $48,000 a year for me and my family. $48,000 a year. I am very privileged. I could absorb any health shock, any rare disease, million, two million bucks. I can absorb it. I don’t need to worry.
Then I did the analysis. Half of our medical expenditures, we weren’t getting reimbursed for, because the insurance industry is very good at creating complexity and nuisance. You have to call somebody and they’re only there from 11:00 to 3:00, central standard time. You give up and you don’t get reimbursed for going to have that mole removed. Oh, and the dermatologist I want to go to is not covered under their plan. There’s purposeful breakage.
So I said (censored) it, I’m not having health insurance. I did that six years ago. I’ve saved $300,000. That will buy a lot of healthcare. 45% of insurance premiums go to administration and profit. When I bought these apartments, because I paid cash, I’m like I’m not getting flood insurance. These things could fly away. They could Wizard of Oz on me. As long as they don’t fly away more than every 11 years, I can afford to rebuild them with the money I’m going to save in insurance.
It’s this industry that plays on fear and ignorance, and also regulatory. If you get a mortgage from the majority of bulge bracket banks-

David:
They’re going to require it.

Scott:
… you have to have insurance. Otherwise, you can’t qualify for a mortgage. So what does that do? It means a guy with some money who’s older like me doesn’t have to have health insurance, doesn’t have to have flood and fire. So, again, another transfer of money.
But I think real estate … Again, if I had to do it again, the wealthiest families in Manhattan, they don’t really talk about them. Everyone’s obsessed with tech billionaires. There’s like a handful of families in New York that own all the office buildings. They never sell them, they just borrow against them. I mean if you have the capital and the staying power to survive cycles in real estate, which can be very vicious, those are the people …
If you look at the Fortune 400 or the Forbes 400, the two people that populated outside of people who inherited wealth are entrepreneurs, number one, and number two is real estate people. It’s just a great way to get rich slowly.

Dave:
So why’d you get out of it? You bought in at a great time in 2010 and you like a lot about it. What stopped you from continuing?

Scott:
Well, in my core, I’m an entrepreneur and I’m fascinated towards eCommerce and growth. I think I’m seduced by what I’ll call the sugar hit of investing in Airbnb and seeing a double. Tech is my bag. It’s what I get. I’ve worked with Ned Spieker at Spieker Properties, and Hamid Moghadam is someone I would call a friend. I know people in real estate and it strikes me that their business is better than my business, but it’s just not my business. I’ve never really done it, understood it.
So I did a crash course in it in 2010 because I saw an opportunity. Now, looking back, I wish I bought 300 of these things, not 30 of them. But I think it’s a fascinating business. Again, if I’d do it again, I would probably try and be in and around real estate. I think it’s a great business.

Dave:
Well, it gives you some of those advantages you were talking about that might be geared towards older people. But if you’re able to buy real estate as a young person, it does allow you to capture those things, like you talked about, mortgage interest, depreciation, some of these things that you said at the top of the show are more designed to help older folks. But if you are young and able to get into this industry, it can help you get some of those cheat codes that the older generations are enjoying, right?

Scott:
Well, again, going back to what other asset class can you get five to one leverage on? I mean-

David:
Or better sometimes, yeah.

Scott:
Some young people do some … I think government programs can get 10 or 30 to one leverage. Again, I think prices have gotten a little too high, so I’d be careful. But I work with Goldman Sachs. They’ll give me two to one on my stocks. By the way, if my stocks go down, they start issuing margin calls. But I can lever up 10 to five to one in real estate. Usually, if you get a five or a 10-year mortgage, they can’t do margin calls on you. They can’t go, “Oh, your house has gone down 30% of value. We need you to put more money up.”

David:
No, that’s-

Scott:
They can’t do that. So it’s the most tax advantaged, it’s the most levered. Now the bad news is all of those things have probably led to an asset class that I would say … And, again, it’s so specific, it’s so regional in asset class type, but I would argue the majority of residential real estate … You didn’t want to be buying six months ago, right? I’m not even sure you still want to be buying.
You guys are going to forget more about this and I’m never going to know. But I went back to the Fort Myers thing. When I saw the hurricane hit and they were saying insurance costs are going to triple, I’m like, okay, there’s opportunity here. I love running into the fire.
I called some brokers down there and said I’d be willing to buy some apartments, or even a small apartment complex, and I thought I was going to get a great deal. They were like, “Oh, yeah, all the guys with the black hats have already shown up. All the biggest capital in the world is already down here trying to be … ” It’s like, “Oh, this wasn’t an original idea?” They’re like, “No, the blip, if you will, or the decline in prices in these areas that were hit by the hurricane lasted about 48 hours.”
But I love the asset. I think it’s a very interesting way to make a living. The majority of my friends out of business school who went into real estate didn’t get as wealthy as I did in the first 10 years, but they didn’t get as broke as I did during the downturn. Yeah, they’ve just slowly but surely … I think real estate’s a great way to get rich slowly.

David:
That’s a wonderful line. When you were describing why you didn’t get more into it, and I really appreciate your transparency there, which what I heard you say is compared to what I’m used to, it’s slow and it’s boring and it doesn’t hold my attention. There isn’t as much upside, there’s not as much creativity I can exercise.
People like you that have the capacity of intelligence that you have, Scott, they know what they can do when they’re put in the highest of stakes environment, which in our modern day environment, I would consider to be tech. You’ve got the biggest upside.
It does make real estate, by comparison, just seem, I don’t know a good comparison, elementary. It’s just this is hard for me to follow. I’ve heard several other people in tech that were pitched real estate opportunities. They’re like, “So you’re telling me I’m going to get a 12% return over five years? It doesn’t really move the needle for me. It’s not a bad idea, but I don’t get excited.”
That is absolutely true. I look at it like people in your space and a lot of your audience, they’re used to throwing haymakers and they’re getting big knockouts. It’s very exciting. They know they’re very talented fighters. This is just a steady stream of body shots that don’t appear to be very powerful until you look over a 20 or 30-year period of time.
Like you said, it’s very difficult to lose and your returns start to amplify, largely because, this is David Greene’s opinion here, inflation. Inflation makes your casual real estate tinkerer look like a brilliant mad scientist because it’s so leveraged. So you’re putting 20% of your capital into an asset that triples in value, but your 20% down payment then would have a 600% increase. It’s different when you’re looking at how quickly you can build equity over real estate, but it’s boring.
So when I come across the people that are very successful in the tech space, a lot of our audience is, they’re into podcasts, they’re into media, they’re also … I live in Northern California. So I’m right near Silicon Valley. They’re fascinated by innovation and creativity and what’s next, what’s a better way to do it, how do you do it more efficient. I look at it like you’ve got to work these vegetables into the sexy, fancy diet that you’re used to. You have to bring this in as a safety net or a baseline on top of what you’re already doing.
When we’re giving advice to young people about building wealth, are you of an opinion that real estate could be a part of a bigger picture or are you pick your thing, completely doubled down on that, and excel as far as you can in whatever asset you’re investing in?

Scott:
So there’s your human capital and there’s your financial capital. I think with your human capital, you should be 110% focused, and that is I don’t believe in side hustles. I think if you have a side hustle, it means you need to find a different main hustle, and that if you find a good job that’s your main job, that incremental investment and time and effort and mental bandwidth that you would give to a side hustle, you’ll get a greater ROI.
In other words, try and figure out a way to be great at your main hustle. The difference between being good and great at your main hustle will produce more than if you’re just good at your main hustle because you’re on weekends and evenings selling rare tennis shoes or something.

David:
DoorDashing.

Scott:
I think side hustles are actually dangerous, unless you see it as a short-term pivot to something else that’ll be your main hustle.

David:
So if you don’t like your girlfriend, get a better girlfriend. Don’t start dating other girls on the side as a hedge.

Scott:
That’s a whole other talk show. But in terms of your investments and your capital, you don’t have to be fully diversified when you’re a young person. You can take more concentration risk. But a third of my net worth, maybe 40%, is in real estate.
A lot of it’s around consumption. It’s hard to time, “Should I buy a house right now?” I get a lot of that question. Then I’m like, “What’s the situation?” They’re like, “Well, we’re in an apartment and we’re having a kid.” I’m like, “Well, do you make a good living?” “Yeah.” “Does your wife make … ” “Yeah.” I’m like, “Buy a house. You need a house. I mean your family’s growing.”
Real estate has a different component of it. Some of it is about consumption where you are in your life. But I wouldn’t … I go all in and have huge concentration risk around your human capital when you’re young to get great at something. I think focus is a key component of being great at something.
But in terms of when you start investing, if you love real estate and you’re young, maybe half your money goes into real estate. But as you get older, and especially when you get to my age, you really don’t want to have more than, in my opinion, 20%, maybe 30% in any type of asset type, because real estate just might get the (censored) kicked out of it the next 24 months.
Now I don’t care what kind of genius you are, market dynamics will always trump individual performance and genius. And so, as smart as you are, as good as the opportunities, your Kevlar is diversification. I invested in oil companies, I’m investing in aircraft maintenance companies.
Another thing you said, David, that I think is really important. I have a chart that I present at the end of my class at Stern. On the Y axis, I have sex appeal and on the X-axis, I have ROI. I’m sorry, I flipped that. Y-axis, ROI. X-axis, sex appeal, how sexy an industry is. The line just goes straight down.
A friend of mine is starting a members-only club here in New York just for artists and entertainment people. It just sounds like it’s going to be awesome. No way will I invest. That is way too cool.
Another friend of mine is starting a healthcare maintenance company that uses scheduling to manage workers who maintain health tech equipment. I hear this business, I want to put a gun on my mouth. That sounds so boring and so awful. I am absolutely stroking a check to that guy. The less sexy the business, the higher the ROI, because not every kid’s dreaming of going into that business. It’ll have an underinvestment in human capital. It’ll have an underinvestment in financial capital.
So there is an inverse correlation between sex appeal and return. Real estate is somewhere in the middle. It’s kind of cool. It’s kind of cool, but I would imagine investing in sea malls or warehouses. It’s not that sexy. Everybody wants to buy, probably.

David:
Self-storage, mobile home parks, [inaudible 00:53:13].

Scott:
Whatever it might be. Yeah, that’s where the money is. When something sounds awful, you should smell money, and when it sounds boring. My dad, later in life, four marriages, total train wreck financially. He and his fourth wife bought a trailer park and it saved his ass. Just saved his ass. A weird business banging on doors for rent, collecting quarters from the washing machine. Great business. Like 17%, 18% a year. Great business.

Dave:
All right. Well, we do have to get out of here soon ,Scott. So I want to bring it back to your book, Adrift, and some of those high-level realities that we’re all facing as Americans. Is there anything you think real estate investors or the people who listen to this podcast can do to create some of the change that you suggest?

Scott:
It’s a thoughtful question. I would just say that … And this is more around, I guess, philanthropy or trying to. I think this notion of third spaces, I think we need more spaces where people who are strangers, or maybe don’t know each other through the course of their day, have a chance to be in physical proximity with each other. Open layouts.
I tell my kids … When I say my kids, the kids who work for me. I have about a dozen people. The median age is like 24. It’s like a bunch of kids straight out of college and then a few of us old people. I say to them, I give them my credit card, and I’m like, “Anytime you want to get together, if you all want to go to Tulum, if you all want to go have dinner, if you all want to go to a concert, I will pay for anything you guys do together.”
I think young people need to be in physical proximity. I worry we’re losing our third spaces, our movie theaters, our malls, the workspace. So any opportunity … I think an investment in your culture and an investment in society is to try and figure out really compelling places for people to meet each other, to establish friendships, to establish romantic relationships. But I worry that young people aren’t meeting, that they aren’t meeting people from different backgrounds. So they don’t have the opportunity to develop empathy, to realize that, okay, that guy who just immigrated here from El Salvador loves his kids, kind of like me, and you have a little bit more empathy for someone.
You run into someone who had a marriage that didn’t work out and she’s trying to raise a kid on her own, and you realize, (censored), this is hard. This is hard. Also, have the opportunity to meet people, fall in love, have sex, and get married.
I think that’s the basis of our society, and we’ve decided that somehow it’s bad, that somehow people getting together and wanting to have romantic relationships, that that’s fraught with all sorts of HR risk. Now that’s the whole (censored) point of all this. That’s the whole point.
So what I tell young men is there’s nothing wrong with approaching a stranger and exhibiting interest. If you don’t know the difference between expressing interest and harassing someone, you’ve got bigger problems.
But I’ve had three weddings from my last company, L2, and each of them is a mitzvah. It’s wonderful. They met and they expressed interest to each other. They started a relationship and now they’re getting married and they’re going to have kids.
Anyways, you asked me what real estate people need. Create third spaces. You might already have your mate, you might already have your house, you might already have great places to hang out with people you love. The majority of young people, and they’ve been taken away. Those opportunities and those spaces have been taken away from them. We need to create more of them

Dave:
Is what you’re talking about here, Scott, really boiling down to community, like a lack of community?

Scott:
I think that’s right, but you can have communities online. You can have … What I’m talking about is physical proximity. Online dating, I think, is a disaster for men-

Dave:
Oh.

Scott:
… because we don’t like to talk about it on the left, but women have different criteria for mating than men. Women primarily want kindness, number three, intelligence, number two, and, number one, resources. Online dating creates this mating inequality where 50 women on Tinder, 50 men, 46 of the women throw all of their attention to just four to six men, leaving 44 to 46 men fighting over four to six women.
The beautiful thing about relationships, friendships, romantic relationships is there’s an X factor, smell, body language, movement, your humor, all this stuff, the way you laugh. You just never know the people you’re going to be drawn to for friendships, mentorships, or romantic relationships, and you’ve got to give the bottom 90% of us an opportunity to exhibit some of those behaviors. You can’t do it online.
So I think to your point, Dave, we need to create more opportunities to develop community in person, boy scout troops, sports leagues, church groups, if that’s your thing, riding clubs, whatever it might be, talking to strangers. I think we’re desperate for touch. I think we’re desperate for community. I think we’re desperate for affection.

David:
Yeah, get out of the YouTube comments.

Scott:
100%.

David:
If you don’t mind, I’d like to move us on to the last segment of our show before we get you out of here. It is called Would You Rather in 2023. So Dave and I are going to take turns asking you questions, and you can give your answer and a supporting statement of which you would choose. So I will go first. In 2023, would you rather buy real estate or stocks?

Scott:
Yes, whichever declines more in the next four months. Whichever takes the biggest beating in the next four months. Probably real estate because … Probably real estate.

David:
Because you see what interest rates are doing and it’s just creating it.

Scott:
There’s opportunity and dislocation. I think the next six months, we’re going to see capitulation and a lot of buying opportunities in real estate.

Dave:
All right. Well, along those lines, which would you rather invest in: tech stocks in the next year or a REIT?

Scott:
Probably a REIT because, at my age, I’m more focused on diversification. I’m just always overinvested in tech.

David:
That’s wise. Got to eat a little more vegetables. That’s my problem. I always want to eat that steak.

Scott:
There you go. 100%.

David:
All right. In 2023, would you rather invest in a series C round of startups or in a real estate syndication deal, which is basically somebody else is buying a property and you are having an opportunity as a limited partner to come in and get access to the equity?

Scott:
Probably the latter, because I get a lot of opportunities around series C investments. I’ve been investing a lot in opportunity zones. Again, another tax avoidance scheme you guys have figured out. But, yeah, probably … I’m at a point in my life … It’s all so true. I’m at a point in my life where I’m not looking to get rich. I’m looking to not get poor. So probably real estate.

David:
Yeah, defense.

Scott:
Yeah, that’s right.

Dave:
All right. Well, then we might know this answer already and, Scott, we’re going to have to have you back on to talk about your opportunity zone investing. But a short-term rental like an Airbnb or Bitcoin?

Scott:
Investing?

Dave:
Yeah. Which would you invest in? I know you like gambling. Want to throw some Bitcoin in there?

Scott:
Oh no, no. Short-term rental. I’m a no-coiner. I’ve never owned a coin. I don’t get it. I just don’t get it. I can’t think of a use case-

David:
It’s too sexy.

Dave:
What is there to get? What’s there to get?

Scott:
I don’t.

David:
That’s the first thing I thought of when you described your inverse relationship between successful and sexy was all these cryptocurrencies that were just popping up out of thin air along with the NFT space. Then we found a way to marry them. So you’re like, well, if you buy this crypto, it works in this theoretical metaverse that we’re trying to create, that has an NFT that is the door to get into it. They took all of these things that were inherently useless on their own and tried to make them valuable by turning them into … It’s like combining a bunch of alcohol together that shouldn’t be good and trying to make it taste good. This Voltron of nonsense is how it looked like to me. It was very sexy, and we saw what happened. It corrected very quickly.

Scott:
Yeah, some of it’ll be enduring. You can’t have this much human in any asset class and not have enduring innovation. But at this point, every time I try and understand crypto, I feel like I could slip and break a hip. I just feel old. I don’t get it. I don’t.

Dave:
[inaudible 01:01:28].

Scott:
More power to them. I know some really smart people making big investments in it. I’m on the board of a company called Ledger, which is a cold hardware storage for mostly crypto, but also for identity. I did it just so I could learn. But I’ve never owned a crypto asset and I doubt I ever will.

David:
So short-term rental it is.

Scott:
Oh, by the way, I should have disclosed, Airbnb is hands down my biggest holding from an investment standpoint.

David:
All right. Dave, any last questions for you?

Dave:
No. Scott, it’s been a lot of fun. Really fascinating. Wish we had more time. But appreciate you coming on the show and sharing some of your thoughts with us.

Scott:
Well, thank you guys and congratulations on your success.

David:
Thanks, Scott. If anybody wants to look you up and learn more about you or opportunities that you present, where’s a good place they can go?

Scott:
God, to resist his futile. I’m everywhere. It’s Prof … Again, my Twitter handle is-

Dave:
He’ll find you first.

Scott:
Yeah. Twitter’s @profgalloway. I have a newsletter called No Mercy/No Malice that comes out every Friday. I’m about to do a show on BBC. If you want to take a course, I’m involved in an edtech company called Section4. So I’m everywhere.

David:
Well, we appreciate you, brother. Thanks for coming on. We’re going to have you back to talk opportunity zones and Tinder strategy in the future. Seems like you have a lot to offer on every element there.

Scott:
They’re related. All right, gentlemen.

David:
Thank you.

Dave:
All right. Take care, Scott.

Scott:
Take care.

Dave:
All right. Man, well, that was a fascinating conversation, David. What were your initial takeaways from the conversation with Scott?

David:
Well, first off, we went all over the place, which was pretty cool. Scott gave us some pretty insightful commentary on a lot of different things, a lot to chew on there.
I like his perspective. He’s coming from someone that has made a lot of money that has been successful in a lot of different areas of finance and has a nuanced position when it comes to both the individual, specific micro ways that we can earn more money for ourselves, as well as the generalized macroeconomic perspective that has to do with government policies and the unseen pressures that allow wealth to be created in different ways.
So I mean I would love to have talked to Scott for longer. We only had a short period of time, and I’m glad that he did talk to us. So what were some of your favorite things that he brought up?

Dave:
Man, yeah, there was a lot there. I do agree, I wish we could have a longer conversation. But I think one of the things that really stuck out to me, which I have conflicting opinions about it, I should say, is the idea that he hates side hustles. I think that’s pretty contrarian to what we talk about here on BiggerPockets a lot.
I get what he’s saying and I think for a certain type of individual, it makes sense to do what he’s saying. But I’m not sure that’s advice I would give blanket to everyone. What do you think?

David:
Yeah, you’re making a good point. See, I think when he said side hustle, we never defined what he meant by that. So I don’t know. I’m now speculating for Scott. But when he said side hustle, what I interpreted was don’t allow your energy to be diverted in several different ways. This is when Brandon Turner would say don’t try to build five bridges to Hawaii at the same time.
So if you’re in a location, in an opportunity where you can be building your skills, which I am passionate about, and I heard Scott talk about as well, like especially when you’re young, skill-building needs to be at the forefront of what you do. I did my TED talk on this.

Dave:
Totally agree.

David:
In the next book I’m writing, I’m big into it. When we interviewed Cal Newport, So Good They Can’t Ignore You, some my favorite books, and that’s exactly the point he makes is you’ve got to build your skills like Napoleon Dynamite, because girls like guys with skills.
I think what he’s getting at is don’t try to avoid the work. It’ll be like, ugh, that’s a hard path to take. I’d rather look for the next NFT that’s going to blow up, or I’d rather make my own blog and make money that way because it’s easy. He was like, no, stay the course. Walk the path.
But what we talk about with BiggerPockets when we talk about a side hustle is probably more geared towards you don’t have a lot of opportunity in your job. You’re listening to this podcast and you’re picking up shopping carts at Home Depot or Lowe’s. What you really want to do is be in construction. So you like working at Lowe’s, but you’re not making enough money to get anywhere.
To you, your side hustle’s actually a step up. Your side hustle might be a contractor you met coming into Home Depot, that hires you to help do some work on the job site, and now you could start to learn a trade. Your side hustle becomes the path, right?
So I think that’s how I’m looking at what he’s saying is it depends on which path you’re on and if the side hustle is a step up, which is a good motivation, or if it’s a distraction, which would be a bad motivation. What were your thoughts on that?

Dave:
Yeah. No, I actually think that’s a really good way of phrasing it is that it’s really about where your focus is. If you’re in a career where you can make a lot of money and do what he’s talking about, or if you really focus, your income can go from $50,000 a year to $500,000 a year, maybe that is a great option for you. I don’t know. I don’t think there are a lot of those careers out there, though.
And so, I think for everyone else who might not have that potential, maybe you’re not working in finance or on Wall Street or whatever, you try and find the place … Put your attention towards the thing that can offer you that ability to 10x your income. If it’s not your regular W2 job or whatever job it is, maybe real estate, or what we were calling a side hustle, can be your main hustle. It’s just something you’re doing concurrently or at the same time as your real job. So I think that was really interesting.
But I completely agree with the sentiment that it’s just get really good at something. I completely agree with it. I think that’s excellent advice for pretty much anyone.
I guess the other thing I was interested in was when he was talking about taxes a little bit and about how advantaged taxes. He was really going off about how amazed he is that you can depreciate things, you can lever it. This is for someone who is primarily a stock investor. So I thought that was pretty cool that he was recognizing some of the advantages that real estate investing have.

David:
Yeah. He also made it clear he doesn’t operate in this space very often. He’s not a real estate person. He’s a stock person. He’s a tech person. He’s fascinated by innovation and startups. If you listen to Scott, Prof. G, he talks a lot about his opinion on Elon Musk per se. That space is much more in creativity.
He mentioned real estate is just comparatively boring. It’s a great way to build wealth slow, which was funny he said that because that’s literally what I say all the time. I’d say this is a get rich slowly scheme. It’s not a microwave, this is a crock-pot, and at the very end is where it starts to get really fun. When you’re really hungry and you’re like, “Oh, I want to get out of this situation in life. I want to eat. I’m so hungry,” no one thinks of a crock-pot.
You’re looking for that hot pocket. You can hit it really big in tech. You can make a lot of money really quickly. When I say a lot of money, we’re like, wow, an 18% ROI is fantastic. They’re more like it’s an 800% ROI. That’s just the world that they’re used to playing.
I liked that he admitted real estate’s amazing, it’s just slow. It’s not my speed, because not everybody is in that same boat. For some of us, slow is the best speed. What about you? What do you think?

Dave:
Well, it’s funny what he says about diversification, because in the venture capital world, which it sounds like what he operates in mostly, the calculus is very different than real estate. They’re acknowledging that they’re going to hit on one out of 10 investments, and they’re hoping that that investment is a huge home run. I think he was an early investor in Airbnb, and that’s awesome. He’d probably readily admit that it took him failing on 20 investments to hit that home run with Airbnb.
That’s just a totally different game than real estate. Real estate investing is about making incremental progress with every single investment and hopefully losing on none of them. You might never hit a grand slam, but that’s okay. You’re like the utility guy in the baseball team who’s just hitting singles every time. That’s totally fine because, for me, especially if you’re starting young, that’s all you need. If you’re starting in your 20s or 30s, if you do that for five to 10 years, you’re going to end up in a good position, almost guaranteed.

David:
You want an analogy I just thought of?

Dave:
Yes, I definitely do.

David:
All right. So tech in the world that Scott operates is like animal husbandry. You are trying to breed-

Dave:
Where is this going?

David:
… a race horse. You’re trying to breed a race horse that’s going to win the Kentucky Derby. You’re going to go through a lot of duds, but if you get that one that hits, you’re incredibly wealthy. You’ve made a ton of money. You can now stud out that horse and do really well.
Our world is much more like farmers. We’re just planting trees. We want an almond orchard. No one ever said it’s really sexy to own a lot of almond trees. It is a little bit more work to have to harvest those almonds and then store them somewhere and sell them. It’s a little more work when you’re running a short-term rental or you’re managing a property. It’s a little bit more like running a business.
When you hit a big on a property, it’s not like you’ve got this race horse that you can make a bazillion dollars off of. You’re probably going to take some equity out of it by three to four more trees and wait, wait for them to start growing almonds.

Dave:
[inaudible 01:10:59].

David:
Right?

Dave:
Yeah.

David:
But it is so easy to repeat it. It’s simple. I mean it’s the same freaking thing you’re doing with a tree over and over and over. Maybe you have some almond trees and some orange trees and some apple trees. You diversify a little bit between a duplex and a short-term rental and a regular house somewhere, but it’s all the same type of stuff. You’re watering trees, the land works the same, the irrigation works the same.
And so, to me, the weaknesses of real estate is it doesn’t scale incredibly fast. The strengths are it’s harder to mess up, for sure. You can have a curb where you never lose money on a house ever and it’s much more scalable versus the high-risk, but high-reward element of the world that Scott lives in.

Dave:
Well, it’s interesting. First of all, if we were playing the game of bingo where you try and work weird words into the podcast, animal husbandry is one I never thought I would hear on this show, but here we are.

David:
Here we are, Dave.

Dave:
No, it makes me wonder about his personality. He said several times he really likes gambling. And so, it’s interesting if that kind of high stakes VC, venture capital world is attracted to him. It’s part of his personality trait. People always think like investing, it’s so dangerous. It’s risky. It’s like, personally, I’m a very financially conservative person.

David:
Me, too.

Dave:
I’ve got a lot of financial anxiety. I just want to keep what I got and just build it slowly. I just wonder if it’s comes down to different personalities and what you’re looking for.

David:
I think that’s exactly right. I’m glad you’re bringing it up because I think it creates confusion for the listener who doesn’t know that, because they’re looking for the blueprint. They’re like, “Well, is Scott’s the right blueprint or is Dave Meyer the right blueprint, or is some other entrepreneur out there? Is Elon Musk the right … Is Gary Vaynerchuk the right one? What am I supposed to do?” Well, it depends your personality. You’re probably going to go in the direction that your personality is bent towards. So figure out how to make real estate work within your personality. You’ll have a much more fun time.

Dave:
Absolutely. The last thing I thought was really interesting is right at the end, he was talking a little bit about community. I asked him what real estate investors could do to address some of the challenges that he laid out in his book, and he talked about a lot of different things there. But I think what resonated with me was that if you are into real estate and real estate investing, create your own real-life community.
We just got back from BiggerPockets Conference where it was a perfect example of that, being able to meet and connect with people who are like-minded, who can help you reach your financial goals, who you can help them reach their financial goals. I found that personally being at BPCON. I work remote. I live in Europe. I found that really energizing to be there and be with the community in real life.
And so, I thought that was a really good lesson that people can take or learn something from, especially if you’re new. It feels really scary, because if you’re sitting in front of your computer or you’re just listening to this podcast and you never went out and talked to other people about it and seen and learned from people directly, it seems like this foreign thing that you can’t really touch or feel. But if you go out there and go to a meetup, you can see that this is achievable and you can meet people that can help you achieve it.

David:
Yeah, it’s funny. When I look at real estate, I don’t ask myself the question of is it achievable, which is what the new person would be thinking. It’s more how could it not be achievable? If you did all the right moves, how would you screw it up? You buy the right property, you buy in the right locations, you keep enough money in reserves, and you wait. Under those circumstances, it’s hard for my mind to conceive of a way that people would lose money through real estate in the long term.
And so, there’s some hope there if somebody’s like, “Oh, I really want to get into this, but I’m just afraid.” The fear is largely based on ignorance or expectations that are incorrect, like, “I’ve got to make $300,000 in my first year because I’m quitting my job in three months.” This is not the asset class to do that.

Dave:
You’re going to have to take on a lot of risk if you want to do that, and it’s probably not going to work out. But if you like the slow and steady approach, we got some ideas for you.

David:
All right. Well, I thought this was a good interview. I enjoyed you being here with me, Dave, as always. You always ask really good questions. If people want to follow you, where can they find out more about you?

Dave:
Well, you can find me on BiggerPockets, of course, or my podcast, another BiggerPockets podcast, called On the Market, or I’m on Instagram at @thedatadeli.

David:
Thank you very much. I am online at DavidGreene24. That’s it. DavidGreene24. YouTube, David Greene Real Estate. You can check out my website, which is also davidgreene24.com. If you have not done so already, please do me a favor and go leave us a review on whatever service you use to listen to podcasts. That would really, really help us.
So thanks everybody for listening here. We hope you enjoyed this. Dave, thank you for joining me. I’ll let you get out of here. This is David Greene for Dave “The Scaredy Cat Investor” Meyer signing off.

Dave:
That’s so true.

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, with James Dainard joining me today. James, what’s up, man?

James:
Oh. Just hanging out in the cold, rainy Seattle.

Dave:
I think we’re back to having the same weather. It’s just dark and rainy and … I don’t know.

James:
Got my space heater at my toes. Yep.

Dave:
Did you know that Amsterdam rains significantly more than Seattle?

James:
I was explaining that to my wife when we were trying to plan our vacation out there. She’s like, “No way.”

Dave:
Yeah. No. But it’s like April to August is super nice. So it’ll be fine. It’s just the whole winter. But, man, we had a long episode, long interview today. So let’s do it. We’re just going to talk quickly, but we have Ashley Wilson, who is a incredible multifamily investor on today. And just want to just give a quick warning. Not warning. Just disclaimer here that if you’re … This is more of an advanced episode, I think. Right? If you’ve never heard of multifamily or don’t know that much about it, you can … Ashley does a great job of explaining things, but there’s a lot of advanced concepts in here that … Honestly, I love this. I think this is one of my favorite episodes ever. But just wanted to give a heads up that there are some new terms that you might not have heard that we go over here.

James:
Yeah. Ashley is one of the brightest people I know in this space, and she will educate you beyond belief. And, I mean, even for me, I got a little bit lost at a couple points in it, so-

Dave:
Oh, dude. She was dropping bombs, dropping knowledge on it. But I think it’s super important what she’s talking about, just market conditions. She offers really concrete examples of what she thinks is going to happen in the multifamily market and why and gives really good examples of backing up some things you, James, have been talking about, some trends you’ve been seeing over the last couple of months.

James:
Yeah. She’s just a very talented operator that knows the nuts and bolts of her business, and she just broke it down, and I think the serious operators out there are seeing the writing on the wall for the sloppy operators. But she’s one of my favorite people to talk to.

Dave:
Totally. If you’re interested in multifamily commercial or just want to learn a little bit about it, this is a must-listen-to episode. There’s just so much good information that. So we’re going to take a quick break, and after that we’re going to bring on Ashley Wilson.
All right. Ashley Wilson, co-founder of Bar Down Investments, bestselling author of the only Woman in the Room: Knowledge and Inspiration from 20 Women Real Estate Investors, and of course an active member of The Real Estate InvestHER community. Ashley, welcome to On the Market.

Ashley:
Thank you so much for having me.

Dave:
Well, I just read your official bio, but can you give us, in your own words, a bit of your background and history in real estate investing?

Ashley:
Absolutely. So I started learning about real estate in 2007. My now-husband introduced me to it, so I’m really blessed that he kind of gave me the first sip of the Kool-Aid, so to speak. Started listening to BiggerPockets and being involved in the community in 2007. We made our first purchase in 2009 of a single family rental. I’ve house hacked short-term rental, long-term rental of single residential properties. I’ve done flipping, high-end flipping, and traditional flipping. And then I transitioned to commercial real estate in 2018 and have not looked back. So I’m in commercial real estate right now, specifically in multifamily.

Dave:
That’s amazing. And you and James, I learned, met … Did you guys meet at … Do I have this right? At Brandon’s Maui Mastermind? Is that right?

Ashley:
Yeah. We did. I am so blessed to have been invited to the event, but more importantly, I’m so blessed to have met James and met a lot of different people there, incredible people that now are my closest friends, including James. So really, really excited that we’re now on this podcast together.

Dave:
I was very jealous. James was telling me everyone who was at that. It was like the Avengers. It was all of the greatest real estate investors meeting at once. I was like, “Damn. I wish I was there.”

James:
It was like the Avengers. But I will say, Ashley and Kyle, her husband, are two of the most favorite people I met there. There’s definitely a little small group that I talk to most, and they are part of that, for sure.

Ashley:
Couldn’t agree more.

James:
Super stoked we met each other.

Dave:
Awesome. Well, now the history between Ashley and James. But let’s jump into this multifamily market. You’re obviously an expert in everything having to do with sponsoring syndications and multifamily. So can you just give us a quick read on what you’re experiencing in the multifamily market right now?

Ashley:
Chaos. No. I’m just kidding.

Dave:
All right. Podcast over.

Ashley:
That wasn’t the answer you were looking for? So multifamily has had kind of a hectic past two years, all starting with COVID, and I think a lot of people across all real estate asset classes, but specifically in multifamily … A lot of people got gun shy at the beginning of COVID, and they really didn’t know how the market would respond, because they really didn’t know consumer sentiment, which is translation of tenants would respond and how rents would not only grow or compress, but also the ability to pay. I think there was a lot of sensitivity around employment and tenants being able to maintain income to be able to pay their rents, and then, as owners, how we would be able to continue to keep operating the properties.
So fortunately there was a lot of government programs both at a federal level, local level, and then also some charitable organizations that stepped up and provided some assistance along this past two-year runway. But what we actually saw was, I think, the opposite of what most people predicted, and I think that was in large part because just the abundance of stimulus that was thrown at this sector.
And what we saw firsthand as well as I look at national metrics all the time … We saw a higher than normal collected versus bill rate across multiple markets, and that’s because of all of these different assistance programs stepping up and not only paying one or two months, but also paying six months out for tenants that were in really difficult situations, loss of jobs being the number one reason, and probably number two is more tied to family dynamics with respect to how COVID was impacting their family and whoever was the breadwinner. So that definitely played a toll as well.
So what ended up happening, because multifamily … The most traditional way in which multifamily properties are evaluated is called the NOI approach. What essentially happened is the income grew, and the income grew at a faster rate than the expenses grew, because at that time initially, we didn’t … Even though we had chain supply issues, it wasn’t impacting multifamily up front. It actually had a little bit of a lag effect. So we saw it later.
When we look at development, and if you … I know I’m going kind of all over the place here, but I’m trying to paint a picture. The overall economy … We already have a shortage of housing supply, so when you look at supply and demand, the supply was shut off with not only federal mandates of supply being shut off when contractors were forced to shut down for that period of time, but also in terms of government agencies approving permits to construct new properties. In turn, what happened is we’re shutting off the supply, then we’re left with whatever supply is available on the market. A lot of people were forced into situations of renting. With the stimulus, we’re growing the income, but we’re not also seeing that expense growth.
Then the tailwind was the expense growth. So we started to see expense growth kind of come into play. But in terms of initially when you’re looking at income growth and you’re looking at the NOI approach, which is the most traditional way in which you evaluate the valuation of a multifamily property in terms of what you pay, you look at it typically on a trailing basis. So by the time of multifamily transactions, if we look at it through the tail of 2021, we saw Q3, Q4, and then spill into 2022 in respect of Q1 and Q2 having these record-setting transactions in multifamily. One example, one specific data point, is in 2022 in Q1 … I just posted an article about it. It’s not like I memorize all this stuff all the time. But I think it was 63-

Dave:
I was pretty impressed. I was like, “Man. [inaudible 00:09:51].”

James:
She’s like a walking robot.

Ashley:
63 billion in transaction volume in Q1 of 2022 across the nation, which is the second largest volume of transactions that have occurred in multifamily history, so I think with the first being in 2000, if I remember correctly. I forget which quarter. But the point remains the same, which is that all of a sudden we have this huge volume of transactions occurring that we weren’t seeing prior to that.
So now we’re in a situation where a lot of people were selling at top dollar and also the volume of transactions was super high. Lenders were really happy about it, because they were essentially achieving their placing of capital metrics, the goals that they have to hit each quarter. By the end of Q2, they were already hitting their goal for that year through almost Q4. So they only needed to transact a little bit more through Q3 and Q4 to hit their metrics for transaction volume. So in terms of where they wanted to place their capital, coupled with the fact that the fed interest rate hikes and how that impacts multifamily, that kind of caused a slow down.
But on the other hand, we now have all this 1031 money. So the 1031 money is now circulating, which is causing properties to still transact at a very high price point because of the fact that people would rather buy a property and even overpay for a property. Sometimes I’ve heard, from personal context of mine, they would overpay by $4 million just not to have a $5 million tax hit.
So because of that … And I see James shaking his head there, but honestly I agree with James on that. I think that’s crazy that people are doing that. But what ends up happening is then you don’t see the compression on the cap … Excuse me. Not compression. Expansion on the cap rates that you really should see, because expansion on the cap rates obviously translates into a lower price point and vice versa. So what we should be seeing is a lower price point on these properties with expansion of cap rates, but really we’re not seeing it. We’re seeing a little bit, but not as much, and it’s only being impacted due to the interest rate, not the cap rates, which is kind of a little bit unique situation.
So when I said it’s a little bit chaotic, I jokingly said that, but I do see indicators that lend itself to chaos. Why are people overpaying? Should they be overpaying? I personally don’t believe that you should ever overpay. I don’t typically think that there’s a good justification for that, but that is honestly what we’re seeing. Everyone said it was multifamily madness in Q1, but I would say it’s more the fallout of that madness that we saw is what we’re seeing today.

James:
Yeah. And it’s crazy that … The point that you just brought up about the 1031 exchange … I feel like that is starting to dry up a little bit in the current market. The 1031s are … They already sold off their property. They had a certain amount of time to reload that money in. It’s definitely starting to slow down. But yeah. That is a huge mistake. I was watching for the last 24 months. People were overpaying just to defer taxes. But if you’re going to lose that position or the gain down the road, it doesn’t matter. You’re just losing the position.
And someone told me … I remember I was trying to do a 1031 exchange about five years ago, and I was doing six properties. Or no. Three properties. And I had uplegged a couple during that time, and I was trying to find the next replacement property, and I could not find anything. And how I buy is deep value-add buy. I want walk-in margins, walk-in equity. And I was going to buy a property that did not meet my buy box, typically. And I was talking to one of my clients who’s a financial planner, and he literally just stopped me, and he goes, “Have you lost your mind?” He’s like, “What is wrong with you?” I’m like, “What do you mean?” I’m like, “I’m deferring these taxes. I’m saving these monies. I’m going to increase my cash flow.” He’s like, “Yeah. But you do what you do. What are you doing? You’re …”
And he mentioned to me … He goes, “There’s two things that put people in bankruptcy. A, thinking you have FOMO, where you’re … that you’re missing out and you’re leaving too many … or that you’re not getting … that you’re going to miss that return, and two, that you’re trying to defer taxes. At some point, you got to eat the taxes.” And I remember I ate 350 grand in taxes. I blew up the exchange and just reset my basis at that point. But that’s been this greed of what’s going on. There’s so much money getting pumped in. People made so much. They don’t want to pay the tax, but then they buy a bad deal, and it’s a huge mistake, and it ends up in the long run hurting you more than just paying the tax.

Dave:
I just want to explain for a minute what you guys are talking about. Just the phenomenon here is that basically a 1031 exchange, if you don’t know what that is, is if you sell an investment property, you can take the profit that you earn and reinvest it into a like-kind property without paying any capital gains. You’re basically deferring the capital gains till some other time. But if I’m picking up right, what’s sort of happened over the last couple years is people would sell. They were often trying to sell at the top or take advantage of this appreciation. But then when they went to go and find that replacement property, they weren’t finding a deal with good fundamentals. But when you do a 1031 exchange, you only have 45 days to find that replacement property, so people often get desperate and make bad decisions. Right? Is that basically a summary of what you’re talking about?

Ashley:
Absolutely. And I think you see that more and more when the volume of transactions is so high. So I think that’s what we were seeing this year more than previous years is we had so much capital at play for people to 1031. So the scale of which the transactions happen, the ripple effect, was there was more 1031 money at play.

Dave:
And so you’re saying it’s sponsors’ 1031 money, and so they’re selling a multifamily asset and then they are trying to purchase another multifamily asset? Or is it the LPs in these deals are also having 1031 money and that’s also contributing to it?

Ashley:
It’s not just syndicators. It can be private owners. It can be REITs. It can be private equity firms. It’s really everyone across the board can benefit from this tax incentive. So I personally saw it across the board. I didn’t see it just limited to syndications trying to reinvest 1031. In fact, if anything, it’s actually more difficult. I have personally witnessed for syndications to do something like this, because it’s just a little bit more complicated. There’s more hair on the process in terms of the actual overall structuring, how the PPM was originally worded, how many LPs you have and whether or not they all buy into it.
There are work workarounds. Excuse me. I am not a lawyer, so I won’t pretend to know the answer, even though I’ve been told what I think the answer is. So just consult with your lawyer if you are interested in trying to figure out a workaround there. But ultimately the people that I’ve seen do it the most are really private owners. But either way, it doesn’t matter whether it’s private owners, syndicators, private equity firms, REITs. The impact it has on the market is massive. These individuals are doing it, but overall it’s impacting everyone, is really kind of the takeaway message.

Dave:
Yeah. Hey. Dave Greene on the BiggerPockets real estate show has been talking about this in the single family space for a while. Where he is, I’m sure it’s pretty common, especially in the Bay Area. But it’s interesting, because I hadn’t really thought about how that impacts the multifamily space.

James:
You always know when the market’s getting juiced up a little bit, because I would get phone calls from commercial brokers, and they’re like, “Hey. I got a 1031 exchange buyer. We will buy anything.” It was like if a broker landed that 1031 exchange buyer, they knew it was a done deal. Right?

Ashley:
Yep.

James:
They’re like, “What do you got? We’re just going to get the deal done. I’m going to rip my check,” and it was like that’s what the people were in the constant … Oh. They got to buy something. What do you got? Just give me … And it’s like, “I’ll sell you this.” We sold a couple of our properties because we got cold call with 1031 exchange wires, and they’re like, “We’ll pay you this,” and we’re like-

Dave:
Just find the biggest turd house you have a listing contract for, and you’re just like, “Here you go.”

James:
Yeah. Here you go. But we got paid well. I love 1031 exchange buyers. They pay very good money for your stuff.

Ashley:
The crazy thing about 1031 buyers or brokers, when a broker lands one, to your point, James, they don’t tell you the buyer’s buy box. They just tell you how much money they have to 1031. That’s my favorite part about it is they’re like, “This is how much we have to 1031. Do you have a deal that fits criteria?” It could be in Timbuktu for all the broker cares about. The broker just wants to place the capital, because they’re foaming at the mouth for the transaction, and it’s astonishing to me that it’s not like, “Okay. Well, it has to be built in 2015 or 2015 or newer,” or something like that. They’d give you no criteria except how much money that the buyer has to 1031.

James:
This is how much I can deploy. Let’s get it done.

Ashley:
Let’s get it done.

James:
Crazy

Ashley:
Send over the contract.

Dave:
That’s a great place to be. Ashley, you mentioned a few things about cap rates that I’d love to ask you some more about. But for those people listening who aren’t as familiar with commercial real estate and cap rates, can you just explain the role that cap rates play in valuations and in multifamily investing?

Ashley:
Cap rates. The best and the easiest, most simplistic way to understand it is actually something my husband told me when he was first teaching me about cap rates, and that is essentially if you were to purchase the property in cash, what your cash flow would be after all your expenses were paid. So if you’re buying a five cap market and you purchased something at a hundred thousand dollars, just for simplicity’s sake, you would receive 5,000 annually in cash flow. That’s essentially what a cap rate is.
In terms of how it is utilized with respect to multifamily and commercial real estate, it is used as a determinant to tell you the trading value across different assets, and it’s supposed to take into consideration risk profile and be able to go across different investments. So say, for example, you’re comparing multifamily to self storage. Well, let’s say self storage is a 10 cap and multifamily in the specific market in the specific buy box you’re buying it is at a five cap. You’re getting less of a return when you purchase a multifamily property versus a self storage, because self storage inherently has more risk. So that is kind of just high-level what a cap rate is.
In terms of how it’s utilized to determine value with the NOI approach, which I mentioned previously, there’s three ways in which multifamily properties are evaluated. One is the comparable sales approach, and comparable sales approach … Most people already understand that conceptually, because it’s the way in which residential real estate is valued. So if you have a property adjacent to another property with similar specs, one property sells, most likely that other property will sell at a similar valuation. Right? So if it sells for $300,000 … It’s a 2000, three bedroom, two bath home on a half an acre. Let’s say hardy siding, two story with a detached two-car garage, and you have the exact same thing. Maybe it’s even 1,950 square feet. You’ll probably be able to sell that for 300,000. They’re comparable. That’s why it’s called the comparable sales approach.
With respect to the second way multifamily is evaluated, it’s called the replacement value. So think of how an insurance adjuster would evaluate multifamily. So replacement value is based off of the replacement cost in which you would replace that same structure. The third approach, which is the most common way multifamily is evaluated on the purchasing side for buyers is called the NOI approach, which is you take your income minus your expenses, you annualize it, you divide it by the trading cap rate within that given market for that specific asset class. So there are different cap rates based off of markets and then also based off of different asset classes. So whether it’s an A class, B class, C class property, 2022 construction versus, let’s say, a 1980s construction, those cap rates are going to vary, and then you come up with an evaluation.
A very simplistic way to determine how you add value to a property … A five cap is typically a multiplier of 20. Well, it is a multiplier, not typically. It’s a multiplier of 20, so it’s a very easy way in which you can determine, “Okay. If I’m saving a hundred dollars a year, that’s an add evaluation of a hundred times 20, so a $2,000 add onto the property evaluation.” So you can see how the multiplier effect is great with value-add properties, because if you add $10 a unit across a hundred units, you can see how that can have a massive impact on the overall evaluation of the property.
So now kind of understanding that basic knowledge on those three approaches and knowing that the NOI approach is the one that is used, it’s important to look at mathematically what those factors are that determine the value. So you have the income and the expense, which people can manipulate those as well. Income and expense are based off of operating income and operating expense, but there are line items that are, quote unquote, below the line, which means below operating variables.
So let’s say, for example, you replace roofs. Replacing roofs is actually called a capital expense. Capital expense doesn’t get calculated into the evaluation, because it’s considered a one-time expense, whereas if you do a roof patch, most operators would agree that a roof patch would fall as an operating expense under general maintenance. So that would impact your evaluation. People do, though, get creative. You can call it fraud. You can call it whatever you want. I’ll throw around the F word. And they can hide that below the line so it looks like their repair and maintenance is lower than what it should be. So the more experienced you are in multifamily, the more you can gauge, okay, their R&M cost, repairs and maintenance, is really low for this vintage property.
A typical and the average expense ratio across the country … Now, it varies by area, so don’t take this to the bank, but typically A class property typically has around a 30 to 35 expense ratio, and then every decade kind of adds a couple percentage points. So like 1980s vintage, you’re typically stabilized. These are all stabilized ratios. Stabilized. Excuse me. For 1980s, you’ll probably be around a 50, anywhere up to a 60 percent expense ratio.
So knowing all these things, you can see that the income and expense can be manipulated. But the other thing that can be manipulated is cap rates. So one of the things we just talked about was the whole history of the past two years of how the multifamily sector has been a little bit chaotic. And the thing with cap rates are cap rates are determined by historic transactions. So in terms of setting the cap rate, it’s based off of transactions that have actually occurred. So in Q1 and Q2, when I was talking about having all of these record-setting transactions occurring, obviously the cap rates were compressed. The cap rates were compressed because we were seeing transactions at the highest or second highest rate that we had seen of all time.
So when that funnels down, then obviously when we get to a period in … Let’s say, for example, we have a halt in transactions. People are really kind of guessing on the cap rates, but they’re using historic sales to forecast where they should actually be at. With respect to the 1031 money circulating, if people are overpaying for properties, then we’re not seeing the cap rate expansion that we think we should see, because really property values have come down, but cap rates aren’t truly reflective of that, because 1031 money is making it look like the market is doing better than it is, because people are overpaying for properties. So that’s part of the issue.

Dave:
You said that property values have come down, but have they actually? Or are you just saying that they should be coming down? Because cap rates should be declining, and if NOI stays constant, they should be … Or excuse me. Cap rates are expanding. NOI stays constant. Then property value should be going down. Right? But is that actually happening? Or is that sort of just what you would expect to be happening?

Ashley:
Well, it’s my belief that it should be happening, because when you look at interest rates … And we haven’t really talked about this yet, but when you look at interest rates, there’s an inversion that just occurred. Right? So previously we saw interest rates lower than cap rates. And when you invest in multifamily, one of the things you’re investing on is that spread between the interest rate and the cap rate. But because we’re seeing interest rates, let’s say, for an agency loan at six percent, bridge loan anywhere from seven to eight percent, but you’re seeing cap rates at five percent, you’re seeing an inversion. You’re seeing interest rates actually higher than cap rates.
So in terms of where they should be at today, there should be some more expansion on the cap rates, and I think that there was … I think 1031s created a fallacy of what cap rates are. I also think with the chain supply issues … And I know this is kind of a divergence of what we’re talking about now, but I do think it impacts pricing. I’m a firm believer that you also have to consider replacement value. I don’t think that evaluation just should solely be off of NOI. I think you should also consider replacement value, because if you can’t build the same product today for the price that they’re asking for, then there’s a trickle effect that’ll eventually happen. There’s lag time. But we had a lot of chain supply issues. I mean, lumber was through the roof. It’s definitely come down significantly. But we still have chain supply issues and shortage of materials and shortage of labor, which is impacting the cost to build.
So when you’re in a situation where you are buying a 1980s vintage property at 150 a door, but to rebuild that it would cost you 195, how do you truly evaluate it? I’m not pitching for you pay 195 for it because that’s what it would cost to replace, but I’m just saying that in terms of trying to determine the value just going off the NOI approach alone … I don’t know if that’s necessarily the answer.

James:
That is one of my favorite metrics to buy on, buy well below replacement cost. When I’m uncertain on a deal, any type of deal, multifamily, single family, whatever it is, if I’m buying at like 30 percent off replacement cost, I feel pretty good about that deal. In the long term, it usually clicks out.

Ashley:
Yep. I completely agree with you, and I actually just recently was talking about this on LinkedIn, and I got some … Obviously, there are some people who feel differently about that than you and I feel, and they’re proponents of, “Well, it still needs to make money. You still need to operate as a business, and you’re buying the business.” I completely agree with all of that. What I’m saying and I think you’re probably saying as well is you can’t just look at it solely off of the business. It is a very important factor, but you can’t discount replacement value. You can’t discount replacement value, just like you can’t discount location. You know? You can’t discount path of progress. All of those variables come into play on evaluation. And you and I might have a different opinion of how much we push or pull back, but my whole point is gone are the days that you just look at a trailing 12 and say, “Okay. That’s what I’m going to offer,” and be done with it.

James:
Yeah. And that’s a big mistake people make is they want to stick to one straight way of underwriting things, and that’s not the truth for anything. You have to look at all those little … There’s little data points everywhere, and you got to take them all, put them in a bucket, figure out what makes sense to you and how you want to evaluate it, and then that will help you make a decision, and that’s really important in today’s market, because it’s hard to know whether you’re buying a good deal or not. And so you have to look at all the factors, and then that will help you make that comfortable decision whether to pull the trigger or not.
But yeah. But, I mean, I love buying below replacement. If I can’t build it for … Because building apartments is expensive. Going back to the supply and demand conversation we were having earlier, the reason the supply is low and it’s going to continue to be low is builders are bailing out of these big complexes. They waited two to three years to get their permits, it took too long, their bill costs are 20 to 30 percent higher than they’re anticipating, maybe even 40 percent, and their cost of money is now up 40 percent, and they’re toast. And now those units are never coming to market, because they’re getting sold and repurposed at that point.

Ashley:
Yep. I completely agree with you.

Dave:
James, are you seeing cap rates sticking lower than you would expect in your market as well?

James:
Well, there’s the sellers asking for it, but they’re not transacting. We’re seeing good buys. In the last four weeks, we … I mean, we closed on a big deal up in Everett, and our stabilized cap rate’s 6.1. Couldn’t get that. No way we were getting that the last couple years. We have another one that we’re looking at in West Seattle that’s … I mean, the deals are out there, but it’s a matter of also making sure that it’s the right buy for yourself. We’re seeing people negotiate pretty rapidly up here. There’s definitely a huge demand fall in Seattle, which is great, because that means we’re going to step up into it, but things are definitely transitioning.
It could keep slipping too. So maybe a 6.1 cap today … Maybe I want a 7.1 cap. I don’t know. That’s what we’re trying to figure out, and that’s why it’s really important to know those extra metrics. The one that we got at 6.1 cap we bought at least 20 percent below replacement cost. No way we’re getting that built for that. We paid under 200 a door. They usually trade at 300 a door up there. So it’s like all these different categories are … That’s why it’s so important to know these extra little factors in your underwriting.

Dave:
So, Ashley, given all the market conditions that you’re seeing and, it sounds like you believe, overinflated prices at this point, how are you handling that in your business? Are you sort taking a pause? Or are you still active bidding on deals?

Ashley:
We’re actively bidding on deals. I don’t think I would ever pause ever. To me, there’s always a good time to buy. It’s always a good time to buy. But the way in which we evaluate deals hasn’t changed, in terms of we’re sticking to our guns on how we evaluate deals. We’re conservative. In terms of the actual numbers, they’ve changed in forecasting interest rates and cap rates on sale. But with respect to general underwriting practices, we have not changed. We have stayed very consistent on being conservative in our approach, forecasting out what we think the interest rates will be upon exit.
A lot of the interest rate issues right now in today’s market, especially on the commercial side, has to do with volatility and uncertainty. So lenders with respect to how they’re pricing interest rates … They’re pricing them base off of a lot of uncertainty. So once the fed hikes kind of stabilize, and it’s not directly correlated, but it does impact the commercial rates, we’re going to see lenders feel more comfortable adjusting the spread over [inaudible 00:35:46] and being more favorable on the terms. For example, LTV. They’re little gun shy on LTV. They want owners to have more equity in the deal, and they don’t want to carry so much of that risk on the deal. But, I think, once that stabilizes, which I hope we see in Q1 or Q2 of next year at the latest, I think lenders will feel more confident coming down off their rates a bit.

Dave:
Yeah. And just to further that, I don’t know personally as much about commercial loans, but I was reading something earlier that said that the spread right now between the 10 Year Treasury and a residential rate is almost 300 basis points right now, so basically three percent. Bond yields. 10 Year Treasury is about four percent right now. Residential rates. Owner occupied about seven percent. Normally, it’s 1.8 percent. So this is exactly what you’re talking about.
Banks … They don’t know what to think. Right? There’s so much volatility. They’re nervous, so they’re … Just like we talk about, they’re padding their margins. Right? They want to make sure that they are going to earn a good interest rate regardless of what the fed decides to do. And to your point, I think there’s a lot of people who are expecting mortgage rates, even if the fed keeps raising rates, might at least moderate or actually come down in 2023, because that spread might actually decrease back to the historical levels that they’re normally at.

Ashley:
Yeah. I think the spread has widened just because of the uncertainty, but that’s something they can control. So to your point, in commercial, it’s about 200 basis points, 200 bps. So in terms of that spread, we could see that spread come down once there’s more certainty and comfort in the risk profile of where the 10 Year Treasury is paced.

Dave:
Yeah. I asked you that question, because I ask everyone that question, how they’re adjusting to it. And the thing I love about talking to everyone, and James gets to do this too, is just every single experienced investor is like, “Yeah. Of course, I’m still bidding. Of course, I’m still doing stuff right now,” and I just hope people listening to this who are worried about this market, which is understandable … There is more market risk right now than there has been in a long time. But just listen to Ashley and James advice here is like if you just keep underwriting the same way, you behave conservatively, there’s no reason why you can’t participate in this market.

James:
Yeah. Go back to your underwriting you were doing two to three years ago. I was talking to my sales guys about this the other day. I’m like, “No. You guys, we’re writing offers.” They’re like, “Well, the deals are too good.” It’s like, “No, no. These were the deals we were doing three years ago.” They just got brainwashed by this last market and what the yield and the profit expectations would be. And so now it’s like everyone’s just resetting. The banks are resetting. The banks are just getting their spread. We’re trying to get our margins in there. And it is balancing out though. I’m noticing it’s balancing a lot quicker than I would think.

Dave:
Ashley, I want to switch gears and ask you one question. Obviously, as an operator, as an investor who’s active in these deals, you’ve shared some really helpful insights for us. What about for people like me who invest passively into syndications? What advice do you have for people who are interested in being an LP for investing in these type of market conditions?

Ashley:
So one of the things that I actually spoke about at BiggerPockets Conference … I had a talk on the speculation and manipulation of cap rates. It was called The Cap Rate Con. And one of the things-

Dave:
I like that name. Very catchy.

Ashley:
Thank you. One of the things I did during that speech is I polled the audience. So there are about three or four hundred people in the audience, and I said, “How many of you passively have invested in the past two to three years in a multifamily syndication?” and I would say about 75 percent of the audience raised their hands. And then I said, “How many of you did well over those years if it sold?” and it first had to sell, so we had a drop off about 50 percent, so about 150 people still had their hands up. And then I said, “How many people did well?” and everyone had their hands up. And then I said, “Okay. Out of all of the people who have their hands up still, how many of you asked for a detailed breakdown on the original projected exit cap rate, the original projected NOI performance, and the actual?” and only two people had their hands raised.
So the takeaway is that when things are doing well, you don’t bother the operators. You don’t ask for the financials. You don’t actually prove up their operations. You never verify that they were able to exit successfully based off of what they did, not what the market did.
And one of the metrics that I had up on this speech as well was a sensitivity analysis table. So ever since we got in multifamily, we have presented the sensitivity analysis table on every single offering we’ve ever done to all of our investors, and what it is is on the Y axis it is the cap rates by 25 bps, and then on the X axis it is the percentage of hitting NOI. So dead center, it’s 0 percent, meaning you hit your projected NOI. And then it goes off in either direction at two percent intervals. So you over perform your NOI by two percent, or you underperform your NOI by two percent. And then on the Y axis, you have that 0.25 basis points.
And what we show to our investors is the risk associated … That’s the intention of the sensitivity analysis table is the risk associated with investing in general. So if we hit our NOI dead on, let’s say, and we have a four and a half exit cap, let’s say, for example, we’re projecting a 14 IRR. Right? But if we underperform our NOI but we still hit a four and a half cap rate, it might go down to a 12 and a half IRR, let’s say. Right?
So what I showed on this table was that when the cap rate compressed to three and a half, so we had a hundred basis points difference on the cap rate, and people underperformed their projected NOI by eight percent, they still achieved over a 20 IRR.

Dave:
That’s crazy.

Ashley:
But that being said, today, if you look at the cap rate expansion, so if you take a four and a half and you go to five and a half, so a hundred basis points expansion, you have to overperform your NOI by eight percent to just get a 12 and a half IRR. So the expansion of cap rate actually translates into you having to better perform on your NOI than initially projected.
So the takeaway message there is twofold. One is, first of all, when you’re vetting people as a passive investor and they’re spouting off all these wonderful performance metrics that they’ve been able to achieve over the last three to five years, dive into it a little bit further. Ask for original projections versus actual both on the NOI and the cap rate, because then you can do the calculation very simplistically to figure out if the operations were the reason that there was success. And then also ask for a sensitivity analysis table on the current investment that you’re considering and how the impact of cap rate expansion will have on your actual returns.
I think we’re in a situation right now … Maybe the cap rate expansion three to five years won’t be … hopefully won’t be a hundred basis points from where it is today. But you never know, so just educate yourself and be prepared for what those returns would look like, and make sure that you’re comfortable with those returns.

James:
What’s that old saying? You never go skinny dipping when the tide’s going out-

Ashley:
Going out.

James:
… or whatever that … I feel this is where we’re going to see whether operators were good operators or not. It was all asset classes. It got so juiced up that everyone was hitting their metrics, hitting their profits. And now as things compress down, you have to operate this as a business and operate it well, or you will not make money doing this. And I think it’s going to be a little scary, because we’re going to see a lot of these … Yeah. They have false success, and then they reload into something else, and because they had that success, they went a little bit more aggressive on the next one. And we’re going to see a little bit of issues coming out of this. I think the IRRs are going to fall quite a bit on people that did not perfect their business. It was just kind of like they bought this thing, they got it somewhat stabilized in an inefficient manner, but they still hit it, and they’re not going to be able to … You have to implement the right plan and really dig down on your core metrics now to make these profitable.

Ashley:
In 2019, I was on a panel at Dave Van Horn’s MidAtlantic Summit, and I was on the panel with Brian Burke, Paul Moore, Matt Faircloth … The fourth person’s escaping me right now, but I will remember in a second. Anyway, long story short, as I said that, in this business, operations are very important, but in a downturn, operations are the most important, and I have stood by that quote forever. That is my personal belief, and I think we’re seeing it right now.
I also think that a lot of people’s business models over the 10-year track and multifamily, this run up that we’ve seen, has been solely based off of … Even though they don’t say it, they’re buying for appreciation, A, and, B, buying for fees. So in terms of when they’re syndicating, they’re so focused on acquisitions. And case in point, to be honest with you, and I’m not trying to pitch this at all, but when I first got started in multifamily, I really struggled to find resources where I could find education, so I contemplated going to these different coaching programs. So I vetted all the coaching programs available at the time, and what dawned on me was the fact that everyone taught you how to find and fund the deals, but no one actually taught you how to operate them. No one. Not a single coaching program.
So we have a coaching program today that literally … That was a deal breaker for me if we didn’t spend the majority of the time of the coaching program focused on operations, because it’s like it’s kind of reminds me … And I know this is probably dark to say, but it kind of reminds me of September 11th when the terrorists learned how to take off the plane and fly it, but they didn’t focus on landing it. You have to focus on the entire process, and when someone’s not focused on the entire process, that should shoot up a red flag.

Dave:
That’s phenomenal advice.

James:
A hundred percent agree with that.

Dave:
That’s a really good point. Yeah. James said on a show recently that he thinks we’re going to see a lot of defaults in the multifamily space over the next couple of years, because people maybe were too greedy, bought too high, and we’re going to start to see … Like you said, the tide’s going to start coming out. We’re going to see who’s swimming naked. Do you agree with James’ assessment?

Ashley:
I am foaming at the mouth to answer this, because the answer is simply yes. And it’s not only for the reasons that you just mentioned, but it’s also because of how people bought. So it’s not about overpaying. It’s about what they did with debt. So what they did with debt is they got variable rates without securing rate caps, and a lot of people are in positions right now where, A, they can’t afford the rate caps.
So rate cap rates … And truth be told, we’re in a situation with our rate cap being astronomical, and I’m happy to share the information just for people to learn, because it’s definitely a mistake we made. Now, fortunately, we also have a lot of reserves, and we counted on some of it, but we didn’t … Honestly, we didn’t count to the extreme that it’s at. But let me just kind of give perspective here on why I think this is going to be an issue.
We purchased a property in September of 2020, and we did a variable interest rate with a one strike for a three-year term. We paid 30,000 for that rate cap. In October of 2021, our lender told us they were going to change the accrual rate. So it was a three-year rate cap, and similar to insurance and taxes, lenders accrue for the next rate cap that you’re going to purchase with your mortgage. So they were accruing at a rate of 1100 a month up until October of 2021. In October of 2021, I received an email saying that they were going to adjust our rate cap accrual to $303, and I said to our accountant, “That concerns me, because the rates are not going to be this low come the time we need to buy the rate cap. So we can pay the 303 to the lender, but I want to accrue on a separate line item for the balance, because this is very concerning.”
In March of 2022, we got a letter from the lender saying that they had just done another audit and that they were going to change our rate cap accrual. So this isn’t our mortgage. This is just for the rate cap accrual, for 9,200 a month. And I was like, “Holy crap. That’s crazy.” Okay. Well, that, I thought was crazy, but like life, it’s all about perspective. So three weeks ago I got another letter from the lender that said, “We just did another audit, and we are going to adjust your rate cap accrual to $54,000 a month for the rate cap.”
And the reason why they’re adjusting it … So let me just talk about how rate caps are set. So we purchased the rate cap for $30,000. It’s a three-year rate cap at a one strike. I get an email every single morning or between 4:00 and 5:00 AM, and it lists out what it would cost if we repurchased that rate cap today. It is now around 515 to 520 thousand dollars to buy that same rate cap.
So a couple things. One is that now I have to accrue based off of the remaining term that I have left, but it’s compressed to account for the deficit that we were accruing at. So that’s the one issue. The second issue is that we’re in a situation where we have reserves. We had factored in a larger purchase on the rate cap when we went to buy it, but we didn’t factor into 530,000. Fortunately, we have reserves and we’re under budget on other items that we can pool from different money, but now this is cash we don’t have access to.
So we’re in negotiations with the lender, and the lender has communicated to us that we’re by far the highest change in rate cap accrual, probably because we went with the one percent strike. And you have to go back to your loan terms to see if there’s ways that you can renegotiate what they’re accruing for, whether it be the term or the rate, the one percent strike. So there’s room for us to have a discussion, which we’re in the process of now, and hopefully we can come to some sort of agreement. But what in turn that has done is that has put us in a situation where we’re telling our investors, “Until we have this figured out, we want to put distributions on hold just till we have this figured out, because it’s the responsible thing to do.” Now, do I ever want to do that? No. But I would rather do that than later say, “Oh, yeah. Well, I didn’t tell you about this thing,” or “I did tell you about this thing, but I didn’t tell you how it impacted you, and now we have to do a capital call.”
So sometimes having difficult conversations is not what operators even want to do, so what ends up happening is it gets too late in the process and then all of a sudden the property’s in a situation where they’re either on lockbox, they’re on the watch list, or they’re foreclosed on, and the passive investors have no idea that this even occurred. And I’m pretty sure if they were informed of the situation when it occurred and you communicated to them what outlook you had and what steps you were going to take, they would all be in agreement for conservative measures to be taken, especially if you attract the right investors.
So we’re in a situation where it’s tough for us, but we’re heavy focused on operations, and we’re going to come out on the other side favorably. But how many other people are not in that situation? Right? How many other people didn’t even factor reserves into when they purchased the property, or aren’t under budget on other projects, or bought a rate cap without even thinking, “Okay. The lenders can audit it every six months and change the rate cap accrual rate”? So I think, to James’ point, I think there’s going to be a lot of people that we see when the tide goes out who were swimming naked because they didn’t factor these variables in.

James:
Yeah. We might see some saggy stuff out there. It could get [inaudible 00:54:18].

Ashley:
It could get ugly.

Dave:
You should see what the beaches are like here in the Netherlands.

James:
But what-

Dave:
Good description of what’s going on here.

James:
Yeah. I mean, what she just talked about is huge. Right? I mean, that’s a big deal, and that’s where things … And operators like Ashley … Like she said, having that tough conversation is important. No one wants to do the responsible thing ever. Right? I’d rather to be irresponsible for the rest of my life. It’s a much easier, fun way to live. But it’s like you’re going to have to have those conversations, and you got to address those and make it up in, to Ashley’s point, the operations. You have to figure how to turn your units for less. You got to keep your units more full. Operators are really going to have to excel to push through this little hump. You can push through that hump, but you’re going to have to perform well.

Ashley:
Well, and to your point, James, if something like this pushes someone to say, “Oh. I got to figure out a way where I can skim on operations,” well, if you never learned operations in the first place, now you have a learning curve to contend with, plus then you have to figure out what you’re going to change, and there’s too much time that goes by. Right? So between learning what’s actually going on at the property.
I talk to so many people that … The thing that was so surprising to me when I first started a multifamily is I would talk to these people who would own properties for 10-plus years, and I would try to have a conversation with them about operations, and they had no idea what was going on with the property. They’re like, “Oh. The property management company handles this.” I’m like, “But you’re responsible for the financials of that property and the performance and the business plan. How do they know how to pivot strategies? How do they know what your overall business plan is?”
I mean, that’s a whole separate conversation, but that’s why I think most people turn to vertical integration. It’s because it’s actually a deficit of themselves, because they lack communication with their property management company. But case in point is they lack communication because they actually don’t know what’s going on. They never spent the time to realize what the property management company is dealing with day to day, coupled with how you then match your overall operations and your business plan together. So I think that situation is going to be exacerbated in this environment.

James:
A hundred percent agree.

Dave:
Yeah. That’s great, great insight. I would love to keep talking about this, but unfortunately we’re almost at the end here. But, Ashley, this has been so helpful. Thank you. If people want to learn more from you, where should they do that?

Ashley:
If you’re interested in becoming a passive investor, Jay Scott and I have bardowninvestments.com. That’s our company. And then if you would like to be an active investor, you could also learn from us through apartmentaddicts.com, which is our coaching program. You can also follow me on Instagram, @badashinvestor, which is B-A-D-A-S-H investor.

Dave:
Awesome. Well, Ashley, thank you so much for joining us. We really appreciate your time.

James:
Good to see you, Ashley.

Ashley:
Great seeing you guys. Thanks again.

Dave:
All right, James. That was incredible. I just learned so much. I do listen to all the episodes, but I’m going to listen to this one like three or four times. I feel like she just dropped so much information I want to use in my personal investing.

James:
I’m going to need to listen to it three or four times, because that was packed full of information where I’m like … At one point, I was like, “Do I need to Google something real quick?” I should have had my search bar open.

Dave:
Oh, man. She’s just so sharp and knows everything, and I just thought her understanding of cap rates and cap rate expansion and what she was talking about validating something you’ve been talking about where you think that there’s going to be a lot of default in the multifamily space. Really interesting dynamics that are probably going to start playing out here in the next three to six months.

James:
Yeah. I mean, how she broke down the baking, the different ways to perform of the deal, the operation side … I mean, she is just … I mean, Ashley … I mean, I remember the first time I met her, we just kind of connected right away on work ethic, because we could really see how much they care and passionate about her business. But she went over that in all of this today, and she broke it down to a next level to where, yes, I’m going to have to listen to this at least two or three times.

Dave:
Yeah. It was great. Well, we’re going to get out of here, because this was a long interview and don’t want to keep anyone too long. But thank you, James, for joining us, and thank you all for listening. We really appreciate you, and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing 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.

Howard Lorber, Douglas Elliman executive chairman, joins ‘Closing Bell’ to discuss how much the real estate market is being pressured by rising interest rates, when rents will begin to come down and insights into both the New York and Florida real estate markets.

David:
This is the BiggerPockets Podcast, show 687. Most of the time my lion does not come out unless I’m threatened. Okay? Unless I’m hungry. Then I actually realize what I’m willing to go do. I got to want something. When my life is comfortable, I don’t really function like the lion. When my life is uncomfortable, a different side of David comes out. And so this is an opportunity for personal growth if you choose to take that.
You could go take more jobs as an engineer. You could start studying sales or business. You could change elements of your personality like I had to do when I became a real estate agent to become more charismatic and easier to talk to and less of a cop.
What’s up, everyone? This is David Greene, your host of the BiggerPockets Podcast here today with a Seeing Greene edition. If you haven’t listened to one of these before, these are shows where I will take questions directly from you, our listener base, and answer them for everybody to hear.
We’ve got video submissions, we’ve got written submissions, and we have me going on rabbit trails explaining ways you can build wealth that you might not have thought about before. These shows are awesome, and you can usually recognize them by the glowing green light behind my head here.
Today’s show is fantastic. We’ve got several areas of interest that I’d like to highlight for you. The first is why cost in an area aren’t working and how to navigate the no short-term rental regulations. As real estate becomes more expensive, it becomes harder and harder to make it cash flow traditionally, which has pushed more and more investors into short term rentals. But there’s backlash from that too as communities don’t like short term rentals in their backyards and nimby neighbors make a stink. Sometimes you got to figure out a way to work around the regulations on your rentals, so we get into that with one of our callers today.
We also talk about why changing markets as an agent isn’t always the best bet. But what you could do if you’re a real estate agent listening to this to grow your business. And then I expand on that to say what you should look for in a real estate agent, that is very important. So that’s another point that we get into today’s show. What questions you should ask of your real estate agent, how to find the right one. And if you’re an agent, how you can make more money, how you can be better in the right way to serve your clients.
There’s also a great question about finding an out of state agent and putting a team together in a new market that you don’t want to miss. So please check that out. This is a great show.
All right. Before we get into our first live coaching call, today’s quick tip is check out biggerpockets.com/resources. It’s a place to find out about all the cool downloads that we have made available and the data that has been put together by our own data guru, Dave Meyer, of On The Market. These are the things that Dave and we at BiggerPockets think would be the most helpful for you to use and see and know.
So regularly check biggerpockets.com/resources. In fact, it might not be a bad idea to leave a tab open on your browser so you can check it every day. And if you listen all the way to the end of today’s episode, you might learn a little bit about what tabs are open on my browser as we speak.
All right. To start today’s show off, we have Garrett with a beard that rivals our own, Brandon Turner’s and Garrett’s car, from which he has asked questions in the past on shows 588 and 618. He’s now coming to us today live from said car. Garrett, welcome to Seeing Green.

Garrett:
Thank you, David. Good to be

David:
Here. Yes. So tell me what is your dilemma?

Garrett:
All right. So in the past episodes I’ve talked about wanting to get into the real estate. My next one was how I can deal with repairs and which one should take priority. And now I’ve kind of prioritized these repairs and got that all under control. I’m starting to pay down some financing. However, I’m trying to see long term with this investment and future investments. And I’m wondering… My question is basically trying to figure out an exit strategy. So I’m on the fence of holding long term, which I always told myself I would do if I would get into real estate staying in two out of the past five years so that I can get the $250,000 capital gains. Or if I should just wait one year after the FHA seasons, sell it, cut my losses and find something new, or possibly a 1081. I’m jumping all over the place.

David:
So this is not a rehab question, this is an exit strategy.

Garrett:
Exactly. Yes.

David:
So we got a property and you’re trying to figure out should… It’s your primary residence. You bought it with an FHA loan. Should you keep it as a rental or should you sell it and move into something else?

Garrett:
Yes. And like I said, I always wanted to buy and hold. However, the reason why I’m considering selling is because of this property. I feel like I might have bitten off more than I could chew. Just to run some numbers, so my mortgage and interest is about 3,500 a month. My W2 is bringing about 5,000 a month. Right now it’s fully rented. It covers principle and interest. However, all of the reserves are coming out of my own pocket. Basically, any repairs or rehabs, anything like that, it’s coming straight out of my pocket. I just don’t know if it’s a very sustainable property.

David:
Well, the rent should go up every year, right?

Garrett:
Yeah, sure.

David:
If you’re making 3,500 a month, that’s a pretty good location. Are you comfortable sharing where it is? What city?

Garrett:
It’s Jefferson Park, Chicago.

David:
Okay. So I’m guessing that those are not cheap homes, that that’s a decent area that you own this asset.

Garrett:
It is a decent area. I definitely feel safe in the neighborhood. It’s a little three flat. I rent out the top and middle unit, and then I live in the basement and rent out the second bedroom.

David:
So not only are your rents going to go up, but they’re going to go up on three different units over time. So exponentially this property will become profitable for you. That’s the first thing I want to say. What are you’re experiencing right now is normal, especially if you’re living in it. It’s a house hack?

Garrett:
That’s correct. Yeah.

David:
Yeah. So if it’s paying for itself and you only have to come out of pocket for reserves or expenses, how much would the rent be if you were to go rent somewhere else?

Garrett:
Probably not as good.

David:
No, just give me a dollar figure per month if you rented a different property.

Garrett:
If I rented a different property?

David:
What would you be spending on rent?

Garrett:
I don’t know, 15, 1600 to rent a place.

David:
Okay. So that property is profiting you 15 to $1600 a month. You’re not looking at it like that because you’re not factoring in the fact that you’re saving that much in rent. Now, if you moved out of that house, does that mean… How much could the unit you’re living in right now, how much would that bring in for rent? Or have you already factored that into the 3500?

Garrett:
So if I moved out, I would get an additional 500, maybe 600.

David:
Not huge, but it would definitely at least break even. Right? Okay. The first thing is when you’re saying, “I always wanted to buy and hold,” selling a property to buy another one isn’t necessarily not buy and hold. Right? I get what you’re saying is you intended to keep it forever and that is an option. But I want to present a different way to look at it. Money is useful for exchanging for goods. That’s typically how we look at money. But I’m writing a new book for BiggerPockets. I believe it’s going to be called Pillars. And part of the concept I’m trying to get through in this book is that money is actually a store of energy. Meaning you go to work and you put in eight hours of work in a day of labor, calories, effort, whatever you want to call it. You exchange that effort and you receive money in exchange. That money is the store of the energy that you poured out when you were working. Are you with me so far?

Garrett:
Yeah, I’m following.

David:
Okay. Now, money is a poor store of energy because of inflation. Inflation makes that money worth less. So the energy that you poured into it bleeds out. Just a different way of looking at it. But it’s better than spending your money and getting nothing. You go buy a pair of shoes, that’s an even worse store of energy than money would be. Right? A better store of energy is real estate. You take the money, you exchange it for a house. Now, that property not only stores the energy that you spent in work for the accumulation of hours you had to spend, it actually increases it.
It takes that energy and it amplifies it. It becomes worth more through appreciation, through cash flow, all these opportunities. When money cash flows into your pocket, you can buy more of it. I want you to look at real estate like a store of energy that you have expended previously through work.
If you sell this house and you buy a different property that performs better, cash flow is more… Whatever it is that you like about it more, appreciates more, has value add opportunity, you go into a rehab that’s not as daunting as this what was. Okay? You got away from buy and hold. You just took the energy out of a vehicle that is not a great storage of it and put it into a better storage. Okay? You’re shifting your energy from one thing to another.
And if this new house has value add opportunity, better neighborhood, also a three flat or a four flat, something is superior to the one you’ve got. You’re still a buy and hold investor. You’re just a better one. So I don’t want you to be afraid to pull the trigger by thinking, “Oh, I said I was always going to be a buy and hold investor.” If you’re doing real estate investing correctly, you will never own every property that you bought.
If you’re really good at this and you end up with 200 single family homes, you’re dumb. You need to exchange those for a couple big apartment complexes. They’re better stores of energy. They’re not going to bleed as much because you don’t have to pay attention to it. So the first point I’d just like to make here is if you sell it, that’s okay. You’re not a sellout. You didn’t do it wrong. The second piece I would say is let’s look at should it be sold? You had mentioned before the rehabs were very difficult. Is that still the case or have you pretty much gotten those under control?

Garrett:
I’ve pretty much gotten them under control. A few minor things here and there that pop up, but nothing I really can’t handle. But the returns are mostly in control.

David:
Okay. So you learned you’re not going to get in over your head like you were on this one, right?

Garrett:
Yeah, exactly. I think I’ve definitely learned that the hard way, but learned for sure.

David:
So you mentioned let the FHA loan season. I don’t think you have to do that. You can sell that house. You don’t have to wait a year to sell a home. Are you aware of that?

Garrett:
I actually wasn’t. I thought you’d have to wait a year.

David:
You have to wait six months to refinance, but you could sell anytime and anytime after six months you can refinance. Don’t have to wait a year at all. Now, you may have been thinking… I guess the year thing is you usually have to wait a year before you can buy another primary residence. That may have been where you got confused.

Garrett:
Yes.

David:
And you won’t be able to use an FHA loan on the second primary residence because you can only have one at a time. All right? So you can either refinance that FHA loan into a conventional loan and use the FHA loan to buy your next primary residence. Or you could keep your FHA loan and you could use a conventional loan to get your next one. That would be 5% down on a single family home. Are you with me so far?

Garrett:
Yeah, I think so.

David:
All right. I’m going to complicate it a little bit.

Garrett:
Okay.

David:
Because if you’re going to buy a true multifamily property… The one you have now, is it actually considered multifamily or is it considered single family, but it just functions as multifamily?

Garrett:
It’s actually considered multifamily, yeah.

David:
Okay. If it’s considered multifamily, you often can’t put 5% down like a triplex or a fourplex. They usually want somewhere between 10, 15, it might even be at 20%, even if it’s your primary. That’s one of the Fannie Mae, Freddie Mac rules that changed. So you can use an FHA loan at three and a half percent down to get one of those properties. So if you reach out to us at the one brokerage, we’re going to walk you through that. We’re going to explain.
So what might be in your best interest is if you refinance out of your FHA loan even into a higher rate which you’re not going to like, but you can use the FHA loan to buy your next property, you can put three and a half percent down on a multifamily house, which is much better than being forced to put down 10, 15% on it. You with me so far?
So even though the rate goes higher, you get the opportunity to keep more of your capital. And then you just get a better property than you did in year one. Less of a rehab that wears you out, little bit better of a location. You’re a little bit better analyzing properties. You’re not going to feel the pressure of, I got to go buy something because you’re comfortable where you’re at, so you can take your time and buy the right property.
The next one can only get better than this first one. So that’s the path I would lay out for you. What questions do you have considering that road?

Garrett:
I guess I’d just have to consider how long it would take to… Because if I sold the house… Or excuse me. If I refinance this house and I use FHA again to purchase another property, then I’m still going to have to put down that other down payment and any potential little cosmetic fix up or whatever might come along the way. But right now I don’t have that capital. So that’s the issue right now. So I’m like, I’m even considering maybe doing a flip here or there just to get something like this, but I also don’t want to deviate from the path at all of just buying small multifamilies right now.

David:
All right. That helps a little bit here. So first off, have you added much value to this house through the rehab you did to it?

Garrett:
Yeah, I’d say some. I mean, I did buy it a little bit over listing, so that complicates things a little bit. But I’ve added new windows. I’ve waterproofed the basement.

David:
I see what you’re saying, but the reason I’m asking is if there’s more equity in the home when you refinance out of the FHA, you may be able to pull some cash out, which could be your down payment for the next home. But if the work you did wasn’t necessarily going to make the house worth more, or if the market has gone down since you bought it, which likely could be the case, there might not be as much cash to pull out of it as what you think.
So that would be your first option is I want to refinance. I want to refinance the primary residence loan and I want to pull cash out. If they let you, there you go. You got some money for the next deal. If not, let’s go back to the drawing board. You’re saving rent right now that you don’t have to pay. You said $1500. That’s around, I don’t know what that would be. Probably 15 to $18,000 a year, something off the top of my head that you should be saving, plus whatever money that you were saving on top of that. Right?
So if you can save $25,000 in the next year by working a lot, that could be another three and a half percent down payment on your next house.

Garrett:
Yeah, that’s true.

David:
Are you just sort of ants in your pants, want to get going, don’t want to have to wait?

Garrett:
I am really excited. I just want to do more, do more, do more. But I just feel a little stuck right now.

David:
Well, when you don’t have capital, you are stuck. There’s no way around it. That’s why I’m writing that book I talked about for BiggerPockets, it’s about capital is freaking and important and real estate investors have access to it.

Garrett:
So in the first unit, the top floor, there’s a long-term tenant. They’ve been there for actually 10 years. So when I bought the place, their rents were really low and I raised that. And then the main floor, that’s the one that I did some cosmetic rehabs on, fixed up the bathroom, made everything look really nice. And then I got someone in there within a month and a half and now they’ll be there for at least… He said at least two to three years because it’s nearby a school for his son.

David:
Do you think, Garrett, there is a possibility that you could rent it out as a short term rental or are you locked into leases right now?

Garrett:
I’m pretty much locked into leases right now, at least until next year.

David:
What about if you moved out of the unit that you’re renting? Would that rent out as a possible short term rental?

Garrett:
So that’s what I’m saying. If I moved out of this unit and then I waited until next year’s due because I have a roommate as well. If we both moved out, I could consider it as a short term rental. That’s a possibility. But I’m not sure what the market is like on Airbnb. I wouldn’t even know where to start there.

David:
So another element we could look into here is if any of the units of your current property could be used as a short term or a medium term rental. What do you think of the possibilities of that are?

Garrett:
Yeah, so I think if my roommate and I move out, it would be about a year. And then after that, I could consider it for a short term rental. I’m not too sure what a medium term rental is though. Could you familiarize me a little bit with what that is?

David:
Yeah, that’s a really good question. A medium term rental would be you renting the unit out to a traveling professional, A person who needs a place to stay for more than a short period of time. So this could be someone has a sick family member at a nearby hospital, and so they want to go stay at a furnished property to be close to them or they get a contract to work at a certain area. They don’t want to buy a house they don’t want to rent for a year and they need it to be furnished.
So these are typically corporate people that are moving somewhere. Someone who moved into an area to get a temporary job. Maybe someone is like, “Well, I work remotely and I met this new girlfriend and I want to get to know her. So I’m going to move to this area, get my own space. I don’t know if it’s going to work out or not. So I don’t want to be committed.”
So those medium term rentals are something that we’re starting to see a lot more of coming into the space. And it’s not as much management on the owner’s behalf because once the person moves in, it’s kind of like they treat it’s a long term rental. So those would be some options that you could have to try to increase the revenue on this particular property. Outside of that, what are you doing for work right now?

Garrett:
So for work, I am in the construction industry. I’m an engineer. Basically, I’m out on the job site and making sure that the contractors and laborers are following the plans necessary to complete the project.

David:
Do you have options where you could increase your income with what you’re currently doing?

Garrett:
So we do have reviews coming up. That’s about it. I am actually currently looking into a second form of employment, like seeking some part-time work with either an insurance agency or selling solar panels, something where there’s room to grow and room to make more. It’s commission based. And maybe if that takes off, I could consider switching over into that. But right now I really do like what I do. I’m just looking for some extra money on the side.

David:
Okay. I’m going to give you my philosophy on this, and this is not the opinion of everyone at BiggerPockets or everyone in the world, just my personal way of looking at it. When we run into the problem, not enough capital, I want to scale, I want to buy more properties, I want to get more into real estate. You’ve got two options. One road is look for creative strategies. And this is typically the one that gets put out as the best option. Go find someone that’s got an off market deal and take over their loan.
Go find a deal from a wholesaler. Go do some kind of magic that you can figure out how to get this deal without money so you can scale. Go borrow money from other people. Learn how to raise private capital. The problem is we’re often giving that advice to people that are newer to investing like yourself. Right?You want to get more reps and you want more at-bats. That’s what you need.
The other option is to take that desire to buy more homes, which is this is the option that I took in life, and let that be the carrot that motivates me to go work harder, take more opportunity, get another job, start a side hustle, start another business, improve the way that I add value to the employer that I have. Do something to try harder.
So Garrett, you’re a human just like everyone else, and there is a element in you that is powerful and brilliant, and genius. It’s a lion. All right? We all have that. Most of the time, my lion does not come out unless I’m threatened. Okay? Unless I’m hungry. Then I actually realize what I’m willing to go do. I got to want something. When my life is comfortable, I don’t really function like the lion. When my life is uncomfortable, a different side of David comes out. And so this is an opportunity for personal growth, if you choose to take that.
You could go take more jobs as an engineer. You could start studying sales or business. You could change elements of your personality like I had to do when I became a real estate agent to become more charismatic and easier to talk to and less of a cop. I would encourage almost you and almost everyone listening to take that road. You want more than what you got.
You have skills in construction, you know you’re good at real estate, you clearly understand this. It’s time to level up. It’s time to get over. Whatever insecurities, fears, worries, concerns, all of us carry around every day that keep us from moving forward, right? It’s hard, it’s scary. That’s why you need the carrot. And you’re feeling it, okay? So that’s the advice that I’d like to give you is what can you do to go get into a different career, a different industry, do more of what you’re doing right now so you can make more money so that you can go buy this real estate that you want to.

Garrett:
Yeah. Thanks, David. I’ll have to consider that. It sounds like good advice.

David:
All right. Cool man. So going into the future, tell me the next steps you’re going to take.

Garrett:
I’d like to, obviously, purchase more real estate. I’m thinking one property every year following Brandon Turner’s favorite or famous stack method. I just finished Multifamily Millionaire. It was awesome. And then eventually after five, six years of owning enough properties and becoming 100% financially free, I’d like to travel more with my fiance, then wife, and just have time to spend with my family and be able to continue purchasing real estate and having that generational wealth for my family.

David:
Well, if that’s the goal, personal growth, accomplish the real estate will definitely make that future even sweeter. So good luck with that, Garrett. Let’s stay in touch.
All right, that wraps up our conversation with Garrett. Hope you’re liking the show so far. At this part of the show, we like to pivot a little bit and read some of the YouTube comments that we’ve received on previous shows. I like to hear what you guys have to say, what you’re enjoying, what you’re not enjoying, what you’d like to hear differently. We read these and we do take them into consideration, so please keep commenting on YouTube as well as subscribe to this channel. If you can take a quick minute to hit that little bell to be notified when new shows air, like and then share this with anyone else who you think wants to grow some wealth through real estate.
Our first comment comes from Phil. “I would agree that it’s easier to find contractors right now, but I’m still finding it tough to BRRRR. I find that it’s more work on the front end, making sure the numbers work given the higher interest rates. What are your thoughts, David?” Well, this is one of those issues where everything in real estate, there’s always something that’s difficult and something that’s easy in different markets.
So when values were going up like crazy and anything that you bought was appreciating more and more people were buying, it was fueling the frenzy of prices going up, and finding a contractor was incredibly difficult to do. So even if you found a great deal, if you didn’t have a person that could go in there and fix it up or their costs were absorbent, you had to pass on it.
Well, now there’s contractors that are willing to work and their prices are better, but guess what? That’s because there’s less demand for them. And why is there less demand? Because it’s harder to find the deals that work just like Phil is saying. Now, Phil, you’re saying that it’s harder to find deals at work because of interest rates, which leads me to believe that what you’re referring to is it’s harder to find something that will cash flow when you’re done.
A few things to keep in mind on that front. You write the offer based on what numbers work for the cash flow. So don’t be scared or don’t hesitate to write lower offers in this market that favors buyers. It doesn’t really matter what the list price is, it matters what your number is to make that work. We call that the home run number. So consider using some of BiggerPockets calculators to analyze these deals and find what numbers work and write your offers at that price. Then just follow up with these people to see who wants to play ball.
Another thing is I’ve noticed that a lot of the newer investors, they tend to try to make up for creativity with volume. What I mean by that is they will analyze more deals that don’t work, looking for the one that will. Whereas I would look at something and say, “Yeah, interest rates are too high to cash flow at that number. It’s not going to work.” So I’m going to quit analyzing those kind of deals. I’m going to look for a different kind of deal that would work. And how that actually turns out in real life is I look for properties that have more than one unit or even more than two units.
I look for ways in a property. Can I finish out the basement and make a separate unit? Does this one have an ADU that other people are not entering into their calculations? What additional ways can I generate revenue from a property that makes the numbers work? Remember how we were saying a while ago that you don’t find great deals, you make great deals?
Well, you can find great deals in today’s market, but you can still make great deals. So if you guys are banging your head into that brick wall, if it feels like you’re trying to take that square peg and push it into that round hole and it’s just not working out, find a way to take that square peg and put it into a square hole. Analyze different kinds of BRRRR opportunities with more than one source of revenue. That’s what I’m doing. I have three BRRRRs going on right now. No, four. And all of them, every single one of them I am adding square footage to that property or converting existing square footage to add a revenue generating component to the deal, which does make the numbers work. That’s all you got to do.
All right. Our next comment comes from Abby Jose. “Hello, I’ve been watching BiggerPockets videos for the past couple years. It’s because of you guys that I refuse to give up on purchasing my first home post-pandemic as a self-employed individual. You are also the reason that I’m gearing up to purchase my second property soon using the creative strategies that I’ve learned from your YouTube videos. That being said, I am in agreement with many of the other commenters. I would love to see some of your personal deal deep dives. Specifically, I’m interested in how you negotiate the deal with the seller and also how you deal with contractors.”
All right, Abby, I appreciate that. We are actually working on doing that. In the future. You might have to be a little bit patient because a lot of the time I will put a deal in a contract and it is months before the rehab is complete and I have a rental history that I can actually show how a property is performing.
So I would keep in mind, three months from now, six months from now, you’ll probably start seeing some deals that I bought six, nine months previously because I have some data that I can share saying how they’ve been going and how it’s been working out, and that’s just part of the rhythm of real estate investing. But we’ve heard you guys say that this is what you want. More specifics, you want to see how the deals work out. This is the first time I’ve heard someone say how they’d like to see me negotiate a deal.
So I will see if there’s a way we can put that into the show. I’d like to share that with you. It’s something I teach my agents. It’s something I teach the people to follow me. Negotiating is a huge, huge, huge part of getting deals in today’s market and there’s a lot to learn there.
Okay. Our next question comes from AZ. “David, I want to know what pages are on your browser when you open a new window? For me, NerdWallet for interest rates, the MLS, BiggerPockets, and my email. Basically, I want to know how you stay up to date with one, the market, and two, news. Also, do you look at the 10-year treasury bond daily, and if so, where?”
All right, AZ. So I actually have several tabs that are open on my computer every time I log in, and that is a different computer than the one I use for recording because I have so much open on it, there’s not enough RAM to be able to record efficiently. So I have a separate computer just for making these shows. Were I to open the other computer, you would see my normal email that is several hours of work every day to keep up with.
My real estate CRM called Brivity that we use to track the deals that the David Greene team has in contract. My investment tracker, which is made up of several tabs. The first tab shows, here’s all the properties I own. This is the loan balance. This is the current value. This is the equity. These are the interest rates. This is the loan servicer that I use to track my overall portfolio.
The second tab has a list of offers that I’ve written that I’m going to be following up with to see if I can put it in contract. The third is a tab that shows all the properties I currently have in escrow. The fourth is a tab that shows the closed properties that are currently under rehab. The fifth is a tab that shows my closed properties, the furnishing to get ready to go for Airbnb and so on and so forth. I have a tab in there to track every month how the properties did the month before so I can see what’s vacant, what is performing well, what needs some more attention to be able to improve its performance, et cetera.
After that, I look at my goals every day. What are the goals that I set for this year? Am I on pace to meet them? Then I have a dashboard that shows the different companies I have and the main statistics I want to look at. So for the David Greene team, how many escrows we have. As well as which agents have them. For the one brokerage, how many total loans that we have in submission for the mastermind that I run, how many members we currently have in there, my social media improvements, the passive income from my investments, the money that I’ve borrowed from other people that needs to be paid back. All that kind of stuff is on the dashboard.
I then go into my second email, which is specifically for my real estate portfolio with all the questions from property managers or contractors or the work that goes into that. Then I have a tracker that shows the overall profit of every company that I have and different revenue sources that I have. There’s probably 25 different sources there that I review to see, “Am I improving? Am I falling down? What’s going on?” And that is what I look at when I need to track what went wrong. We made this much revenue. Now, we’re only making this much now as the CEO.
I have to dive in and find out did someone make a change that I didn’t authorize. Did the market turn around on us? Did we lose a top producer? The dashboard is… Sorry, the RevTracker is how I track all the income that is coming in. Then I have the one brokerage growth plan that I review with my partner, Christian, and that has to do with the steps that we have for pushing that company forward.
There’s always a book I’m writing. Right now, it’s a book called Pillars. So I actually have a tab open that shows that where I am in writing that book at that time, so I can work on that in between meetings. I have a page that shows all the projects that I have going on that don’t fall into a specific company. I’ve got a daily schedule by Google Calendar that tells me what I need to be doing, where I need to be recording and what needs to be happening, what meeting I need to be in.
I tend to check Bitcoin every day because I’m looking to see if that falls more. I’ve got a BiggerPockets inbox. I keep a tab open for that so I can try to keep up with the things that come in there. This isn’t in my tabs, but I do have to check my DMs in Instagram, Facebook, and whatever other social media is out there to try to keep up with inquiries from that.
I have research I’m doing for the book, Pillars. There’s several tabs open for that as I’m looking up studies that have been done in personal finance or how people can make more money. I’ve got my David Greene team mastermind where we have a website that actually all the members talk in each other with and so I review that as well and more.
So I don’t actually have a website that I’m spending a whole lot of time looking up. I’m tending to just try to keep up with the chaos of what is happening as I’m building this ecosystem for investors to come to if they need whatever it takes to be able to have a trustworthy agent, loan officer, insurance provider. All the things it takes to be able to take what you learned at BiggerPockets and then go execute it.
So BiggerPockets is incredible at helping you start scale and manage your portfolio. And then I just try to fill in the little gaps of the specifics of what people need to be able to do that better. So most of the news that I get comes from specific searches that I do or something coming up in my phone. I’ll get notifications that this just happened. I also listened to a lot of podcasts. So if you guys are wondering how I keep up with all this in the day, I don’t really know how to tell you how I do it, but if you’re not getting an answer from your email, this is probably why.
Whenever I’m not working on something, if I’m taking a break to go walk or I’m going to the gym or I’m going to eat, I put in my AirPods and I listen to different podcasts that talk about the same type of stuff. So I am constantly having information going in my brain about other people that have read the news and they have digested it for me and I get their take and their summary on it.
So I liked that you asked me that question. I left out probably two thirds of the other tabs I have open. I just couldn’t remember them off the top of my head because I don’t have that computer open. But thank you for that question. All right, we love it and we so appreciate your engagement. Please continue to do so. We would also love it if you would like, comment and subscribe on YouTube as well.
If you’re listening on a podcast app, which many of you are, take some time to give us a rating and an honest review on there. Those help a ton. And in order for us to stay at the top of the business and the real estate categories, we need your ratings and reviews. So please do so.
Last thing, what did you think about all the tabs that I have open? Leave a comment about what information you’d like to learn more about or what you thought when you heard me read those off. Tell me what you’re thinking. All right, let’s get back into some questions here. Our first question comes from Ryan Alexander in Pennsylvania.

Ryan:
Hey, David. Ryan here from Pittsburgh, Pennsylvania. I am a real estate agent and investor. I started buying properties last year and I have eight doors in Cleveland and then I also have a short term rental in the Smokey Mountains. My question to you though is more geared towards the real estate agent side of things. I got my license back in 2019, but I was only part-time for the past three years. I went full-time this past March because help from the rentals and everything I was able to get out of my nine to five.
My question to you as far as the real estate side of things of being an agent is if you had to move into a new market for whatever reason and were in a market where you didn’t know anybody or you didn’t know very many people, what would you focus on to generate leads and basically dominate that market?
I just started doing videos because I’ve heard obviously that’s a big part of it, but I wanted to get your insight on it and I have your first book, I have the second one and everything, so I’m waiting for that to come out. But just would like to get a gauge from you, an answer from you on what’s what you would do in a new market like that if you were presented one and how you would go about it to generate leads and everything and get noticed in that market? So that’s it. That’s my question and I appreciate everything you guys are doing at BiggerPockets.
You truly are changing lives. I mean, you’ve changed my family’s trajectory for sure in the past year just alone with eight doors and the rentals that we’ve gotten. So I appreciate it and looking forward to hearing your answer. Thank you.

David:
Well. Hey, Ryan, thank you very much for the compliment there. It does mean a lot that we’re changing lives over here at BiggerPockets and frankly that’s because how much money you have has such a big impact on the quality of life that you live. And it doesn’t mean that I think you should go out there and buy fancy BMWs and wear jewelry. It’s more about money enables you to have the freedom to do what you want, when you want and how you want.
So you’re still working, you’re just working in a different way that you enjoy more and I love hearing that. I’ve often said that real estate and God are the only two things I’ve ever come across that I can’t outgive. As much as you give to real estate, it will give you more in return. I can tell that you’re super bought into it because why else did you become an agent?
If someone gets their real estate license, everybody, it means they love real estate because you eat a lot of crap when you’re an agent. You’re often sort of dealing with the hardest parts of the entire economy or ecosystem of real estate. Your question specific was how do you move into a new area and dominate a market? All right. The short answer is you don’t. You’re not going to dominate a market moving into it as a new agent.
Let’s get out of the sales pitches that people have to give realtors where they try to sell them software or a system or a marketing technique that will allow them to dominate a market. They’re going to tell you, “Oh, send letters to every house and farm a neighborhood and go door knocking and introduce yourself to the people there.” That was probably significantly more effective 20, 30, 40 years ago because he didn’t know an agent until someone came and met you and shook your hand and you got a feel for him.
That’s how people made decisions back then. I don’t think people make decisions like that as much anymore. A certain demographic will, majority of them. I don’t want to talk to someone who comes and knocks on my door and they shake my hand. I mean, some people may like that In general. I don’t trust the person who just walks right up to me. I want to be able to research them.
I think a lot more people are doing that nowadays. When you meet a new person, one of the first things you do is you go look at their social media or maybe you go look at a website that they have, but you’re trying to get information about a human to make a decision for yourself rather than just a gut feeling like what we used to get in person. So the farming technique doesn’t work as much anymore.
Video does help that you mentioned specifically because it allows people to get more information about you. But here’s the problem. Video is very easy to do which means every other realtor is doing it. And so we go deeper and deeper down this rabbit hole of how you make yourself stand apart and it’s incredibly difficult to do because everyone else is already doing anything that I could tell you.
When you look at the realtors that crush it, there’s a few patterns that I’ve noticed emerge. The first one is that they have been in the industry for a long time. It’s typically the agent that’s been in for 20 years, 15 years, 25 years, that’s doing so well. And as I ask myself, “Why is that?” It became pretty clear. It’s because they have the biggest database.
Time in the market as an agent, much like an investor is your best friend because you meet more people. That’s what you really want. You want an army of humans that are sending you referrals, which is a relationship situation. And the longer you give yourself to build these relationships, and the more that you can build, the better you will do.
If you jump around from city to city to city too many times, it makes it too hard to build the relationships that agents need to thrive. The second thing that I will notice with successful agents that do really well is that they make sure that every client has the best experience possible. They don’t try to automate their job. They don’t try to turn it into something that’s quick and easy. They’re not transactional. They’re actually not necessarily doing it for the money. The money follows the relationship. I know the difference between the agents that worked hard to make me money, that worked hard to find me deals and the agents that just waited for me to tell them what to go do.
The ones that work hard for me, the ones that go out of their way to find deals are the ones that get my business and my referrals the most. Again, it comes down to the relationship component. Now, if I were to move to a new market, the first thing I would consider is I want to move to market with high price points. I want to be selling $800,000 homes, $1.4 million homes, not $200,000 homes.
I would also brand myself as a person that helps people to make money. So you want people from out of your area to be looking for you because they’re easier clients to work with. You don’t go show them 70 homes. They look at the homes, you said. Maybe they find one on their own, they send it to you. You go to the property, you send a video, you do a lot of due diligence, the numbers work, they put it under contract. Those are much better clients than your standard ones.
So you want to be able to market yourself as someone who could do everything. You have the property management connection. You have the contractor connection. You have the lender connection. You know all the numbers to the city that they need to call to get the permits for whatever they want to do. Do you want to market yourself as the person that has all the answers that they would need?
Now, a lot of this is covered in the books that I’ve written for BiggerPockets. The first one’s called Sold, the next one’s called Skill, and the third one will be coming out in the next couple months, it’s called Scale. That’s about how to build a team. I think that you mentioned those briefly, but I would definitely read those books.
Now here’s the good news, there’s very few good realtors out there. If you set yourself apart with a great work ethic as a person who comes up with solutions rather than gives excuses, as a person who goes and looks for what needs to be done rather than tells the client why it can’t be done, you’ll set yourself apart. And that advice is good for everybody. I just got off the phone call with my chief operating officer, Kyle, about a different person in our company and we had said, “Hey, can you go do this work for us to prepare for an event we have coming up?”
And their response was, “This is why I can’t. This is why I can’t. This is why I can’t.” It is maddeningly frustrating when you need someone to do something for you or you want them to work through a solution and they give you all the reasons it can’t work. Now, you’re in the position of trying to overcome their objection and convince them why it can, get them to think creatively about the problem.
Don’t be that person is what I’m getting at. If you don’t want to do something, just straight up say, “I’d rather not do that.” Don’t give all the reasons why it can’t be done. The reason I wrote long distance investing and changed the way that people invest in real estate is everybody else said all the reasons it can’t go right or it can’t work. And I came up with a system that it could work.
The same is true for pretty much every business I’ve started, book I’ve written, or piece of advice I’ve given. If you look at what it would take to make something work versus give reasons why it can’t, you’ll find yourself significantly more wealthy. Ryan, you got the love for real estate. You got the drive. I can tell your energy is very positive. If you’re a solution-oriented person, you will absolutely succeed. I hope this advice helps you and reach back out and let us know how it’s going.
Next question comes from Becky Pike in Oregon. “I’m in Oregon and I’d like to invest on the Oregon coast, but so far I’ve found that rents don’t cover the mortgage payment very well.” What that basically means, Becky, is that the price to rent ratio is not in your favor. The homes are too expensive for the rents they can generate, which is normal. When you get into higher price point areas, it tends to work out much more favorably in lower price points when you’re looking into rent. And if you’d like, I can give you a more detailed explanation of why that is.
Just put something in YouTube comments that you’d like me to expand on that and I’d be happy to do so. Back to Becky, “The properties I can afford are zoned no short term rentals, only 30 days or more.” Before I keep reading, I’ll let you know. The reason that you can afford them that they would work out is because you’re not looking at long term rent. You’re looking at short term rentals, which are much more labor intensive, but do generate more money.
So you’re seeing, I can already tell in order to make that expensive housework, it needs to be a short term rental. But Oregon is one step ahead of you and they have outlawed short-term rentals. You have to rent them for 30 days or more. “I’d like to do medium turn rentals so I could raise the monthly rate, which I believe you mean to be higher than a traditional month to month rental. Where do I advertise such a rental so that traveling nurses and traveling workers can even find my place? Where are these people looking to find their medium term housing? Thank you, David.”
Well, first off, Becky, you’re asking the right questions, so congratulations on that. Second off, I’ve got a couple resources for you. We recently interviewed Sarah Weaver and Zeona McIntyre who wrote a book for BiggerPockets about this exact situation, about medium term rentals and how to manage them.
I would check out that podcast and consider buying that book. Side note, if you’d like to get 10% off anything that you order on BiggerPockets, just use my name as a discount code when you check out D-A-V-I-D. We also did an episode with Mark Simpson who manages short term rentals and gives advice for medium term rentals and he wrote about how you could do this without using online travel agencies, which is what you’re asking about.
So I would consider listening to that episode learning about that. Funny how all these questions were recently covered in what we’re doing and maybe getting his book too. I can tell you right off the cuff that Furnished Finders is one way that people find medium term rentals and Airbnb works the same way. So does VRBOO. You just classify it as a medium term rental.
And then the last piece of advice I’ll give you is I don’t look for that myself. I hire people who have experience doing this to be my property manager and they figure out where to go advertise it. So that’s another avenue that you could take is finding a person who does this and hiring them to advertise on whatever platforms I specifically don’t know about.
So to recap, you got the episode with Sarah and Zeona. You got the book with Sarah and Zeona. You got the episode Mark Simpson. You got the book with Mark Simpson. You got Furnish Finders, you got Airbnb, you got VRBO, and you’ve got property managers that can help you. I believe that is seven to eight different methods that you can use and I do think you’re wise to be taking this course of action and asking these questions. All right, our next video question comes from Aaron Horman in Kansas City.

Aaron:
Hey, David. This is Aaron here. Got a question for you about investing in a city that I’m not currently located in. So been looking in my hometown where I live and the market is pretty tough right now, so I’m looking at maybe investing. I’m looking for a property in some other areas that I’m interested in. Just want to get your advice on how you recommend going about looking for a realtor in that area that can help me find the properties I’m looking for. Thanks for your feedback and everything you do with the podcast. Great, I appreciate it.

David:
Thank you for that, Aaron and I do have some advice I can give you because I’m in a similar boat. First one, if you didn’t know it, I wrote a book called Long Distance Real Estate Investing that specifies exactly what you can do to find a realtor in another market if you want to do it by hand. So you can check out that book by going to biggerPockets.com/longdistancebook and using the discount code David for 10% off. That will help you out quite a bit.
Second off, you can use the BiggerPockets agent finder by clicking on tools and then agent finder and typing in the area where you want to buy. You’ll get a list of agents that are affiliated with BiggerPockets that understand the lingo that have worked with investors before. Research them and find one that will help you.
Third, you can reach out to me directly and you can ask, and if I have an agent in that area that I’ve used before, I am happy to refer them to you.
And then fourth, you can actually start asking other people on the BiggerPockets forums if they’ve used an agent and did they like them? Also, ask a question of what did you not like about this agent? That’s a good question to ask. That’s one of my favorite questions to ask. So if someone says, “Well, I didn’t really love that the agent was really pushy.” I David Greene might like that. I might prefer an agent who’s pushy because I have an idea of what I want, so pushiness doesn’t bother me. I don’t want a passive agent. I don’t want an agent that I got to text first that I got to keep saying, “Can you go do this? Can you go do that?”
I want an agent that runs out there, does everything, comes back and says, “Do you like it?” And if I say no, they go do it again. One of my big pet peeves agents do is they text me an address or they email me an address and they say, “Hey, I like this property. What do you think?” Then I have to say, “Well, what kind of revenue is it going to bring in? Did you get that verified by a second property manager? What are the comps for this? What do you think the price that we could get it would be? Have you talked to a listing agent? Are they motivated?”
Now, I got to give them a homework assignment that they got to go ask all these questions and I got to wait for them to come back. They should just do that first. Don’t send me the house until you’ve already called the listing agent and said, “Hey, I see you’re listed for 1.5 million. Do you think we could get something done at 1.2?” And they call the property managers and be like, “Hey, I think this house could work for my client. What do you think the numbers are like on this thing. What could they expect?”
And then wouldn’t it be amazing if they did the analysis for me and they said, “Here’s your income that you expect. Here’s your expenses that I would estimate. They’re conservative. Here’s what I think your profit would be. Oh, and by the way, I’ve already called the listing agent and they asked these questions and they said, ‘I think if we have a number between 1.2 and 1.3, we got a good shot.’” Wouldn’t that be wonderful?
As an experienced agent, that’s what I do. So I’m just expecting other agents to do the same. Aaron, if you ask these questions when you’re interviewing the agents and tell them that’s what you like, you’ll get a better feel for what you can expect when they are working with you and then be very direct about what you want.
That’s another problem that the clients make. It’s not always the agent. A lot of the time the client doesn’t communicate their expectations because they don’t want to seem needy or they don’t know what’s industry normal or whatever their issue is. And then the agent doesn’t know how to serve them. So check out my book. Use the BiggerPockets forums. Use the agent finder and message me directly and I’ll connect you to somebody in that area. Thank you very much.
And that advice goes to everybody else who’s looking to invest in long distance as well. I am here for you and so is BiggerPockets. One of the key components of long distance real estate investing was this idea of a core four. I call it long distance real estate investing, but it’s really a book about systems. These are the systems that I put in place and if I have these, I can invest anywhere.
A key piece of that is your team. And your team is made up of four people. Your deal finder, which is typically your real estate agent, your loan officer, your contractor, and your property manager. And if you have those four people, you can invest anywhere. So as you’re doing this research, my advice would be to ask your realtors, “Do you have a good contractor? Do you have a good property manager?”
You’re looking for realtors that can give you actual access to the people that you’re going to need to get a deal done in that area. If they say, “No, I don’t have any of that. No, I don’t have any of that,” they probably don’t do a lot of deals, because just by nature of doing a lot of business, they come across referrals that are needed. So that’s one of the things that I always prioritize.
Is this a person that can help me with putting my team together? And if they’re not, they better have a very specific niche skill set. They better be great at analyzing deals. They better know a lot about short term rentals. They better have some access to off market stuff that other people don’t have. There’s got to be some reason I’m going to work with you if you don’t have a team, because then I got to put the team together myself. Good luck out there. Happy hunting.
All right. That is our show for today. Thank you everybody for joining us on this Seeing Greene episode. I hope that I gave you some information that you didn’t already know that will help you in your journey, and I hope you had a good time listening. It’s important that as I give you information, I also make it fun and easy to listen to. So let me know if there’s anything I could do to make the medicine taste better, right?
The information is a brand muffin, but I can still put a little bit of icing on that brand muffin for you. So let me know what we could do to make this show better. We’d love it. Please subscribe to the channel and remember to give us an honest review on whatever app you are listening to this show on. We could really, really, really use that. All right, everybody. I’m going to get us out of here for today. Please check out another video or episode if you have time, and if not, I will see you on the next one.

The Federal Reserve just increased interest rates another .75% in one of the fastest course corrections in the history of monetary policy. Many are now predicting doom for the real estate market. And while real estate will almost certainly go down (indeed, that seems to be intentional), the strong lending standards of late, low-interest, fixed-rate debt most homeowners have, and the persistent housing shortage should prevent another housing crisis.

But the saying amongst military strategists that “generals always fight the last war” could just as well apply to economists; “economists always predict the last recession.” (That is when they’re not predicting seven of the last two recessions, but that’s another topic.)

Housing will likely suffer, and the market will “freeze,” as I will discuss further below. But the real dangers to the world and the American economy lie elsewhere.

Indeed, the “technical recession” of Q1 and Q2 this year, where growth dipped but unemployment stayed below 4%, is not going to be enough to quell inflation. And Federal Reserve chairman Jerome Powell seems (surprisingly from what I predicted) quite dedicated to “be sufficiently restrictive to return inflation to 2%,” which will almost certainly push the United States into a not-so-technical recession. 

But it’s important to remember that most recessions are far from catastrophic. People think of the 1950s as an economic boom time, yet it had three separate recessions. Even the deep recession in 1982 caused by Chairman Volker sharply increasing interest rates to quell inflation was relatively short-lived. There are, however, ominous clouds circling in areas outside of real estate and the United States in general that should be monitored carefully as they could conceivably cause a global financial contagion.

And the first place to look is Europe, most notably Germany.

The European Energy Crisis

Most of Europe has found itself in a severe energy crisis, with Germany being hit the hardest. When Russia invaded Ukraine, the United States and other European nations put a litany of sanctions on Russia. Russia responded by cutting off natural gas, particularly to Germany. Energy prices spiked and pressure mounted in Germany to reopen Nord Stream 2. However, such possibilities came to an abrupt end when the pipeline was sabotaged in late September.

Indeed, in September, the situation looked absolutely dire. Just look at this graph showing an almost ten-fold increase in the price of natural gas futures over the previous year.

European leaders have scrambled to find alternatives and shipped in an enormous amount of natural gas from abroad. Indeed, they have shipped in so much that the situation has (sort of) reversed itself, and spot values have fallen below zero. 

Unfortunately, this most certainly does not mean that the problem is solved. Germany, and all of Europe for that matter, has enough gas to get through the winter as of now. The problem is how much they have had to pay for it.

As CNN notes, despite being blessed with “unseasonably mild weather” with “consumption closer to August and early September [levels],” natural gas futures “are still 126% above where they were last October.”  

Indeed, to fill European gas storage to capacity, it cost 6.5 times as much this year than in previous years. 

The crisis is hitting most of Europe. The U.K. government, for example, estimates 10,000 Brits will die this winter due to energy expenses making them unable to sufficiently heat their homes. But again, the country in the worst shape of them all is Germany, which was especially vulnerable as 55% of its natural gas had come from Russia before the war began. Spiegel International puts the crisis into context,

“The current gas crisis has all the ‘ingredients for this to be the energy industry’s Lehman Brothers,’ Finnish Economic Affairs Minister Mike Lintilä said recently. Back in 2008, investment banks triggered a global financial and economic crisis by selling toxic home mortgages tied up in wild securities constructs. This time, it is high gas and electricity prices that could trigger a systemic collapse…

“Many companies are unlikely to survive. In August alone, the number of insolvencies among corporations and partnerships, mostly medium-sized firms, grew by a quarter year-on-year. For October, Steffen Müller of the Leibniz Institute for Economic Research in Halle predicts an increase of one-third compared to 2021. And this doesn’t even take into account the increased energy costs and inflation. Müller expects a structural change in the German economy. Due to the long-term cost increases in energy, wages, intermediate products, and interest rates on loans, ‘some business models are just no longer sustainable.’ Müller says that weak companies ‘are now getting flushed out of the market.’”

The measures being taken to address this crisis have ranged from the obvious (extending the operations of nuclear power plants that were scheduled to go offline) to extreme (cutting down ancient forests for wood to burn as fuel). And, of course, Germany intends to subsidize electric bills while mandating less energy use amongst its citizens and businesses. 

Government forecasts for growth have been reduced by almost 3% and now expect Germany to fall into a recession in 2023 while inflation stays near 10%. At the same time, for Europe on the whole, energy bills could be three times higher than last year. 

And, of course, it could be substantially worse. There were, after all, many overly optimistic predictions about a short recession at the beginning of the housing crisis in 2008.

A Global Contagion? 

Europe is going to go through a lot of pain this winter. And while our thoughts and prayers should be with them, the immediate question is simply whether this will be Europe’s problem or, as Mike Lintilä analogized, “the energy industry’s Lehman Brothers.” We should remember that what was predominantly (but not only) an American housing collapse in 2008 unleashed a worldwide recession that was by no means restrained by the borders of the United States.

Markets are global, and shortly after the energy crisis started, the United States started sending the bulk of its export gas to Europe. While this made perfect sense, it also depleted domestic stockpiles and has caused prices here to rise.  

While nowhere near as acute as Europe, across the board, we’re seeing energy shortages. For example, in New York and New England, heating oil is at one-third of its normal levels, and rationing has already begun.

The United States also depleted half of its strategic oil reserve to combat higher gas prices earlier this year. In an attempt to alleviate global shortages, the Biden Administration asked (begged?) Saudi Arabia to increase oil production. Instead, Saudi Arabia cut oil production by 2 million barrels per day. Unfortunately, it turns out that relying on a medieval, theocratic oil company isn’t a particularly reliable strategy. 

In particular, though, diesel fuel is in short supply. As of October 25, the U.S. was down to just a 25-day supply. As New Your Magazine put it, “The last time there was this little supply, there were about 3.5 billion fewer people on the planet.”

Of course, the United States will almost certainly not run out of diesel. What will happen instead is that prices will rise to both ration supplies and incentivize imports and production.

The problem is that, well, prices will rise. In fact, prices have already doubled this year and will likely increase further. 

Energy prices are a major driver of inflation, and, as we have seen, central banks are cranking up interest rates to slow general price increases. Even still, Germany is expected to have significant stagflation next year with near 10% inflation during an expected recession (and perhaps, a deep recession). And if many factories and businesses go under from excess energy costs, it could cause permanent damage to the German economy that will prevent anything even resembling a “V-shaped” recovery.

It should also be noted there are other global areas of concern. The war in Ukraine could potentially escalate. China’s sovereign debt situation is teetering on the brink of becoming a crisis. Volatility and risk is high right now, to say the least. 

Given this situation, it is unlikely that inflation will be quickly stymied, which will require central banks to maintain high rates at least through much of 2023. An all-out collapse isn’t probable, in my judgment. But at this point, recessions throughout much of the world—particularly Europe and probably the United States—seem to be all but a given right now. 

Of course, if we do fall into a deep recession, pressure will build for central banks to ease up, and, at that point, it’s anyone’s guess whether they will cave. Earlier this year, I would have said they absolutely would lower rates if we went into a non-technical recession (one with high unemployment), but their recent aggressiveness has given me second thoughts.

How Will This Affect the Domestic Real Estate Market?

A somewhat odd headline recently ran in Fortune starting with “Housing market activity is crashing.”  Notice it’s “activity” that’s crashing more so than the market.

It notes that, for example, “mortgage purchase applications are down 38% on a year-over-year basis.” It’s clearly not a good time to be a real estate agent or a mortgage broker. 

And with the increase in rates and global energy crisis, there’s no reason to see this train slowing down.

The good thing this time around is that lending standards were far better than pre-2008. Now, almost everyone has fixed-rate debt at low rates and substantial equity in their homes. Therefore, instead of a real estate crash like 2008, expect a “real estate freeze,” or, as Bill McBride puts it, a “Sellers Strike.”

New real estate listings are already down close to 15% year-over-year, and given most people don’t need to sell because of the fantastic loans that were available over the last few years, there’s little reason for them to sell.

It’s this ability for sellers to “strike” that usually buoys real estate prices during recessions. As you can see, looking through the Case-Shiller Index since its inception in 1987, in four of the last five recessions, real estate prices either didn’t go down or barely did. 

Even during the 1982 recession, which saw interest rates in the teens, home prices actually went up 1%. (Although they went down in real terms when adjusted for inflation.) Of course, the 2008 recession was very different. That, however, was because the spiral of defaults and foreclosures from all the bad mortgages lead to a wave of distressed sales.

Goldman Sachs sees home prices falling 5-10% next year. Wells Fargo, for its part, expects the following for 2023:

• New Home Sales down 6.5%
• Existing Home Sales down 13.1%
• Home Prices down 5.5%

I think it will likely be a bit worse, but not by any means catastrophic in terms of prices. 

It will be “catastrophic” in terms of activity. Again, it will likely be very tough for real estate agents, wholesalers, and mortgage brokers. Flippers will also have struggles finding buyers and buy and hold investors will have a lot of trouble with financing.

The most likely effect the global energy crisis will have on housing is that it will likely extend this “freeze” for quite some time. Don’t expect rates to be “back to normal” by the middle of next year. 

It could possibly lead to a global contagion and financial crisis as well. While not likely in my judgment, with this much uncertainty going into the winter, it would be wise to stay as liquid as possible with as high of cash reserves as possible. If we do go into a deep recession, having excess cash to help with increased delinquency and higher interest rates is essential. It’s also great for buying up cheap assets at fire sale prices. 

It would also be wise to be extra conservative on new acquisitions in the coming months, at least until Spring returns. Buying a large project before the bottom falls out is not a particularly lucrative strategy. 

Caution and liquidity would be my recommended approach, at least until it’s clear that the energy crisis in Europe (and the rest of the world to a certain extent) only causes a recession and does not become “the energy industry’s Lehman Brothers.” 

On The Market is presented by Fundrise

Fundrise is revolutionizing how you invest in real estate.

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

Learn more about Fundrise

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