Richard

Mindy:
Hello, hello, hello and welcome to the Bigger Pockets Money podcast where I sit down with James Dainard, Jamil Damji, and Kathy Fettke, three of the panelists from On the Market podcast, which is a sister podcast of this show, and we talk about this flip-flapping real estate market we find ourselves in.
I am here to make financial independence less scary, less just for somebody else to introduce you to every money story because I truly believe financial freedom is attainable for everyone no matter when or where you are starting. Whether you want to retire early and travel the world, start your own business, go on to make big time investments and assets like real estate or even just get a handle on what is going on in this market right now, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
All right. Today, I am joined by James Dainard, Jamil Damji, and Kathy Fettke. James, welcome to the Bigger Pockets Money podcast. Please introduce yourself and tell us why you are so great.

James:
Hey, Mindy. So I’m a full-time investor. I’ve been an investor in the Pacific Northwest for the past 19 years now. I started when I was a senior in college. I’m a heavy value add investor where we do a lot of heavy lifting on properties of increasing day one margins. So whether it’s fixed and flip properties, development sites, building homes or large and small multi-family, we’re stabilizing them and increasing their value. I’m also broker up in the Pacific Northwest, where we do about 150 million a year with investors of just helping investors through the process, sourcing on and off market deals, and then handling the disposition as well, but just full-time deal junkie, Pacific Northwest. That’s where I hang.

Mindy:
Full time deal junkie, I love that. Jamil, welcome to the Bigger Pockets Money podcast. Let’s let everybody know why you’re so great.

Jamil:
Thank you, Mindy. I appreciate being here. I am Jamil Damji. I am a national wholesaler. So what I do is I wholesale properties all across the country. I founded the largest franchise for a wholesale in the United States called KeyGlee. Not only that, I also fix and flip property, and I’m on a television show on A&E, where I flip properties with my best friend and big sister, and like James, do a lot of value add, a lot of heavy construction-type projects. So this is very interesting to me. Nice to meet you.

Mindy:
Well, it’s nice to meet you too. Thank you for joining us today. Kathy, last but not least, she is alphabetically last. Kathy Fettke, welcome to the Bigger Pockets Money podcast.

Kathy:
Thank you.

Mindy:
Please let our listeners know why you are so fantastic.

Kathy:
Oh, thank you. I’m the co-founder of Real Wealth. We’ve been helping investors in high-priced markets find properties in cashflow markets, so that means understanding what it takes to own a rental property out of state. We do a ton of education at Real Wealth, and I have a broker-to-broker relationship with agents across the country who really know investment property and know what the rents are. Many of them own property management companies so that you’re not stuck with an agent that just wants the commission and is going to take you to the wrong neighborhood.
We also provide the resources that come along with that like insurance companies and the lenders that can do loans in those states. So we’ve been doing that for, oh, my gosh, almost 20 years now, and then I also started syndicating in 2010 in the downturn when we were buying land for 10 cents on the dollar. So that’s been an interesting ride as well for the past 12 years.

Mindy:
Well, I’m so excited that the three of you are here today. I’d like to say I assembled this amazing mastermind team of panelists to come in and talk about the real estate market, but I actually had some help. They are the panelists that regularly appear on our sister podcast called On the Market, where they talk about the state of the market in general, and that’s what we’re going to do today. We’re going to talk about the state of the market in general.
If you haven’t been paying attention, the fed raise interest rates, what, three times in a row, and they didn’t just give them a little bump. I believe all three times was 0.75 basis points, which is a huge amount. They haven’t done that … Well, they used to say they haven’t done that since, what was it? 2010 or something? Now, it’s like every month they’re doing this. So it’s been a lot.

Jamil:
I think I had read it was ’94 since it was-

Mindy:
’94, yes.

Jamil:
… that large of a raise.

Mindy:
Yes. They haven’t had this much of a raise since 1994. You are correct, and now they’ve done it three times in a row. Why does the fed keep raising these rates? Because inflation. They’re trying to fight inflation. Let’s talk about inflation.

Kathy:
Well, it’s interesting last year that same fed said it was transitory and a lot of us were looking at each other like, “Are you sure about that? Because we’re seeing something different out here. We’re seeing bidding wars and lines out the door and 90 people want a house paying way too much for it.” So it’s shocking that the federal reserve, which is really the banking system, it’s not a government entity and people get confused about that, but they are tasked with controlling inflation. So they really got it wrong. They have admitted that, but to me, the bigger picture is the amount, again, well, you said, “What is inflation?” It’s simply prices going up and, like you said before this show, supply and demand usually controls that, but we’re in a very different world today.
The economy is not the economy of our parents. Economics is not what people learned in school. It’s extremely manipulated by the fed, by the banking system. Again, not a federal, not a government agency. The banking system is what it is, and they have been able to create an enormous amount of money, which was not okay when I was young. They would print a little bit of money and it made headline news, but to just give an example of how much, I’ve talked about this on our On the Market podcast, in my parents’ time, it was two trillion dollars circulating or less. If they printed even a few billion dollars, it was a big no-no. Today, they’ve created seven trillion dollars in the last two years. How could that not create inflation when there’s that much more money circulating?

Mindy:
What I find very interesting is that it’s usually supply and demand. When supply goes up, rates fall or prices fall. When supply goes down, prices increase, and it doesn’t really matter what you’re doing. If there’s no supply, prices are going to go up unless nobody wants it. Like typewriters, you can make those a thousand dollars a pop. Nobody’s buying those. You make them a dollar a pop, nobody’s buying those, but right now, we don’t have supply. We have supply chain issues that stem from this little thing called COVID, and raising interest rates, in my opinion, I’m not an economist, but raising interest rates when we already don’t have supply doesn’t seem like the right move here because, yes, you are dampening demand for housing in some markets, not in all markets, but in some markets.
I’m in the Denver market and our demand with the June rate increased. Our demand was like, “Oh, no more. We don’t want any houses at all,” and that was very difficult as I got my first listing in a very long time and now it’s still on the market, which is shocking to me that it’s still on the market three months later, but in other markets it doesn’t matter. It doesn’t matter how high the rates are going to go. People are still buying, and we still have record low inventory. So how does increasing interest rates help with inflation? All I see is this hurting the people who have to move, who have to buy, who have to … and it’s not just houses, it’s cars and other things as well, but this just seems like the wrong direction that we’re going in.

James:
What we’ve seen is we’ve seen inflation come down a little bit off peak of June. I think it was at 9.1 and now we’re down to 8.3, but a lot of these rates, they’ve been adjusted because it’s not just a supply and demand thing that is part of the problem, but we are seeing the supply start to increase. Even the other day, we do a lot of construction, and we’ve heard that there’s actually warehousing with oversupply of flooring and different types of material because they bought up, bought up, bought up, and now they’re stuck with inventory. We’re actually seeing that also in the used car market. I’ve been seeing that too. Lots are starting to fill up, but part of the reason they’re also increasing the race is they’re trying to slow the money down in our economy. It is going way too fast or it’s been going way too fast and it’s been consuming everything, which was a lot of the reason there was also no supply in addition to it’s not just a supply and demand thing, but it’s a labor issue is a lot of the inflationary cost that I’m seeing is a labor issue, not just a material cost.
That is just because unemployment is basically at zero. It is causing labor costs to skyrocket, and they’re trying to get that back down, which unfortunately means slow the money down. Slowing the money down leads to a recession, and then you have to kind of transitionally push through. I know personally as an investor who does a lot of construction, manage a lot of employees, the labor market is a mess and it does need to be fixed because it is really hard to get your job sites done, and until they make these corrections, it’s also going to push that down, which there’s going to be a lot of relief for investors on that side. You’re going to be able to get guys to show up to your work. You’re going to be able to actually pay them an affordable rate, but it has to be slowed down and that’s half the reason they’re also increasing rates. It’s not just a supply and demand thing.

Jamil:
I agree, James. I think we’ve got such a complicated situation right now that we’re dealing with, and the variables that are creating the inflation crisis I think it’s not just the simple math of, “Okay. Let’s raise rates and everything will fix itself.” I think that that is just indicative of the very surface level problem solving we have right now from the fed. I truly don’t believe that they’re looking at the problem deep enough. Again, I’m not an economist and so I don’t have better solutions to say but there was an interesting article that I read. Steve Forbes said, “We need to be looking at this situation from the level of the currency. We need to be shoring up and strengthening our currencies, not just raising rates to weaken the economy.”
In fact, all that we’re doing right now is we’re beating up the people that are the working class people, folks that are really need help in markets like this. When things get tough, we find a way to continue to beat up people who are in most need of the help. So again, I think that the way that we’re approaching this right now is totally backwards, but it’s interesting.

Kathy:
Yeah. I see it as a silent tax if politicians and their constituents want more things and want, again, student loan debt canceled. I look at Europe and they have free university and healthcare, but here in the US, if politicians want something, it is much easier to just print more money for that thing versus taxing people because at this point, you’d have to tax people 150% of their income in order to pay for all the debt. So it’s a silent tax and it does hurt the people that are already struggling because when prices go up, you’re paying more at the pump, well, I have an electric car, it doesn’t affect me or if people I know who they still bought their RVs and they’re still driving around paying all this money for gas, they’re not as affected obviously or else they wouldn’t be doing that, but it’s the people trying to just get to work that they were already struggling. So it’s an interesting time and, hopefully, more and more people will awaken to some of the manipulation of the market.

Mindy:
Do you think that rates are going to continue to go up? I mean, the fed has indicated that they are not real concerned with keeping everybody happy. They want to keep inflation down and they’re going to do it, they’re the boss, but where do you think rates are going to go in 2023?

James:
Well, I think they’ve said that they’re going to keep increasing the rates. What’s too bad is they’re being so reactionary now, and so they’ve had to go on this aggressive hike because they ignored the issue for nine months because at the beginning of the year, what he was saying was that the fed rate was going to land around two and a half to three points by the end of the year or up into 2023 and that should fix the issue, and then it changed from two and a half to three, to three and a half was the prediction. Now, they’re saying four and a half percent from the fed rate, and typically, rates are three points higher. So it’s going to be a seven and a half, eight percent loan for most investors, buyers, anybody getting any bank financing, which is a huge increase than it was 12 months ago because we were at two and a half percent and now it’s going to be eight, and there’s going to be shock waves by that.

Mindy:
Do you think that’s going to affect pricing? We’re still really low with inventory. I mean, you look back to 2008, 2009, we stopped building, essentially, in 2008, so 2008, ’09, ’10, ’11, ’12. I don’t know when they started building by you. I don’t remember seeing building, big subdivisions going back up until ’14, maybe even into ’15. That was a long stretch of time with no building, and that wasn’t just my neighborhood, that was everywhere. Builders went out of business. Trades people left the market and didn’t come back, left the industry and didn’t come back. So now, we’re short all this housing. I hear people say, “Oh, this is just going to be like 2008,” and I don’t really feel that that’s going to be that this market is the same that has different causes, but do you think prices are going to fall like they did in 2008 or anywhere closer like they did in 2008?

Kathy:
It’s already happening.

Jamil:
We’re baking in around a 10% correction for pricing moving forward in most of the markets that we’re in, and we’re seeing a lot of opportunity for people to actually position themselves temporarily right now to benefit from what’s happening in the market, right? So you’ve got cash-heavy investors who are actually pulling the trigger, but really, really, really getting significant discounts on their purchases right now, but I don’t think that lasts. I think it’s a temporary situation where there’s going to be some … Those who have to sell will sell, right? That’s the thing that we’re finding is that the individual who’s in the situation where they’re moving, they’re relocating or they’ve inherited a property or a sale is a necessity, they will make the decision to sell. Are they going to absolutely get creamed because of this? Yes, they will. They’re going to feel that.
I don’t think that we can ignore the fact that you said, Mindy, we are at record low inventory, and because of what’s happening right now, builders are pausing building, right? So were already short. We were already short on supply, on inventory, and now you’ve got rates going to where they are, builders pulling back even further. What does this create? At the end of the wave, what does this create for inventory and pricing? I think what you’re going to find is you’re going to have a temporary, a momentary opportunity where people, investors or whoever can get in and buy.
I was on a flight yesterday, and it’s really interesting when you sit with people who really aren’t even in housing, they’re not in real estate, they don’t trade in it, but the sentiment, right? It was like when I told them that I was in real estate, immediately, they were consoling me. So the sentiment that they had about what’s going on in the housing market, they were like, “Oh, I’m so sorry.”
You think, “Okay. This is the sentiment out there for the average person who’s not investing in real estate but just watching and reading the headlines.” Then I think what ends up happening is we will absolutely get a small depression because people, they believe that the value of housing is going down, so sellers are more open to a steep discount, but I think what shakes out at the end of the wave is going to be an even bigger inventory crisis and this is going to create even more appreciation and another correction going back up with pressure moving prices up. That’s what I’m predicting two years down the road.

Kathy:
I just said at the beginning of the year when I do my predictions that you got to pay attention to the fed because we’re just puppets, they’re the puppeteers. They control things, we need to listen and follow. Really, experienced investors do that, especially stock market investors. Early this year, Jerome Powell said, “We’re going to raise rates seven times.” I actually didn’t believe. I was like, “Why would the fed, federal reserve …” When you say the fed, it sounds again like a government agency. It’s the banking system. The central bank decided we’re going to raise rates seven times, and I thought, “Why would they want to crush our economy? Why would they do that?”
First of all, overstimulate it and then decide, “No, we overstimulate it, now we got to crush it.” So I just thought, “Why would you do that if you’re representing this country?” but they have come out loud and clear just last week that, “No, we’re going to crush it, and there’s going to be job losses, and we’re going to bring asset values back to where they think they should be, which is affordable.”
So depending on who you are, it’s either good or bad. Headline news has a different interpretation, depending on what you’re doing and where you are. For a buyer, that’s going to be a good thing. In the meantime, it’s a terrible thing for people who own the asset class that the federal reserve’s trying to kill, basically, right? So you have certain areas that went up as much as 40% just in one year.
So there’s a good chance that those areas are going to correct, and that’s the way Jerome Powell said it, “We’re going to correct the housing market,” and I only see that as one thing. They’re the ones who blew it up. One of the ways they blew up this bubble is buying mortgage-backed securities to keep interest rates low. When you have the central banks buying these mortgage-backed securities and then you pull back, which is what they’re doing, they’re tapering, now you don’t have a buyer for those. So then rates have to go up.
So again, why would they have done that all the way up until March of this year when prices already gone so high? They were still stimulating in overly stimulated market. Now, they’re like, “Oops, okay. We’re going to pull all that back and stop buying or, at least, again, taper the buying.” So I listen. Really, a month ago, I would’ve said something different, but based on what Powell said last week, he’s like, “No, we’re we’re going to destroy it.” So you got to pay attention.
Now, that doesn’t mean some of the things that we’re doing I would change because we’re still buying homes in the 150, even $80,000 range in parts of Texas where there’s job growth. So there’s always ways to work through an economy like this, but at the end of the day, people who are in short-term loans pay attention. People who have overpaid for properties hopefully are locked into a rate that will still make it okay over time, but the value might go down. That doesn’t mean your cashflow will go down. So maybe just if you’re locked into a low rate for 30 years, don’t worry so much even when you see you might have lost some money. Just keep holding because eventually it comes back, but there’s going to be some bubbles that get popped.

James:
Yeah. I think you can’t increase the cost of money by 40 to 50 percent and not expect for things to deflate down. Stock market, crypto, housing is also coming down and deflating down. It’s just too expensive on the monthly payment. The quicker they get down to a more stable market, I’m a pro rip the rates up. Let’s get to where we need to get to to start working off like even what Jamil just said was 100% right. There’s an overreaction right now and there’s more deals in the market, and then once they get to where they need to get to, we can actually level the plane field back out and just buy like we normally buy, which is, “Here’s the math on the deal, execute the right plan, stabilize it out whether you keep it or dispo it out.”
Everyone should expect, or at least I’m expecting a retraction and values because you just cannot increase the money by that much in a short amount of time and not have an overreaction. With every action is a reaction. We pumped in too much money, it went flying through the roof, now we’re pulling the money back the other way, it’s going to come down the other way, and that is okay. It’s just leveling it out.

Mindy:
What retraction do you foresee in prices?

James:
We’ve seen about in the Pacific Northwest, we’ve seen about a 25 to 28 percent drop off peak pricing. What we saw in February, March and April is we saw an appreciation rate that was absurd. It was hitting 19 to 24 percent, which is just nuts. So we’re seeing it back down this other way, but we’re still sitting four to five percent over the median home price growth from last year. It’s just off that peak, peak number. If you bought a short-term deal doing February, March, April, May, it’s going to hurt a little bit and sting because those are the fly that have just been deflated down. I don’t really see this as a crash, I just see that we’re deflating things.
So it’s totally different than 2008, which was like a brick wall market free fall down. This is like a slow, we’re just letting the air out, and as the air gets loosened up, everything will level out, but we’ve seen about 25 to 30 percent off peak pretty quickly.

Mindy:
Okay. That’s interesting, and that aligns with something that I was speaking to a local agent in the front range area in Colorado and she said, “Yes, we are seeing prices going down, but if you look at the trajectory from 2021 up in December, if you drew a straight line and skip the huge bump from the spring, you’d see the same steady growth up into the right, but if you look at with the spring, you’ve got this huge hump here and then it’s continuing to go.”
So it’s like you said, it’s off the top of the peak, but it isn’t prices falling. It definitely is not 2008 level crisis thing. I’m wondering, Jamil and Kathy, if that’s the same price decrease, I’m doing that in air quotes, that you’re seeing, a deflation as opposed to a free for all drop.

Jamil:
Absolutely. From what we’re seeing, especially from our investor activity because I primarily wholesale, and that means that I’m betting on people, betting on the market, right? The people that I’m transacting with on a day to day basis, these folks are looking at making projections as to what they’re value or what the property that they’re buying right now after they fix it is going to be worth in three or four months. So we’re all putting on our little fortune teller hat when we’re trying to make these decisions.
What I’ve been seeing right now in our primary markets, so we’re talking Phoenix, Tampa, Orlando, these are spots where we heavily transact, we’re seeing about a 10 to 15% drop right now, but again, I don’t feel like it’s bottomed yet. So that’s what we’re experiencing right now, some markets fairing better than others, but I’ve also heard in some markets as well that the 25, 30 percent drops have been seen.

Kathy:
Yeah, and there is no, as you know, housing market. Every single market is behaving differently, and some markets were just really popular. There was job growth or there was big money moving to those areas, so they saw gains that they hadn’t ever seen, again, Boise, Austin, Nashville. Nashville was not, when I started investing, was never a growth market. Austin was once the tech industry moved there. Seattle, of course, same thing, when the tech industry blossomed there became a growth market, but these are areas where there has been tremendous job growth, tremendous migration, and the people there were priced out, for sure.
People moving in, it’s still cheap, it still is. For people moving into those areas, it’s a deal, it’s a bargain, but how much longer is that going to be the case? So definitely, the markets that went up unsustainable are going to feel it the most because no market, no matter how much growth you have, can sustain a 40% growth in rents or in home prices.
One of the things that is concerning is that shelter inflation is one of the big metrics that the fed or that the government looks at when looking at inflation numbers, energy and food, certainly in housing, and it’s a lot, the rental costs. Will those rents drop? That is a bigger issue, right? We’re seeing home prices drop, which is, again, good for buyers, not so good for people who own that asset, but in rents, will we see that same correction? If we don’t, then the fed is just going to keep going at it because if rents are staying high and that keeps inflation high and they think the only way to solve that is to kill landlords, you know what I mean, what are they going to do to get where they want?
At this point, it looks like Jerome Powell is in battle, a battle against inflation that, again, happened because of too much stimulus of the economy. The way you undo that mistake is you pull that money back out, and the way you pull money back out of an economy is through bankruptcy, it’s through job losses, it’s through stock market crashes. That’s how you get it back out, and that’s just a horrible way to run an economy, but it’s what they’re doing and it’s what they plan to do and he’s making no qualms about it like, “This is where we’re going.”

James:
He referenced that at the end of his speech. He said, “The inflation around housing would take some time to work its way through but it will get there.” When you hear that line, that means, yes, I think Kathy’s 100% right, they’re going to try to deflate rents, deflate values, and create affordable housing. That is something all investors should be paying attention to right now as you’re doing your projections.

Kathy:
On top of that, make it an opportunity. The world doesn’t really know this yet. So if you’re in a property that it’s not your best property, maybe just put it on the market. You might take a loss, but maybe it’s less of a loss than later.

Jamil:
I just don’t see how we’re going to get to a spot where rents come down because even if, just say for instance, you’re sitting on the sidelines right now and you’re like, “Well, the rates are too high. I don’t want to buy,” so you rent, there’s a lot of pressure right now for the rental market. I don’t know if it’s the same everywhere, but just what you can see here in Phoenix where you put a house up for rent and there’s multiple people trying to get that property and the rents are stupid high. So I still don’t understand where that money is coming from. It’s all of the pressure, all of the things that are happening, but there are lineups right now for people to rent houses because they don’t want to make the decision to buy.

Mindy:
Yeah. Buyers have to go somewhere. I’ve got several questions. Is now a good time to buy real estate? Jamil said a few minutes ago there’s a small window to come where rate prices are going to drop even though rates are high. Cash investors, investors are heavy with cash, they’re coming in to snap up these properties at lower prices. Do you see rates coming back down in the future so that buyers who don’t have cash can eventually refinance out of these crazy high rates? I say crazy high rates, I think we should acknowledge that 7%, traditionally, historically is not a crazy high rate. That’s a historical average for a mortgage. The problem is prices have gone up so much that now 7% makes that mortgage payment just 99% of your income.

Kathy:
Yeah, I mean, it just comes down to what your intention is. If you are on the hunt for cashflow, there’s opportunity out there even though rates are still high. It’s interesting because the non-conventional loans are actually lower than conventional right now. You can go to a private lender, it’s amazing how things have flip-flopped, but if you’re able to find a property right now that cashflows, so you’re able to get a good price at it and you’re paying maybe a little bit more for that debt but it still cashflows, great. Granted, some areas might possibly see rent go down, but that’s questionable. It depends on supply. That is definitely a supply issue. If there’s lots of jobs and people need a place to live, they might not buy but they’re going to rent.
So if you’re buying your own primary residence and it’s cheaper than rent or there’s not a lot of other options, you’re still getting all the benefits of real estate. You’re locked in to a payment, you’re paying down your loan, over time you’re getting tax benefits. So there’s always good reasons to buy real estate. Same with investing. If you’re buying for cashflow and you’re able to lock in a rate, and you have somebody else paying that loan down for you, and you’re getting tax benefits and asset protection, and over time, generally, if inflation is an issue, then debt is a good thing. Debt becomes less big in an inflationary economy.
So all of the fundamentals are still there. If your strategy from five years ago or 10 years ago is a strategy that’s worked for you, keep using it, but just know that some of the things have changed where you’re maybe buying it cheaper, but in trade you’re getting a higher interest rate, but maybe the cash flow is the same.

James:
I’d say it’s a different type of BRRRR property now or process. 24 months ago, how you buy a BRRRR property is you’re buying something with a heavy value at. You’re buying it at a discount. You’re putting in a rehab. Sometimes you’re stabilizing that, at least in our expensive market, for 12 to 18 months. We’re not getting any cashflow at that point and we’re having to do all this work. The reason we’re doing that is to get an equity position and a high cashflow position at the end of the day because we bought it cheaper.
Now, it’s actually a different type of BRRRR is how I’m looking at everything. I’m running my metrics on a deal and looking at their current rate, if it’s at 8%, and if I’m getting a four to five percent cash-on-cash return right now, I do am projecting that rates will be around 5% in about 24 months. So now, I’m actually just looking at a deals, “What is this going to look like in 24 months? In 24 months, my 4% return. I can buy something that’s actually in a lot better condition. Now, I don’t have to do all the hard work, I just have to hang onto it at a 4% return. Once the rates fall down to five, it actually goes to a 12 to 14 percent cash-on=cash return, and in addition to, because everyone’s a little bit nervous right now, I can get that massive equity position right now.”
So it’s a different BRRRR process. It’s the same type of process. You’re buying something, you’re waiting on the cashflow to get the big upside at the end. It’s actually an easier way to do it now. I don’t have to go tear a building to shreds to get the margin. I just have to hang in there and stomach some okay cashflow for two years. So as long as you look at things and just run the math, you can position, change your process, and it’s the same end result.

Jamil:
I just want to point out because, James, the thing I was saying is happening, these cash investors coming in, just literally coming in and taking huge, huge discounts on properties. It’s exactly what he just said he’s doing. Guys, if you’re sitting there listening right now and you’re like, “I don’t know if now’s the time,” follow the leader of the pack. Follow the people who are making the market. Exactly. He has the market timed out for the next 24 months. He knows how this plays out.
So you should not be sitting on the sidelines and letting yourself miss a massive opportunity to come in and get a property at a significant discount. Look, I’m not a fan of an adjustable rate mortgage, and please don’t make this sound like I’m saying that, but if there was ever a moment that I thought that it would be less of a risky situation to get into an adjustable rate mortgage, it would be right now. Go in. Get a property significantly discounted. Get an adjustable rate mortgage. Lock in at a lower rate for the next five years if they give them to you that way, and then refi out of that thing in five years when the rates come back down, but you will get a huge benefit by taking advantage of the market situation right now. Do you like froth? I like froth in my coffee. Go get the froth. Now’s the time.

Kathy:
Yeah. People shouldn’t be so afraid of ARMs today because the lenders have learned there’s much tighter regulation, and you actually have to qualify for that adjustment if rates go up. So they’re really qualifying ARM borrowers. So they want to make sure you can handle an increase in payment in five years. That was not the case 10 years ago. In fact, they were giving out ARMs. We were. I was in the mortgage industry at that time, and we were literally, not my idea, someone else’s in the big offices in New York was saying, “Nah, let’s just qualify people on a teaser rate, so just a fourth of what their actual payment will be and see how that works out,” which didn’t work out.
Today, it’s the opposite, “No, we’re going to qualify you on the adjustable rate of what it could be.” So I’m not worried about ARMs. I think they’re a wonderful, wonderful solution for today, and that is exactly why we’re doing a single-family rental fund right now, which some people might think is crazy, but it’s like people can put in a $50,000 investment in that and we’re going in and paying cash. Again, that’s why I said we’re buying stuff in one of the fastest growing parts of Dallas where all these chip manufacturers are moving because the Biden administration is subsidizing that, 52 billion dollars, and they’re moving to this North Texas area. Yet, we’re able to negotiate with all cash offers at, like I said, $60,000, $80,000 for a property. Put about 50, 60 thousand into it to make it really nice for those tech employees, I don’t see how a huge recession would affect that. So there’s still opportunity. There’s tons of opportunity out there.

Jamil:
Take notes, guys.

Mindy:
I’m really glad you mentioned ARMs because that’s one of my questions up here. Traditionally, the ARM is not a “good product” in air quotes because it’s going to go up. It always goes up. In the past few years, nobody was getting an ARM because rates were so ridiculously low and now, even now, ARMs are higher than regular rates were, but they’re still lower than the fixed rate loan.
I just want to point out that if you’re considering getting a loan at all, talk to your lender. Ask questions. Your lender cannot read your mind. They don’t know what you’re thinking. Talk to them about ARMs. ARMs are not just three year loans. The ARM, the adjustable rate, it’s a fixed rate for a certain period of time and then it can adjust. It can adjust, what, once every year, once every two years? It can start adjusting, but there’s a fixed period of time. So a three-year ARM means for the first three years it can’t go up. There’s five-year ARMs, seven-year ARMs, 10-year ARMs.
Do you think rates are going to stay like this for the next 10 years? I don’t. I don’t have a crystal ball. Past performance is not indicative of future gains, but I think a 10-year ARM is still better than a 30-year mortgage, and people move on average every five to seven years. So if you’re going to be buying your primary residence and your options are, and I don’t have quotes on ARM rates, but I think a 30-year fixed right now is 6.5% for an owner occupant. So let’s go with a 10-year ARM is 5.75 or even 6%. That’s less. So that means you’re paying less, so that’s better.

James:
The thing is capital is just a cost of the deal, and I think investors fall into this, and I can do it too. You fall into this rate trap where you’re like, “Well, the deal doesn’t make sense with this rate,” but each capital has a purpose. When I’m borrowing money at 10 to 12 percent on hard money for a one to two-year period, I’m not just fixated on this. That’s just the product that I had to factor as a cost of the deal. Right now, when you’re looking at buying a rental and you’re using an ARM product, that’s what you’re doing to get you by if you do think that rates will fall in two years. I do believe that rates will be back in the fives in about 24 months.
Having an ARM product can be risky, but not if I’m getting it for the intention of bridging me to where I can get my high cashflow. So whatever the loan product is, talk to your lenders, like you said, and then just factor it into how you structure your deal and the cost of the deal, and then at that point, it’s just absorbed in the math.

Mindy:
I do want to point out that Kathy, James and Jamil are more investment-minded than owner/occupant-minded, and they’re in it for the long haul. They’re holding period is forever to quote Warren Buffett, my favorite. So if you are thinking about buying a house that you’re going to live in for a couple of years, this is going to be advice that may not apply to you. If the rates are still going to be really high in two years and you’re not going to have an opportunity to pull your money out or to refinance and then you’re going to sell and maybe it’s still a down market in two years, maybe it’s not, this is going to be different advice. This is more for people who are investing.
A few minutes ago, James said, “Run the math.” I think that now even more than ever before when it was already really important, knowing how to run your numbers is so important and really running them carefully is key, but we’re still, like James said, in historically low inventory market, and that is not going to change anytime soon. You can’t just build four million houses overnight. You can’t just get … I mean, have you ever tried to get anything approved to the permit office? Even the most generous of permit offices take forever. What does it take? I’ve never built a whole neighborhood from scratch, but it’s a three or four-year process. It’s not just like, “Hey, I want to build houses in that vacant land over there,” and then tomorrow you’re pouring cement. It’s a really long process.
So we are going to have historically low inventory probably for a decade to come. So when this little blip that we’re going through right now changes, if you’re looking to buy a house that you’re going to hold onto for a really long time, we could be in a situation where now is an awesome time to buy, and if you want to buy a long one, I have a house for sale.

Jamil:
Well, what happens in 24 months, guys, when we’ve got depressed building now, we’re already short four million houses? What happens when rates stabilize? Where does the market go then when so many builders are pausing right now and inventory is already short? What’s the effect

Mindy:
The building fairy is going to wave her magic wand and say, “Poof! There’s four million houses.”

Kathy:
I think I actually have changed my mind about this. I have changed my mind about inventory just recently because at a time when the government is, basically, or the fed is pulling the plug on economy and people are losing money in the stock market, they don’t have that extra money, when you have extra money, you buy things you don’t need, right? When you don’t have it, you don’t. So there are people who got short-term rentals that maybe they’re like, “Oh, this isn’t going to work,” or they got rental properties and it’s not working out the way they thought.
You also have baby boomers getting a lot older and dying, the oldest ones, and then you’ve also got the millennial population that over the next three years or so is a really large generation, but then after them, it starts to wane. So I don’t know that I’m in the camp anymore that this inventory problem’s going to last forever. I actually think it’s going to normalize in a year or two, if not sooner. So that’s something to pay attention to as the population, as the demographic shift a little bit.

Jamil:
Interesting. I’d like to talk to you about that further and expand on that a little bit because it’s a very contrarian perspective, and at the same time, I’m curious as to what data, and I know you make decisions very thoughtfully, so I’m interested as to what made you make the shift.

Kathy:
Oh, I just interviewed John Burns on the Real Wealth Show and he sent me all his slides and he studies demographics, and he’s just got an enormous amount of data. We’ve known for a long time that the largest part of the millennial generation is now. From 2020 to 2024, this was going to be the biggest buying pool and we weren’t prepared for them, but after that, the Gen Z population is smaller. So when you look at the population growth, you’ll see this bump, but then it’s a bump. So what’s behind them is less people, less buyers at a time when you’ve got baby boomers aging.
So it is a blip in time, for sure, where we weren’t prepared and we didn’t have the inventory. We shut down the economy. We stopped producing, and yet we had all these families forming. So if we had just planned things a little better and not stimulated the economy at a time when there wasn’t enough supply and huge demand, then we wouldn’t be in the situation. When I say we, I’m not talking about me, I’m talking about the fed. I know that’s depressing, you guys, but I’m a firm believer that no matter where, there’s always opportunity in any city.

James:
I think inventory is honestly going to go into overcorrection mode for a minute because that’s … Real estate, when it goes up, it comes down, and then it levels out. The thing about the American public, the American consumers is they’re very reactionary. We’re seeing it now. We are getting really good buys right now because people dump and they’re just reactionary in general. So as you see those things, people get FOMO, they want to maximize their equity, they’re seeing other things like their stock accounts getting shrunk down to. People feel like they’re losing wealth right now, and when they feel like they’re losing wealth, they make very bad decisions and very quick decisions.
So we may see this surge of housing come to market, but then it will work its way through and it’s all okay. You just don’t want to be the reactionary person giving away your asset or selling off your asset too quick or just trying to buy too quick as well, but it’s to be expected, when rates increase, when we go into recession, things will slow down, inventory will increase and will work its way through the system.

Mindy:
I think that’s interesting your comment about the surge of inventory. During the spring, I’m a real estate agent who primarily represents buyers, and I would look in my MLS, my local MLS, and houses came on the market on Thursday, showings were Friday, Saturday, Sunday, offers were due Sunday or Monday, and they were under contract on Tuesday. So on Wednesday, there was nothing on the market. I’m talking maybe 10 properties. In my city of 90,000 people, there were 10 houses available up to $700,000, and this was every single week for about three or four months.
Now, I can go in and search, and there’s 75 or 80 houses, which is a whole lot more, but still historically low. There should be 100 or 200 houses on the market to give you a really good mix of houses to buy and to look at, and there’s still low inventory. I think there’s so many people who are not in real estate who don’t pay attention to this. Not everybody is as big a geek as we are about real estate, guys. So they don’t know that 70 houses is low. They think, “Wow, there’s seven times more houses now than there were in the spring, so we are back to normal.” We’re not even close.
So I just think that this is very interesting that we’re having this inventory conversation. I think that Kathy’s incredibly intelligent and she just spoke with somebody who is far smarter than I am, but I just hate to argue with you. I don’t see a change in the inventory and I hope I’m wrong.

Kathy:
I think the boom is going to go for a while. Like I said, it was 2020 to 2024, before all of this. I mean, that was predicted that this millennial population would be at home buying age and household formation age. So I don’t think it’s going to change today, but just the 10-year outline in the future, maybe we’ll see some shifting then. Unless, again, we depend on government policy, unless there’s a change to immigration because the birth rate is slowing down too, so if we become more open to immigration, that could change it.

Mindy:
Okay. I think this has been a fantastic discussion. I really thank you all so much for your time today. Let’s remind everybody where you guys are normally found every single week.

Kathy:
I’m at realwealth.com and I’ve got the Real Wealth Show, and then my syndication company is growdevelopments.com.

Jamil:
You can find me on my YouTube, @JamilDamji, also on Instagram, @JDamji. Check me out Saturdays at 10:00 AM on A&E and watch us flip houses, make mistakes, and try to make some money.

James:
First and foremost, check us out on the On the Market podcast. This is where we all get a hangout. It’s by far one of the highlights of my week. I mean, just amazing people on the show. Then for more construction tips, investor tips, check me out on Instagram, JDainFlips, and on YouTube, @ProjectRE.

Mindy:
Okay. James, Jamil, Kathy, thank you so much for your time today. This has been a lot of fun. Don’t miss checking out James, Kathy, and Jamil, along with Henry Washington and Dave Meyer on the On the Market podcast, which is available every place you get your podcast.
Holy cats! That was one of my favorite episodes. I love talking about real estate, and Kathy, Jamil, and James are so informed and so smart. Some of my key takeaways from this episode are, number one, investing can be scary and there is always risk involved in investing, and the best way to mitigate that risk is to be informed. So look at what’s going on in the market. Interest rates are the big story. Listen to what the fed is saying. Like Kathy said, she listens to what the fed is saying. She listens, she watches the videos, she reads the articles.
All three of our guests today listen to the videos and read the articles and they’re really doing their research. It isn’t just, “Hey, I bought a house. Now I’m an investor.” You really need to stay informed if you want to continue to grow as an investor, but there is, like James said, there is success down the horizon. There is a light at the end of the tunnel, and he’s predicting about 24 months we’re going to see a difference in rates, we’re going to see prices starting to go up again. So now is a really great time to be buying a house, so long as you can afford the payments currently.
Like Jamil said, the market, he’s seeing price corrections in his market. I’m seeing price corrections in my market, and that’s not super awesome when you’re the seller. It’s a good time to be a buyer right now. It might become an even better time to be a buyer in the next few months. The market is going to be down for a short period of time. So there is opportunity to buy even with these current higher interest rates.
Inventory is going to continue to be down for years. We are not going to be able to correct our low inventory, historically low inventory situation in just a few months, in just a few years. I don’t see us getting back to correct inventory levels for a decade, and even with Kathy’s very well-reasoned comments about the baby boomers was the largest generation that we’ve had and they are getting older, they are starting to pass on. Even with them passing on, we’re still four million housing units short.
That’s the number that I keep hearing from all of my people in the data analysis department of Bigger Pockets, Dave Meyer, who happens to be the host of On the Market, which is where all of my panelists came from today. I keep hearing that we’re four million housing unit short, and even if we’re three million housing unit shorts or five million housing unit short, that’s not overcomable in just a few months. That is years, even decades down the road that we will finally be able to figure that out if we start taking steps now, but like they said, builders are even starting to pull back. So I really do think that inventory is going to be a factor for a while, and there are outside factors affecting our current inflationary period that are outside of our housing market control that I think will come into line very shortly. I think we’re looking at an interesting window right now of opportunity for those who can afford to buy.
One last takeaway, my biggest takeaway, if you are at all interested in investing in real estate, you need to add On the Market to your podcast rotation. It’s hosted every week by Dave Meyer, who I think walks on water. He is incredibly smart data analyst guy who’s been with Bigger Pockets for I think six years. He has this amazing ability, just like Kathy, Jamil, and James, he has this amazing ability to take complex real estate and economic ideas and theories and translate them into understandable English. So that is an excellent podcast to check out every week wherever you your podcasts.
From the Bigger Pockets Money podcast, this is Mindy Jensen signing off.

Abhishek Lodha of Lodha Group says the Indian property market is at the start of a “long-term upcycle.”

Dave:
Hey, everyone. Welcome to On the Market. I’m Dave Meyer, your host, and I am here with two BiggerPockets and investing legends. We’ve got Henry Washington who’s here a lot. Henry, how’s it going?

Henry:
What’s up, buddy? Glad to be here.

Dave:
Thank you. Thank you for being here. And we also are bringing back, I think you are our first two-time guest, J Scott. What’s going on, J?

J:
I am doing great and I am thrilled to be your first two-time guest. I can’t wait. And hopefully, I’ll be your first three-time and four-time and five-time also.

Henry:
Whoo. Whoo.

Dave:
All right. Wow, I like it. Yeah. I mean, I think your episode about investing in a recession might be one of our best, if not our best episode of all time. So if you haven’t listened to that already, you should check that out. J has written a book about recession, investing in all sorts of market cycles, particularly useful in this type of economic environment. But J, can you tell people why you’re here joining us today?

J:
Yeah. I’m here today because you wanted me to be here because you and I are getting ready to release a book, our next book for BiggerPockets, and you were too ashamed to self-promote and announce it yourself. So you brought me on to announce it so you wouldn’t have to look bad.

Dave:
That’s exactly right.

J:
So we’re here to talk about a lot of… Or I’m here to talk about a lot of things, but would definitely want to mention that you and I, Dave, are releasing a book called Real Estate by the Numbers. It’s coming out in a couple days, I think October 13th, from BiggerPockets. It’s now available for pre-order. And basically, it’s all about how we can better think like investors. So how we can think more strategically, how we can employ investing concepts that really successful investors use, all the math that goes on behind the scenes that we need to underwrite deals, and how we should be thinking about investing from the most basic level, like underwriting deals, to how we should be thinking about structuring our business and structuring our portfolio basically to be a more successful, more profitable investor.

Dave:
That’s perfectly right, and thank you for taking the responsibility of the shameless plug. We got to do it, but I do want to mention that it is available for pre-order for two more days. And if you do pre-order it, there are benefits. J and I are both giving away coaching calls. We’re going to be hosting a webinar that you can attend. It’s a live Q&A. There’s a couple other benefits. And you can use a discount code, DAVE, to get 10% off. Or J, I think, do you have a code also?

J:
Yeah, JSCOTT.

Dave:
Okay, or you could either use the code Dave, D-A-V-E, or J-S-C-O-T-T, JSCOTT for 10% off. So you should check that out. So it’s a great book. I think you should read it. I think Henry actually even wrote a little blurb about how much he loved the book on it.

Henry:
Yes. You know what’s funny is if I were to direct somebody, if somebody came to me and said, “Hey, Henry, I really need to know about what are the best rules of thumb or financial equations, or how do I get really good with numbers? Who do you know at BiggerPockets that could help me with that?” My 1000% answer would’ve been like, “Oh, you got to talk to Dave and J Scott. Talk to those two people. Those are the ones who can really break down the numbers for you.” And so the fact that you actually wrote a book called Real Estate by the Numbers, it’s almost like, it’s like a meme. Like, “Of course, Dave and J Scott wrote a book Real Estate by the Numbers. That is 1000% who they are.” So I think people should take advantage of that because you want people to speak on the things that they are passionate about and that they know the best. And if I know anything about the two of you, it’s that you’re passionate about data, the numbers, and real estate. So that’s super exciting.

Dave:
Well, thank you, Henry.

J:
Thank you, Henry. I don’t want to spend the whole episode talking about the book. There are so many more important things to talk about, but I do want to point out that Dave and I, we worked for several years on this book. This is my fifth and by far the hardest book that I’ve ever worked on. And no way I would’ve accomplished it at all, let alone it be as good as it is without Dave. So we put a lot of time and effort and blood, sweat, and tears into this one. But at the end of the day, I am more excited about this book launch than any of the other four that I did because I really think this book is going to help more investors over the next 10, 20, 50 years than anything we’ve ever written.

Dave:
All right. Well, we will get into the meat of this episode because we want to hear about what J is doing with investing. But I am also excited because I now have physical proof to all my teachers and guidance counselors who said I’d never graduate college or do anything with my life, that I have done something with my life. So there.

J:
I like how he says he has physical proof and he just holds up an invisible…

Dave:
Yeah, it doesn’t even exist. I’m just holding up nothing. But in a couple of weeks, I will. This is what they meant, J, when they said I’d never amount to anything.

J:
It was all a dream.

Dave:
All right. Well, let’s take a quick break, but then we are going to talk to J all about his investing and what he’s doing in this very confusing economy, and we will be right back.

Speaker 4:
(singing)

Dave:
Okay. So J, tell us about your read of the economy. And what are you doing in your investing business right now to adjust to these very confusing market conditions?

J:
Yeah, I wish I had a better answer than what I’m about to give, but I think right now is very much… I’m not stopping investing. There’s no reason to ever stop investing if the right deals are coming along, but I’m certainly being a little bit more introspective, and sitting on the sidelines a little bit and waiting to see where things go probably not for too much longer. I think we’ll have a good bit more clarity in the next month or two. So everybody knows that we’re experiencing some high inflation and that’s leading the Federal Reserve to raise interest rates to slow down that inflation, which is leading to higher mortgage rates. And now, debt is more expensive. It’s harder to get a loan, or it’s not hard to get a loan, but it’s harder to get a cheap loan to buy your real estate.
And so nobody really has any idea of how high interest rates are going to go. And so we’re in an uncertain time right now. But what I will say is that even though some other asset classes, I mean, the stock market has struggled a little bit recently and crypto is down like 80%, and other asset classes that I look at are down a good bit, real estate has stayed pretty strong. Now, certainly there’s a few markets around the country that things got so hot over the last couple years, places like Seattle, San Francisco, Boise, Idaho, New York City, where things are starting to slow down a little bit and we’re seeing prices actually decrease in a few markets. But for the most part, in most markets… And I know it’s going to be a couple weeks before this episode’s released, hopefully nothing’s happened in those two weeks that make this statement look idiotic. But for the most part, most markets have been pretty resilient.
And so what we’re seeing is there aren’t a lot of sales. Sellers aren’t really lowering their prices and buyers aren’t necessarily willing to come up to the high prices right now. So what we’re seeing is a drop off in sales. We’re seeing increased inventory in a lot of these markets and we’re seeing lower transaction volume, but the nice thing is we’re not seeing desperate sellers. We’re not seeing a real… I mean, foreclosures are up a good bit percentage wise, but they were so low that even the big jump percentage wise doesn’t translate to big numbers. So foreclosures are still relatively low. Lots of people locked in long-term, really low fixed-rate debt a couple years ago. So I don’t see right now a whole lot of desperate sellers, which means prices are going to stay relatively strong.
Now, the downside is, as real estate investors, we don’t mind if prices drop because we just dollar cost average and buy more real estate, but what I expect over the next at least six to 12 months is that we’re going to see just a stagnating market. We’re going to see prices that don’t really go up, don’t really go down, we’re going to see sellers that aren’t really willing to budge off their prices because they don’t have to, we’re going to see buyers that aren’t really willing to come up to the seller’s prices just because they don’t know where things are going. And so I think it’s going to be a quiet six to 12 months, despite the fact that we could be facing a big recession in the economy and other parts of the economy could be getting much worse. So it’s interesting that we’re facing a lot of economic headwinds, but real estate could really just be boring for the next six to 12 months.

Henry:
Yeah, man, that’s super interesting. I share your perspective. I think things are just going to stay where they are. I don’t see much of a drop coming in prices in most markets. Like you said, some markets are going to see somewhat of a drop, but we’ve got this… What did Jamil call it? We’ve got this standoff happening in real estate until there’s some change that has an actual major effect. One thing you did mention that I want to ask you about is you did say that you’re not stopping investing, but also have been waiting on the sideline. And so can we define that for people? Because I think there’s a lot of investors out there who feel like they should be waiting on the sideline. And I think us as investors, when we say that, we’re really meaning like, “I may not be as actively aggressively searching for something to pour my money into, but I’ve still got my eyes out there. And if something comes along, we’re going to jump on it.” So what does that really mean to you?

J:
Well, here’s the big thing, I can stay active and we can all stay active in real estate without buying or selling anything. So I’m actually using this time to investigate some new asset classes. So there’s some asset classes that I think are likely to do well during a downturn. So over the next year or two or three. There are a couple asset classes that I’m starting to look at and we can talk about those. But just at a high level, I’m using this opportunity, one, like you said, I’m not stopping investing. I’m still looking for deals. I’m not finding as many deals. I’m not finding as many opportunities, but if a good deal comes along, I’m going to jump on it. But at the same time, I’m using this slow down to do research, to learn how to underwrite other asset classes, to build relationships with operators in other asset classes.
When I say other asset classes, I don’t mean outside of real estate. I mean instead of focusing on multifamily, which is what I’ve been focused on the last few years, I’m starting to investigate other commercial niches, and I’m still buying some single-family stuff. But I’m trying to see where the market is going, where the economy is going in the specific locations where I’m investing and seeing what opportunities might exist outside of the core asset class, again, for me, multifamily, that I’ve been in. And what I like to tell people, is that you don’t necessarily ever have to stop investing. You may have to move to a different location, or if you want to stay in the location, you may have to find a different niche, or different asset class, or different business model.
But if you’re good at being flexible and you’re good at pivoting… And this is why… And to go back to the fact that the book Dave and I wrote is so important, it’s really important that you’re able to evaluate deals in different ways. We all probably know how to underwrite if we flip houses. We all know the equation to evaluate a house flip. And if we hold a rental, a lot of us know the equations and the formulas for how to evaluate a single-family buy-and-hold. But the reality is every deal is going to be analyzed differently. Every asset class is going to be analyzed differently. And there are lots of different ways to look at deals and look at markets, and there are lots of different reasons we invest in real estate.
And so using this time to really educate yourself on how to look at deals from different perspectives, and how to maximize the returns on deals with other things other than maybe cash flow, or other than maybe just equity growth. There’s a lot of things that we can be learning and doing right now to really find these needles in a haystack, and to find other asset classes that might be more advantageous given where the market’s headed and where the market currently is. And so what I’m spending a lot of time doing is, one, I’m not stopping looking for deals, but I’m really trying to get familiar with other asset classes, and other business models, and other niches that I can leverage to really grow my portfolio in a market that’s about to change.

Dave:
J, can you remind everyone what your primary niche is currently? And then talk a little bit about some of the niches that you think are going to work short term, or maybe some of the niches and opportunities you are excited about on the longer term perspective as well.

J:
Yeah. So long term, I’m excited about everything. Honestly, I mean, we’ve talked about this before. Go back and listen to the last episode we did of this podcast that I was on. But the reality is that historically speaking, recessions don’t last that long. And so if the Fed started raising interest rates six months ago on average between the time the Fed starts raising interest rates and starts dropping interest rates, is about two years, just over two years. The longest it’s ever been is about three years. So if history is going to repeat itself, which it normally does, we can expect that in the next year and a half to two and a half years, we’re going to see interest rates starting to come down again. So if you’re a house flipper, if you’re a buy-and-hold investor, whatever you do, most likely in the next two to three years, it’s going to be a great time to do it again. The market’s going to have recovered and interest rates are going to come down. Everything’s going to be good.
That’s longer term. From a shorter term perspective, the next 6, 12, 18 months, what I like about real estate is that there’s a segment of real estate called commercial real estate where values of properties are based on the income those properties produce. So if I go and buy a single-family home… I live in a house right now. The house that I live in, the value of that house is going to be impacted by the value of all the other houses around me. So if somebody goes to sell… If I go to sell my house right now, I’m going to look at what my neighbor sold his house for last month, or what the guy down the street sold his house for three weeks ago, or whatever. I’m going to find other houses that are similar to mine, what we call comparables or comps. And whatever they’re selling for, that’s probably what my house is worth.
In the commercial real estate world, and when I say commercial, I mean anything that you use that generates income that’s bigger. So multifamily, or self-storage, or mobile home parks, or office space, whatever it is, the value of that real estate isn’t based on what the building next door sold for, or what the complex across the street sold for. The value of that building, or the value of that real estate is based on the income it’s producing. And if it makes more income next year than it did this year, the value is probably going to go up. And so the reason I really like commercial real estate right now is because even though values may drop on a comp basis, even though single-family values may go down or stagnate over the next 6, 12, 18 months, in the commercial space, as long as rents are going up, we’re going to see values going up for the most part. Now, there’s another component there, but for the most part, if rents are going up, values tend to go up.
And so the question we need to ask ourselves is, “What are those asset classes where we expect income to go up?” So multifamily, that’s the niche that I’m in. I own a bunch of apartment complexes and what we’ve seen over the last couple of years is this trend away from home ownership and this trend towards renting. More people are renting, wages are going up, people are moving to certain population centers. So if you’re in the right market with good population growth and good wage growth and good employment growth, you’re going to see that rents are going up. And so I really like multifamily in a lot of these markets because I know that rents are going to go up, which means values in my properties are going to go up. And so any asset classes where you think income is going to go up over the next couple years, that’s a good place to be.
Historically, during recessions, people move from bigger houses to smaller houses, but they don’t like to sell their stuff. What do they do with their stuff? They put it in storage. So historically, self-storage is counter-cyclical to the broader economy. If the broader economy is doing worse, self-storage is doing really well because people need a place to put their stuff when they downsize. So I really like self-storage right now. Mobile home parks, mobile home parks tend to do pretty well during a recession because it’s the lowest common denominator for housing. And so a lot of people that have to move out of their house or out of their apartment, a lot of them will look for a mobile home. And so typically, mobile homes do pretty well during recessions.
Other asset classes that I like right now are industrial and warehouse. So we’re seeing this shift away from in-person retail. People aren’t walking into stores and malls as much anymore. This isn’t a revelation. Everybody knows this. They’re ordering off of Amazon, or they’re ordering off of other online retailers, and these retailers need to be able to ship in 24 or 48 hours. And so they’re opening warehouses all around the country to make basically their fulfillment and delivery systems more efficient. So lots of big companies like Amazon are buying warehouses all over the country, as well as smaller online retailers doing the same thing. And so what we’re seeing is demand for these light industrial warehouse lots and warehouses has been going through the roof. And so I really like that because I think that trend is going to continue.
Now, there are other asset classes in commercial where I think income is likely to go down; office space. So we saw a ton of office space open up after COVID, simply because everybody was working from home. And a lot of companies have recognized that this work-from-home thing is actually working okay for them. Not saying everybody. Some companies are starting to tell their employees to come back to work, but for a lot of companies, they’ve recognized that this work-from-home movement is a great way to save costs for the company. And so they have all this office space that they may have leased for a year or two years or three years or five years, but at some point, that lease is going to come due over the next couple years and they’re not going to renew. And the landlord, whoever’s holding the building, is going to have trouble leasing this office space. So office space, I have a feeling, is going to be one of those asset classes that’s going to start to contract over the next year or the next couple years.
Retail. So retail tends to not do well during recessions. People don’t go out and shop as much. Certain types of retail do well. If you own an anchor store like a grocery store or the big store on the corner of the shopping center, that might do well. But in general, retail and strip malls and mall space isn’t going to do well during a recession. So I’m staying away from retail. So this is basically what I mean by there are going to be opportunities out there, but you really have to understand how the market works, you have to understand how the economy works, and you have to understand how the two work together, how the economy impacts the real estate market in certain asset classes. And so I’m starting to do research on those asset classes that I think are likely to do well over the next couple years, as well as starting to build relationships with other operators who are working in those asset classes so that I can either learn from them, I can partner with them, I can invest with them, whatever it is.

Henry:
That’s super interesting because we have taken some time this year to do almost exactly the same thing. And so I purchased my first commercial office complex this year, and also we’re looking at a trailer park. And so all that to say, not to toot my own horn, but I’m agreeing with the point that you’re making, is that there are other niches and there are niches that are going to be better suited to the economic conditions. It’s an echo to what you said in the beginning. There’s always room to be an investor. It’s just about what you invest in, what price points you enter at, and then what your return on that investment is.
A good deal, is a good deal, is a deal. And we say a good deal is based on what you’re getting it for in that current market condition. And so you can get a good deal in any market condition. So I love that you’re looking into those things. And I hope that encourages some people to think, not necessarily outside the box, but just be smart about, in sports, we call it take what the defense is giving you. And so you look around at your environment, at what the defense or what the country or what the economic status is giving you, and then you look for the opportunities there. So that’s awesome.

J:
Yeah. And another thing to keep in mind, I think one of the reasons I like real estate right now, I love real estate right now, is because I think the long-term growth trends are astronomical. One of the big concerns that the Federal Reserve has now, for anybody that’s listened to some of the recent press conferences or read some of the things that Jerome Powell, Federal Reserve has released over the last couple months, is this concern for housing. And they’re not concerned about housing because they want us real estate investors to continue to do well and make money. They don’t care about that. They’re concerned about housing because they know that if we don’t continue to create more housing, that we’re going to have affordability problems, that we’re going to have a housing crisis where people can’t afford to live. Basically, the Fed is telling us, “We need housing to do well because we need builders to keep building, and we need people to keep providing housing for all the people that can’t afford a place to live or a place to buy.”
And so I have a feeling, and not just a feeling, but the data supports this as well, that there’s going to be a whole lot of housing, millions of units literally somewhere in the three to five million units that are needed over the next five years to support all of the people that are looking for housing, and all of the people that can’t necessarily afford to buy and are looking for rental housing. And so if you’re a landlord, if you’re a developer, if you’re a multifamily investor, this is going to be a fantastic place to be over the next five or 10 years. So what I would suggest to anybody is if you’re flipping houses right now, start investigating how to buy single-family rentals because there’s going to be a great opportunity and it’s going to be a very powerful asset class over the next few years. If you’re already buying single-family rentals, start looking into multifamily and looking into going bigger. Because again, it’s not that difficult to do bigger in the residential space. And so start thinking about how you can scale up your business.
If you’re in multifamily or if you’re a single-family landlord, start thinking about development because there’s probably going to be some good opportunities. I’m not saying this month or even this year, but over the next several years, there could be some great opportunities for you to be doing either ground-up development or infill development, which means basically buying a house, knocking it down and rebuilding it. And so learning these new skills now while everything’s slowed down and boring is going to be a great way for you to be making a lot of money come two years from now or three years from now or five years from now.
I see too many real estate investors that are so focused on what they’re doing day in and day out that they’re not thinking about, “How am I going to be able to make a lot of money two or three or five years down the road?” Well, now is the time. If you’re not doing a lot of deals, now is the time to be reading, and learning, and studying, and building relationships that you can leverage a couple years down the road when the market’s really going to need more rental housing.

Dave:
I love that, J. It’s such a good synopsis of the long-term prospects for real estate investing. There’s just a supply shortage in the market. There’s going to be so many ways to profit from that over the next couple years. And not just profit from it, but provide housing for people that need it. You are providing value to society and you could benefit from it personally too. To me, I agree. That gets me super excited about real estate investing over the next couple years.
A couple of the asset classes you talk about, to me, at least when I was getting started, felt a little daunting, retail. Henry, you’re just buying office spaces. What would you say to people who are ready to get into the market now, or maybe they’re in one of those markets that have already settled down or maybe is going to keep growing over the next few years? Do you think now is a good… Would you caution people away from single-family rentals right now if they can find good deals? Or do you still think those are possible to be profitable in the next year or so?

J:
Well, let me start with the first part of that first. Yeah, people are definitely scared of these bigger asset classes. I know that when I started, I used to think that people that owned apartment complexes were special people. It wasn’t people like you and me. I grew up living in an apartment complex, probably literally one of the largest department complexes in the country. It was something like 1600 units. And so my idea of an apartment complex is, “You’ve got this multi-billion-dollar company that buys these things and that’s who owns apartment complexes.”
And what I’ve realized over the last couple years is, “No, there are a lot of mom and pop investors like me and you and Henry and other people who are buying up apartment complexes or buying office space or buying retail space.” We’re not talking about necessarily having to go in and buy a billion-dollar shopping mall or having to go to New York and buy a skyscraper for office space. Henry, tell us a little bit about the office space you built or that you bought, and break it down for us in a way that makes it sound like it’s really not that daunting. I imagine it probably wasn’t once you broke it down.

Henry:
Yeah, no, the way I approached it is the way I’d probably advise someone who’s new to commercial real estate investing. I had a general interest in wanting to understand it better. And so the way I went about doing that was obviously on my own research, but I put intention around networking with people who already do it and are good at it. And so I was able to then create a friendship with someone who thrives in this space, and then we started looking for deals together. And then as deals would come across, we would analyze them, and then we would make… Just like in residential real estate, we would analyze the deal, we would figure out what we think the value is based on the income that it’s making, and then we would figure out what we think the value could be based on the income that it would be making if everything was at market rates and in good condition, and then we made our offer.
And when we made our offer, the financing worked almost the same as how it does when I buy my residential properties. The only difference was the evaluation was based on the money it brings in. And so we put the deal under contract, we went and looked at the property, we did an inspection on the property, it had an appraisal. And then we bought the property, we then met with the tenants, and we either are renewing leases at market rates or we are going to bring in new tenants at market rates. The only major differences between this deal and what I do in the residential space was these new leases are going to be on triple-net leases, which is not something we can get in residential, but it’s super sweet if we could. And then the evaluation and the value of it is based on the income that it brings in. Those are really the only two things that were different.
And so as I got into doing it, first of all, I partnered with somebody who’s an expert. So that way, when I do my analysis and when I looked at something, I could be looking at it through the wrong lens because I’ve never done it before. So I had that sounding board to bounce things off of. And then so I partnered with somebody, I brought value to the table, and then I learned along the way and I’m still learning. And what I’ve learned was that it’s not much different than the process I’ve been doing with residential minus a few things, but the values are higher and the income is higher. And so that’s what I would tell people. It’s daunting until you surround yourself with people who are doing it and then it just seems like the thing to do.

J:
Yeah. And I think you hit a couple really important things there. And Dave, I have not forgotten your main question and I will come back to it.

Dave:
Go on. You could ignore me. Don’t worry about that. Henry’s got more interesting things to say anyway.

J:
Yeah, but the way he described it is the same way you would describe buying a single-family rental. Basically, you have to find the deal, and then you have to underwrite the deal or analyze the deal and figure out, “Do the numbers work?” And then you have to figure out how to make the money part, the financing part work, and then you have to manage it on the back end. And so at the end of the day, these are the same steps we take, whether you’re buying a hundred-thousand-dollar single-family house or a hundred-million-dollar skyscraper. And so I just want people to start thinking from the perspective of yeah, the nuts and bolts change.
You need to learn how to underwrite different types of deals. Finding these deals are going to be completely different than finding single-family deals. And structuring the loans and the money you put in is going to be different. And then managing it on the back end is going to be different, but it’s the same four steps. It’s finding, underwriting, capital stacks or financing it, and then managing it. And so really, I would encourage everybody out there, don’t not think big. If you want to be doing single-family, that’s fantastic. I did single-family for 10 years. I love single-family, but don’t stay in single-family just because you’re scared to move out of it. If you want to stay in it, great, but don’t think you can’t do other things.
Now, getting back to your original question, Dave, do I think single-family is still a good asset class to be in? Absolutely. Here’s the thing, there’s more single-family houses out there than any amount of commercial real estate in the country. So opportunity is obviously larger. And here’s the other thing, real estate in general, single-family real estate in general is one of the best hedges against inflation on the planet. And we’re all concerned about inflation. I think we’re not going to see 7, 8, 9, 10% inflation like we have the last few months. But I think there’s a really good chance that over the next five or 10 years, we see inflation a little bit higher than it’s been the last 10 years. Last 10 years, it’s been under 2%. Most likely over the next 10 years, it’s probably going to average two and a half, 3%.
And so what is real estate… Why is real estate good when you see a lot of inflation around you? Well, number one, if you look over the last hundred years, real estate in general, single-family real estate in general in most places tends to track inflation in terms of home values. So we like to think over the last couple years, home values are going up 5, 10, 15, 20% a year. That normally doesn’t happen. But if inflation’s at three or 4%, home values are likely to go up at least three or 4% per year. Secondarily, the best part of real estate is you can get loans against it. You can get the bank to give you money and they’ll give you money at this low interest rate.
These days, it might be 6, 7, 7.5%, but still, you can refi it in a couple years if rates go down, but the best thing is your mortgage payment never changes. In 20 years when your income is doubled because of inflation and everything, all the money you’re making has gone up because of inflation, that mortgage payment’s going to be exactly the same. I mean, I know people that got loans on real estate 20, 25 years ago. They’re almost done paying it off and their mortgage payment is like three, four, $500 a month because they locked in debt 30 years ago when everything was so cheap. And when I say three, four, $500 a month, that sounds like little, but back then, that was a lot of money because we didn’t have 20 years of inflation.
So yeah, I love single-family real estate and there’s never going to be a bad… As long as we see inflation… And we’ve had inflation pretty much throughout this country’s history. As long as we have inflation, single-family real estate’s going to be a great place to be. And so obviously, you need to know how to underwrite your deals, you need to know how to analyze your deals and look at the numbers. And right now, you might want to be a little bit more conservative than you have been in the past, and you want to be more cognizant of the location that you’re buying. Buy in places where populations are growing, people are moving, employers are coming in, laws tend to be landlord friendly. As long as you’re focused on those things, you’re not going to make a mistake buying real estate that you’re going to hold for the next 10 or 20 years.

Dave:
I love what both of you’re saying because you’re reinforcing the idea that if you learn the principles and concepts behind analyzing deals, it applies to single-family rentals, it applies to multifamily, it applies to trailer parks, self-storage, office space. It’s almost like if someone wrote a book that taught you how to analyze those deals and to learn all those formulas, that that would be super helpful. So that’s me giving you a shameless plug for J and my book. We have two of them now. We’ll give you one more shameless plug. We won’t do more than three.

J:
But here’s the thing, it’s not just about the numbers and the formulas. It’s understanding that for any deal you do, you have to ask the right questions. And Dave and I came up with this idea back when we started writing the book a few years ago, that instead of just throwing a bunch of formulas out there and saying, “Here, learn the math,” basically, we decide to write a book to teach you how to think about how to do these investments. And we wrote a book that starts… Every chapter starts with a bunch of questions, “Here’s the questions you need to be asking for these types of investments and here’s how to answer them.”
And so it doesn’t just teach you to fill in the blanks or put numbers in a spreadsheet. It teaches you how to ask the right questions and be thinking about investments because I have investing situations every day that come up where I don’t know what formula to use. I can’t just stick the numbers in a formula because I don’t know a formula. I give an example in the book where I had this house that I was selling a couple years ago, and I listed it for sale and I got two really quick offers. And the first offer was full price, full list price, cash, close in two weeks.
The second offer was from another investor who really wanted the property, but he didn’t have the money because he had another deal that was closing, and he told me he was closing seven months from now. And basically, he said, “I’ll pay you. I’ll close on the property. I’ll buy your property today, but I can’t pay you for seven months. You’ll have to wait seven months. And I paid cash so I could do that, I could hold the note, I could do what’s called seller financing.” And he said, “I’ll pay you in seven months. I’ll buy it now, but I’ll pay you in seven months.” And he said, “I’ll pay you more than list price.”
And so I needed to figure out how much more do I need to be selling this property for in seven months so that it’s a better deal for me than selling it for full list price today? And so once I knew the right question to ask, and that was the question I needed to ask, “How much is a property going to be worth in seven months to me? Or how much do I need to sell a property for in seven months for it to be worth it not to get the money for seven months?” And once I realized that’s the question to ask, well, then I can figure out what formula or what concepts to use to plug the numbers in and figure out that number was.
And at the end of the day, this was a real deal I did. I went back to the guy. I figured out how much more I would need in seven months to make me actually get the same amount of money and then I bumped it up 10,000. I went to him and I said, “Here’s how much I need.” And he said, “Okay.” And I knew that I was actually getting a better deal waiting seven months for my money. And so again, that’s not something where I could just have said, “Okay, stick it into this formula and get an answer.” I need to understand the concepts behind, in this case, something called time value of money. If I wasn’t going to get my money for seven months, how much more do I need to get to make myself whole?

Dave:
Well, learning about the time value of money legitimately changed my life more than almost anything. Once you understand and can incorporate that concept into your everyday thinking, your spending, your investing, it’s really honestly life changing. Henry, I’m curious, are there any formulas, investing tricks, or concepts that you have come across in your career that have just opened your eyes that really changed your perspective on investing or money in general?

Henry:
Yeah, yeah. So for me, I’m mainly single and small multi. And so my whole business is based off of the 70% rule of thumb. For me, that’s my measuring stick to, “Is this even worth my time?” Because what it did was when I was first starting out, I would have to go look at every single house, and then you do the dance of, “Do they want retail? Do they not want retail?” And you waste a lot of time. Now, when you’re new, I actually encourage you to do that. The more houses you can walk into and evaluate and make offers on, the more experience you’re going to get. But as you close more deals, that time that you’re putting into that is better used on deals that are actually going to produce the income. And so I had to figure out a way to still evaluate property and scale, still make the amount of offers I need to make, but not have to physically go put myself inside of every property before I knew that.
And so I know everybody understands, or most people have a general understanding of what the 70% rule is, but understanding it and then putting it into practice in a way that’s going to benefit you financially are two different things. And so for me, everything gets run through that filter before I’ll even go put my time into looking at that property and making an offer. And I’m not saying that that rule is a hard and fast rule, but what I needed was something for me to say, “Hey, this is probably worth your time,” or, “This is less likely to be worth your time,” so that I could spend my time on the ones that fit better. And so for me, I evaluate everything through that lens. If I’m talking to a seller and I can get them to tell me what they want and it doesn’t seem like it’s going to fit at a 30% discount, then we don’t even waste the time. It directs the conversation that I have.

Dave:
Can you just quickly though explain to anyone who doesn’t know what the 70% rule of thumb is?

Henry:
Yeah, absolutely. So as an investor, if you’re going to make money on a property, typically either as a rental or make profit as a flip, it’s that you need to be buying a house at a 30% discount or buying it at 70% of its value minus the repairs that it’s going to take to fix that property. And when I started just running it through… And I mean, you get enough where you’re just running it through it in my head. But yeah, typically, if I’m talking to somebody and I know their house in that neighborhood is worth a hundred-thousand dollars, I get it, there’s no house worth a hundred thousand dollars. I can hear you all already.
But just for numbers’ sake, if I’m talking to somebody and I know that their house is probably worth a hundred-thousand dollars and they want 95 for it, then that’s a lead that is less important to me than one that’s worth a hundred and they’ve already said they’d entertain an offer of less than 70. And so it helps me prioritize where I’m going to go to first and then prioritize who I’m going to make offers to first.

Dave:
I love that. Yeah, it’s a great way. Yeah, just allows you… These kinds of rules of thumbs, these concepts allow you to scale your business a lot faster than you would when you’re running everything single deal through a calculator, treating every lead equally, spending a lot of time just in random houses. I felt really old when I bought a deal that I had been in twice. It had been in the market and sold and then I came back to it. And it’s because when I first started, I would go to every open house. I was like, “Whatever, whoever will show me a house, I will go,” but you quickly learn that that is not sustainable. Well, thank you both. We do have to start wrapping this up, but this has been super helpful. J, is there anything else you think our audience should know about investing in this current climate? Or any words of wisdom for people who are trying to get in right now?

Henry:
Yeah, I’m going to use… Anybody that’s listened to me speak more than two or three times has probably heard me say this, but for anybody out there that hasn’t heard it or that just needs the reinforcement, anybody out there that’s looking to get that first deal, I don’t believe there are any secrets in real estate. Go to BiggerPockets. It’s all out there. But if I had to pick that one idea that’s the closest to a secret in real estate, it’s this, I’ve met two types of real estate investors in my life. 95% of the people, of the real estate investors I meet have never ever done a deal. They want to do a deal, they’re trying to do a deal, they’re thinking about doing a deal, but they haven’t yet done a deal. That’s 95% of the investors I meet. The other 5% of investors I meet are people who have done three deals or five deals or 10 deals or 50 or a hundred deals.
There’s one type of investor I hardly ever meet, if ever, and that’s an investor who has done one deal. And there’s a reason for that. There’s a reason for that because if you can do one deal, if you do one deal, you’re going to do a second, and you’re going to do a third, and you’re going to do a fifth, and you’re going to do a 10th. It’s so hard to get that first deal. But anybody that does recognizes the second one becomes so much easier because all the pieces fall into place and the third one becomes so much easier after that, and the fifth one and the 10th one, they all get easier.
So if you’re one of those people that’s on zero deals right now, just remember if you can get to one deal, you will do 3, 5, 10, 50, a hundred deals. You just cannot stop until you get to that first deal. Don’t give up until you get to that first deal. And once you do, you’re going to realize, “Wow, this really isn’t that hard, and now I understand, and all the pieces have fallen in place, and everything’s going to get easier.” So for anybody out there that needs a little bit of motivation, don’t think about how hard it’s going to be to do 10 deals because it won’t be. It’s hard to do one deal. And as long as you don’t give up before you do that first deal, the rest of this business is easy.

Dave:
I love that. I’m feeling inspired now, J. That is good. I totally agree. That’s a good point. I don’t know anyone who’s been in the game, who did a deal five years ago and was like, “Eh, I had enough. I’m good.”

J:
Exactly.

Dave:
Well, J and Henry, thank you so much. Again, if you want to check out the book that J and I wrote together, it is available right now for pre-order. If you use the code, either JSCOTT or DAVE, you’ll get 10% off and a chance to win coaching calls with either J or myself. And hope you check it out. I think you’ll really like it. J, where can people connect with you if they want to do that?

J:
Yeah, absolutely. So anybody who wants to connect with me, go to www.connectwithjscott.com. And that’ll link you out to everything you need to know and also let you get in touch with me directly if you want to.

Dave:
And Henry, I know that everyone who has an Instagram account already follows you. Your Instagram is so, so popular, but if there’s three people out there who don’t know yet, where should people connect with you?

J:
Yeah, best place, Instagram. I’m @thehenrywashington on Instagram.

Dave:
All right. Thank you both for being here, and thank you everyone for listening. 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 Ascarza and Onyx Media, Copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets podcast, Show 672. If you chase cash flow, it takes a long time to build financial independence. You typically get a couple of hundred bucks per unit for every good deal that you buy. If we all live to be 900 years old, I think that would be a great reliable and steadfast strategy, but we don’t. You also have less control over building cash flow. You can’t automatically force cash flow in a property unless you convert it from a long-term into a short-term rental, you raise rents that were kept artificially low by the landlord before you. There’s a handful of situations where you can create more cash flow for your properties, but it’s not a lot. What’s going on everyone? This is David Greene here in Scottsdale, Arizona with the desert behind me, bringing you a show from the sanctuary that I bought with Rob.
I got a little retreat going on where I’m teaching people how to invest in real estate. We’re having a blast, and I get to make some content for you guys while we’re here. Now, this is a great time because I’ve got all this stuff on my head because I’ve been teaching people. You’ll notice my voice is a little bit hoarse. I’ve been doing a lot of talking and giving it everything I have all day long to give as much value as possible, and today is no exception. Today, we have a Seeing Greene episode where listeners like you submit questions, and I do my best to answer them in a way that will help them grow their wealth. It’s part of education knowledge, it’s part of motivation, and it’s part of giving you direction for what you can do to get from the place you are to the place you want to be.
Some of the topics that we cover today is, can you buy a house with someone else, and how much of the down payment are you allowed to contribute? Should you start flipping houses at 23 years old, and if so, what should you be learning? And one of my favorite topics, I had something great happen, what do I do with it? We have a listener who’s got a bunch of equity in a property that they bought, managed well, made good decisions on, and now they’re trying to figure out, should I keep this property? Should I refinance this property and reinvest the money or should I sell it? And if so, where should I put the money? I have a really fun time answering the question of what you should be looking at, and how you should be analyzing opportunity when you have a property with a lot of equity as well as opportunities to buy more property.
And again, I’m just going to say it, these rising interest rates are not a lot of fun, but they lead to a lot of fun because rising interest rates lead to decreased demand which leads to investors like us having a better shot at landing better deals. And in today’s show, I go into a good framework to operate by with understanding supply and demand and individual markets, how it affects them so you can pick the right one. If this all sounds crazy and cool and new to you, that means you haven’t read my book, Long-Distance Real Estate Investing, so I would encourage you even as a new investor to check that out because it talks about a lot of the principles of what you want to look for in a market as well as the systems that I use to buy properties everywhere. Today’s quick tip, get around people that are different than you, and more importantly, that think different than you.
If you get around people that think the same as you, you’re going to have the same life tomorrow that you have right now. Changes in life and improvements in life come from getting around people with a different mindset. You want to be around wealthier people, happier people, more honest people, fitter people, better overall quality of life people. You’ve got to get out of the areas that you’re comfortable. It will feel uncomfortable when you go do that, but it’s worth it. It feels uncomfortable every time you start working out again. Every job you ever took started uncomfortable when you first had it, but it usually made you more money than the job you had before and that is why you took it. So today’s quick tip is to get around people that are more successful in whatever way you can.
At the retreat today, I’m getting to learn a lot of new people that are getting to learn how I think, but you can do this on the BiggerPockets forums. You can do this at a local meetup. You can do this by just talking about BiggerPockets to other people that you come across in life and sharing it with them, and seeing if it resonates with them and possibly making a new friend. But just remember after you listen to this, if you leave thinking the same way that you thought before, you’re going to have the same life that you had before you listened to it. All right, let’s bring in our first question.

Brantly:
What’s up, David? My name is Brantly, I’m an investor and a real estate developer in Rexburg, Idaho. My question is hopefully simple, I’m going to break it down. So I’ve got a 16 unit apartment complex here in Rexburg, Idaho, a fantastic college town. It’s close to Yellowstone National Park, so that brings traffic this way as well. I’m trying to figure out if I should hold it or if I should sell it or refinance it. So we bought it from 1.5 million. It’s roughly worth 2.7, I would say, so I’ve got about 1.2 million in equity which based on the cash flow, it’s bringing in a measly 3% return on equity which I know is pretty low.
So I’m trying to figure out if A, I should just be grateful for what I have, that I hit the jackpot on it. B, refinance, but I’m worried about interest rates, and I’m worried that I would be in negative cash flow if I did that. Or C, sell it and then redeploy the money. I’m confident in my ability to find other options for it and to find more equity, more cash flow with redeploying that money, so help me out here. I love the show. Keep up the great work. Thanks, David.

David:
Hey there, Brantly. First off, I want to commend you for knowing the terms on return on investment and return on equity, and looking at your investment from a financial perspective. That’s exactly what you should be doing. Now, let’s talk about whether you should hold it or whether you should sell it. There’s actually a method that goes into this that you can use. The first question you want to ask is, do I want to hold this property? Is this something that I would want to keep? Because there’s something about it you really like, some reason to think that some new industry is going to be moving in soon, and you’re going to make more money, something like that because not every property is a property you want to hold for a long time. Now, here’s what gets in the way. A lot of the time we get emotionally attached to our properties, they start to feel like our children.
You’ve poured time into them, you’ve literally invested into them, you’ve thought about them, you’ve worried about them, you’ve solved their problems, and you’re like, “This is my baby. I don’t want to let it go,” but that’s not a good habit to get into. You can’t look at properties as your baby. They’re not people. Properties exist to serve you, and if this property isn’t serving you, it’s okay to let it go. Now, the question you have to answer is, “Should I refinance it and redeploy or should I sell and redeploy?” Here’s a few things that I like to tell people when they’re faced with this problem. I’ve already mentioned the first one, “Do I want to keep the property? Do I really like it? Is it an area that I think that there is more value that’s going to come to this property?” The second thing is, “What are my options elsewhere? Can I get an ROI and another property? Are there deals to be had?”
Now, in today’s market, we’ve got some better deals than I’ve ever seen in a very, very long time. I like buying in this market. So that’s something that I’m optimistic about, and I think you should be too. The next piece is, “Can I break my emotional connection with this property and sell it?” Now, if you’re only getting a 3% return on your equity, it should not be hard to beat that with more properties. And you also mentioned that you bought this property with partners, so you’re going to have to get their input on this as well. What I remember you saying about the area and the property itself is that it’s in a college town of Colorado where you’ve got people visiting a national park. So a third option you could look into is moving it from a long-term rental into possibly a short or a midterm rental and you can increase your revenue that way as well, basically finding the highest and best use for that property to increase your revenue.
If you really like Rexly, Colorado, it would be okay to hold it and refinance it and redeploy the money, but you’ve got to talk to your partners first. This isn’t a market that I would say, definitely sell. There are some markets where I say, definitely sell if the population isn’t growing very quickly, if industry is not moving into that area, if there isn’t a very clear and well defined path to appreciation in holding that asset, sell it let another new investor get in and take that over and move into a higher echelon of investing where the stakes are higher, but that’s okay because your skills are higher as well. If you feel like that market is slow and not growing, I would say move your money. The Southeast is growing rapidly as the population moves into that area.
Certain areas like Idaho, Arizona, Florida, Tennessee and Texas are exploding right now. As people move there, they need places to live. You seem like a pretty smart guy, so I would recommend that you look into where businesses are moving, try to get ahead of a very big plant, and then provide housing to the workers. That would be the advice I’d give you if you’re going to sell and move it somewhere else. If you end up keeping it, I don’t think that’s a bad area. I don’t really think you can go wrong either way. And congratulations on getting this asset that has over a million dollars in equity. That is fantastic, and I love you sharing this with the BiggerPockets community. Thanks for your question. Let us know what you decide.
All right, our next question comes from Mike Higgins. “I’ve got a good problem. I openly share my lessons learned and financials with all who ask, and this has sparked a lot of interest from friends and family and a willingness to become an investor, but not an equity partner. I’ve already identified an off market property with two duplexes on the same plot of land in the vicinity of my last duplex. Therefore, I am confident in my financial analysis forecast. My goal is to invest in this property using only private money funding. You should know I have listened to recent podcasts with Amy Missouri, and it was helpful. So what’s my problem? I need help understanding and explaining the best practice in the flow of funds that go from an investor’s account to an escrow account to using the money to buy the property. Where do the investors send the money or what type of account? Is this account part of an LLC or another type of entity? How is the account managed or controlled in such a way to ensure investors feel safe that the money is secure?”
All right, Mike, I don’t do a ton of this because as a lot of people know, I don’t partner on a lot of deals, but I have done it a few times, so let me take my best stab at answering that question. I’m going to give a caveat out here. There’s probably some people listening who could even give you better advice than me because they have done this. So this is a great question to go to the BiggerPockets forums and ask there because I bet you there’s a lot of people with more experience than even me when it comes to borrowing money and then deploying it in the right way. If you’re doing a partnership where there’s equity involved, you would typically have an LLC created or some form of legal entity, and every partner would have a percentage ownership of that entity. So if you’re 50/50 partners, you create a legal entity, you make yourself 50/50 partners of that, if there’s three of you, maybe you go 33 and a third for every person.
Or maybe there’s one partner who’s bringing in less money than the others, so they get 20% and the other two split the other 40%. But it’s easy to split ownership of an LLC, it’s a little more difficult to do it of the actual property which is why people tend to create a LLC, and then own the property in the name of that LLC when they’re going to be equity partners. But you said something different, you said you don’t want equity partners. So if your friends and family are willing to become partners with you but they want to be debt partners, now what you’re talking is them letting you borrow money and you pay them interest on that, and their investment is secured by the property that you’re going to buy. So what they’re going to be worried about is, “If I let this person borrow my money, if I give it to Mike, how am I going to make sure that I could get it back if something goes wrong?”
So what you want to do is have a title company at a lien to the property with their information attached to it so that if they don’t get paid back, they would technically be able to foreclose on you to get that money back. This can all be written up by an attorney. You just have someone draw up a legal document that says, “This person is letting me borrow this much money at this interest, amortized this way over this period of time, and they will have a lien on the property.” Any title company around if you tell them you want to do this will know exactly what to do. It’s not very tricky. This is another case of people that say, “I have to understand everything about what I’m trying to do before I go do it.” Now, you’ve just got to ask the right people to be involved that will tell you how to go through this process.
You can set it up so that you have a bank account attached to an entity that you already own that’s going to own the property or the duplexes that you’re buying, and then have them send you the money into that account. But again, their biggest concern is going to be making sure that a lien is put on the property with their name on it so that if they don’t get paid back, they can get access to that property to sell it to get their money back. It’s the lien on the property that the investors have that lets them know that their investment is secure, not necessarily the type of account they put their money into or if you have an escrow account set up.
Technically, their money doesn’t have to go into the actual escrow and into the deal. You could get their money sent somewhere else to you, have that money and then close the deal with your own money. If they’re letting you borrow 50,000, it doesn’t really matter if you put your 50,000 in, and then reimburse yourself with their 50,000 or if you use their 50,000 to close on the deal. What does matter is that they get a lien against the property, and you have a title company, and likely an attorney draw up the documents that spells out the terms of the loan. Thank you for the question, and I hope it goes well with those duplexes.

Al:
Hey, David. I hope all is going well. My question to you is centered around investing in this high interest rate market that we’re in. A little context about myself, I’m single. I live in the New York City Triplex here in The Bronx with my father. I work a W-2. My father is retired. The property that we live in was purchased in around 2006, 2007 for 650, and it’s since then appreciated to 1.1 mill. The house cash flows, we live in it, all expenses paid, big advantage.
As a result of this advantage, I’ve been able to accumulate a down payment over the number of years hoping to find another property, another gem like this one down the line, but due to high interest rates and home price is not really dropping, I believe I’ve been priced out. So I’ve been looking at cash flow markets like the Midwest or upstate New York. I’m thinking of potentially buying in cash. The thing is I would love to add leverage to my portfolio, but I don’t want to run the risk of over leveraging myself due to these high interest rates. So I guess, my question to you is, if you were starting out, and you had around a quarter million, how would you invest it in this market? Look forward to hearing your answer. Thanks.

David:
Okay, Al. Here’s where I’m going to challenge you. I heard you say, how would you go about investing in this current high interest rate market for investment properties that typically require 25% down? And you say this would rule out house hacking because you care for your father. Few things, I don’t know if you’re looking at it the wrong way, but I just want to challenge you and let everybody else here because I think the questions that we ask determine the result that we get. By the way, I bet Brandon Turner himself would love what I just said right there. You said, “How would I go investing in this high interest rate market?” I’m reading that as you are implying that it sucks that rates are high, but I’ve got to say, I’m having more fun investing than I ever have in my entire career. This has been a blast for me, and the only thing that changed that made it possible for me to do this is the higher interest rates.
I want to take a quick minute to explain how interest rates affect real estate because many people think they know, but they don’t really know. Conventional wisdom or maybe common knowledge I would say, suggests that as rates go up, prices go down as there is this inverse relationship between rates and values, and that is true, but kind of. While there is an inverse relationship, it’s not directly connected. There are situations where rates can go up, but prices don’t go down, and that happens when supply and demand are off. I think a better way to look at it is that interest rates affect demand. The higher rate goes, the lower demand goes. You can see a direct relationship between the two and it is inverse. Rates go up, demand goes down, rates go down, demand goes up, and that’s because when rates go down, the house becomes more affordable, so of course, you wanted it more, and when rates go up, the opposite happens.
Now, let’s talk about supply and demand. If they are even when rates go up and demand goes down, you would theoretically have more supply than demand. You would have to reduce the price of that supply which would increase the demand for the asset, and then they would come even again. But in many markets throughout the country, we don’t have even supply and demand. We have not enough supply and way too much demand, and even though rates are going up and it’s pushing demand down, it’s not getting all the way down to where supply is. Other markets in the country, we had too much supply even further demand that was there, and so in those markets we didn’t see prices going up anyways. In this current high interest rate market, a better way to look at it is that there is less demand, meaning you have less competition for the same assets.
Now, in an environment like that, my advice is you buy the best assets. If you could go get it and there’s less competition, but we don’t really know, what if prices come down even more because rates could go up even higher. Well, to hedge your bet against the market going down, get into the better neighborhoods, get into the better assets, get into the stuff that you never could have bought before because someone was going to snatch it up right away. I’m not a old man, but I’ve been around the game for a little bit now, and I’ve seen a couple different market cycles, and here’s something I remember from the last nasty one. In 2010 when prices crashed, they did not crash evenly across the board. The best neighborhoods, the best cities, the best real estate had a little bit of a dip. It didn’t collapse.
The worst areas, the déclassé neighborhoods, the places where there wasn’t natural demand, a demand was kind of artificial based on the market, those areas were decimated. If you’re from Northern California like me, think about Stockton, California. It got hammered. Now, think about Walnut Creek, California, needle barely moved. So whatever your market is, understand that when the market could drop more, you actually want to get into the better homes which are typically higher price but they’re safe. After our market is crashed, that’s when I would go invest into some of these other areas that aren’t as desirable because they’ve got nowhere to go but up. So it’s the first piece of advice I’m going to give you. We don’t know what’s happening in today’s market. We don’t know if rates will keep going up, and therefore prices could keep going down, but demand will keep going down if that happens, so buy better assets.
What do I mean by better? It doesn’t just mean they are more expensive, but often they are more expensive. It means better locations, better schools, better amenities, better views, better neighborhoods, bigger lots, pools, better floor plans, better constructed homes. We’re talking about this stuff that people that have money would prefer to buy, not the stuff that’s entry level that someone who doesn’t have as much money just has to accept. The next thing I’m going to say, your broker told you that you got to put 25% down, but caring for your father shouldn’t automatically mean that’s true. There might be more to the story than what I’m reading here, but I would advise you to talk to a different broker and say, “I want to live in this investment property. My father’s going to live with me as I care for him,” but I don’t think that will automatically disqualify you from getting a primary residence loan.
And if you’re worried about putting 25% down, find a place that you can live in that you can also rent out which would be house hacking. Do that for a year or the period of time that you can, and then move out, let a tenant move in, and repeat this again. You can go from butting down 25% to somewhere in the five to 10% range depending on the type of property that you buy. You want financial independence, here’s my personal advice. If you chase cash flow, it takes a long time to build financial independence. You typically get a couple of hundred bucks per unit for every good deal that you buy. If we all live to be 900 years old, I think that would be a great reliable and steadfast strategy, but we don’t. You also have less control over building cash flow. You can’t automatically force cash flow in a property unless you convert it from a long-term into a short-term rental, you raise rents that were kept artificially low by the landlord before you.
There’s a handful of situations where you can create more cash flow for your properties, but it’s not a lot. What you do have a lot of control over is creating equity. You can buy equity, you can build equity, you can force equity by improving a property. You can get into the right market where appreciation is more likely to happen, and oftentimes with appreciating values comes what? Appreciating rents. That’s another way that you put the odds in your favor to grow more cash flow. So don’t just think about getting cash flow right off the bat, especially if you’re going to stick all your money into one deal and it’s hard to get it out. Think about how you can improve the value of the property that will result in equity being created. Think about how you can buy in the best markets where people and business are moving to. That will result in equity growing over time.
Once you’ve done this several times over several properties successfully, you can move that equity into a higher cash flowing asset. You can literally house hack putting five to 10% down on several different properties, 1031 all of them into one commercial property that gets really good cash flow, and get a commercial loan and then go back to buying properties the house hacking way, and just keep turning these little green houses into big red hotels over time. Last piece I’m going to leave you with is, just remember these higher interest rates have made it possible to get some of the best assets and define the more motivated sellers. You never found them before because as soon as our house hit the market, somebody else snatched it up because there was 10 people trying to get it. Be grateful for the fact that we’re in market where rates have gone higher, demand has gone down, and we can actually get some real estate and just be extra careful about how you run your numbers. Thanks, Al, and good luck to you.
All right, thank you everyone for submitting these questions so far. At this stage in the show, I’m going to read you the comments from YouTube, and I would love it if you would leave me a comment on YouTube as well. Tell me what you liked about the show. Tell me what your questions are. Let me know what you thought was funny. Tell me what you want to see more of, if you haven’t noticed I’ve got the desert behind me. I’m out here in Scottsdale at the sanctuary that Rob and I bought, putting on an event and recording the Seeing Greene for you guys. Do you like it when I’m on location to different places? Do you want me to post more videos of where I am? Would you like to see these recordings with different backgrounds and different spots? Tell me what you think would make the show cooler, and we will do our best to put it in there.
By the way, make sure you give a shout out to Eric Knutson at BiggerPockets, who got me a brand new microphone while I’m out recording because I think I sound fantastic. All right, our first comment comes from Assassin Dude, “Yes, to Deal Deep Dive episodes. It would be great to have them as a recurring episode type. I find it very educating to walk through real examples.” Do you know Assassin Dude, also known as AD in the streets? We’ve been toying with this idea of having me walk through properties, some that I’m buying, some that I don’t buy, and then making episodes of why I liked it, why I didn’t like it, what I looked at, what made me chase it or what didn’t. If enough other people come on YouTube and they say, “Yeah, we want to see an episode where David’s walking through a property, we can see the deal and then he can break down what he liked or didn’t like about it,” I’ll make sure we do more of those.
Next question comes from Inzora 100, “Deal Deep Dive for sure, 1031 as well. I sold the property for a $98,000 profit. I’m looking for the strategy to best leverage that and reduce tax liability.” Well, Inzora, you should go to BiggerPockets.com/david, and submit the information about this so that I can give you advice on how you can reduce that tax liability and increase the cash flow as well as your future upside on that property and build some wealth my man.
And our last comment comes from Benjamin Pape, “Thank you so much for taking my question, David. You earned me some bragging rights at work.” I love that man. Everybody at your job should see you featured on the BiggerPockets podcasts if you are a loyal listener and you’re listening to this right now. At your local meetup, you should be able to show the clip of you talking to me, asking a great question and getting it answered. How can you do that? You go to BiggerPockets.com/david and submit your question there as well as commenting on the YouTube page so that I can read your comment on one of these shows, and you can get bragging rights that way as well. All right, let’s take another video question.

Jace:
Hey, David. My question for you is around co-balling. I invest in the Salt Lake City market and have three rentals. My wife doesn’t really want to move a fourth time to get the fourth rental, and that means we’d need to put 20% down which is currently out of reach. However, I have a younger brother who I could co-invest with and he could move into the property for one year, so we’d only need to put 5% down. And here in Salt Lake City there’s a lot of properties with basement rental potential, and that’s what I’ve done with the previous ones is living in the upstairs while renting out the basement.
So if he could live upstairs for one year and rent out the basement, then he could pay for his portion of the mortgage and then get the remainder to pay towards the mortgage from the tenant below, and then after the first year he could move out. My first question is do you see any lenders having a problem with this, if I’ve provided almost all of the 5% down payment while my brother lives in it? And my second question is how do you recommend structuring the ownership split between my brother and I? I would provide the down payment. He would cover his portion of the mortgage, and we’d split the cost of the repairs. Thanks for all you do.

David:
All right, Jace. I like how you’re thinking here. You’re not asking the question of should I do it or should I not do it? You’re asking the question of how can I do it? And your questions are leading you down a good path. Now, let’s talk a little bit about what some of your options are. What I hear you saying is that you can’t buy a house because your wife isn’t on board with you moving your primary, so you’d have to put 25% down to get an investment property, but your brother is willing to buy a primary residence, and you’re trying to think about how you can use him to get the house. If your brother’s the one buying the house, and he’s the one getting the loan in his name, this could work. You could have yourself added to title after it closes. In most cases, that would probably be fine.
The problem is that you’re wanting to provide the down payment, but you want your brother to buy the house, and here’s how the lending standards are probably going to go down. They need the down payment from the person who’s getting approved for the loan, so if your brother can’t get approved for that loan or you wanted to be the person on the loan, this isn’t going to work. Now, one possible thing that you could do is you could have your brother buy the house in his name, and then you could gift him the down payment, but I don’t know if you can gift an entire down payment. I’d have to have one of the guys on my team look into what the guidelines are for that, and if you can get a full down payment gifted from somebody else. If you can’t, your brother’s going to have to have some of that money himself.
What you’re talking about is tricky because it sounds like what you’re saying is you want your brother to buy a house but with your money. Now, you’re correct in seeing that each person needs to contribute something to this deal, but where you’re wrong is when you’re thinking about borrowing money from a lender, and then having your brother be the person who is on the loan, meaning he was approved to make these payments, but you giving the money for the deal. That’s going to be very tricky to work, and on a primary residence it probably won’t go down the way you’re describing, so can we get your brother to get approved for a loan himself? You should reach out to us and see if that could work. Or if you’ve got a broker you’re working with, reach out to them. Assuming you can figure out a way to get the house, let’s talk about your strategy of if you’re going to split the mortgage with him because he’s basically paying rent to live there and split the expenses.
Your brother’s not bringing much to this deal other than the possibility to get the loan. Cutting him on the equity just because he’s paying rent which is the same rent that somebody else would be paying if they live there doesn’t really benefit you financially, and splitting the expenses with him could benefit you financially because a tenant’s not going to do that with you, but I don’t know that it’s as big enough benefit to be worth it. It sounds like you’re trying to get around the 25% down to buy an investment property. My advice to you, and I’m not in your position, is to try to find a property that your wife does not mind moving into. Not every house hack has to be a rent out the rooms to people you don’t know situation.
Can you get a nice house that has a basement and an ADU and you can rent out those, and you can live in the main house, and your wife never has to see the tenants or share a living space with them? Could you guys live in the basement and rent out the ADU and the main house? Same thing, you have your own living quarters. You’re probably going to have an easier time trying to get her on board with what you’re trying to do than to get your brother to buy a house with money that you give him. If your brother can get qualified for the loan, that would work. If your mom or dad can get qualified for the loan, that could work. Or if you could find another partner that could do this, that could work. The thing is the loan’s going to be in their name, and you’re going to have to get added to the title afterwards, that if you could make it work that way, I think this could be a strategy that could work. Thank you for your question.
All right, our next question comes from Dane in Omaha, “When we do a BRRRR, and you start the refinance process, we always use 20 to 25 year commercial loans which are a five year adjustable rate mortgage with an 80% loan to value.” Okay, so first off, what Dane is saying here is, when he does a BRRRR he gets a five year adjustable rate mortgage, meaning for five years that he has the loan, the interest rate is the same for all five years, then it can actually increase at that point, and usually by a certain amount every year, and then the 80% LTV means he’s having to put 20% down on the property. “I see a lot of people talking about DSCR loans. Do you have an opinion on which product is more appropriate, time and place for both?” Thank you for that, Dane.
Not only do I have an opinion, I think we do better DSCR loans than anybody in the country. We do a ton of them, so I know a lot about these. Here’s what’s cool about a DSCR loan. I know it’s confusing, and people are talking about it like it’s this crazy cool strategy. It’s really not. It’s very boring. A DSCR loan is just a way of saying we’ve always valued commercial real estate by the income it provides. So when I’ve gone to buy commercial real estate, the bank doesn’t even ask, “Well, David, how much money do you make? How many expenses do you have?” All they say is, “How much money does the property make, and how much expenses does the property have? Because once we know that, we can figure out the NOI, and when we know the NOI, we know what the property’s worth, and then we can determine if we’re going to give you a loan to buy it.”
You see, when you’re buying a commercial property, the bank just wants you to be the operator. They’re not lending the money based on your ability to make or save money. It’s a more financially sound underwriting process which is why they use it for big buildings. Nobody goes and buys a 400 unit apartment complex for $30 million and gets approved based on their ability to repay that loan. There’s not a whole lot of humans in the world that can repay a loan of $30 million based on their own personal debt to income ratio. The DSCR product is just taking the commercial underwriting of what does the property make and applying it to residential real estate because we are using it as a business, we are using it as an investment. We are intending for that property to earn income, so it makes sense that the person giving us the loan will look at the deal the same way.
The cool thing about the DSCR loans that we do is that they are still a 30 year fixed rate term. You don’t have to worry about this adjustable rate mortgage that typically comes with commercial property. You don’t have to worry about inflation taking your interest rate and making it skyrocket, and if you happen to not be operating the property well, your cash flow can get diminished. They’re actually safer than the commercial option, and that’s why I like them more. Time and a place for both, only if you think it’s better to get an adjustable rate mortgage. If you don’t love the adjustable rate mortgage which, in general I try to avoid it unless it’s clearly way better, I’d go with the DSCR loan at the 30 year fixed rate so that you can lock things in and you can always refinance it if rates do come down in the future.
Question six comes from Christian in Chicago, “As I am 23, I only invested in stocks currently, and looking for which property to buy. What is a good amount to have in cash for me to be able to flip a home? I keep seeing many people talk about creating a business structure to flip homes. Is that a good route to take? I’m also open to other tips as I’m going to be a new home investor.” All right, Christian, let’s break this down a little bit. I appreciate you reaching out. You’re asking some good questions, but there’s a lot of questions you’re not asking, and I’m going to focus on those in this answer. It’s not just about how much cash you need to have on hand to flip a home. It’s much more about how familiar you are with the market you’re flipping the home in, and how well you can manage the operation of said home flip.
There’s two things that destroy most home flippers, and ironically that the same things that hurt most BRRRR deals. The first is that the value that you intended to sell the home for goes down, either you misestimated what it would be or the market shifted on you during the renovation. The second is that the construction gets out of hand. If your contractor rips you off, if there’s more wrong with the house than you thought, if there was a bait and switch where they told you what it would cost, and then they came back and asked for more. If they’re not experienced, if their crew quits in the middle of the job or if they’re just lazy, the whole thing can balloon out of hand, and you can put a lot more money into that deal than what you originally expected. So flipping houses is something that I would typically recommend for someone that has experience, knowledge or a background in construction.
Now, after you’ve invested in real estate for a while, you will gain those things, and then house flipping becomes a more viable option. But for you at 23 just getting started, it’s very difficult to acquire those resources that I just described, and learn how to flip at the same time and try not to lose all your money. I don’t know you, so I can’t deter you from doing this, but I can say what it sounds like as this is a very risky endeavor. Now, I would ask the question, “Well, why do you want to flip homes as a 23 year old who’s never invested in real estate and only invested in stocks?” Probably because you’re thinking you don’t have that much cash, and you heard people say, “If you don’t have money, go flip houses and you can make it. If you don’t have money, go wholesale and you can make it.”
And I’m going to be blunt with you, frankly, I think that’s bad advice. It’s just easy to tell a person that doesn’t have money, “Well, go use these strategies of real estate investing and you can make money with them because they’re not long-term investment strategies. They’re short-term income producing activities.” On paper, that’s true. The problem is they’re also part of the riskiest and some of the hardest ways to make money in real estate. It’s much easier to buy a property, wait a long time and it’s going to go up in value if you wait long enough, the cash flow’s going to go up, and it’s hard to lose. That’s why I typically encourage everyone to buy more properties like house hacking, a great way to build yourself equity over a three to a five year period of time. Get some capital that will supercharge your business much less risky, which is why I tell people to go do it.
Flipping houses, very risky. I flip houses, and still at times I get caught off guard by stuff that I just didn’t think could have gone wrong including the price of materials going up or my contractor having issues in their personal life, stopping how well the deal gets put together. You can have neighbors in the city complain about it, and that can slow everything down, and it can take four to six months of extra time to get things done where you’re holding costs which could be anywhere between two to $10,000 on most deals, accumulate every single month. I don’t want to make this all about horror stories, but I do want to say, if you don’t have very much money and you don’t know much about real estate, stop looking at flipping and wholesaling as the best way to go. And every wholesaler and flipper listening to this is giving me an amen and a hallelujah to what I’m saying because they know just how hard it is to do what they do.
Here’s my advice, if I’m right and you don’t have a ton of knowledge about real estate investing, and you don’t have a ton of money saved up. First off, ask yourself the tough question of why you don’t have a lot of money. You are 23 years old, you haven’t given yourself very much time to be able to save money. You probably don’t make great money at the job you have. Those are two things that you can change by continuing to save money over time, and by continuing to focus on making more money, by bringing more value to your employer or to a different employer, you can actually start to accumulate more capital. While you’re doing that, you can buy properties that accumulate capital for you. That would be house hacking. This is where you buy a house with anywhere from three and a half to five to 10% down in a gray area.
You find something under market value that you can rent out to other people. You earn some cash flow from the rents that you get from them as well as the value of your property increasing. Once you’ve built up equity, you can move that equity out of the home and into your bank account and then go invest it. If you really think about it, capital is what we call value when it’s in your bank account, and equity is what we call value when it’s in a property, but you can move them back and forth. Now, I did not mean to crush your dreams there. What I really wanted to do is set some more reasonable expectations because I’m trying to figure out from your question what might be going through your head. I’m assuming that you’re hearing a lot of people saying the stuff that I said. You’re interested in real estate investing, and you keep hearing people say, “It’s a great investment opportunity, you’ve got to get into it.”
In many cases they’re right, but there’s different ways of doing this. Flipping is a short return that is very risky and takes a lot of work. Buying a primary residence and house hacking it and waiting for a long period of time is delayed gratification, a long-term requires less work and is also much safer, so I’d like to see you start with the safer route before you get into the more risky stuff. Now, nothing says you should stop learning about flipping while you follow my advice. So here’s some information that I could give you where you can increase your knowledge so that the podcaster that you’re hearing like this, and the mentors that you are out there finding will be giving you information that makes more sense. I’ve written some books that you should check out, reading The BRRRR book would probably be one of the better ones because it’s like flipping, but instead of selling the house at the end, you keep it, put renters in it, and let it build equity for you over time.
So that book is called Buy, Rehab, Rent, Refinance, Repeat. If you just search BRRRR David Greene, you can find that one. Also, BP has some really cool personalities that do this for a living that you can learn from, two of the greats are James Dainard and Terrell Yaba. Both of them are in the Seattle area where there are high price points, and they can make a great profit flipping. And there’s also many others on the BiggerPockets forums where you can go and find local Chicago meetups or meet other local Chicago flippers and learn from them. I appreciate you saying that you’re open to other tips as you are a new home investor, I would highly recommend learning about house hacking. I wrote a couple of articles for Forbes talking about it. If you just type in house hacking into the BiggerPockets forums, there is a ton of information.
I tell people all the time, you’ve got to be doing this. I wrote a book called Long-Distance Real Estate Investing about buying properties in other states. I wrote a book called The BRRRR Strategy which is about buying properties, fixing them up and getting your money back out. Even though I’m a huge proponent for both of those, I’m an even bigger proponent for house hacking. Every single person should be buying one house a year for themselves as a primary residence as a house hack, and then anything else you do like long-distance investing or the BRRRR strategy should be in addition to house hacking in the best location you can possibly get in. Last piece of advice, if you really want to flip, here’s a great way you can get into it with training wheels. Find a fixer upper property that’s really ugly and been sitting on the market a long time.
Buy it as a primary residence with a low down payment, move into it and house hack it. Either fix it up yourself or pay a contractor to come fix the house up while you live there. You get all the benefits of a flip, we call this a live and flip, without the risk of trying to get it done while you’re holding costs are super high. Sell that house or rent it out, repeat. The next thing next year you can go a little bit bigger and a little bit better, and grow your wealth safely, slowly, but in a fun way that’s sure to be rewarding for you over the long-term.

Matthew:
David, you have more analogies than Jim Carey has faces Green. Thank you so much for taking my question. David, it’s a simple question which is, I’m trying to set a 10 vision for my real estate portfolio, and to a degree, even just a 10 year vision for my life. But how do I make sure that I’m setting goals that are large enough? I’m afraid that because I’m shortsighted and can’t see 10 years into the future that I might be setting goals that are too small, and thus I might be chasing the wrong goals. Can you help me have better goals? I appreciate you, David.

David:
All right, Matthew Vanhorn. You know we have a Dave Vanhorn in the BiggerPockets community. He’s an awesome guy. I love talking to Dave Every chance I get. Super smart, very humble, and always giving back. So guys, go check out Dave Vanhorn, and send him a message saying that David Greene says he’s awesome. I’m sure he’d appreciate it. He is the note expert in this space. I’m wondering if you might be related to him and don’t know him, Matthew. All right, the question of, am I setting too big or too small of a goal? I like it. You’re asking a good question. Here’s the problem with the question, you’ll probably never be able to answer it. A lot of people hear this, and they hear someone say, set bigger goals, and they make a vision board, and they put a jet on there, and they say, “I want to have a private jet.”
And then they get a bunch of sports cars and they say, “I don’t want one Ferrari, I want 10 Ferraris, one in every color.” And then they get the biggest house that they can possibly find, and they put on the vision board and they go, “You know what? I actually need two of those houses.” And it goes on and on like this where they just say, “If I set my goal big enough, it’s just going to happen,” and goals do not just happen. The universe does not just bring you things and hand them to you. What happens when you set a goal is, your subconscious hears you say it and goes, “Oh, that’s what Matthew wants. Let me figure out a way to make that happen.” Now, oftentimes the goals we’re setting in our subconscious are actually more negative and fear based. So the goal would be, “Don’t look dumb, don’t lose money, don’t do something that I’m uncomfortable with.”
And your subconscious here’s that and says, “Oh, you would be really uncomfortable going to that meetup and learning from that person. Let’s not go today. Let’s watch Dancing with the Stars instead. Oh, you could lose money on that deal that you’re thinking about right now. We don’t want to lose money. Let’s find a reason to look at that deal and say it doesn’t qualify,” and on and on. Your subconscious listens to what you’re telling it and then does its job of making that happen. If you’ve ever said, I want to go work out, but secretly what you were thinking is, “I don’t want to get hurt at the gym,” or, “I don’t want to go to the gym and look stupid.” Your subconscious heard that, and when it’s time to go to the gym it goes, “You know what? Why don’t you eat a bowl of ice cream instead, you’ll feel just as good.”
Creating goals like you’re talking about, is just a way for you to program your subconscious, and if you program it to go by yachts and sports cars and private jets and these big goals, they’re probably never going to happen because you don’t have the means to actually get there. So here’s what I’m getting at, set a goal for yourself that is reasonable, that you can attain, and get comfortable with the fact that goals will always change. Very few people know when they start the journey what they’re going to want in the end. You can have some of the wealthiest, most successful, amazing people that set huge goals and hit them, and then their goal changes. They go from, “I want to make a billion dollars, I want to give to charity and help the most people. I want to influence the most people.”
Tony Robbins has a big goal of wanting to feed, I don’t know what it is, just tons and tons of people for Thanksgiving. He didn’t have that goal, I don’t think when he first started. If he did, it wasn’t the focus of his business. He had to go make money and learn how to be good at what he did. So here’s a couple of goals I think you should set for yourself, pursue excellence. In fact, I’ve started saying pursue excellence, not cash flow because cash flow will be the result of excellent work. As a real estate investor, if you become excellent at anything you do, money is going to follow you, and here’s how I know this. Think about what you want when you go somewhere. There’s a difference in the experience if you go to Jack in the Box versus Chick-fil-A. Why is that? Well, Chick-fil-A set a culture of excellence that they want everyone to follow. They are constantly raising the bar and raising the standard of what they want from people, and we have a better experience when we go to a Chick-fil-A.
Imagine, you go talk to a CPA and you say, “Hey, give me some strategies to save money using real estate on my taxes,” and they haven’t set a standard of excellence for themselves. Well, they probably give you some run around or tell you why it won’t work or it can’t work, and then bill you for that conversation. And every one of us who’s sitting here knows exactly what those conversations are like. Don’t get mad at a CPA. Don’t get mad at that individual person. Don’t get mad at the tax code. Get mad at the concept of shirking excellence because what you really want is a CPA who is chasing excellence, and as a result of that can help you, as a result of helping you, you make more money, as a result of you making more money they get paid more, and everybody wins.
This is what excellence does, is it raises everyone’s standard of living up, and my opinion is there’s not enough people that are chasing excellence. So if you’d say to yourself, “Well, I want to buy one house a year. What if I’d set the goal to buy two, I could have bought more.” It just isn’t realistic because it doesn’t work out like that. Set yourself the goal of, I’m going to buy as many properties as I can do safely. That could be one that could be 10, you don’t know. It could start off as one, and you start going to meetups, and then you meet an agent, and then that agent has a good contractor, and then that contractor has a good lender. And the next thing you know, you’ve got an awesome Core 4, and you’re so good at doing what you’re doing that you go, “Holy cow, I could scale.”
And then you go to that same meetup and start raising money, and within two years you’re buying a ton of properties. There’s no way that you could have known that was going to happen when you set your goal. And another circumstance you might go to the same meetup and not meet anybody there, and have to go to a different one and a different one and a different one until finally you meet those people, and that can be two and a half years of time. If you’re chasing excellence, it doesn’t matter. So here’s my personal philosophy, and this is going to be in a book that I’m going to be writing for BiggerPockets if God willing, I’m able to get it written. There’s three things you focus on to building wealth, and therefore your goal should be centered around these three things. Number one, is saving money. You want to live frugally, you want to live responsibly.
You don’t want lifestyle creep to cut into your life. So if you start making money, now you start spending money, you make more money, you spend more money, you’re always doing better as far as what you’re making, but you never actually get ahead because getting ahead is a difference between what you made and what you spent. So you want to focus on defense first which involves self-discipline and delayed gratification. You’ve got to find different ways to be happy than just spending money to make yourself feel good. Gary Keller had a really good comment. He told his son, “Son, the experience at the beach is the same for a billionaire as it is for the person that’s broke.” There’s so many things in life we can do that are fun that don’t cost money, and we don’t have money just focused on those things. Going hiking, going trail running, going to the beach, having really good conversations with genuine people, serving others, helping people that in ways you never got help.
All of these things feel really good and they cost nothing. Next step, focus on making money. Not enough people think about this. They just have a job and they say, “That’s my job,” and they don’t think about it anymore. If you’re at a job that is not challenging you, you go out and you cut grass every day for a landscaper. Chase excellence, try to cut that grass as good as you possibly can. Learn how to do it in the most efficient way possible. Look at the difference between going around the perimeter of the lawn, and just going back and forth across the lawn and see which one’s faster, which one you can do quicker and which one’s easier on the lawn mower. Make it a game to see how fast you can mow a lawn. The point isn’t to get really good at mowing lawns. The point is to get really good at solving problems and finding patterns because when you get really good at mowing lawns, and you’re chasing excellence, you get bored, and when you get bored, you start looking for the next opportunity.
And then instead of mowing lawns, you’re going to start wanting to teach the new people at the landscaping company how they can do the same thing. And now you need new skills, now you have new goals. I’ve got to learn how to train, I’ve got to learn how to manage. I’ve got to learn how to teach, and I start creating systems and models and training opportunities, and I start learning how to connect with other people. That’s a pretty valuable skill. Now, you can go start your own landscaping company, and you can be hiring and training the employees instead of doing it for someone else. Once that happens, you learn how to market. You learn how to grow the number of customers that are coming in, how to market to hire more people. And the next thing you know, you went from, “I just cut grass,” to, “I am a business person that runs a big successful landscaping company,” and that will probably open doors into finding really good deals.
Your neighbors that you talk to, the clients that you talk to are going to have neighbors that are going to be selling their house. They may ask you to go cut the grass of a house that someone would’ve found when they were driving for dollars. You might be able to buy that investment property. The universe rewards when we chase excellence, so continue to look for different ways that you can make more money by bringing more value. And then the third way that we build wealth is by investing the difference between what we made and what we kept. It’s really that simple. You don’t need to pay a hundred thousand dollars to take a course. You don’t need to look at 500 properties every single day hoping that the magical one will fall out of the sky.
If you are well capitalized and you are well educated, you will find the best assets, and then they tend to snowball and steamroll. You buy some really good properties this year, four years later they’ve grown a lot. You paid the loan down, they’ve gone up in value. You’ve got equity, you cash out or refi, that buys your next three. Five years later, those three, you’re ready to do the same thing, and you start to see exponential increases over time. But Matthew, you will rarely ever succeed past the level of success that you’re comfortable with. There’s no way you’re going to get to 30 or 40 properties if you’re still mentally at the point of, “I just cut grass.” You wouldn’t even be able to manage those 40 properties that you want to have. I guess, what I’m talking about is a shift in mindset from, “Real estate will help me escape the life that I don’t like,” to, “Real estate is a great way to build wealth, but it will challenge me, and I always have to be growing and trying to hit my potential.”
So rather than waiting to get a bunch of properties and then stepping it up, ask yourself, in what ways can you step up now? That is a goal that will never let you down. Every single day, you can get out of bed and the world is going to throw challenges at you, and you can ask yourself, “What can I do to be the best servant, the smartest person, the wisest person, the hardest worker, all of these virtues that will lead to success.” You don’t know the way that the universe is going to reward you for what you do, but you do know that you need to be become the quality of person to be able to handle the reward that comes. So my advice when people ask about goal setting is, don’t say I’m going to buy a 500 unit apartment complex. If you were given one of those right now, you would just run it in the ground and lose it.
Set the goal of I need to become the kind of person that can handle the wealth that I want, and I feel like the advice that I gave you will help you on that path. And then don’t leave anything on the table at the end of the day, work as hard as you can. Give everything that you can, learn as much as you can. Try to be perfect, chase excellence as much as possible, and you will find that these opportunities will find you. All right, and that is our show for today. I hope you all don’t mind me giving advice that’s not always directly tactically related to real estate investing, but does involve the character traits and the qualities that you will need to be a real estate investor. In today’s show, we got into how you can buy a house with somebody else using primary residence loans.
We had a great conversation there with Matthew about what you can do to set goals that require you to become excellent. Somebody made a very funny analogy saying that I have more analogies than Jim Carey has faces, which was pretty funny because in The Mask, Jim Carey’s face was green and that’s my last name and more. Look, to everyone listening, I really want you to be aware. We don’t know what’s going to happen in the market, but this is one of the best times to buy houses I have seen in a long time. As long as you are making more money, pushing yourself individually to hit your own potential, get out of your comfort zone in as many ways as possible. Avoid feeding your vices and the worst parts of yourself that will take all the money away from you that you have, continue to grow more wealth, make more money, save more of that money, and then invest it wisely.
You don’t have to worry about what the market does, and I’m such a fan of this because you can’t control the market, you can only control you. Last piece of advice I want to give everybody here, go to BiggerPockets.com/store and check out The Richest Man in Babylon. I wrote the Forward for the book that BiggerPockets has republished, but the book is incredible. It changed my life when I read it. Josh Docan loves it as well. It’s one of the first things that we bonded over. You can get a lot of value out of that book, especially if you’re a younger person like Christian here who wants to be a house flipper. Learn the fundamentals in that book, and then if you should buy something or if you shouldn’t, the decisions you’ve got to make become much more clear when you’ve embraced those principles. Thank you very much for being here with me today.
Thank you for letting me challenge you. Thank you for letting me push you out of your comfort zone a little bit as you heard this today, as I’m sure many of you were listening to these answers, and thought, “Ooh, I could probably do better in that area of my life too.” Get excited about that because that’s what’s going to lead you to more success. Thank you for your attention and taking this journey with me, and letting me be the person that helps grow your real estate investing knowledge. I’d love it if you leave me a comment, like this, share this and subscribe to the BiggerPockets YouTube channel. You can find me online everywhere @davidgreene24, Instagram, Twitter, LinkedIn, Facebook, all those places, and then on YouTube @davidgreenerealestate. I will see you on the next show.

Don Peebles, founder, chairman and CEO of the Peebles Corporation, joins ‘The Exchange’ to discuss how real rates for mortgages are slowing new home purchases, how changes in housing trends impacting the rental market and considerations for property developers amid the current rate environment.

Ashley:
This is Real Estate Rookie.

Dave:
More good deals will come on the market over the next couple of years, but you do have to contend with some risks of declining value and high interest rates. I think that’s just because over the last couple of years there’s been super high competition and that makes it really hard for investors to land under market deals. Now the markets are shifting a little bit away from probably one of, if not the strongest sellers market in history, to one that is a little bit more balanced. And so that could create some more opportunity for people.

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

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information, and motivation you need to kickstart your investing journey. We often like to start these episodes by shouting out on some folks who have lend us some reviews. This week’s review comes from the Skids85. The skid says, “This podcast has great tidbits for rookie investors. Anyone looking to start in real estate investing will find nuggets of valuable information throughout the podcast. And if you couple this podcast with the original BiggerPockets Real Estate Podcast and all of the BP books, it’ll give you the courage to dive into investing, which is what it did for me after five short months. The rookie replies are shorter, but I love them because that’s what all the good information is.”
The skids, we appreciate you, brother. And if you haven’t yet, please you’ll leave an honest rating and review for the podcast because it helps us reach more folks and that’s our goal here. So Ash, how about we skip the boring banter for today? I think the guests were bringing on… They’re too boring enough guys so we don’t need to add to that, huh?

Ashley:
You know what Tony? I was hoping that you would say that line because I was still debating in my head, “Was our producer joking when he said that we could say that?”

Tony:
No. Ashley and I are joking. We got two absolute studs on the podcast today and I think that’s why Ashley and I are excited to get into the content. We’ve got J. Scott and Dave Meyer. You guys probably know Dave from the recently released On The Market podcast. J, he ran the BiggerPockets Business podcast. He’s written four, now five books for BiggerPockets. These are literally two of the absolute smartest guys I’ve ever met when it comes to real estate investing. I’m so excited we got to share their knowledge with you guys in the podcast today.

Ashley:
And by boring, we mean there’s no stories of bears coming on to your Airbnb or exciting things like that, the click bait things in. This is basically what you need to know. As a real estate investor, they wrote this book about running the numbers and how to analyze a deal efficiently and effectively, everything that you need to know. I think the book is like 450 pages long with all this data. It took them several years to write it because they really got down into the nitty gritty of it. It’s not only you have the BiggerPockets calculator reports, which are great, but it’s more than just plugging in the numbers. It’s understanding why you’re plugging in that number and what that number means and what outcome you want from that. So they break it down into four different ways that you can generate money off of your investment. We’re not going to tell yo. You have to listen and listen to all four.

Tony:
Yeah. I asked them two questions that I think most new investors are probably thinking as well, the first one is, is now still a good time to invest if you’re a new investor. And you get to hear both of their explanations or answers to that question. The second question I asked them is like, “Okay, what is a good cash-on-cash return or investment metric I should be using?” So these are two questions that Ashley and I get all the time. Both the answers that Dave and J. gave, I think, were phenomenal and you guys are going to get a lot of value from hearing it.

Ashley:
Make sure you check out J. and Dave’s new book Real Estate by the Numbers, available at the BiggerPockets bookstore. They’ll tell you guys about all the benefits you get if you purchase it directly from the bookstore, maybe even a call with them. So listen for that. And then at the end of the episode, they give you a discount code. We are super excited to see who you guys like better because there might be a little competition at the end of this.

Tony:
Guys, I am so, so, so excited for today’s episode. You two are literally probably two of the smartest people that I know when it comes to real estate investing in the economy and just all the data points that folks should be looking at when they’re thinking about investing in real estate. This is honestly probably the episode I’m most excited for. So Dave, we’ll start with you. Can you just give a quick background on who you are and kind of what we’re talking about here today?

Dave:
Sure. So I work at BiggerPockets full time. I’m the vice president of data and analytics where I handle a lot of our internal data analysis and business intelligence, but also get to spend time studying the housing market and trying to understand what’s going on in different markets and different opportunities that exist for the BiggerPockets audience. And in that effort, I am also the host of BiggerPockets newest podcast, which is called On The Market and is focused on just that, examining trends, data, news that impact the lives of real estate investors.

Tony:
Dave, we also had you on the Rookie podcast. I can’t quite recall which episode it was, but folks can go back and listen to that episode because I think it was one of our top performing episodes because people love when we talk about the economy and it just shows the kind of wealth of knowledge that you are, man. So excited to be chatting with you.
Our next guest, we’ve got two guests for you guys today, I just want to give a brief introduction because this man’s resume is quite impressive. But he’s written two books I think already for BiggerPockets, a book on flipping houses. Four books. So I’ve read two of them. You can tell us what the other ones are. He was on number 10 on the Real Estate podcast. He was on episode number 10. He’s been on multiple podcast episodes since then. A successful house flipper, now a successful real estate syndicator, apartment syndicator. I’m just super, super, I think, humbled and happy to have this guy on the podcast. So J, tell the folks, I guess, what I might have missed.

J:
No, it’s okay. So I found BiggerPockets back in 2008 when I started flipping houses. I was flipping my first house and doing an internet search for how to learn how to do it and found BiggerPockets and started becoming involved in BiggerPockets. And so a lot of people think I work for BiggerPockets, I don’t, but I’ve been so intimately involved with BiggerPockets over the last 15 years sometimes it feels like I do.
And so yeah, I’ve written four books. I think The Book on Flipping Houses, Estimating Rehab Costs, also The Book on Negotiating Real Estate that I wrote with Mark Ferguson and my wife Carol Scott, two amazing investors. And then my most recent book up until now called Real Estate… Wow, I don’t even remember the name. It’s called Recession-Proof Real Estate Investing, which is a book all about economic cycles and how they impact real estate investors. I was also the host of the BiggerPockets Business podcast for a couple years where my wife and I talked with literally over a hundred different entrepreneurs and business owners about all things business. And that’s still out there for anybody that’s interested in that topic and want to learn more about business and entrepreneurship. Check out the BiggerPockets Business podcast.

Ashley:
Well, J. and Dave, we have you guys on here for a reason because you have written another book. It is Real Estate by the Number. So do one of you want to give us a brief description of what this book is about?

J:
Sure. So Dave and I have been working on this book for a really long time. The goal of the book, and I think I’m proud to say I think we’ve accomplished the goal, but the goal of the book was very much to dive into and delve into all aspects of the math and the concepts and the strategic thought that goes into real estate investing. In fact, I think if we were to rename the book today, we’d probably call it Think Like An Investor, because that’s really what the book’s all about, how to change your mindset and really learn how successful investors think, again, from a concept standpoint, from a strategy standpoint and also from a math standpoint. And so it’s a long book, it’s over 400 pages. I think it’s the longest book BiggerPockets has published. We’ve been working on it for many years. But it’s something I think Dave and I are very proud of.

Ashley:
I can’t wait to read it because I think too, for rookies and even experience investors, it’s like going back to the basics of is it a good deal, is it a bad deal, should I do this deal. Well, run the numbers. That’s very, very common where I think people are looking for somebody to give them the answer if they’re making a good investment where if you run the numbers and you know how to properly do that, then you’ll be able to figure that out on yourself.

Dave:
Yeah, I just want to add to that this book I do think does make sense for rookies, even if you’re thinking math is not your thing or that this sounds complicated. J. and I, it took us so many years because we’ve gone through painstaking efforts to make sure that this is applicable to anyone. Whether you haven’t bought your first property yet or you’re an experienced syndicator at this point, we want to make sure that everyone, whether you’re a rookie or experienced, can analyze deals like professional. And as J. said, I think we’ve accomplished that.

Ashley:
One thing too, I’ve noticed if you go out and buy calculator reports or the BiggerPockets’ reports that they do to analyze deals, all of them will vary. They’ll have different formulas or ratios that they calculate for you or different inputs for them. So instead of going out and buying all these calculator reports, I would think it would make sense to buy your guys’ book and kind of develop your own from it. Can you go through that as to once you have this book, how do you put it to use?

J:
Yeah, well I mean I would start with, again, for anybody that might be a little bit math phobic, I’m an engineer by education, so I like the math, and I know Dave is a numbers guy. But here’s the cool thing. If you take this book and you literally cut out all the math, you cut out all the formulas, you cut out anything math related from the book, you’re still left with… What do you think, Dave? 250 pages of concepts and stories and narratives and examples of just deals that Dave and I have done throughout our careers. Then you add in the other 150, 200 pages and then that’s all the math behind it and you get everything. But even if you don’t care about the math and you don’t want the math stuff, I think anybody, now I’m not even going to say including, but especially new investors, if you want to know how successful and experienced investors think, this book is going to really going to help you achieve that.

Dave:
Ashley, I think one of the things that is tempting because the BiggerPockets’ calculators are extremely useful and helpful to people, especially rookies, is that you have to understand the concepts and what the numbers deeply mean. Of course you know that a 7% cash-on-cash return is not as good as a 9% cash-on-cash return. But when you actually go through the process of learning how to calculate these things, it adds new meaning and I think it allows you to make more confident decisions.

J:
Here’s the other thing. We often talk about getting the right answers and figuring out if something’s a good deal. And so we start with this assumption that we know what questions we’re supposed to be asking so that when we get the answer we know that that answer is meaningful to us. Dave and I actually approached this book from the other side. We approached this book not from the perspective of you asked the question, we’re going to give you the answer. We approached this book from the perspective of, let us help you ask better questions.
And in fact, I don’t remember, there’s like 40 chapters in the book. Each chapter starts with, “Here’s a list of questions that this chapter is going to be answering so you know the right questions to be asking.” And because I find a lot of new investors, they happen upon a deal and they get into a situation and they think, “Okay, I need to know if this deal makes sense, did the numbers make sense?” but they don’t know how to formulate the right questions to be asking to look at the deal.
So for example, a seller finance deal. You’re not going to evaluate a seller finance deal the same way you’re going to evaluate just a regular purchase or a note or a commercial property or a deal where… I give an example in the book of a deal I did where I’m going to sell a house and I list the house and I get two offers. This was a true story. I got two offers. One was a full price offer, basically quick close from a cash buyer. The other one was another investor who had a deal that was closing seven months later and basically said to me, “I really want your house but I can’t afford it for seven months because I have another deal closing. I’ll get a bunch of cash in seven months. So I’m happy to close on the deal now, but I kind of don’t want to pay you for seven months.”
I own the house for cash so I could afford to basically just not take the money for seven months. But then I had to ask myself the question, “How much more should I be selling it for if I’m not going to be selling this house for another seven months where it still makes sense? How much more would I have to ask him to pay where his offer is now as good or better than the guy that was willing to pay me in two weeks full price cash?” The nice thing is when you know how to ask the right questions, when you know how to ask the question, “How much is this house going to be worth if sold in seven months compared to if it’s sold in two weeks?”, when you know to ask the question the right way, then you can start evaluating the answer in the right way. And so I think a lot of new investors, they’re not always sure what the right questions are. And so we start with the questions and then we jump to the answers. And so it kind of hits both sides of the equation.

Ashley:
J, in that scenario, would you go and would you look at, “Okay, what would my money look like in a year?” So if you got the money in the two weeks and you went and invested it into something else, what would your return be in a year from that pile of money? Or if you waited in seven months and gotten it, what would you actually do when you’re asking that question as how would you run the numbers on that exact situation?

J:
Yeah. I don’t want to go into any of the math because a lot of us don’t care about the math right now, but the concept behind it like you just said is immensely important in real estate. It’s called the time value of money. It’s basically this concept that a dollar that I get today is worth more than a dollar I get a year from now or seven months from now. Because if I get it today, what am I going to do with it? I’m going to invest it. And in seven or eight or nine or 12 months, it’s going to be worth more than a dollar. And so I need to figure out that dollar that I’m not getting today, how much more would it have been worth in seven months if I had gotten it? And that’s the amount more that I’m going to need to get for that property to make it worth it to wait seven months to get the money.

Tony:
We’re like five, I don’t know, 10 minutes into this episode already and you guys have dropped an immense amount of knowledge, which is why I was so excited to chat with you guys. But I want to ask one question that I’m sure a lot of rookies are asking and then we can get into the meat of the episode. But there’s a lot of information floating around that I think has some new investors afraid to get started. There’s the two quarters of the GDP getting smaller, which some people makes us feel that we’re in a recession. There’s the climbing interest rates, which we all have reason to believe might continue to climb. So I guess my question to you guys, and Dave we’ll start with you, if I’m a new investor, an aspiring investor, I have no deals, is now still a good time to get started?

Dave:
Oh, you’re hitting on our most beloved topic that everyone loves talking about right now. I think it’s hard to say categorically whether it’s a good time or not. I think it comes down to individual investors and goals. And J. actually and I, talk a lot about this in the book, is a big part of being a successful investor is identifying what types of deals are good for you personally. So there might be times… Like say for example you’re a house hacker. I think in almost any market conditions, house hacking is usually a pretty good idea because if you’re comparing that to paying rent and rent is super expensive right now, it’s really great. I don’t flip houses, but I’ll just say I’m not going to start flipping houses right now. I think that there are different strategies that people should be taking depending on their personalized situation.
I know that’s sort of punting on the answer, but I’ll just say that my guess is that more good deals will come on the market over the next couple of years, but you do have to contend with some risks of declining value and high interest rates. I think that’s just because over the last couple of years there’s been super high competition and that makes it really hard for investors to land under market deals. Now the markets are shifting a little bit away from probably one of, if not the strongest seller’s market in history, to one that is a little bit more balanced. And so that could create some more opportunity for people.

Tony:
And J, what are your thoughts?

J:
Yeah, I 100% agree with Dave. There are lots of factors at play. Keep in mind that when we say real estate investing, if I say that to a hundred people, I’m going to get a hundred different thoughts of what that means. If you’re flipping houses, that’s a very different strategy than if you’re buying notes, which is a very different strategy than if you’re buying RV parks, which is a very different strategy than if you’re house hacking. And so there’re literally dozens, dozens of strategies out there and not all of them are going to work as well at different points in the market cycle. Some are going to work better during a recession or equally well during a recession. Some are going to work really poorly during a recession. Likewise, different strategies are going to work differently in different areas.
So what we’ve seen over the last couple years, not only is the market changing, but also the demographics and populations have changed in the US. People are moving from certain areas to other areas because we have a lot more remote work and people have the opportunity to go where they want. And so we’re seeing certain areas that are still seeing huge population growth. We’re seeing other areas that are seeing population decline. And during even the best market in history, I don’t want to flip houses in a place where we’re seeing population decline.
So even going back to 2015 when it was a great time to flip houses, it wasn’t a great time to flip houses someplace where people were moving out of. And so you can’t just look at the economy, you can’t just look at any one or two factors. You have to look at all of these factors. You have to look at the economy and you have to look at population growth and you have to look at employment trends and you have to look at the specific strategy that you’re looking to employ. And then you kind of put all of this stuff together and you ask the right questions about specific deals and then you determine does this deal make sense. And so again, like David said, I’m not looking to punt on the answer, but it really is, it depends. It depends on what you’re trying to do, where, when and how.

Ashley:
Okay, so even if you’re… Whatever strategy you’re doing, running the numbers, the reason you’re doing that is because you want to generate revenue, you want to make a profit or you want to have a good investment for down the road. What are some of the ways that you talk about in your book that you can generate money from making this investment into real estate and how does that kind of factor in when analyzing the deal?

J:
Yeah. So first let me step back and just say this one other thing. For anybody that’s out there that’s listening, this is the Rookie Show. So a lot of people that are listening are probably either just getting started or getting ready to get started in real estate. Something to keep in mind when we talk about the economy is that things move in cycles. And so, well, we may be headed into a recession, some people would say we’re in a recession. Historically, recessions last 12 to 18 months. So even if now isn’t the best time for you to be doing whatever strategy it is you want to do in whatever location you happen to be in, there’s a good chance that in 12 months or 18 months or 24 months, it could be a really good time. So it’s always a good time to be learning.
So even if now isn’t the right time to be flipping houses in New York City or whatever it is, now is a great time to learn about how to flip houses in New York City because in a year it may be a great time to be doing it again. So let me start with that.
But going back to your question of how do you make money in real estate, this is actually a really interesting question that we don’t talk about enough. A lot of us, especially when we’re new investors, we tend to look at real estate returns one dimensionally. If we’re somebody who is working a 9:00 to 5:00 job and looking to escape that 9:00 to 5:00 job, it may be that all we care about is cash flow. We want to make as much money every month as possible so that we can quit our job as quickly as possible and we can replace our income with our cash flow from our real estate. Other people aren’t in that situation. Other people might be thinking, “I love my 9:00 to 5:00 job. I’m going to be working for another 30 years. All I care about is that I build up enough net worth enough equity over the next 20 or 30 years so that when I retire, when I’m 50 or 60, I have plenty of cash that I can invest and get cash flow then.”
Other people are thinking they don’t care about either of those things. They care about the fact that they have a high paying W2 job right now, or they’re making a lot of money from some investments right now and they want tax benefits. Real estate’s a great way to get tax benefits. So there are all different reasons why we may be want wanting to invest in real estate, and the reason you invest may not be the reason I invest.
And so when we look at how real estate actually generates money for us, generally it falls into four categories. So number one is cash flow, and that’s exactly what we’re saying. That’s the monthly income or the quarterly income or the annual income that your cash flow is going to pay you when you invest in it. Number two is this thing called appreciation. And I know we think about appreciation as like if we invest today, the market’s going to go up 10% tomorrow and we’re going to have a whole bunch more money. There’s actually a couple different ways that we see appreciation in real estate. It’s not just waiting for the market to go up and we can talk about that. But number two is appreciation.
Number three is this thing, the fancy word is amortization. The layman’s term is principal paydown. If I get a loan on a property, I’m paying that loan every month. I’m paying my bank every month on that loan. Part of the money that I’m paying is interest. And so interest kind of goes away, it’s an expense. But part of the money I pay on my loan every month is actually paying down the balance of the loan. And so on day zero, I might take out $150,000 loan. In 30 years after I’ve made my final payment, that loan is now zero. I’ve made $150,000 by paying off that loan. It didn’t really make 150,000 and I still paid it, but presumably my tenants paid it. And so over time I’m paying down the loan and I’m accruing equity. I’m building up equity in the property. So this principal paydown or amortization is the third way that we typically see real estate make money.
And then the fourth way I mentioned it is tax benefits. So real estate provides tax benefits that you really can’t get from any other investment on the planet. Some amazing tax benefits. And when you know how to think about taxes and you know how to think about the benefits of real estate investing, you can find ways of basically offsetting income that you’re making today through those tax benefits, which is really as good as it’s cash in your pocket today. So cash flow, appreciation, principal paydown, and tax benefits. Those are the four ways that real estate makes money for us. And anything else, I mean there are lots of other things people can suggest, but that’s really going to probably fit into one of those four categories.

Tony:
J, what an amazing breakdown. I’m so glad that we kind of covered those four different categories because I think a lot of folks, especially those that are getting started, like you said, they just kind of look at real estate investing as this one dimensional kind of return that they should be looking at. But you really gave all these different categories that they can look at. So if we can, I want to just dive into each one of these in a bit more detail. So you had cash flow, appreciation, principal paydown, and then tax benefits. So Dave, I guess I’ll start with you first and we can go to you afterwards J, but let’s talk about flow. What exactly do we mean when we say cash flow? What kind of metrics should I be looking at when it comes to cash flow? And in your mind maybe who is it, what kind of investors should maybe value cash flow over some of the other types of investments?

Dave:
Yeah. Cash flow is a great place to start because I think most real estate investors get into real estate investing because they want to generate cash flow. I don’t know about you, Tony and Ashley, but that’s certainly where I was coming from when I first got started. Basically I was just hoping I produced more cash than I spent each month. And that was sort of the extent of my knowledge of these four different things. Like I knew of the other ones, but that’s really what I was hoping for when I got started. But cash flow is wonderful because it basically can end supplement or eventually replace your W2 income and it provides something that you can live on. If you’re investing in the right way, then it is a very reliable source of income and it could be used for whatever you want, either reinvesting or for covering your regular expenses.
Cash flow is relatively simple to calculate. We give some ways to do that in the book. But basically you add up all of your income, you subtract all of your expenses and after that you have your cash flow. You can also calculate easily. Once you have that, once you know that and how much you’ve invested into the deal, you can calculate what’s probably, I don’t know, I’m just assuming this is the most popular metric in real estate investing, which is cash-on-cash return. And that basically is a great measurement for how efficiently your investment is producing cash flow for you, because it’s great. I hear a lot of investors say like, “I did this deal. It’s producing $300 a month of cash flow. Is that a good deal?” Well yeah, if you invested 10 grand, it’s a great deal. If you invested 300 grand, not such a good deal. So you have to be able to calculate both the absolute number of cash that you’re getting in your bank account every month and be able to calculate how efficiently your investments are generating cash flow for you.

Ashley:
Before you go on there, can you just tell us, define cash-on-cash return is, so what the formula is, how somebody can figure that out.

Dave:
Sure. Yeah. So you just basically take your annual cash flow and you divide it by the amount you invested into that property. And so for each person, that’s going to be a little bit different. For most people getting started, it’s going to be your down payment, maybe some closing costs. And if there’s any maintenance that you did right at the beginning, that came out of your pocket, not like your mortgage, basically the cash that you took put into the property. So you take the annual cash flow, divide it by all of your expenses, that’s going to get you your cash-on-cash return. In the book we also talk about how you can advance your thinking about cash-on-cash return over the course of your investment using a metric called return on equity. But we won’t get into that nerdy here.

Tony:
One follow up question. J, I’ll point this to you first, and Dave we can go back to you. What is a good cash-on-cash return? In today’s market, say I’m buying maybe like a long term single family house, what’s a good cash-on-cash return?

J:
It’s a great question. It’s a question we get all the time. Let me step back before I answer that question. But as Dave said, it’s really important when we think about cash-on-cash return, it’s an indication of how efficient our investment is generating cash. So if I invest a hundred dollars in a deal, and obviously not real estate because it’s only a hundred dollars, but let’s say I invest a hundred dollars in something and I get back $10 at the end of the year, I then invest a hundred dollars in something else and I get $11 back at the end of the year. The second thing that I invested in is doing a better job of it’s more efficiently returning me cash on the money I invested. 10%, 11%, it’s just numbers. But the important thing is, the more money I’m getting back means that the money I invested is working harder for me. Obviously, we always want our money to work harder for us, we want it to be more efficient.
But here’s the other nuance that we really need to keep in mind, and too many newer investors don’t think about this. Returns are correlated with risk. And if I told you I could give you an investment that generates 50% returns or an investment that generates 20% returns, which one’s better? Well, you may want to just jump to, “Of course 50% is better.” But in the real world, returns are correlated to risk. A deal that returns 50% or projected to return 50% is typically going to have a lot more risk associated with it than a deal that’s projected to return 20%. So that 50% return deal, you might have a much higher risk of losing all your money or you might have a much higher risk of making zero return or losing a little bit or making a little bit. Your chances of actually making 50% return is going to be lower than your chances of actually making a 20% return with the deal that projects to return 20%.
So anytime you see returns, always think about it from the lens of how much risk is involved and what is the specific risk, what kind of risk is it. Is it a binary risk? So if I told you that we have a deal where there’s a 50% return projection and another deal where there’s a 50% return projection, even though the risk might be the same, it may not be the same type of risk. For one, the risk could be, yeah, there’s a good chance you’re going to lose all of your money, but there’s also a good chance that you’re going to make a hundred times your money, or a small chance you’re going to make a hundred times your money.

Ashley:
Well, J, I have a question too. Do you think, is time put into the deal kind of considered into that too as to like, okay, you can look at the cash-on-cash return, you only put 10 grand into the deal, you’re getting a 20% cash-on-cash return, but you also didn’t hire anyone to do the labor for the rehab. So is that another thing besides just risk, is taking into consideration the time that you’re putting into the deal too?

J:
Yeah, absolutely. This is where this idea of hourly return comes in. And so yes, one deal might generate 10% cash-on-cash return, another deal might generate 8% cash-on-cash return. Is the 10% better? Well, no. If I spent 10 times as many hours doing that deal and generating that return, that 10% might be a whole lot worse than the 8% return if that 8% return is completely passive.
And so, certainly in addition to risk, we need to be looking at things like what is the amount of time we spent and what is our hourly return. And this is why it gets back to the fact that there’s not just any single metric that we want to look at. Certainly there are some metrics that are more important than others, especially depending on our goals. But we need to be able to think about things multidimensionally from different aspects. And you have to be able to put all these things together so at the end of the day you can say, “Okay, I have two investments. Which one is better?” And generally the answer is we don’t know until we answer a whole lot of other questions about what our goals are, what we’re trying to achieve and what the risks are.

Tony:
J, I think so often, new investors, they just want the answer given to them around these different decisions that they need to make in their businesses, which I get it, right? Because it’s scary, you’re investing maybe your life savings, you’re buying this several hundred thousand dollars investment, it’s your first time doing this, you want some reassurances that you’re doing the right thing. But like you said, it’s hard for Tony or for Ashley or for J, or for Dave to know all the intricate details of that person’s life, their goals, their personalities, their skills, their abilities to be able to tell them, “Yes, this is the right deal for you.”
I’m glad we’re talking about these four different categories because like you said, if someone’s focus is appreciation, maybe them buying a deal that only cash flows 6% makes sense for them because they know 10 years from now that building will doubled in value. But for the person that’s focused on cash flow, maybe they want a 15% cash-on-cash return and they don’t care about appreciation. So everyone’s personality, situations, et cetera will dictate something different. So Dave, I just want to kick it back to you. Any other comments on that on the cash-on-cash return piece?

Dave:
Well, hopefully you’re picking up on the trend. If you try and pin J. and I down to answer any question directly, we’re going to say it depends. But it really does. It really is. You said it really well, Tony, that we all wish someone could just tell us what to do, but ultimately financial decisions are deeply personal. And they should be. You should have your own set of goals and ideas about what you want.
I’ll give you a quick example. In March or April, I sold a rental property and I wanted to do a 1031 exchange and I had an intention to buy a small multifamily. I just couldn’t find a deal that penciled. As you guys might know, I live in Europe, so it was really hard for me to go look for deals. And so I was looking at syndications, but I couldn’t find one in a market I understood. And so I didn’t have time to understand a new market. I wound up doing a deal that took about 5% cash-on-cash return, which is lower than a lot of people would accept and it’s lower than other syndications that I was looking at. But it was in a market I really understood, I felt like there was very little risk. My primary objective with the 1031 exchange was to preserve my capital and to defer my taxes.
And so I was able to accomplish all those things. Did I take a less cash-on-cash return? Yeah, but as J. said, I think I took a lot less risk too. And with this set of money that I had, my goal was long term preservation of capital. And so I think I made a good decision there, where someone have made a totally different decision. Someone might have taken that money and rolled the dice and been willing to take on more risk than I was because they wanted a 12% cash-on-cash return. So I think you guys said it really well, but I just wanted to hammer home the idea that you have to really factor in everything and personalize these decisions to your specific circumstance.

J:
Yeah. And keep in mind, I mean, going back to this whole risk profile thing, there are investments out there that have zero risk. If you want to invest in treasury bonds, like government bonds, you can do that. You can make 2 or 3% per year on your money. Now, a lot of us would sit here and say, “We’re real estate investors. I’m not willing to make an investment that only generates 2 or 3% per year, even if there’s zero risk.” But there are trillions of dollars worth of investors out there who are very happy to invest for 2 or 3% at zero risk. Their goals are very different than ours or yours. The fact that maybe they’re retired and they have enough money that 2 or 3% is great, but they want zero chance of losing that money.
So again, every everybody’s goals are going to be different. Everybody’s risk tolerance is going to be different. If you want super low risk deals, then you’re going to have to accept super low returns. If you want super high risk, if you want the potential to make tremendous amounts of money, you’re going to have to accept super high risk deals. And then there’s everything in between. So you really need to figure out where you are on that risk/reward spectrum to determine the types of deals that you should be doing.

Ashley:
And J, for our next one, appreciation. Can you go through and define appreciation and then what metrics are tied to appreciation that you talk about in the book? Then also, who’s the ideal rookie listener that actually should value appreciation maybe even compared to cash flow?

J:
Yeah. Again, cash flow is the money that our deals are giving us every month for investing in them. We’re basically getting/spending money or investing money every month or every quarter, every year after we invest. Appreciation is kind of just the opposite of that. That’s the money that builds up in the investment that we’re not actually getting back. So for example, just the simplest example, if I buy a house for a hundred thousand dollars today and in 10 years I sell that house and it’s worth $200,000, that’s appreciation. The value of that property went up a hundred thousand dollars over 10 years. There are two types of appreciation that we typically talk about.
The first is this thing called natural appreciation. This is the idea that just holding real estate over time, it’s going to go up in value. Why? Because it always has. Realistically speaking, real estate tends to go up in value over time. We’ve seen it for 150 years, it’ll likely continue. That said, a lot of people, they don’t have a true understanding of how much real estate tends to go up over time, especially for younger investors. If you started investing in 2008 or ’09 or ’10 and you’ve only seen what’s happened with real estate over the last 10 years, or worse yet, if you started investing two or three years ago and you’ve seen what happened with real estate values over the past two years, you probably think real estate tends to go up 5% a year or 10% a year or even 20% a year.
But the reality is, over the past hundred or so years, on average in most places in the US, real estate has tracked inflation. So if inflation has been somewhere between 2 and 3%, real estate values have tended to go up 2 or 3% per year. Not bad, but it’s not something that’s going to make you rich. Basically, your real estate is going to keep you from losing money to inflation. So that’s the first aspect of appreciation. Just overtime the market is going to tend to go up in value. Our houses are going to tend to go up in value and you’re going to make money typically at least enough to cover inflation, hopefully a little bit more.
But the real value of appreciation in real estate is what we call forced appreciation. And this is the idea that as real estate investors, a lot of us have the ability to buy real estate that’s undervalued and we have the ability to increase the value through the work that we do. And so when we talk about that work, it’s really in two areas. Number one, we can do physical renovations on the property, we can improve the property. So when we think about flipping a house, we buy a house for a hundred thousand dollars. By the time we sell it, it’s worth $250,000 let’s say. That’s appreciation. We’ve added value through renovations that we can then capture when we sell the house.
The other way we can capture appreciation is through management improvements. So number one is you make a whole lot of money by improving the physical aspect of the house. Number two is you actually lower the cost of holding that house. So if you’re a landlord and you can buy a property and you can make it a whole lot less expensive to hold, you can appeal your taxes or you can get your insurance costs down or you can get your other holding costs down, you’ve now increased the value of that property. So as good real estate investors, yes, we love the natural appreciation, we love that 2 or 3% per year that we’re going to get that’s going to offset inflation, but we should also love the idea of we can increase the value of a property through renovations and management improvements. And then once we increased the value, we then have the ability to capture that increase in value either by selling the property for a profit or refinancing the property and pulling out some of that value that we’ve added.

Tony:
Dave, let me ask you a follow up question here and then we’ll go back to you, J. What kind of rookie investor is the focus on appreciation best for? What kind of questions should I be asking myself to determine if focusing on appreciation is the right kind of, I guess, wealth tool for me to focus on?

Dave:
Well, to echo what J. said, I think for rookies really the key is to focus on forced depreciation. And particularly in this type of market cycle that we’re in right now, I just think that’s even more important. For most rookies, I would recommend being very cognizant about the amount of work that goes into forcing appreciation and making sure that you take on an appropriate amount of effort, risk, and capital that needs to go into a renovation.
When I was getting started, I did a lot of what you call a cosmetic value add, where you’re painting, you’re updating the appliances, maybe you’re putting in some vinyl flooring to make it look better. That to me is a little bit more manageable especially if you’re handy yourself or a good trades person. I wouldn’t be looking for places with foundation issues or who need a new roof if this is your first time out there. If you’re a contractor, if you have experience in construction, maybe you could. But for me that’s just my personal advice. People can take that on as much as possible. But for your first deal, I think those types of cosmetic value ads really can be achievable and are relatively low risk.
Another thing that I’ve done pretty successfully a few times now is, repurposing space is a great way to force at least rent appreciation and some value appreciation. For example, if you take a place that has a lot of living space but only has two bedrooms, can you add a third bedroom? Can you add a fourth bedroom given the existing structure so that you’re not building new walls and taking on a lot of construction risk? You’re just sort of repurposing the space in a more manageable type of value add situation that can add value to the property and can increase your cash flow as well.

J:
I think Dave and I both ignored the question. Tony, you and Ashley both asked the same question, we both kind of ignored the answer. So let me try to cover the answer that we ignored. Who is the right person that should be thinking about appreciation? Generally, you’re going to think about appreciation when you have a longer term wealth horizon, when you’re thinking about building wealth over time. Somebody that wants cash flow is somebody that needs the income every month, maybe somebody who’s looking to quit their job and wants to replace their income. Somebody that’s looking for appreciation is looking for a bucket of cash at some point. That could be a bucket of cash in three months by flipping a property. It could be a bucket of cash in 30 years when you sell your rental property. But typically the person that’s looking for appreciation is the person that’s looking for that bucket of cash, which I talk about how real estate has tremendous tax benefits.
Sometimes it doesn’t when you’re getting buckets of cash. But in general, if you’re looking to increase your net worth over time, appreciation is one of the best ways to do that. Let me also answer a question that you sort of asked. I used to work for eBay. At the time the CEO, a woman named Meg Whitman, used to say to the company, she had a really popular quote that she would always say, which was “Embrace the end.” Too often we think about do we want A or do want B without thinking of “Is there a way for us to get A and B, or A and B, and C and D?”
And in this case, when I say cash flow is right for this type of investor and appreciation is right for this type of investor, what I would encourage every investor to do is think about what’s most right for you, but don’t exclude those other things. So maybe your primary goal is flow, but still think about how you can get appreciation at the same time. Because even though cash flow today is great, you’re going to want that bucket of cash when you sell the property in 20 years and you’re looking to retire. So embrace the end and don’t just think about these returns as which one is most important or what’s the only one I want. Think about maybe which one’s most important, but how do I get the others as well.

Tony:
J, I’m so glad you mentioned that and it reminds me of you and I were having lunch in Maui. And when I asked you about why you switched from flipping houses to apartment syndication, that was kind of what you mentioned to me, is that when you looked at flipping, it was these big chunks of cash but there wasn’t that consistent cash flow. There wasn’t the necessarily appreciation long term. But it’s like when you went to apartment syndication, you kind of got the best of both worlds where you’re able to generate these big cash flows and oftentimes these big chunks of cash, refinancing and the fees that come along with putting those things together. And then when you go to sell, raising the value of an apartment complex is significantly bigger than one single family home.
When I think about why I started investing in Airbnbs, it was really the same thing. I felt like when you talk about risk adjusted returns and accessibility to a new investor, I feel like Airbnbs and short term rentals were the best asset class to do that because you don’t need to raise funds typically like you would for a syndication, but you get these much bigger cash flows than you do from long term rentals, but necessarily it’s not the same as flipping because it’s not as risky about like, if the market turns today, I’m not going to be stuck holding this property that I’m going to lose money on. So I mean, I just love that point of thinking of all the different ways you can combine some of these things together to get the best end product for yourself.

J:
Yep. Sometimes appreciation can be a tricky thing. It isn’t always obvious. Like when we want appreciation there, there’s cases, and we talk about this in the book, where appreciation might hurt you. So for example, let’s say I buy a rental property for a hundred thousand dollars and I can rent that property out for X dollars a month. I also have the option of doing a renovation on that property and now I can rent it out for more money per month. Should I be doing that renovation so that I get more money? Well, it’s a difficult question because depending on how much I spend and how much more money I put in, that’s going to affect my cash flow.
So the decisions I make around appreciation, I could potentially do a huge renovation. I could knock the house down and rebuild it and now make that a hundred thousand dollars house worth a million dollars potentially. But that’s not necessarily a good idea. If the rent’s only going to go from a thousand a month to 2,000 a month. I’ve created a ton of appreciation, but now I’ve reduced my cash-on-cash return, that other metric that we talked about with respect to cash flow. So all of these things play off of each other.
And so maybe appreciation, maybe doing a renovation on the property is a smart thing to do before I sell, but maybe it’s not a good thing to do now. Maybe it’s a good thing to do five years from now or 10 years from now. And so we constantly have to be looking at all of these different scenarios. And again, it goes back to asking the right questions and not just saying more appreciation is good, more cash flow is good. Yeah, in a lot of cases it is, but in other cases now might not be the right time or it might not be the right thing to do for this particular property, for this situation, for my particular goals.

Tony:
So we’ve hit two of the kind of ways that real estate can generate wealth and profits. I want to focus on those last two. So principal paydown. Dave, I’ll start with you. If you can, same as the other two, define what principal paydown is and what metrics I guess we should be looking at to kind of measure how well a property does with that specific metric.

Dave:
Sure. Yeah. So principal paydown is basically a way of generating returns that exists for pretty much any long term investment. Basically when you take out a mortgage, you pay back the bank every single month. There are two components of that payment. It stays the same every month, but every month you’re sending the bank principal, which is basically repaying the amount that you borrowed slowly over time. And then there’s interest, which is the bank’s profit. Unfortunately with interest, that’s just gone. As J. was saying earlier, that’s just the bank takes that, you don’t get anything back. But when you pay down your loan, that means that you owe the bank progressively less and less and less. And over time when you go to sell it, you may owe the bank half of what you used to owe them, or hopefully maybe you pay it off over 30 years and then you don’t own the bank anything at all.
The beauty of this is that it’s not you who’s paying the bank back, it’s your tenants who are paying the bank back. You are taking part of their rent and paying the bank back with them. And so over time, basically they are allowing you to owe the bank less. And when you go to sell your property, you’re going to realize that gain. And unlike cash flow, it’s not something you realize immediately. It’s much more like appreciation that we were just talking about that you see the benefits of loan paydown when you actually go to either refinance your loan and pull some cash out or go and ultimately sell your property.

J:
I like to think of the principal paydown sort of like cash flow. So every month if we’ve done things right with our property, we get this cash flow, we get this profit that goes into our pocket. Principal paydown, it’s not quite as good as cash flow. We don’t actually get money every month that goes into our pocket. But what we are getting every month is equity. We’re getting value added to the property when we resell it or refinance it. And so we can evaluate this principal paydown in a lot of ways the same way we evaluate a cash flow. So Dave talked earlier about the metric that we use for cash flow as this thing called cash-on-cash return. So for every dollar that we get out of the property, that dollar is working for us. Or for every dollar, excuse me, that we put into the property, that dollar is working for us and is allowing us to get money out of the property. And the more money we get out compared to the amount we put in, the higher our cash-on-cash return is.
We can do the same analysis. We can do the same kind of calculation on principal paydown. So if at the end of the year we have a property that we paid a hundred thousand dollars for and we paid down $5,000 of our loan balance after a year, we’ve basically earned $5,000 out of that a hundred thousand dollars we invested. We’ve now made 5%, not cash-on-cash return because it’s not cash that we’re getting, but what I like to call 5% equity on cash returns. So we’re getting 5% of whatever we invested back in equity. Now, how do we capture that? Well, since it’s a lower amount of our loan, we capture that by either selling the property, in which case it costs less to pay off the loan than the total loan that we took out, and that goes into our pocket. Or we refinance the property. We can actually take more money out of the property based on the amount that we’ve paid down in the loan.
So this idea of equity on cash return is very similar to cash-on-cash return. And when I look at a rental property, I’m going to look at my cash-on-cash return. So let’s say I put a hundred thousand dollars into the property. Let’s say I get $5,000 in cash flow at the end of the first year. 5,000 divided by a hundred thousand dollars investment, that’s 5% cash-on-cash. But then when I realize that I’ve paid down $5,000 in that loan the first year, that’s another $5,000 that I’d gained in equity. So 5% equity on cash return. When I add those two together, I’ve now made the equivalent of 10% return on my investment. Now obviously again, the equity on cash I can’t actually capture that unless I resell or refinance, but I’m going to do that eventually. So I can look at my return now as 10% return, not just 5% if I were just looking at the cash-on-cash.
A lot of people ignore the fact that they’re building up equity every year by paying down their loan. But this can be a huge part of the total returns that you’re generating. And if you ignore this, then your returns are going to look a lot smaller than what they actually are.

Tony:
J, I’m so glad you mentioned that. It kind of gets my mind spinning here a little bit, but we talked about metrics for each one of these individually, right? Metrics for cash flow, metrics for appreciation, for principal paydown. Is there one master metric that I can use to combine all four of these things together to say, “Okay, cool. This is the one”?

J:
There isn’t. Unfortunately, I wish there was some grand unification metric, like this one formula that you can plug all your numbers in and it comes out and it tells you this is how much money you’re making. But at the end of the day, again, each of these four ways of making money in real estate are going to have different benefits and drawbacks for different individual investors. And so you need to know what’s important to you, and then you need to analyze those metrics. If you really have no care in the world about tax benefits, well, you can ignore that and you can just look at the other three. But most of us care about all four of these.
And so what we do is, in the last part of the book… There’s several different parts of the book. The last part of the book kind of puts everything together and analyzes and looks at a couple different types of deals. And at the end of the day, it really boils down to, you need to run the numbers for cash flow, you need to run the numbers for appreciation, you need to run the numbers for principal paydown, you need to run the numbers for tax benefits and then put all of those numbers together in a way that you can see a holistic view of the investment itself.

Ashley:
Dave, let’s start with you for the last one, the tax benefits. So how are you generating money from the tax benefits of investing in real estate?

Dave:
Well, let me just start by saying that I think taxes are probably the last thing most investors start thinking about. I know when I first got started, I really wasn’t even thinking about this. If you’re a rookie, you’re like, “I just want to generate money first and I’ll figure about taxes and hanging onto it later.” I definitely fell into that camp. And I think as you mature as an investor, you realize how important taxes are, because the more money you can keep, the more money you can reinvest. And if you’re familiar with the concept of compound interest, which we talk a lot about in the book, basically if you’re able to keep more money into your investment machine, that means you can generate more and more returns and you can defer your taxes for longer and longer. And maybe in some cases you can defer them all together.
And so basically, similar to some of the other concepts that we’ve been talking about here, taxes are obviously, they’re not putting more money in your pocket every single week, but if you can strategically use real estate to optimize your tax mix, you wind up having a lot more money to invest into your deals that can generate you more appreciation, more cash flow, and more loan paydown over the course of your investing career.

J:
Here’s something a lot of people don’t think about. They think, “How do I lower the amount of taxes I ever have to pay?” But it’s just as important to be thinking about, “How do I put off paying taxes for as long as possible?” I talked earlier about this concept of time value of money. A dollar today is worth more than a dollar 10 years from now because I can invest that dollar today. Well, likewise, having to pay a dollar in taxes, not today but five or 10 years from now, allows me to keep that money, not pay it to the government and invest it for the next 10 years so I can earn more on it before I actually have to give it away to the government.
So a lot of what we talk about when we talk about tax benefits of real estate, it’s not necessarily that you’re going to pay lower taxes throughout your entire life. You will actually, and there are a lot of tax benefits there. But a lot of the things that we tend to think about less is how do we just push off paying our taxes till next year or the year after or five years down the road so that we can take that money and we can invest it in the meantime and make a whole lot more money before we have to give any of it to the government.
And so real estate kind of gives us these two benefits. One, it gives us the ability, one, to pay less total tax over our lifetime of the investment. But two, more importantly it gives us the ability in a lot of cases to defer those taxes for a long time. And we can do that through a couple ways. Number one, we have this thing called depreciation. And basically what that means is just like anything else we buy for our business, and real estate is a business expense, that thing is going to wear out over time. If you buy a car for your business, the government says, “Yeah, your car’s going to wear out about 20% per year for five years,” and they’re actually going to let you take a tax deduction for 20% of the car’s value every year for five years. I’m making that up, I think it’s five years. But it’s some amount of time. And you can take a deduction every year for your car.
Likewise, if you buy a printer, you can take a deduction because the government knows your printer’s eventually going to go obsolete. Or if you buy basically anything, a piece of office furniture or a computer, basically the government allows you to take a deduction against that every year as a tax benefit. Same way with real estate. So the physical real estate that you buy is going to deteriorate over time. Your properties, you basically need to maintain them and upkeep them. So the government’s going to allow you to take a deduction against the value of your property over time.
For a residential property, a single family house, you can take that over 39 years. So if you buy a property that the physical structure is worth a hundred thousand dollars, the government’s basically going to allow you to deduct $2,500 a year over 40 years, 39 years actually. And that’s a tax deduction that you get every year. You eventually have to pay it back. When you sell the property, you’re going to have to pay it back, but you can defer taxes for as many years as you hold it. And remember, deferring taxes is good because time value of money.
So depreciation is number one. Number two, we have this thing called a 1031 exchange, which allows you to take an investment property, a rental property or a commercial property, and it allows you to sell that property for another similar property under certain circumstances and not have to pay taxes on that sale. You can then basically hold off paying taxes until you sell that second property, or you can do a 1031 exchange on the second property and defer paying taxes potentially until you die. So between depreciation and 1031 exchanges, there are two great ways to basically put off having to pay taxes on your property for potentially years or even decades. There are plenty of other ways, but those are the two big ones.

Ashley:
J, a kind of a follow up to that is, what rookie investor would make this, I guess, route of investing their priority? Who would choose this one as, “This is the way I’m going to generate money off of my investment.”?

J:
Yeah, so there are a couple things to answer in that question. Number one, if you’re buying rental property, you’re getting depreciation. A lot of us, if we buy a single family rental, we’re going to pay close to zero taxes these days on that rental property simply for the depreciation that the government gives us. We have to take that… Well, we don’t have to take it, but we’re going to have to pay it back at the end so we might as well take it every year. So what we typically find is, if we buy a rental property, we may not be saving taxes on all the other things in our life, but we’re going to typically save taxes on that particular property. And for a lot of my single family rental properties, the income I earn from the rent that I collect, I pay close to zero taxes on that every year. So if I buy 20 rental properties, I may pay close to zero taxes across those 20 rental properties.
Now, in some cases, I may even get more tax benefits than I made in income on those properties and now I might be able to use that income to offset income I’m making from other places. I might be able to offset income I’m making from a consulting job I’m doing or from stock income that I’m making or from a W2 job. And so it has nothing to do with whether you’re a rookie investor or you’re a seasoned investor, it really depends on the type of properties you’re buying. If you’re flipping properties, you’re not going to get any tax benefits. Flipping properties is… If you’re getting into real estate for tax benefits, don’t flip properties. I’ve paid more in taxes then most people should have in a lifetime because I flipped so many properties.
But if you’re buying investment properties, if you’re buying rentals or you’re buying commercial property, you’re automatically going to get some of these tax benefits. And then if you’re smart about the way that you get rid of your properties when you sell them or exchange them, you have the ability to push off paying taxes. So it’s not a question of who should be focused on the tax benefits, I’ll get into that question in a second, but all of us, if we’re buying rental properties or commercial properties, we have the ability to take advantage of those tax benefits even if we don’t try. So that’s number one.
Then we get into the question of who should be investing primarily for the tax benefits. There are a couple people. One, if you are a real estate professional, which means you spend most of your time in real estate but you make a lot of money doing other stuff, you can then take the tax benefits you’re generating from real estate and you can apply it to all the other stuff.
So just to give an example, and I don’t say this to brag or to kind of mention numbers, but the reality is I work in apartment complexes now. We buy and sell apartment complexes. This year I’m going to have over a million dollars in tax benefits that I can use for any income that I might generate. Literally, if I make a million dollars from selling books or a million dollars from consulting or a million dollars in the stock market, I can take up this million dollars in tax benefits I’m getting from real estate and I can offset all that other income, and I can literally pay zero tax this year thanks to what I’m doing in real estate no matter where my income might be coming from. So for me, if I’m making a lot of money selling books, or if I’m making a lot of money consulting, or if I’m making a lot of money flipping houses, the fact that I’m doing apartment complexes and have a million dollars in tax write offs, I basically pay zero tax on anything.
Now, again, I’m not going to pay zero tax forever. I’m just deferring that. At some point I’m going to sell these apartment complexes, at which point the government’s going to say, “Okay, now you owe us all the taxes that you saved on.” But at that point, I’m going to buy more apartment complexes and do the same thing with the income I made from those. And so I’m able to kind of push my tax burden down the road. Hopefully I can push it down the road until the day I die, at which point it’s my kids’ problem. But more importantly, if I die, a lot of it is just going to go away because a state tax allows me to kind of generate a certain amount of net worth before I have to pay any taxes.
So somebody that’s a high net worth earner that’s working primarily in real estate, they may be looking for tax benefits. But even if that’s not you, even if you’re just a new investor that doesn’t make any other income and you’re just buying your first rental property, you’re going to be able to benefit from the tax benefits if no other place than just in that rental property that you’re buying. You might make $10,000 on that rental property just in income this year, and you might pay close to $0 in taxes. That’s a huge savings.

Ashley:
And even for rookie investors, if you don’t even have your first deal yet, it’s great to start your tax planning. BiggerPockets does have a book for this by Amanda Han, it’s The Book on Tax Strategies. It goes through basically a lot of what J. just talked about and kind of breaks it down for you if you want to learn more about it. And then that’s where you can take it to your accountant or your CPA, but better yet to find somebody who’s going to tell you to do these things during your tax planning instead of having to figure it out on your own.
But speaking of books, Dave and J, can you tell everyone where they can find your new book?

Dave:
Yeah, you can find it on the BiggerPockets store or you can go to numbersbook.com. Either one will take you to the BiggerPockets’ store where you can find the book. We just wanted to let everyone know, if you order now, it is still during the pre-order period. And if you buy it now, you have the opportunity to attend a webinar that J. and I will be hosting to talk about the state of the economy. We’ll also be giving away coaching calls. So if you buy the book, you might be able to win a coaching call from either J. or myself, and you can use the free code, DAVE, for a discount of 10%. Or I think you can use the name J. as well.

J:
I think JSCOTT or DAVE, if you put that into the coupon code, you get to save 10%. Whole bunch of other bonus materials as well that haven’t been announced yet, but you’ll see them if you go over to the bookstore. But yeah, a lot of bonus content. The book is called, I don’t know if we’ve even mentioned the name, but the book is called Real Estate by the Numbers. And like Dave said, if you want to get it, you can go to the BiggerPockets bookstore, biggerpockets.com/store, or you can go to numbersbook.com, which will take you right over there.

Ashley:
And where can everybody find out more information about each of you? Dave?

Dave:
Yeah, so either on BiggerPockets or Instagram where I’m @thedatadeli, or check out the On The Market podcast.

J:
Yep. And for me, obviously, BiggerPockets. Or you can go to www.connectwithjscott.com and that’ll kind of link you out to everything I have going on.

Ashley:
Well, thank you guys so much for joining us today on the Real Estate Rookie Podcast. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson. And we’ll be back on Wednesday with another episode.