Dave :

Hello investors. My name’s Dave Meyer and welcome to the BiggerPockets Podcast Network. Today we are covering a breaking news story. If you haven’t heard already, there have been a bunch of antitrust lawsuits lobby against one of the biggest trade organizations in the entire country, the National Association of Realtors. And just last week, NAR, the National Association of Realtors has settled these antitrust lawsuits and what was contained in those settlement really is the potential to change the entire real estate investing industry. And I know that might sound a little bit dramatic, but it is really true. This could really fundamentally shift the way that people buy and sell real estate. So today, in order to fully understand this super important topic, we’re going to bring on Debra Kamin, who is a journalist from the New York Times to discuss the most recent developments. Before we bring on Debra, I just want to acknowledge that this recent and unfolding story has created a lot of uncertainty and a lot of strong opinions about what might happen next, what should happen, whether this was the right thing to do or not. In today’s episode, what we’re focusing on is what we actually know because there’s a lot of speculation and we’re going to just have to wait and see how a lot of things unfold over the coming months. But our purpose here in bringing in Debra is not to say one way or another what should be happening, but instead to just say what has actually happened so we can all learn the facts and form our own opinions about what this means for the real estate industry. So with that said, let’s bring on Debra.

Debra, thank you so much for joining us today.

Debra :

Thank you for having me. It’s fun to be here.

Dave :

For our listeners who might not be real estate agents or familiar with the whole drama that’s been going on, can we just start with the basics and have you explain to us what the National Association of Realtors is in the first place and what is their significance to the real estate industry?

Debra :

Dave, such a good question and the word that I’ve been using this week as I’ve been talking about the fallout from the story, the words are invisible hand. Essentially the National Association of Realtors has been for a hundred years like an invisible hand that’s guiding the entire housing market because they are such a large and powerful trade organization. And because to buy or sell a home in the us, you basically have to be a member. Otherwise they make it incredibly difficult.

Dave :

And that’s for real estate agents who need to be members of the National Association of Realtors, right?

Debra :

Correct. Exactly, yes.

Dave :

And how do they make it difficult to buy or sell a house if you’re not a member?

Debra :

So there’s a couple ways and pretty much from the entire transaction, from getting the house on the market to physically getting into the house to show it to a buyer or a seller, to then even completing all the documentation that comes with a home sale NAR is involved from the get-go. The most important way that they’ve really practiced control over the market is through these things called multiple listing services or MLSs. These are just databases where homes are listed for sale. So if I am selling a home and I hire a real estate agent and I say, okay, let’s put this house on the market, they’re going to put it on something called the MLS. But in almost every city in the US the MLS is actually owned and operated by the local subsidiary of NAR. And in order to access that database and see the houses for sale, you have to be a member. So it’s basically if you’re not a member, you can’t see if the homes are even on the market. You can’t bring buyers to them. You can’t operate in this space as an agent.

Dave :

Okay. So NAR is this essential part of the real estate buying and selling industry right now, as you said, they are sort of this invisible hand over the last couple of years they’ve faced many lawsuits, but there’s been one in particular over the last few months that has been really important. Can you tell us about these antitrust lawsuits?

Debra :

Absolutely, and I want to be really clear, there’s one that was really important. There was one lawsuit that was, they lost in October, but the settlement that we’re talking about actually wraps all those lawsuits together and is a global settlement because all of these lawsuits have made the same accusation. NAR has set rules for how agents are paid for the work that they do for the commission that they receive, and even how that commission is communicated to them. And because they are so powerful and because they control so many aspects of the housing industry, there have been arguments against them that these rules are essentially anti-competitive. I don’t know if you know about the 6%, I don’t know how deep you want to get into this, but are we familiar with the 6% that people pay to buy and sell a home? Do you want me to dig into it for a sec? I think

Dave :

A lot of our listeners are, but let’s get into it because I think the details do really matter here.

Debra :

Yeah, so 6% is this number that when we’re talking about this settlement with NAR, everybody has been throwing it around 6% is essentially the standard fee that you almost always have to pay somewhere between five and 6% in America. If you are selling a home, this fee is not written anywhere. It is not set in stone, it is not required. And that has been n NAR’s argument. But because the way they’ve set up the rules and because there’s really been no way for agents to be competitive in real estate, everyone has essentially charged the same fee. When you sell a home and you pay 6% to your agent, that agent then will take half of that and give 3% to the buyer’s agent. If I’m selling my house, I pretty much just have to take on this additional cost of 6% of the sale price that I’m going to pay and commission to my agent, and then that agent’s going to go ahead and pay the buyer’s agent.

And in 2018, 2019, a group of home sellers in Missouri looked at the contracts that they’d signed with their real estate agents and realized that they did not know that they could have negotiated that fee. And in some cases they didn’t even know they were paying that fee until the money had already come out of the transaction and they thought we might have a, so they went and they got an attorney. And that spiraled into a class action lawsuit in Missouri that in October of last year, NAR lost and the loss was nobody was shocked by the loss more than NAR themselves. They never expected it. And since then it’s really been just like a domino effect. That brings us to where we are today.

Dave :

Thank you for explaining that. That was a great explanation of how this works and how we’ve arrived. At this point, I do want to ask a little bit about these contracts because I hear from real estate agents all the time and I know from my own personal experience that these commissions are technically negotiable. And so what is sort of the point here or why did the jury side with the plaintiffs here saying that there was actually this collusion to keep prices high when technically you are able to negotiate,

Debra :

So technically you are able to negotiate and that has been NA’s argument all along, but whether people actually are aware that they can negotiate and whether if they negotiate they are then put at some sort of disadvantage in the market is an entirely different conversation. The two pieces that were argued in court were not even really about the 6%. The first was this rule that NAR has that a seller agent can offer commission to a buyer’s agent. And by doing so, it has made commissions high. So if I’m an agent selling a house, when I’m telling my clients you need to pay commission, that commission needs to be big enough that I get my piece and the buyer’s agent gets their piece. So that has inflated these commissions up to 6% because half of it has to be split with the buyer agent. And there was actually a rule that NAR had that anybody who was a member of the organization had to follow that if I’m a real estate agent and I’m selling a house, I have to make an offer of commission on these databases where homes are listed to the buyer’s agents.

And basically what that means is buyer’s agents, if they’re taking customers around to see homes, can see before they even take people into the homes, how much they stand to make if they sell that home. So why would anyone offer less than 3% if they’re trying to sell a house, why would they say, Hey, come see this house. I’m only going to give you 2%. You’re not going to get any buyers to come buy this house that you’re trying to sell. And that has kept commissions inflated artificially. So that was the first thing the jury said, this is a conspiracy, this is price fixing. There’s no room for competition here because these rules have made it that everyone’s offering the same thing because otherwise they can’t compete. The other aspect of the argument was this idea that offers of commission are made on these databases in the first place because that means that only people who are in this organization and following these rules can sell homes. It keeps all other people who might offer different types of commission or might even sell houses differently if they’re not members of NAR. It keeps them out of the market because if you can’t access the MLS, you can’t access home listings. You can’t sell a home without accessing home listings. So those were the two pieces that actually came down and were discussed court.

Dave :

Alright, so now that we know the basics of these lawsuits and where the 6% commission rate came from, we’re all wondering what happens next? What do these changes mean for you? Whether you’re an investor, an agent, or just someone trying to buy a home? Deborah spells out the scenarios we may see right after the break.

Welcome back to bigger news. I’m here with Debra Kamin from the New York Times talking about the breaking in NAR settlement and what it means for the real estate industry as a whole. Thank you for explaining that. Debra. I know this is sort of a complicated process, but the details do really matter here. And for everyone listening, I know you probably have your own opinions on which way you would’ve cited if you agree with the jury that this is collusion or if you agree with the NAR that this is a perfectly fair practice. I totally understand this is a complicated topic, but today in our conversation with Debra, I want to focus on what might happen next because the jury’s already made a decision and so let’s look forward into how this might impact all of us in the real estate investing industry. So Debra, tell us a little bit about this settlement. We just heard about the judgment that was made back in October. What is the settlement that took place over the last week?

Debra :

Yeah, so Friday morning, we’re talking really early Friday morning like 1:00 AM Friday morning NAR. And the attorneys for the plaintiffs in these settlements decided to settle and it came for many people as a surprise when the verdict came down in October, NAR stance really was that this was a false verdict. There was no price fixing, there was no collusion. They were going to appeal, they were going to appeal, they were going to appeal. That was their line. What happened after that lawsuit is the floodgates essentially opened and all these other copycat suits started being filed and by the time we got to Friday, NAR was facing something like 20 different lawsuits all making the same accusations, and the pressure had really become insurmountable. So they decided to settle. The amount of the settlement is $418 million, which is a fair amount of money, but what’s more important is the rules that they’ve agreed to change as a result of the settlement.

And those include that sellers agents can no longer make these offers of commission to buyer’s agents using the databases. That’s the main thing. And there’s other rule that homes have to be entered into these databases that are controlled by nar. That rule has also changed. So what it’s done is really for the first time in a hundred years broken this hold that NAR has had over the real estate industry and allowed the possibility for competition to enter the market. And we all know that when competition enters the market, prices tend to go down because people can compete and offer the safe services for less or offer different types of services, and that’s what we’re going to see.

Dave :

And can you tell us a little bit just logistically how this new competition may play out and drive prices down?

Debra :

Yeah, absolutely. So there’s been a lot of questions people have said, how is it possible this is going to lower prices if all this means that now buyers are going to have to pay their own agents? And the reasoning behind it, every economist I’ve spoken to has said the same thing. When you sell a house and you sit with your agent and you set the price that you’re going to put the house on the market for, it’s a number you agree upon with your agents. Anyone who’s ever sold a house has gone through this and the agent says you’re going to pay commission. That amount of commission then gets baked into the home sale price so that if I’m selling a house that’s worth a million dollars or I want to take home a million dollars from the home sale, we tack on enough so that the commission can come out of that sale and I can still walk away with money.

So home prices have been elevated artificially according to the lawsuit because they have included this high commission rate for so long. So if those commission rates go down, the amount that’s baked into the home price is also going to go down, which is going to lower home prices across the board. It might just be one or two percentage points, but when you think incrementally about the size of the US housing market and the amount of money that Americans have traditionally been paying for commissions, it’s something like a hundred billion a year that Americans spend on home commissions alone, economists forecast that number is going to go down by like 20 to $50 billion. So think about that reduction into home prices across the board that will lower home prices. It will also make the cost of moving lower because the commissions involved with moving are lower, which might encourage people to move more often, which will put more fluidity into the housing market and really just give a bit of an injection to a housing market that is so stagnant right now because affordability is so dire for so many Americans.

Dave :

I get how commissions could get forced down or a downward pressure could be applied to the seller side commission. Right now, if you’re a seller, you’re like, Hey, I only want to offer 2% or I’m only going to work with an agent who offers for two or 3%, but the part of the puzzle here that’s confusing to me is the buyer side. So if sellers aren’t going to pay for a buyer’s agent, does that mean we’re going to see a complete shift to where buyers have to pay a commission or a flat fleet or somehow pay for the real estate agent that they presumably will use?

Debra :

Dave? It’s such a good question and it’s one of the big things that people are most concerned about with this settlement because for so many buyers, especially first time buyers, they are barely scraping together enough pennies just to have a down payment. So now think, oh my God, now I have to pay commission to my agent on top of this. How am I possibly going to afford this? It is highly problematic. That being said, what this is going to do is allow for there to be new models for how buyers work with agents to enter the market. The way that we buy and sell houses today in the US is radically different than it was 50 years ago. It used to be if you wanted to buy a house, you called a real estate agent, they picked you up in their Volvo, you drove around, you saw the houses that they knew that were on the market, you looked to ’em, that was it.

Now 99 to a hundred percent of home buyers are using sites like Zillow and Redfin look at the market themselves before they work with an agent. This doesn’t mean that buyers still don’t need agents. This is probably the most important financial transaction of someone’s life and there’s a very strong argument to be made for working with an expert, but it does mean that perhaps what the rate that we’re paying should shift or should evolve or should somehow represent a different type of compensation because the process is different. So we might see agents who are charging a flat fee or charging by the hour. We might see sites like Redfin and Zillow making it so you can look at home listings and then buy through those sites the same way we can now book travel through Expedia and Kayak when we used to have to go through a travel agent. There’s a lot of options here for the entire market to completely be restructured and recalibrated because this choke hold that NAR has really had, and I use that word carefully, it’s been broken for the first time.

Dave :

Deborah, are there any models from other countries or elsewhere that could be an example of what might play out here in terms of new models for agents and buyers working together that we may see here in the us?

Debra :

That’s a really good question, Dave. I’ll tell you what I do know, and I’m not an expert on international home buying by any means, and I don’t want to pretend that I am. I will tell you that real estate commissions in the US are among the highest in the developed world. It’s something like number three out of all countries. In most countries, they’re not 6%. There’s something closer between two and 3%. In a lot of countries, buyers don’t use agents. In some countries dual agency where an agent represents both people is much more common. There are pros and cons for that argument. Some people say it’s great because it saves money. Other people say you have one person working both sides of a negotiation which causes problems. So yeah, I think actually a really good way for real estate agents to think, oh my God, what’s the day after going to look like once they recover from the blow of this news is to look at other countries and see if there is a model that would apply. Obviously the entire economy in the US is different than other countries and our housing market is different. So it’s not a perfect comparison, but it would be a good place to start to get some ideas.

Dave :

Yeah, it’s super interesting to think about. I am still trying to wrap my head around it because it’s just so foreign from what I’ve experienced being in this industry for the last 15 years. I’m wondering if you think there’s an opportunity or one of the models may be fewer people using real estate agents, and I am a big proponent of people using real estate agents. I think they add a tremendous amount of value and it sort of worries me a little bit to think about, particularly like you said, first time home buyers trying to go it alone on what can be a complex and really financially intensive decision.

Debra :

I totally agree with you. I will say I have gotten a lot of angry emails over the past few days from real estate agents and there are a lot of really high emotions right now. Completely understandably. Part of the reason for that is that real estate agents have been very much left on their own to make their own money to survive financially and then also to deal with the fallout of this lawsuit without any sort of support or guidance. Most of them are not employees, they’re freelancers. Even if they work for brokerages, they have to split that commission with the brokerage they work for, but they don’t have the benefits of being a full-time employee or the security or the safety. And most of them have been paying dues to NAR for years loyally and then feel like after putting in all that money and all that time NAR went to court, they lost and now it’s the agents who are left seeing their livelihoods potentially halved or slashed, and then also being vilified by some people who are saying, well, hey, I don’t even need an agent in the first place.

What I definitely think will happen as a result of this ruling is we are going to see fewer agents in the marketplace. There are a lot of real estate agents in America, tons and tons. So many people during the pandemic especially went and got their real estate license because it’s not that difficult. It takes about 40 to 50 hours of certification and when the market is really hot, you can make a lot of money really quickly selling a home. Those agents, the ones who are only selling a home casually here and there probably will leave the market. The ones who are really good at their jobs, the ones who really do provide an extremely useful benefit to buyers and sellers will stick around, but we’re going to see probably a time of transition before it flattens out. And then the ones who stick around, they have to change how they are paid and that’s going to be painful for some of them.

Dave :

Absolutely. Yeah. I forget the exact data, but there’s some stat where it shows something like 20% of agents do 80% of the volume. So there’s about 1.5 million members of NAR and as of the last reading, the amount of inventory on the market in the United States is 900,000,

Debra :

Right? So imagine how competitive it is. This is why real estate agents are panicking understandably. There’s so many agents, there’s so few houses, and now they’ve just been told even if you do sell the house, you’re going to make less than you plan to make less than your entire financial structure was built around. This is really tough news. The good news is that if we do see fewer agents, the ones who stick around stand to be more successful once the dust settles from this, I hope that’s at least comforting. That

Dave :

Is the feedback I’ve gotten. I have a lot of close personal friends and professional friends who are real estate agents, and that does seem to be sort of the prevailing belief here is that there is going to be some short-term pain. I think that’s the unfortunate news for the real estate agent industry, but a lot of the people I know who have built successful businesses over the last 10 or 20 years feel that what this will likely do is eliminate a lot of the people who are part-time agents, and I actually even know a couple part-time agents who are like, yeah, I’m probably not going to renew my license and have sort of owned up to that. This is no longer going to be worth it to them. But the people who make this their profession and who do add tremendous value to this industry, and especially obviously to home buyers, but in our industry of real estate investors, they add a tremendous amount of value. I think a lot of the experienced people I’ve talked to have echoed what you said, Debra, is that they feel like this might actually be beneficial to them in the long run, but it’s going to be an uncertain period here for at least six months a year, and it maybe even a little bit longer. Alright, we have to take one more short break, but stick around because Debra’s going to give us her insights on the future of NAR right after this.

Welcome back everyone. I’m here with real estate reporter Debra Kamin. Let’s jump back in.

Debra :

One of the other criticisms of NAR over the past few months that I’ve heard is that they have not done their job as a trade organization of convincing people of the value that real estate agents bring. So many people now hearing about this verdict are saying, oh, well, I’m just going to not use an agent. And okay, fine. Obviously you can buy anything you want with or without an agent. This is one of the nice things about living in America that is part of the economy, but there is something to be said for being guided through the transaction NAR and their role as the largest most powerful trade organization in the US has put out some sort of materials about the value of real estate agents, but they’re not getting into the market. People who are buying and selling homes, the message is not resonating. And that’s a problem too for real estate agents, especially for those who are thinking, wait a minute, is my entire financial future now at risk because of this ruling that they lost in court? So there’s a lot of anger towards them, and I think it’s understandable. There was a lot of arrogance going into this case and they did not expect to lose.

Dave :

Well, they have been quite successful historically at sort of swatting down lawsuits because they do get sued quite a lot and they have, but well,

Debra :

I’ve spent a lot of time examining their financials and they spend a lot of money on lawyers,

Dave :

Aren’t they? One of the biggest trade lobby groups in the whole country,

Debra :

Dave, they are the largest political action committee in the country. So not only are they the largest trade organization in America, they are the largest political action committee, and that has been really, you just hit the nail on the head. That has been the key to much of their power because in addition to being a trade group, they give money to candidates who support their agenda and they spend money to fight candidates who don’t support their agenda. So they’ve been able to really maintain a lot of their power and influence through that avenue. Now, if they stand to lose as many members as is projected, and some of the projections are, they’re going to lose up to two thirds of their membership. That also means they’re going to lose a lot of their political donations, their members who fund their pac. So that means that the lobbying arm that’s pushing a lot of these agendas in Washington is going to be a lot weaker. So that’s the real fallout couple years from now that I have my eye on for what the real impact of this is going to be. It’s not just about commissions being baked into home prices.

Dave :

Wow. And Kailyn, our producer just sent me a note that the amount spent lobbying by NAR in 2023 was $52.4 million.

Debra :

That’s actually probably not even the number because that’s

Dave :

The number really, it’s

Debra :

Higher. Well, that is the number that they have officially spent through their own channels, but they also make a lot of donations to other groups who then filter that donation to other groups. And that in addition to NAR, you have to remember there’s the National Association of Realtors, but then at every state, there’s the California Association of Realtors then have had Association of Realtors, and then every state has its own small city groups. So there’s the San Diego Association of Realtors. Each of these groups also have political action committees and also raise money, and a lot of the funds are flowing back and forth and then being moved to nonprofits, and this is a project that I’ve been working on. It’s a story that we haven’t published yet, but I’ve been tracking their finances for quite some time to really see the size and scope of this machine of money coming from the realtor lobby and where it goes, and it’s monumental.

Dave :

Wow. Well, it really makes you wonder what the future of NAR is going to be if there’s a lot of dissatisfaction among its members. People are projecting such huge losses. Do you have any thoughts on how this might shake out for the organization itself?

Debra :

I don’t see a day where NAR is gone completely. I think that they a serve an extremely important role in the housing industry and the real estate industry, and they’ve been around for a very long time. There’s a lot of legacy and a lot of history, but I also cannot imagine a future where they have the same unchecked influence and sort of wild power that they had a year ago. They have been through so much over the past year, not just the lawsuits, but also the sexual harassment. Have we talked about that? Do we want to talk about the sexual harassment?

Dave :

I think we should because their organization I do. But yeah, so I know there’s been a lot of internal turmoil at NAR, but could you fill us in?

Debra :

Yeah, I mean, I enter the story at this point in many ways. When I became a real estate reporter at the New York Times, which was a little bit over a year ago, I had never heard of NAR. Most people who have not bought or sold a home or not directly involved with real estate investing have never heard of NAR. They just know that they have a realtor and they think realtor is a normal word. They don’t even know that realtor is a word that has been trademarked by NAR, and you cannot use the word unless you are a member. None of this was on my radar. So I started looking into them and I became aware of many allegations of extreme sexual harassment and bullying at the National Association of Realtors. Most of those allegations were directed against one man, Kenny Parcell, who was the president of the organization.

And at the times, I published an expose on these allegations last August, and that was really the moment that NAR entered the global stage in the conversation. A lot of people who read that story had never heard of them and did not know how powerful they were. Kenny Parcell resigned two days after the article ran, and there was a lot of uproar at the organization from staffers because not only had he allegedly been sexually harassing women, many women who had been whistleblowers were paid off. There had been lawsuits that had been quietly closed, and there were a lot of calls for the CEO to resign and for there to be other staffing changes. All of this was happening in the background when NAR went to court in October. So since that moment, they’re now on their third president in six months and they’re on their second CEO. There’ve been a lot of other resignations since then. So they’re having all of this turmoil with their leadership and all these legal challenges, and every single one of these events is like a cut, right? So you add up enough cuts, their power has really been blunted because of it, and their reputation has been blunted.

Dave :

Wow. Yeah. It sounds like we’re just sort of at the beginning. I know we’ve, A lot has already happened per your reporting and multiple leadership changes, multiple lawsuits, but I think this is going to be a story that continues to unfold, it sounds like for months on the NAR front and certainly on the commission front and how this all impacts real estate agents. So Debra, we’ll have to have you back hopefully sometime in the near future to fill us in on how this story continues to evolve.

Debra :

I’d be very happy to do so. Thank you.

Dave :

Thanks again for joining us, Debra. We appreciate it.

Debra :

Of course.

Dave :

Another big thanks to Debra for joining us for this breaking news episode. Now, I know that this is a very important and often controversial and sometimes emotional story that really impacts every corner of the real estate investing industry. I, myself, am still trying to think through all the implications of this settlement, and I do want to recognize that for real estate agents and people who work with them, this can be a difficult and maybe a frightening time right now, and we would love to hear from you. If you have some comments or thoughts on what this means for you and your industry, we would really appreciate your input. So if you’re watching this on YouTube, please comment in the comments below. We also have BiggerPockets forums about this, BiggerPockets blogs that you can comment on, because we want to hear from those of you who in our industry, that this impacts whether you’re a real estate investor, a real estate agent, or someone else in the real estate industry. Thank you all so much for listening, and we’ll see you again soon on the BiggerPockets Podcast Network on the Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

With inflation hovering slightly north of 3%, the Federal Reserve’s meeting this week and its decision to leave interest rates where they are were seen by many as inevitable. Inflation has dropped dramatically since its post-pandemic high of 9.1% in 2022 after the Fed hiked up rates, bringing an overheated real estate market to a standstill.

However, it’s still proving a stubborn beast to tame, as the economy has remained resilient. Thus, leaving rates as they are—the federal funds rate is currently at 5.5%—is a hedge against inflation rising again should the Fed choose to lower rates later.

Is the Fed’s desired 2% inflation rate doable? How long can a straining real estate market, desperate for oxygen, hold out? Those questions have undoubtedly been on the Fed’s mind as it attempts to balance holding the line and stimulating the economy.

Low Inventory Has Played a Role

The lack of housing inventory has undoubtedly influenced the Fed’s decision to keep rates stagnant. Similar to what happened after the pandemic, lowering rates when there is little housing stock to go around is an explosive combination that causes sky-high price increases. Ditto for rent.

The lack of housing availability and affordability has seen many renters waiting on the sidelines for a break. The relatively low unemployment numbers—which have lingered below 4% for the longest period since the 1960s—have provided an uneasy equilibrium, allowing landlords who hold property financed at low interest rates to keep buildings rented at high rents while potential homeowners and investors stay put.

Dovetailing rate cuts with an impending building boom in Sun Belt cities that saw dramatic population growth could be a more pragmatic approach. Indeed, construction of new homes increased 5.9% last month from a year earlier, boosting builder confidence. 

A Balancing Act

The Fed’s challenge is to keep price growth bottled by leaving rates where they are without escalating unemployment, which would topple the economy into a recession. Although the Fed is supposed to be politically impartial, that would not be a good look in an election year.

Ironically, a contentious subject also tied to the election—immigration—could also play a role, as more workers put downward pressure on wage growth and thus slow inflation. 

“More people entering the country expands supply and demand,” Matthew Bush, U.S. economist at Guggenheim Investments, told NBC News, saying what most politicians would not. Immigrants, he contended, have a higher tendency to be in the labor force. This means “the expanding supply pool of available workers is greater than increased demand for more workers. That increases economic growth, and you have a greater capacity to produce new goods and services.” 

The Economy: A Hot Political Topic

There’s no doubt that inflation and the Fed rate cut decisions are hot political topics, especially during an election year. The Fed doesn’t want to be caught in the middle and certainly doesn’t want to be accused of influencing the election one way or another, which it would be seen to do if it cuts rates too late.

In his State of the Union address, President Biden alluded to making it easier to build affordable housing, and while tax credits and access to loans will help, lower interest rates will be a massive boost in that area. 

“Any political considerations align with their economic objectives,” Bush told NBC. “The only thing is they might not want to start the rate-cut cycle in the months before the election cycle, so they’d probably prefer to get started in June rather than September so it’s not too close to the election.”

Mortgages

Although rates on 30-year fixed-rate mortgages don’t match the Fed’s benchmark, other loans, particularly those many investors opt for, such as HELOCs and adjustable-rate mortgages, align with the Fed’s rates, usually mirroring them within two billing cycles. 

The average rate on a home equity loan was 8.59% as of March 20, according to Bankrate.com, while the average HELOC was 8.99%.

Final Thoughts 

For homebuyers and investors, high rates for the last two years have been painful, and while many people have tried to spin 7% to 8% rates as normal within a historical context, to see interest rates double within two years without increased wages softening the blow has put a massive dent into people’s financial lives. 

It seems like there will at least be some sort of rate cut before the end of the year, but it won’t be substantive. Yes, they will allow a little wiggle room for mortgage approvals but don’t dream of 3- 4% interest rates again—no matter who is sitting in the White House in January 2025.

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The 15-minute city as a concept has been around for a while now. First introduced by the Colombian-French scientist Carlos Moreno and eventually implemented as an official urban planning policy by the City of Paris, the 15-minute city promises its residents access to amenities without the need for a car. 

The idea is that you should be able to go to work, do your grocery shopping, visit the local medical center, and pick up the kids from school, all within a 15-minute walking radius of where you live. This all sounds wonderful, but what matters from an investor’s point of view is whether there is demonstrable demand for it—and whether it will continue growing. 

So, are 15-minute cities worth factoring into your real estate investment decisions, or are they just a temporary fad?

Beyond Walkability: Why the 15-Minute City May Be a Useful Concept

Most real estate preference surveys focus on walkability as a growing demand factor. The National Association of Realtors (NAR) is the most robust source of data on the subject and has been running its Community and Transportation Survey every three years. The results of the latest one, completed in 2023, are actually pretty mixed if we take walkability as a stand-alone measure of a location’s attractiveness. 

In fact, only 48% of respondents rated walkability as a high priority if they were planning to move. Instead, people prioritized high-quality public schools in the area (62%), a short commute (61%), and having a large yard (56%) and a large house (54%). Note that the majority of those respondents (53%) were homeowners, and only 36% were renters. 

It’s not that being able to live in a walkable community doesn’t matter. It’s just that, for current homeowners, it doesn’t matter enough to move the needle in their decision-making.  

Does that mean that the 15-minute city idea is of no value to a real estate investor? Au contraire. In fact, it may be a more valuable tool for investors than surveys about walkability. 

What matters isn’t just walkability on its own but where and what people would be walking to. The 15-minute city concept is about more than building more sidewalks and bike lanes; its core principles are sustainability, solidarity, and citizen participation. 

In other words, it’s about people building meaningful connections and supporting each other within the community. This is quite a different setup from your typical suburban residential neighborhood, with a sidewalk for jogging. 

What Renters Want

Recent research that zooms in on renters’ preferences shows that their values increasingly align with this concept of a supportive, friendly neighborhood where people can connect. 

One in-depth survey of 1,500 renters in multifamily apartment units across the U.S. by a resident experience company called Venn found that the vast majority favor three things: 

1. The chance to live in a place with thriving local businesses (4 out of 5 respondents)

2. The ability to grow their social connections and socialize with neighbors (three-quarters of respondents)

3. Opportunities to volunteer in the local community (3 out of 4 respondents)

The Venn survey emphasizes that many landlords don’t understand what renters actually want, mistakenly assuming that they’re attracted to the latest smart home technologies and free subscriptions to services like Netflix. But these things factor very little into people’s decisions about where to rent—and even less into their decisions about whether to renew their lease. Instead, the survey found that renters who were satisfied with their local communities were twice as likely to renew their leases than those who were “amenity-rich” but didn’t feel like they belonged where they were.  

On a purely psychological level, this makes a lot of sense. Renters know that where they’ll be living likely won’t be their dream home. Most renters have to compromise a lot on space, furnishings, and even the type of housing they end up living in. No amount of Netflix will fix that. However, making friends and hanging out at a great local café may just take the edge off some of the downsides of the renting experience. 

The survey even found that people reacted more positively to apartment ads that showed communal spaces with people in them, as opposed to just images of empty apartments. 

Doing Your Neighborhood Research the Right Way

As is so often the case with doing successful market research as a real estate investor, the trick here is to switch on your nonlinear thinking. It’s not that walkability doesn’t matter to renters; it’s just that taken as an isolated factor, it’s not very useful. Instead, what pays off is assessing the whole neighborhood. Walkability is not a bad place to start this kind of assessment because highly walkable neighborhoods also tend to be the ones that have thriving businesses and communities. 

Antoine Bryant, Detroit’s director of planning and development, described growing up in a walkable Brooklyn neighborhood in an article about 15-minute cities: “I looked out the window, and across the street was a bodega, which is like a mini-grocery store. Fish market, dry cleaner, meat market, pizza, another dry cleaner, liquor store, hardware store and then another bodega.”

This is the sort of thing the modern renter wants. The success of cities like Portland, Oregon, Boston, and Baltimore is not just due to these places drastically improving walkability. It’s the whole urban regeneration package, with communities transformed by sustainable green spaces, thriving small businesses, and an overall friendly and inclusive environment. Not only do renters like this setup in theory, but they are also prepared to pay more for it.  

A cursory look at recent rental market trends in Portland, for example, shows that it really pays to do your research on a granular, neighborhood-by-neighborhood level. Don’t look at overall rent statistics. 

Portland’s average one-bedroom rents are showing a 4% annual increase. But look at the annual rent price increase for the popular King’s Hill Historic District (full of restaurants, cafés, daycare centers, etc.)—it’s a whopping 31%. Oh, and by the way, King’s Hill has a walkability score of 94. Food for thought?

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Ashley (00:00):
This is Real Estate rookie episode 382. Today’s guest has not won, but two different horror stories that we’re going to cover. They range from $50,000 worth of water damage and a remodel that took over a thousand days. So you don’t want to miss some of the lessons learned from this one. I’m Ashley Care and I am your host of the Real Estate Rookie Horror Show today, where every week, three times per week, we are bringing you the inspiration, motivation and hair raising stories like today that you may need to learn to be successful. I’m here with Daniel Stoll, an investor out of DC that has been investing for four years. We are going to cover a nightmare remodel and things you need to know when using flipper contractors on your 2 0 3 K loan for your primary will also cover what a 2 0 3 K loan is. Also why interest rates and deal analysis matter more than you think. Why renter’s insurance may not always be the safe bet when placing tenants. Daniel, welcome to the show. Thank you so much for being able to join us today to talk about these traumatic experiences that you’re going to share with

Dan (01:15):
Us. Thanks, Ashley. I’m really looking forward to it and I know there’s a lot that can be learned from some traumatic real estate experiences, so happy to share.

Ashley (01:23):
Well, Daniel, I appreciate you coming onto the show today. Let’s get started with what is the first horror story that you want to talk to us about today? Kind of set the tone, set the picture, give us some description of where you are at your own life and what’s happening with this nightmare.

Dan (01:40):
Sure, thank you. Happy to share. During Covid, I actually ended up moving out of the Atlanta area and in with my now wife and during that time when I moved up I wanted to fill my, what was my old primary house and fill it with a renter at a couple of other properties in Atlanta. So I had been a little bit experienced in that and the tenant that came into the property ended up being not who he said he was and ended up being a really complicated story where I had a little bit of the tenant from hell.

Ashley (02:19):
So with this tenant, what were you doing with the property? Was this just you strictly rented it out as a rental? Was it short-term, rental long-term rental? Tell us a little bit about the property.

Dan (02:29):
Oh sure. I bought it as a personal residence. It was kind of a big one bedroom with a den, so I converted the den into a full bedroom so I could live in the place where I wanted to live in midtown Atlanta and had a renter in there for a while who became one of my closest friends actually. And then when I was moving out, we both moved out and I converted it to a long-term rental at that point. So I had rented it for a couple years before I ended up finding the wrong or a bad tenant that got placed in there. And so I had wonderful tenants that were there before. Midtown is kind of a luxury area of DC or area of Atlanta that’s really walkable. It’s really gone through a glow up in the last 20 years and it’s high rise luxury buildings, and this was a lost property that was one of the only true lost in Atlantis. It was a really wonderful property and so I rented really well, but the tenants that I had ended up buying their own place in that building because they loved it so much. And so in the middle of Covid kind of late 2020s, I had to find a new tenant. And at that time in Atlanta, the tenant pool wasn’t as great as it had been in the previous years. And so I can talk a little bit about how finding a tenant went there and kind of the things that went a little bit sideways.

Ashley (03:58):
Yeah, I would love to hear that. I definitely want to get into why this tenant was a nightmare, but let’s talk about finding that actual tenant. What are some of the things that you were doing during C to put a tenant in place?

Dan (04:12):
Oh, great. I’m still learning how to do tenant selection. I have done it, we have five, but now four properties at the time. I’m not really great at tenant selection. It’s something that I’ve learned through trial and error, and so now I engage systems to be able to help me select good tenants. But I did want to learn that as kind of a beginning real estate investor over the last four years, how to do tenant selection. And so with this property, I was looking for someone who kind of fit the mold of people who wanted to live in a midtown and I wanted them to be able to stay for a little bit longer period of time, which isn’t always the case with a lot of high income professionals moving into a certain location. So for tenant selection, there’s a company that does tenant selection in Atlanta.

(05:06):
They have a lot of experience with that rent marketplace and they are experts at selecting tenants and they’ll do it for you or they’ll help you along the way. And so I used their systems to be able to do that, but I did kind of the review and selection myself on this one. So I had in Atlanta at the time, it was kind of three times gross rent. There was a credit score minimum of six 20. I wanted to see a verifiable rental and income history and I wanted to see the move in funds in a bank account that were equivalent to the security deposit and the first month’s rent. I didn’t want to see bankruptcies or collections or write-offs on what came up on the credit report. And then I did have a preference for longer term renters, no smokers and no felony convictions. So for this place in Atlanta that didn’t narrow the tenant pool too much.

Ashley (06:03):
So I mean you’re doing something correct, you’re creating a criteria, you have at least a list of guidelines. You’re not just winging it with, oh, you know what? This lady seemed really nice. I have a really good gut feeling, I’m going to go there. So when you met with this horror tenant or you started their application process looking back and now are there any red flags or why do you think following your criteria didn’t kind of give you the perfect

Dan (06:32):
Tenant? And I had been encouraged by mentors in the real estate investor community there to have a really written, actually written tenant selection criteria. So that’s what I did for each person looking back, it was the operational, it was actually how I put it into practice. And so I’m a pretty detail oriented person, so all that stuff needs to be verifiable. So I need your W2 or 10 99, I need your last two pay stubs. I re corrected your two months of bank statements. We did a credit score, a background check and really verified each one. Where I missed was looking at really particular details. So as I said, it wasn’t a good tenant environment and I wanted to get the place rented as we all do.

Ashley (07:23):
So you felt kind of rushed as to giving a little bit of leeway when your tenant screening just so you could get someone in there. I’ve been in the same boat before,

Dan (07:34):
Correct. And really the worst mistake, it’s better an empty house than a bad tenant, especially in long-term, single family home real estate or apartment. But so for this one there were key things. So what I like to see now is from the bank statements, I want to see the income that is actually itemized in that bank statement. So it’s got to match up with the pay stubs that I’m seeing so you can actually verify that they’re getting paid and it’s going into this bank account also, it’s got to verify their rental history. Do you see the lease that they said that they’re paying on and is that coming out of that bank account? If not, you got to get receipts for those things. And so what the place where I skipped is I allowed this tenant not to send me his 60 days of bank statement, but a bank receipt from an ATM.

(08:31):
And so I wasn’t able to verify those, so I skipped that step that I had. Also, you’re doing this for a lot of different people and so it takes up a lot of time, but you want to make sure that you’re really detail oriented there. And then with verifying the rental history, I call the former landlords if they own their own home, you can even look up the property records and make sure that they’re those match what they came up on, their rental history and what they said in their application. And so you got to be really detail oriented about this stuff. And so I didn’t verify where his previous address was through property record search and I didn’t look at the bank statement to make sure that the income that was provided was matching what was coming in to the bank statement.

Ashley (09:18):
It is funny, people put so much weight on deal analysis like don’t trust Zillow for the property taxes. You have to go and you have to verify, you have to look at what the school taxes are, the county taxes are. But when it comes to tenant screening, it’s not as much of verify, verify, verify, go into detail. There’s all this rush and excitement to get a tenant into your property that there’s so many things you can do to safeguard yourself, even though it’s not guaranteed, there’s still steps that you can put into place because there are going to be, there are going to people who are going to want to try to get into your property that actually aren’t qualified for it and they’ll do whatever it takes to get into there. So we’re going to take a quick break and when we get back, I want to understand why this tenant actually became horrible. What did they do? What happened that made them such a bad tenant? So we’ll be right back. Okay. So welcome back from our short break. We are here with Dan who just talked to us about tenant screening of some of the things he does during his process and things he didn’t do but has learned lessons on that. He does do now. And we’re going to find out right now. Dan, why was the tenant that you put into your building during Covid, why were they so awful? What happened?

Dan (10:38):
It was good until it wasn’t.

Ashley (10:41):
How long was it good for? How long did that last?

Dan (10:44):
Probably six months. So paying on time and not creating issues in the building and apartments, you have a little bit more consideration for other people who are living there. So you want to consider that in your tenant selection process as well. What went wrong was just he always was a little bit late. I just thought he was kind of a single bachelor guy that just wasn’t quite on top of all of his

Ashley (11:11):
Finances. Yeah, right.

Dan (11:14):
So it’d take a while to get things from him, but other than that, it was okay when things went wrong, it was just one night I got a call at two 30 in the morning after what I realized were a flurry of emails that were going back in the building and there was an active big water main break is what they thought at the time that was flooding someone’s apartment on the first floor. It turns out they were rushing around trying to figure it out where it was. It turns out it was coming from my apartment. So they looked everywhere and then they knocked on the door very early in the morning. Eventually the tenant came to the door, opened the door, and they saw that you could see from the entryway that the bathroom sink was just running and overflowing. The person was home but didn’t notice the issue that was going on. For whatever reason,

Ashley (12:01):
I’m a little shocked by this that you don’t notice that there’s water running. I guess maybe if you’re sleeping for eight hours or something and the sink is running, but at that point what is going through your mind when all of a sudden you realize that it wasn’t a water main break, it was actually your tenant, your unit that has caused all this damage throughout the building?

Dan (12:22):
Well, the first thing I was is let’s get this turned off and solve the problem. And so once all they had to do was turn the faucet off and then they just waited for an hour to see what happened with the water. They didn’t know if that was really what was causing it. And so that was my first concern. The concerns happen when you wake up in the morning, you’re kind of trying to figure out the process. And that was my first time I require all my renters to have renter’s insurance. So I woke up, I said, okay, no big deal. Looked through the renter’s insurance policy. I was like, okay, this appears to be covered, so let me contact my tenant and just see how we can put this claim, see if he needs anything. Lemme stop, put in the claim. Let me see if the tenant needs anything.

Ashley (13:15):
Yeah. At that time when you’re putting in the claim, do you know what the damages are? Has the building come to you? It’s an HOAI am assuming. Did the HOA come to you and say there’s this amount of damage and you are responsible for it or were you just responsible for the damage in your unit? How did that all play out?

Dan (13:34):
Correct. Oh, good question. So I was initially concerned about the damage in my unit. No one was going to do that for me. So I sent somebody out to take a look at it and then they were investigating was there any damage to the building and was there any damage to the units that were flooded? It was one unit that was flooded, so everyone was getting either insurance involved or contractors to come out and assess the damage. So everyone’s kind of dealing with their part of the building. So that’s the complexity and apartment building that if something happens and it affects other people, the situation is even more complex because there’s so many different parties involved. So we had four different insurance companies involved at one point because the building has a master insurance policy, I have a dwelling insurance policy, there was a renter’s insurance and the person affected had their insurance involved. And so as we figured out what the damages were, they were basically limited to my unit and the unit below, which had extensive water damage, which told to be about 47,000,

Ashley (14:41):
$47,000. So at this point, are you worried that insurance is not going to cover some of this?

Dan (14:48):
Of course, yeah. I’m very worried, especially when what they call the water. There’s companies that come out and we’ll do an inspection of an insurance issue related to water, and so they drafted their report. However, I thought with the four insurance policies that were involved that we would get some of this paid for and I thought, I was thinking that I only need to pay really what the deductible

Ashley (15:14):
Was. And how did that end up working out? Is that what you had to pay? How did it figure with the tenant’s insurance? Were they more at fault because they were the ones that left it on? Did their policy pay out more?

Dan (15:27):
Yeah, the frustration started with the renter’s insurance.

Ashley (15:32):
Landlords do require to have renter’s insurance or they don’t, but actually I’m curious as to how good is the actual renter’s insurance in a situation like this where it’s your property, but the tenant caused the damage?

Dan (15:46):
Right. Yeah. So the renter’s insurance, it looked like it was supposed to be able to cover. This is when some of the tenant issues started to arise. The tenant had stopped responding to my phone calls or text messages or emails at this point. And it turns out that they didn’t actually have renter’s insurance. They had canceled the renter’s insurance and I hadn’t been notified of that. So it was required by my lease to have it, but if you have an event and it’s not active, it doesn’t really help you. And so there was a couple weeks of back and forth trying to get that renter’s insurance and meanwhile everybody else in the building is getting mad at the owner. So it was creating not a great situation there. And so when it came out that he didn’t have renter’s insurance, we went through other processes and it turns out that I just put the person in contact with my landlord policy and they negotiated it out.

(16:52):
The first person to pay in that situation that was told to me would have been the renter’s insurance. But since it wasn’t active then there was a lot of negotiation. I think my insurance company first declined the claim because there was no fault of my own in that it wasn’t a broken pipe or it wasn’t a maintenance issue. And so the person below unfortunately was working through their own insurance company even though they caused the issue at all. So I don’t actually know how the insurance companies have worked it out. I think that my insurance company probably ended up paying out, but at that point I was no longer involved.

Ashley (17:31):
You’re just glad you didn’t have to pay $47,000. Yeah. Okay. So now that this has happened, this person, are they still living there? Do they just leave? What happens with the person that has done this damage to your unit?

Dan (17:48):
Our relationship changed overnight. The person said that they’re no longer paying rent because they, after the issue, unclear on the reason why. And so I had to go through the eviction process, which was really delayed from some of the covid eviction stuff That tenant ended up, I eventually got a mediated agreement and the tenant moved out right before the sheriff came in to take the unit back

Ashley (18:17):
Then. So they had paid for six months. And then what was the timeline from the water damage until they were actually evicted?

Dan (18:24):
It was about eight months. So they were in the unit. It was a high income unit, it was a more luxury place. So it was a pretty significant financial burden during that time. But I had prepared for some of the worst days. I hadn’t imagined this, but I had a good reserve built up, so we were able to float that. But definitely it does hurt when you’re losing thousands of dollars a month and this person has, it becomes emotional. You have to try and take your emotions out of it. And I involved a legal group who helped facilitate that eviction process, which was fantastic because if you do it yourself, it could be easier to let your emotions kind of guide your decision making in the process. And I really, it’s really important that you aren’t making emotional decisions that are potentially illegal in those moments.

Ashley (19:21):
So how would somebody who’s maybe going through their first eviction,

Dan (19:25):
So on the tenant screening side, as I think we talked about, your house is better empty than a bad tenant. So even though you’ve got money burning, take time to select the right tenant for your place. And so what that means is having the criteria, following the criteria, also listening to your gut. I had something in my gut say, this is not the right fit, even though I felt that they checked all the right boxes and I should have listened to my gut even though I couldn’t explain it at the time. But looking back, it was pretty easy. And if you’re not good at tenant selection or don’t have a lot of experience in that, find someone who’s an expert in that to help you do it and to help you learn how to do it. Learning how to read a credit report is not intuitive. Learning how to read a background check is not intuitive. Learning how to look at the financial statements and make sure people are doing what they have reported, it’s not always that obvious. And so when you get the details, a good tenant who wants to stay for a long time, you’re going to that benefit from that over potentially years. The most important thing is buying a good property. The second most important thing is putting the right person in that property.

Ashley (20:38):
That is great advice. And we could just end the podcast right there with that line right there. But we’re going to take a short break and we’re going to come back with to hear his second horror story. And I’m pretty sure almost every investor not only has had a tenant horror story, but also has a contractor horror story. So we’ll be right back with that. Okay, everyone, welcome back to the show. Dan told us all about his tenant horror story and now we are moving on to nightmare number two with a contractor. So Dan, what deal is this on?

Dan (21:14):
This is our second to latest deal, so it was number five,

Ashley (21:19):
The second to latest one You did? Okay. And what market is this one in?

Dan (21:22):
This one is in the Washington DC area.

Ashley (21:25):
And tell us a little bit about the property when you found it. I’m assuming it needed a rehab that you had to hire a contractor.

Dan (21:31):
Yeah, this is in 2021, so still covid times DC like everywhere else in the country, had super heated people were putting in offers with no contingencies and in DC sometimes a hundred, $150,000 over the asking price. So its a super competitive market. And I guess side note is DC has been a hot market throughout Covid. We didn’t really see much of a cooling off, and so things are still going really fast. So with that, we came up with a strategy. We were living in the suburbs when we moved into the city because I love being in the city and convinced my wife to do that. So we came up with a strategy to buy a row house, older house, fix it up and have an Airbnb like garden apartment in the basement and figuring out what all the things you have to figure out to be able to do that legally in dc.

(22:34):
It was complicated, but happy to share that if people are interested. We looked on Zillow for a number of months and then when we were ready to go, we went and saw some properties and the property we ended up purchasing, we went one day and it was the third one we purchased. So we knew what we were looking for. And so as soon as we got there and saw it, we were able to move on that quickly. And so it was super heated in the finished groups, but in the crappy falling apart houses, it really wasn’t that competitive. And so we actually got our property, we were able to negotiate it $40,000 below asking price, which was fantastic for us. It was what we needed and it was in the market that you basically couldn’t compete or you had to go so far and above your limits to compete. So it was a really good strategy for us. What

Ashley (23:29):
Was your scope of work for this project? How deep was the rehab that you’re going to be doing?

Dan (23:33):
The rehab was extensive. It was a row home, so I thought how big of a rehab could it be? They’re a lot. So just because they got brick on three walls doesn’t mean that it’s not going to be an extensive rehab. So we did a full gut, everything went and we replaced everything besides the party walls.

Ashley (23:54):
So a big project that you’re going to be working on here, what are the steps you take to first find a contractor? Are you finding a contractor while you have it under contract or did you wait till you close and tell us a little bit about the process of actually finding your contractor?

Dan (24:09):
It’s complicated because in hot markets, contractors can choose what projects they want to get involved with. And so it’s easy to say all the different steps you can do to vet and find a really good contractor, but sometimes contractors might not want to go through those steps. So you got to figure out how much is enough information to go forward. And so when we were purchasing it, we had already talked to contractors, and so we brought a couple in to walk through and come up with what the scope of work would be because we had a budget. And so if it was too big of a budget, we wouldn’t have gone through with the sale of the property. Once we had an idea of how much the renovation would cost, we wanted to spend 200. We were getting quotes of about two 50. And then hindsight and plus covid inflation, things probably cost about 3, 3 50 unless you have your own teams. And so learning those numbers didn’t come beforehand. It was going through the process. So we found someone who said they can do the scope of work. We had seven different contractors come in and evaluate how we were going to do this, and we did learn something from each contractor. And so I recommend when you’re doing anything in a house, get three to five people to give you quotes on it, which takes a lot of time, but you get a really thorough understanding of the issue and the different creative ways to solve that issue.

Ashley (25:38):
When you’re having those contractors walk through your property, are you giving them the scope of work or are you having each of them create the scope of work for you and giving you that estimate? It

Dan (25:48):
Was a little bit of both Walking through with the first one, we didn’t know what we needed to know after the first one. We had a very clear idea of what the scope of work could entail, and we tailored that considerably to what we wanted. This is our primary home, and so we had different requirements than we would have when buying an investment property. So we tailored that into what type of kitchen layout we want to have, what the cabinet quality and how many bathrooms and what the quality of things because quality of material also costs a lot.

Ashley (26:21):
And Dan, I forgot to ask this. How were you purchasing this property?

Dan (26:25):
Oh, right. We were purchasing this property with a FHA 2 0 3 K loan.

Ashley (26:31):
Dan, we have to know what are the awful things that happened with your contractor? What is the reasoning this took so long? This project,

Dan (26:40):
We selected a contractor based off of a recommendation from an investor friend that we had here in dc, but we did our own due diligence. So we went to see probably four or five of the current flips that they were working on, and they looked pretty. And we also saw some of the finished product, which will look great, and we said, okay, this finished product is what we’re going to look for. However, this was the first time they hadn’t done build for primary owners. They had been exclusively investment products. And so there was no person to talk to who individually had a relationship with this contractor.

Ashley (27:20):
So somebody who bought the flip and lived in it for a little while to understand what actually came out of the house,

Dan (27:28):
That’s a great idea. We didn’t even think of talking to someone who had bought the flip a few months later because we felt like we did good due diligence on that. It turns out that Washington DC for a number of years was the number one flip place in the US in terms of turning a profit. It was turning over really fast. It was becoming a really desirable place to live, where previously people had been living around the suburbs. So it had been a really profitable place to work. Washington DC and obviously some of these contractors were doing many different jobs at one time, which I think is usually a good thing as long as you can get enough of their time. However, when working with a primary or a loan product versus a residence, you can’t really come back and ask for capital raises essentially.

(28:20):
And so this contractor had been working with investors who he’d find an issue and say, oh, I need an extra a hundred thousand to fix this issue, and they could supply that with a loan. Everything signed in the beginning, your scope of work is locked in your bucket for fixing things you didn’t expect is locked in. And so we went through that in the first month. As I said, this was a thousand days contract. And so he had the expectation that, so he had underbid the contract to win it. We had selected him because he fit our budget and was the lowest, and we had nowhere to pull those reserves from because the reserves went immediately. And so we got a flip quality contractor who flips in dc everyone we know has who’s bought one here has had significant issues. So just the quality is very low and the profit margins are really high and the supply is really low.

(29:20):
So we had issues with the contractor not following the identified scope of work. So they would, for example, they’ve finished the basement and they hadn’t done the waterproofing, like a sump pump in French drain. When water rolls downhill and hits the house, they have somewhere to go besides flooding in the basement. So had to dig up all the concrete, cut all the drywall out, and this was weeks that they had that set them back. They didn’t follow the scope of work, the person, the fundamental issue that they did is they took out some of the structural supports that were holding up the house. And I actually noticed it and I took a picture and called them on. I said, Hey, I don’t think this is supposed to come out. And the person just kind of ignored the message after a number of follow-up. And so I thought, okay, they know what they’re doing.

(30:13):
And so they took out some of the steel structural elements because it would’ve impacted the flow of the basement. And then we had structural problems, which caused the thousand day renovation to continue for that far. And underbidding, the project caused a lot of issues in real estate. I like all parties to make money. I want the real estate agent to make money. I want the contractor to make money. I don’t want to pay more than I have to, but I want everyone to benefit from the transaction. And when you have a gc, when you have an underbid scope, it turns people into doing things that are not good for you and are not good for them. And so there were issues with stealing material and pushing that material to other jobs or changing the quality of things so that they could save costs. And so we kept catching them.

(31:11):
And so one of the things that we did really well, which I had learned from one of my mentors in Atlanta, which is we said during this renovation we’re going to go there every single day. So we did that for six months, driving two hours each way in DC traffic to take pictures, see what happened. And we have the whole thing documented, which ended up being to our benefit when things went wrong. But they said, if you don’t know the contractor, go every day. If you really trust the contractor, go every other day or have someone who does that. And that really saved our butts because we were able to prove what happened versus it was kind of bit he said, she said kind of thing.

Ashley (31:56):
So with this property, what were you planning on doing it? Is this going to be your primary for a while forever home, or what were the long-term plans for it? Yeah,

Dan (32:07):
I don’t know if we have a forever home, but we constructed it in a way that really makes us happy. We planned to stay here for a while, and so the result has been great after all going through this. And in the end, we benefited by buying early in the covid days. And so the property has appreciated quite a bit despite having all these issues. So we’re really happy with this property. I know it down to probably the screw that’s in the wall next to the washing machine. I know everything that’s behind everything that’s on top because I’ve done a lot of it and I’ve also made sure that they had to fix a lot of the issues. But it’s a really wonderful property. The challenge I think, with the primary residence is that when it’s not just you, it’s your family. Stress from that renovation where it can bleed into family life and going back, even though we have some equity in the property, I wouldn’t want to do it this way again. I’d want to pay for the better contractor because it’s not worth your life to trade this long of a period of time and that much blood, sweat, and tears to make even a good amount of money on the side. So I would prioritize the relationship in the family over hiring the cheapest contractor.

Ashley (33:32):
Yeah, Dan, so many great things and lessons learned, and I’m sure there’s a lot of people listening that are feeling your pain because they’ve learned lessons the hard way too. But to recap here, some of the things you talked about were just the money thing. Don’t always go for the cheapest contractor. The next thing is having that really great scope of work, having that built out, know exactly what you want, but also how you took a referral from investors. Usually that’s what we all preach is get referrals. Get referrals. But you pointed out something that is so obvious but really isn’t is that you need to get a referral from somebody that has the same type of property that you are doing. So for in your example, it was going to be your primary residence where you wanted more quality than an investor’s contractor. And you’ll hear investors say all the time, I don’t work with contractors that do residential homes, that do remodels for people’s homes.

(34:34):
And that is part of the reason there really is a different quality. A contractor that works for an investor, knows the investor wants to save money, wants to make the biggest profit where a homeowner wants everything done correctly and nice. And not that an investor doesn’t want it done correctly, but they will. We’re going to go with the cheaper tile. It still looks just as nice, but it’s not exactly what we wanted. But I think it’s really great advice of how you said to go and take pictures too. And even though you did that every single day, what a huge time consumption that must have been. And there’s probably a way that you could have outsourced that as to pay someone to go and take photos or whatever that is. But having that follow-up, especially when you’re working with a contractor for the first time, understanding the work that they do.

(35:25):
And if you can get somebody maybe who has some construction experience, a retired handyman, say, Hey, I’ll pay you this much money to just go there every day, take a look, a pictures, let me know if there’s something you don’t agree with that you think is going on there, and that’s definitely beneficial and can really help you in the long run just like it did you having that proof. I remember when I built my property, we were so thankful we had a wonderful contractor, but we were also given the advice to before they closed the walls, to take pictures inside everywhere so that you always knew where all the wires, all the plumbing and everything ran, so that later on if there was any problem, you could go ahead and you see where the exactly you had to cut on the wall. So pictures, pictures, picture is always a benefit to them. So Dan, thank you so much for joining us today and having to relive these two horrible experiences. But I am so glad that you are now sitting happily. Are you in the property right now? That has turned out amazing.

Dan (36:30):
This is it, and it’s still standing.

Ashley (36:32):
So if you want to find out more about Dan, we’ll link his information in the show notes. And Dan, thank you so much for providing such valuable information on finding a contractor, tenant screening, and also a renter’s insurance too. So thank you. I’m Ashley, and we are going to be back with another episode of Real Estate Rookie. We’ll see you guys then.

Donald Trump and his co-defendants were in talks with insurance giant Chubb for a $464 million appeal bond in the former president’s civil fraud case, but the company backed out — days after it raised eyebrows for giving Trump a bond in a separate case, according to a Trump lawyer.

Chubb was one of more than 30 companies that refused to craft a bond that would put the massive business fraud judgment on pause, attorneys for Trump said in a New York appeals court filing Monday.

The attorneys in that filing asked the appeals court to “put the brakes” on the judgment before New York Attorney General Letitia James can start to collect on it — a process that could begin as soon as next week. James has said she will seize Trump’s assets if he cannot pay the judgment.

A panel of judges on that court has yet to rule on Trump’s request to pause the judgment without him having to post a fully secured bond.

Alan Garten, a lawyer for the Trump Organization, said in that filing that Chubb was the only company willing to consider underwriting an appeal bond secured by a blend of liquid assets and real property.

The other companies — which included Warren Buffett’s Berkshire Hathaway, Liberty Mutual, Allianz, and Travelers — wanted only cash or other liquid assets.

Appeal bonds aim to prevent the loser of a court judgment from using the appeals process to delay or avoid paying their penalties. The bonds also ensure that, if the appeal is unsuccessful, the plaintiff can quickly receive their award.

Chubb was “actively negotiating” with Trump and his co-defendants, Garten said. But “within the past week,” he said, Chubb reversed course and “notified Defendants that it could not accept real property as collateral.”

“Though disappointing, this decision was not surprising given that Chubb was the only surety willing to even consider accepting real estate as collateral,” Garten said.

Garten’s statement came more than a week after it was revealed that a Chubb subsidiary gave Trump a $91.6 million appeal bond in a separate civil case where he was found liable for defaming writer E. Jean Carroll after she accused him of rape.

Chubb faced swift scrutiny for underwriting that bond. News outlets noted that Chubb’s CEO, Evan Greenberg, previously had been appointed by Trump to a trade policy advisory committee and to a business group aimed at combating the economic toll of Covid-19.

On Wednesday, Greenberg sent a letter to investors, customers and brokers who had expressed concerns about that bond.

“As the surety, we don’t take sides, it would be wrong for us to do so and we are in no way supporting the defendant,” Greenberg wrote. “When Chubb issues an appeal bond, it isn’t making judgments about the claims, even when the claims involve alleged reprehensible conduct.”

He added that Trump’s bond in the defamation case was “fully collateralized.”

Records show that Trump used a Schwab brokerage account as collateral for the Carroll-related bond.

CNBC asked Chubb on Wednesday if the company was talking to Trump’s team about obtaining a bond in the business fraud case.

In response, Chubb said, “As a matter of policy, we do not confirm or deny whether we are engaged in business discussions with businesses or individuals.”

A Chubb spokesman did not respond to CNBC’s request for comment on Monday’s court filing.

The lawyers argued in that filing that Trump will face major harm if he is forced to quickly sell parts of his real estate portfolio to get enough cash to obtain a bond.

They said it would be “impossible” for them to post a complete appeal bond, despite their “diligent efforts.”

That’s largely because the few surety companies willing to write a bond this large will not accept “hard” assets, like real estate, as collateral, they said.

Since the person appealing often loses again, surety companies consider the bonds “hazardous” and usually demand that they are fully backed by liquid assets, said JD Weisbrot, president and chief underwriting officer at JW Surety Bonds.

Unlike banks, which are better equipped to attach liens and sell properties, insurance companies are “not in the business of holding real estate,” Weisbrot said in an interview with CNBC.

Still, Weisbrot agreed with Trump’s lawyers that the size of the bond is “unprecedented.”

“I have never heard of a bond being required of this size of a private organization,” he said.

With a deadline fast approaching for James to collect on the fraud judgment, the Republican presidential nominee has taken to social media to vent his rage against the case.

The trial judge “actually wants me to put up Hundreds of Millions of Dollars for the Right to Appeal his ridiculous decision,” Trump posted Tuesday morning on his social media site Truth Social.

“I shouldn’t have to put up any money, being forced by the Corrupt Judge and AG, until the end of the appeal,” he claimed in a later post.

In fact, New York court rules require Trump to post an appeal bond in order to keep James from moving to collect on the fraud judgment.

“Nobody has ever heard of anything like this before. I would be forced to mortgage or sell Great Assets, perhaps at Fire Sale prices, and if and when I win the Appeal, they would be gone,” Trump wrote on the site.

David:
This is the BiggerPockets Podcast show, nine seven C. What’s going on everyone? This is David Green, your host of the BiggerPockets Real Estate podcast, the show where we arm you with the information that you need to start building long-term wealth through real estate today. And I’ve got a surprise for you. We’ve got a Seeing Green episode that’s right in today’s show. If you’ve never heard one before, we’re going to take questions from you, the listener base that sent them into me directly and answer them for everybody to hear. In today’s show, we get into if interest rates justify holding a property that’s not performing well or if you should reinvest that money into better opportunities, what to do with $70,000 if your job is to escape the rat race and a little back and forth going on in the BiggerPockets forums. What to do when you’ve got a bunch of equity in a brrrr stir?

David:
That’s a brrrr property that’s now a short-term rental and more up. First, we’ve got a flipper wholesaler who is looking to expand into multifamily and storage. He wants to do all the things and wants to know where he should start. Most importantly though, if you want a chance to ask your question, please go to bigger p.com/david where you can submit a question, be featured in the show. If you don’t remember what I just said, we also put the link in the description. I love it when you guys listen to me. Thanks so much for submitting your question. Let’s kick this thing off. Alright, up next we have Mike Larson out of South Carolina. He was featured at episode 2 75 of the Rookie Podcast and he’s here joining us on Seeing Green today. Mike, what’s your question?

Mike:
What’s going on guys? Well, first I just want to say thank you for having me. This is truly a ton of value. So right now I own a small wholesale and a flipping business and I’ve built up the systems to find single family homes, but I want to start to scale into storage and multifamily and I use your basic marketing cold calling, texting P-P-L-P-P-C, direct mail and stuff. But how are you guys marketing and finding properties that are 10 plus doors or storage facilities that are a hundred plus doors?

David:
James, what are you doing to find these? You got a whole bunch of apartment complex stores, don’t you?

James:
Yeah, we’ve been buying a lot the last 24 months too. Even with these high rates, one thing that we’ve learned, and Mike, I started the business doing what you’re doing. We had a wholesale business fix and flip brokerage, and we were always the people self-generating our own deals for small multifamily fix and flip any of the residential space. But then as we started to grow our doors, what we noticed, at least in our market is we had to expand our network because large multifamily a lot of times is a smaller group of brokers that actively know that product. So the good thing about commercial brokers or multifamily brokers, they’re not as wide as we are as investors, and so when you get into that space, you want to kind of expand your network. And so again, I self generate a lot of my own product with cold call rooms, direct mail door knocking referrals from other investors.

James:
But where we get most of our larger multifamily once we stepped in that space is those commercial brokers. Because commercial brokers work specific areas and because there’s only so much product in a lot of those areas, they know the sellers a lot more. And by getting to know your seller leads more, just like you do with wholesaling, you get higher conversions. If you know what’s going on, you’re staying in front of ’em. And so we’ve had really good luck just working with our commercial broker network and multifamily broker network, always bringing us deal flow because a lot of times these multifamily properties do never hit market. They’re trade off market. These guys are good at finding the opportunity, selling it, they’re motivated by their commissions and that is by far the most product we get is from our broker community.

David:
What do you think Mike? Makes

Mike:
Sense to me. I mean, I’m good about the networking aspect as far as what I’ve been doing so far. Hold once a month I’ll do a meetup to try and meet other people in the market and have other wholesalers send me deals. So I guess I could just do the exact same thing as far as going after the commercial brokers try and meet up with more of those

David:
Guys. So you mentioned the similarities. Like you said, you network with residential people like wholesalers and agents. Now you’re going to be networking with commercial. Here’s the differences so that you’re not walking in blind. Most wholesalers and agents aren’t worried about if the person asking about the properties is a serious buyer because it’s not hard to get financing for residential properties. There’s a million different loans that you could get right now. You got people that are putting together money and they’re thrown at an investor’s just like, please take my money. There’s more money to land than there are Deals are. When you walk into the commercial space, those brokers are going to be way more concerned that you’re a tire kicker, that you’re wasting their time, that you’re not a serious buyer than what we residential investors get used to. So you’re going to want to understand their vernacular.

David:
You’re going to want to get cut to the chase and be able to portray yourself as a serious person. This isn’t like real estate agents are willing to give me a free education and real estate hoping that I become their client. These are sharks. They’re only here because they spend their entire life building relationships with wealthy people that own these commercial properties. They’re understanding what triple net leases are, the different financing options with these things, how you’re going to improve the net operating income. They’re going to use phrases that you may not know if you haven’t gotten involved in this. And if you’re staring at them blankly, it’s a really good way to lose the trust and then that deal’s not going to you. It’s going to someone with a proven track record. Kind of got to fight your way into the good old boys club if you want to be a commercial investor.

James:
And the reason it’s like that too is these commercial brokers are working this targeted area and they have a lot of times they have a small group of sellers and they don’t want to jeopardize that relationship they’ve been working on for two years. So that’s why they want to bet you correctly. But as you go into markets too, other things, commercial brokers, they can be a little standoffish sometimes and just like David said, you want to kind of qualify yourself, but if you’re getting some pushback or they’re not bringing any inventory, other ways that we do target multifamily and Mike, if you’re a wholesaler, you could definitely do this because you know how to target direct or direct to seller targeting. A lot of times we like to pull the recently rented properties and then we pull the information on ’em. So let’s say an apartment building is running for a thousand dollars a unit.

James:
We pull that tax record up that looks below market value and we see when they bought it, then we can look at how much they’ve depreciated from that property based on if they’ve been there 10 years, they’ve depreciated most of it. Then we’re looking at their equity position and we run the return on equity. And that’s what we approach these sellers with is going, Hey, we have an opportunity for you. You have almost a fully depreciated building right now. You’re collecting this much in rent with this much equity, which is this return, and usually it’s going to sound pretty low one to 2% because it is. And that’s how we get these multifamily sellers to at least start listening to us because they’re more sophisticated than your usual single family seller. And when you’re talking to you’re, when you’re talking to ’em about buying their property and you’re giving them the information, they already understand the benefits of depreciation and return on equity, but they just don’t realize it sometimes.

James:
And so by summarizing it can get them to kind of work with you a little bit more. And so those are ways that we’re looking for because we can call them with an opportunity, they should upgrade their portfolio we want to buy. And so those are good target lists. And another really good way to find more multifamily is to reach out to multifamily property management companies. Say, Hey, look, I’m looking to buy, if you’ve put it together the deal, I’ll use it as a broker and I’ll keep your property management in play. They have a lot of sellers that it is in their best interest to sell that get ’em into another property anyways, and they might know landlords that want to move and it’s another good way to dig out deals without having to pay all the broker fees.

Mike:
That’s genius. I love that.

David:
There you go, Mike. Thanks a lot, man, appreciate it and good luck to your nephew in his wrestling tournament today. Thank

Mike:
You, sir. Thanks guys. Have a good one.

David:
All right. After this quick break, we’re going to be covering different financing types and the pros and cons of each and welcome back. We just heard from Mike who was trying to scale up from wholesaling and flipping to finding more commercial properties, breaking his way into a new asset class. Alright, James, now we sort of covered there with Mike that the networking component is different with commercial than residential. The financing component can be pretty different to especially when you’re a residential investor that’s used to buying distress properties. Can you kind of cover what people can expect in financing differences if they make the jump from residential to commercial?

James:
Yeah, a lot of times, especially when you’re buying those brrrr, multifamilies two to four, a lot of investors including myself, that you utilize hard money and construction loans because you buy it’s below market, increase it with the construction funds and then refi it into a permanent loan commercials just lot more, it’s a lot different, right? Because you’re not getting 30 year financing typically on these buildings, they’re commercial loans that have balloon payments at five, seven and 10 years. And typically when we’re buying these multifamily, small or large, we’re working with local banks and that is a big difference between your residential lenders too. When you’re getting your commercial financing, you’re actually meeting with your bankers, you’re talking to your local bank and they’re looking at it like an actual asset. Whereas if I’m getting a residential loan, I’m dealing with the mortgage broker who’s making sure that I’m packaged up right, and they’re dealing with the bank.

James:
And so commercial, as you get into multifamily, these relationships with local banks are really important. It’s good to go meet with them, establish some, move some deposits over. The more you get to know them, the better leverage they would get. And when we buy value add multifamily, it’s always a two step loan, but it’s rolled into one transaction. So when we buy these properties, we set it up with a bank financing, they give us a construction component, it’s interest only, a little bit higher rate, but it’s about three points cheaper than a hard money loan. When we close on that loan, we’ve already had our permanent financing locked. So we know when we get done with the stabilization what our interest rates going to be, and I do think that’s really important for people to look at as they get into multifamily. You don’t want to buy a property without a locked rate because if the rate changes your perform is going to change. And so the beautiful thing about multifamily is you can get your construction loan and your perm loan all locked in one, so you can actually reduce your risk, but you want to work with a local bank that understands multifamily and does construction. There

David:
You go. Another little perk that I like with that is if you’re maybe unsure of your underwriting or the process of buying commercial properties, if you’re going the route, you’re saying, James, you have a couple other sets of eyes looking at the deal that you won’t have yourself, right? It doesn’t hurt to have more experienced people looking at it and maybe saying, Hey, this could be a problem, or we would want to see this become better because you’ll learn from that experience. Great point there. Alright, in this segment of the show, I like to take questions from the BiggerPockets forums or comments from YouTube or reviews that people left wherever they listen to podcasts and share ’em with everybody. Today we’re going to be getting into a question from the BiggerPockets forums, which real estate strategy works the best to escape the nine to five rat race?

David:
My question for anyone that escaped the nine to five rat races, what real estate strategy did you use? For example, if you had between 20 to $70,000 to invest in real estate, how would you use that to replace your income of seven grand a month from your job? Would you do fix and flips tax liens, mortgage notes, buy and hold rentals, Airbnbs, what would you do? They then go on to say that they think house vacuum would be a great strategy, but they prefer tax liens and short-term rentals. Now Abel Curel from Queens, New York responded with, Hey Rodney, great question and you came to the right platform. Each strategy that you listed requires different experience, risk tolerance, networking, connections, project management and initial capital to invest. Have you tried looking further into those strategies? I’d suggest that you weed out the ones that don’t fit your end goal and your schedule.

David:
Rentals and Airbnb seem to be the most common route for investors in your situation. Depending on the cost of living in your local market and availability of two to four unit properties, house hacking may be a strategy worth exploring. Travis Timmins from Houston weighed in and said, my path was owning a business that I sold and acquired real estate along the way. It’s going to take more time than you were planning and be harder than you thought. Real estate doesn’t pay you well. If you need the money, it’s like the house knows you need the cash and something’s going to break and deplete all of the cashflow for that year. As far as the strategy goes, I would suggest leaning into your current skill set and knowledge to find an unfair advantage. Flipping short-term rentals, tax liens that set are all great strategies if you are good at them and terrible strategies.

David:
If not, if I had 20 to 70,000 to invest, I’d buy a house hack in Dallas if your debt to income ratio is solid. So it seems pretty clear that Rodney with around 20 to $70,000 is trying to escape the rat race and the people in the forums are saying, you’re probably not going to do that with 20 to 70 grand. You should start house hacking Now why are they saying that he should house hack? It’s because they’re recognizing that Rodney needs more equity or more cash to invest in real estate if he wants to get enough cashflow to quit the job. House hacking is a great way to start that journey. You start the time ticking or you start the snowball rolling of building equity and when you get enough of it, you can invest it at a return that could provide you with enough income to quit your job.

David:
But like Travis said, it’s going to take you longer than you think. It’s going to be harder than you think. This is a one step at a time journey. This is not a thing that you’re just going to learn in two to three years and then have $20,000 of cashflow coming from your single family rentals that you can just quit that job and that rat race. It’s one of the reasons that I wrote Pillars of Wealth, how to make, save and invest your way to financial freedom because you got to focus on three things, making more money, saving more money, and investing the difference, not just investing to get where you want to go. And in the book I talk about, you got to find a way to make money that you like doing. You got to find a way to fall in love with the process of becoming great.

David:
We really want to be chasing excellence, not just chasing cashflow because when you catch excellence, money will find you and you will have a lot more to invest which will turn into cashflow. Great conversation here. I appreciate everybody’s engagement and I love being a part of a community that asks questions like this and shares it for everyone to hear. If you’re liking today’s show and you’re enjoying the conversation, please take a second to leave me a five star review wherever you listen to your podcast and comment on YouTube and let me and my production staff know what do you think about today’s show and what do you wish that you could get more of? All right everyone, let’s get into the next question.

Rory:
Hey, David, Rory, corporal from Lamont, Colorado here, a longtime listener first time poster. So hey, we’ve got a mountain property that we did as a burster. We built it back in 20 and 20, 21 and the short-term rental market has really slowed down, but we are sitting on a ton of equity really thinking about what our next steps are. Looking at either a 10 31 exchange and moving that into turnkey properties or an RV park or self storage, something with real estate involved or potentially or multifamily. Another option would begin, have a HELOC on it and use those dollars to invest in some other building projects that we’re looking at as well as perhaps buying a cash pulling business. Love to get your thoughts on what we should do with the equity. We’ve got about 600 K that we’re sitting on right now, and yeah, love the show. Love what you guys have going on and really appreciate your help. Thanks, bye.

David:
All right. We’re going to take a quick break, but when we come back, a Brrr-ster property owner has $600,000 of equity and is looking for their next move. Is it a 10 31? Is it a cash out refinance? Are they going to move to The Bahamas and open a snow cone company? The tension is killing me and I bet it’s killing you. Hang tight. We’re going to hear about it after this break. Welcome back to the BiggerPockets Real Estate podcast. Let’s jump back in.

James:
Rory. He’s got the same question we all have. What do we do with this equity and how do we maximize it? When I hear this, especially when we’re talking about reloading it into 10 different asset classes, we got it’s self storage business, RV parks, multifamily, and again, that comes back to all the noise in the internet now because everyone’s promoting that their strategy is the best, and you know what? It probably works really well for them. Anytime that I’m looking at making a trade on equity, I want to put it, if you’ve earned $600,000 in equity, you did a phenomenal job, you bought the right thing, you grew it correctly. How you execute even higher is buying something that you know and you’re familiar with. And so when I’m looking at doing trades, I like to look at what is my skillset and how can I maximize this?

James:
If I did it with a single family house that maybe I was a heavy renovator, the next transition for me would be into going to maybe a value add multifamily, because it’s the same type of asset, it’s the same type of product, but a little bit different asset class. To increase the cashflow, I have to renovate it like a single family house. I have to lease it like a single family house. And with your short-term talents, you might be able to do two short-term rentals and a couple stable long-term tenants to keep your investment more stable. And you can do a hybrid blend. And so I would say you want to audit. What do you want to do with your equity? What is the return that you want to make? What markets do you want to be in? And then what products should you be looking at to meet that return expectations rather than just the next hot sizzly asset class? And I think a lot of people are in this jam right now with the short-term rentals. They bought a lot of good property that grew in equity and as that slowed down, the returns have diminished. And so you’re doing the right thing. Is my asset producing me the right return, right yield? And if it’s not, relo it out, but do that soul searching, find out you’re good at what you want to make on your return, then go look at the asset class because each asset class pays you differently

David:
A hundred percent. First off, I don’t think that you should have equity burning a hole in your pocket. I guess it doesn’t burn a hole in pocket. That’s cash equity. Would what? Burn a hole in the house. Don’t worry about it though. You don’t have to invest that $600,000. You could take your time. Second, just like James said, don’t ask the question of, well, what’s the best return out there? I don’t know that there is a best return out there. Ask the question of, well, what do my skills, my opportunities and my competitive advantage offer me? Do you have opportunities to put that money to place that someone else doesn’t because of the background? Do you have a construction background? Do you have a finance background? Are you really good with short-term rentals? And so you can buy more short-term rentals in the same area that you already have some now and get economies of scale. Think like a business owner. And then lastly James, what do you think about somebody like this lending out, maybe taking a HELOC on their property and lending that money out? Becoming a private lender to other investors?

James:
That is actually how banks make money and a lot of times people kind of forget that they borrow money and then they relend it out and they make an interest yield. I think that’s a great way as long as you are not jeopardizing your own asset. Before you do that, you really need to know how to vet a loan. You need to vet the operators and the more experienced your operators and the more you understand how to vet a hard money loan, the less risky it is. I do thousands of hard money loans a year between our company and myself privately. I have a default rate over a 16 year span that’s less than a quarter percent, or actually, excuse me, it’s less than 1%. Well, I’ve only lost money on a loan less than a quarter percent, but that’s by underwriting correctly underwriting the borrowers.

James:
I’d be cautious about taking out a heloc if you’re going to get it right now, HELOCs are about 9%. You’re going to re lend it out about 11 to 12% or maybe get some equity in there. And so the yield’s small and the gain would be small for you, and so make sure that you really understand it. You don’t want it being too high of risk for that little return. If it was me, I would look at 10 31 exchanging, go buying a property so I can get that depreciation right down the taxes and then maybe pull some out to invest it in hard money separately so you’re not taking on more leverage. I’d rather pay the tax than take on more leverage and have a smaller yield. Hard money is a great space if you want to make cashflow. The one negative is you pay high tax. You don’t get all the same benefits as you get from owning a rental property. The depreciation, the depreciation, the write-off expense, it’s ordinary income. You’re going to pay it. It’s a high. Typically I’m paying 40% tax on my hard money loans and there’s not a lot of relief there, but it is steady cashflow and it is how I live my life today. Everything I do today is paid for by my hard money passive income.

David:
Great point, James. Different opportunities come with different pros and cons, and one thing that creates analysis paralysis is investors that are trying to find the one option that doesn’t have any downside, but you’re not going to get it if you’re trying to avoid the tax implications. You’re going to take on more work or more risk. If you’re trying to get the best return possible, you’re probably going to have to learn a new thing. If you’re like, man, I just want a high return with no work, you could put it in a retirement account, but you’re not going to able to use the money for something else. So the key is to look at the downsides of every single option and find the one that the downsides affect you the least. Alright, our next question comes from Dan Way in Madison, Wisconsin. Dan says, I’m wondering how saving money in the future through refinancing would look.

David:
Most of the time I hear about refinancing, it’s when rates are lower than when you originally purchased the property. How can we ever expect to lower our monthly payments without the expectation of seeing lower than three to 4% rates? I’m looking to find my next property through Fannie Mae loans for the low down payment aspect. However, the monthly payments associated with these properties with the low monthly down payment make it almost impossible to cashflow, which I understand is harder to find in this market at this time in this first place. But how can I even rationalize these deals with little to no possibilities of lowering those monthly payments in the future? So this is an interesting question here, James. If you’re getting in at a three to 4% interest rate, you have no possibility of really refinancing any lower than that. It’s hard to picture rates getting lower than that.

David:
But if you’re buying property now and you’re waiting for a refinancing rates to go down, you don’t feel like you’re in control of your own investment future because you don’t control when the rates are going to go down. And it looks like Dan’s thinking, Hey, I’m willing to buy property that doesn’t cashflow right off the bat if I have hope that I can refinance these things in the future, but how do I rationalize these deals with little to no possibility of lowering the monthly payment in the future? So the question is, should we be buying real estate right now if we don’t know that we can refinance into a lower interest rate later? What’s your thoughts there?

James:
I think one thing I would really remember is interest rates. Cost of money is just the cost of the deal, and I don’t make my investment decisions based on interest rates. I make it based on cashflow and returns. Very recently, I just traded a property that cashflow $1,200 a month and I had a 4.25 rate on it and I traded it for a property that basically breaks even and I have a 7% rate on it, and there was a purpose to that. I think a lot of investors get caught on that rate. They’re like, I can never get rid of this rate, and I wouldn’t look at it that way. I would look at, okay, if it’s not working for me, I need to explore other markets to give me a better return.

James:
I think it’s important that you evaluate, Hey, here’s my strategy. You came up with my strategy. I’m going to use a Fannie Mae loan, buy a rental property with low down, I’m going to get better financing than an investor. That is your strategy. Now it’s going, how do I execute it? And maybe the market that you’re looking in right now is just not working and you need to go to outside markets because you can cashflow in this market. You just might have to explore cheaper ones. If that is your plan, I would go find the market that it works in, utilize that loan, and then look at pivoting your strategy out later. You can only do so many low down loans anyways. I would utilize it, put that money to work, but change how you’re implementing it, not how you’re doing it.

David:
That’s a great point. I’m also not a huge fan of the, I have a two and a half percent interest rate. I can never let it go. I’ve never heard a person who did really good in real estate. And when I talked to ’em about how they did it, they said, well, you know what? I got 3% interest rates and I held ’em the whole time. They always talk about the deal. They talk about the property, they talk about the increase in rents, they talk about the increase in value, which is usually a function of the location that they bought in or the time when they bought. It’s never about the rate. And so I just don’t know why we put so much emphasis on that other than the fact it just stings that it used to be better than it was. But isn’t it always like that?

David:
We talk about 2010 real estate. It used to be better than it was. I wish I had bought then in 2016, everybody thought that real estate was too expensive compared to 2010 Now. Now in 2024, we look back at 2016 prices and say, oh, I wish I had bought then. And you know what? In 2034, we’re going to be looking back at 2024 prices and saying, oh, I wish I had bought. Then we are not going to be thinking, well, the interest rates were seven and a half, and so it didn’t make any sense to buy it never actually works out that way. So try to take your attention off of the rate and try to think about the other ways real estate will make you money. Can you get a tax advantage from it? Can you shelter income from other things with it? Can you set it up to we’re making extra payments on your principal and pay it down quicker?

David:
Can you add square footage to the property? Can you add units to rent out? Can you buy in an area before everybody else gets there? That’s the next up and coming emerging market. Let’s just think a little bit more than just what fits into the spreadsheet. And sometimes those answers will pop out. All right, and that was our show for you all today. Just a little recap here. We talked about networking for commercial properties and how to build a pipeline, whether you should keep a property because of the interest rate or think about the overall returns, what to do to escape your nine to five with $70,000, and how to handle the problem of having a whole bunch of equity and not sure what to do with it. Thanks again, everybody. We love you. We appreciate you for being here. I know you could be listening to anybody to get your real estate investing knowledge from, and I really appreciate the fact that you’re coming to me. You can find my information in the show notes if you want to reach out to me personally, and if you’ve got a second, let me know in the YouTube comments what you thought about today’s show.