David (00:00):
This is the BiggerPockets Podcast show 9 1 2. What’s going on everyone? This is David Greene, 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. Today’s episode is a Seeing Green episode that I’m bringing to you from Las Vegas where I’m attending a Keller Williams real estate event and I brought in some backup. James Dayner and himself joins me to tackle your questions and help you all learn how to build more wealth, get more real estate, and put together the life that you’ve always wanted to live in today’s show, we got some really good stuff. We talk about trapped equity, what to do when you are equity rich, but cashflow poor. How to think about equity like a bank account and where you’re storing your energy, including the pros and cons of the different ways that you can store energy.

David (00:49):
And if you want to know how to get a 13% return, James is going to share one of his strategies with you all. So make sure you listen all the way to the end to get that information. Now up first we have a live caller wanting to double up his portfolio and we’re going to take that call right now. So buckle your seatbelt and get ready. Let’s see some green. Alright, up next we have Matthew Marli in Houston. He was featured on the BiggerPockets Rookie episode 3 47 and today’s Seeing Green. We’re doing our best to bring the BiggerPockets community into the podcast. Matthew, what’s on your mind? Hey

Matthew (01:21):
Guys, good afternoon. Thank you so much for having me, David. Firstly, I wanted to thank you so much for all of the information that you’ve doled out over the years. You guys have been instrumental in my success at helping me become stage one financially free. So super enthused and thank you so much. And James, congrats on the market. I love that podcast. I listened to the episodes as soon as they drop. So today wanted to ask about partnerships. So I currently have 11 units over four properties. I have all the TRS, S-T-R-M-T-R-L-T-R. My 2024 goals are pretty ambitious. I’d like to double my monthly profit from 5K to 10 K, and to do that I may need partnerships. I’ve already completed one partnership that went really well in New Braunfels, Texas. I gave my buddy a stellar deal. He may not know it. Just kidding.

Matthew (02:15):
I tell him all the time. So not only did I bring the time and the knowledge, but I also brought 50% of the funds to the closing table as a Texas real estate broker. I did receive some commission that I put some into the business startup fund, but as I continue on this journey, more friends are noticing my success and they want in totally don’t blame them, but since they’re busy w tours, they really can only contribute money and not time or knowledge. And we know that equity partners are more expensive than debt partners, but I do want to share this adventure with them. If you or me, how would you structure future partnerships that give my friends a fair return but also acknowledge my knowledge and time that I bring as well?

David (03:03):
All right, I’ve got some thoughts on that, but James ladies first

James (03:06):
Appreciate it. I absolutely love this question. We all do this when we first start getting investing. When you get going, you’re trying to raise the money, you’re offering massive service to start grow it out. I did the same thing throughout all of my twenties, partnering with people over providing the services. I definitely think I brought a lot more to the table than they did, but at the time, well, no, at the time, they were bringing a lot because they’re bringing the cash in. And as you grow, you have to adjust your partnerships and your offering because a one, you’re a more established operator with better systems, which means a safer investment for them. And your time is money that prevents you from scaling. And so that’s one thing I really had to figure out in my early thirties was like, Hey, I love these partnerships, but because I’m doing so much work, I can’t keep growing in certain aspects.

James (03:58):
And so you always want to audit those throughout the years, but typically a lot of us do that 50 50 split in the beginning and there’s nothing wrong with that, but it’s about exploring all the different options and what you need inside your business. There’s so many ways you could do it. Actually, we just built a calculator that allows people to play with it all and make offerings out for people and so they can play with the different fees throughout it because there’s different ways you can cut it up. You can still do a 50 50 split, but you’re still working throughout the deal in my opinion, 50 50, they would bring the cash in and then you can also fee it throughout each transaction, right? Like when they purchase it for the leasing, if there is a turn and you have to lease it up for a month, you can charge a fee there.

James (04:44):
The reason you want to charge your fees isn’t to be greedy. So you provide your company the capital to grow and scale, and the more capital you have coming in for the fees, the better your business can run, which is going to take better care of your investors. A lot of our fees when we’re doing partnerships, they’re not really profit centers for us, but what they are are engines for quality. Our company runs a lot more efficient now by having these fees because we’re not constrained on capital, it’s not affecting our return. So as you become a good operator, it’s about a, I don’t think you should be bringing your own money in the deal, and if you are bringing your own money in the deal, they should get a much smaller equity piece or they need to bring all the capital, but then make sure you’re charging for your time because you’re going to get your time back by having those extra fees. You can hire out and scale. You don’t want to get trapped in that partnership mud where you’re doing all the work and there’s nothing wrong with it, but it’s not going to get you to financial freedom 2.0.

Matthew (05:43):
Yeah, no, that makes perfect sense and that’s exactly what I was looking to hear, so I appreciate it.

David (05:48):
Before I weigh in, what are your thoughts on James’s answer, Matthew?

Matthew (05:51):
I love it just because I am naturally a doer. So for example, we had a big freeze in Texas and some of our pool equipment froze, so I got my car, drove here and fixed it and did some other things around the house. So I need to get out of that and charging those fees, being able to hire people to do that will allow me to scale.

David (06:11):
All right, Matt, I’m going to weigh in with my thoughts on this right after a quick break. So stick around for some more seeing green truth and welcome back. Matt here is trying to figure out how to double his portfolio with partnerships and then how to structure the splits. All right, I’ll weigh in on this whole idea of partnerships and I’m going to go a little bit deeper, which might not be what people want to hear. Oftentimes what someone’s looking for is just a quick answer. It should be 50 50, it should be 60 40. They just want a shortcut, but life doesn’t always work that way. Most things in life operate with a lot more gray than the quick answer we’re looking for. So when I’m in a situation like you, Matthew, where I’m trying to figure out how do I split a partnership, there’s a few negotiation principles that I’d put into play.

David (06:55):
The first thing is who controls the deal? That person has more negotiation leverage than the other one. So if your partner is finding the property and putting it under contract and they are in control of how things go, they’re relinquishing a portion of their power to you, which means that they have more negotiation leverage than you do. Now, if they are a poor manager of that leverage, they will give you a bigger split than what you maybe deserve. 50 50 tends to come out, everyone feels good about it, but you only feel good about it until you see who’s doing the work and who’s taking the risk. And then you don’t feel good about 50 50 anymore. It’s not as safe of a place to start as what people assume because like James was just saying, if he’s the one managing the risk, managing the clients, taking on all the stress and his partner’s just putting money in the deal, he’s not going to feel good about 50 50.

David (07:40):
It actually isn’t fair like what it said. In fact, the whole idea of fair is actually a social construct we’ve created. There’s no way of ever measuring what’s actually fair. So ask yourself who is controlling the leverage and then how much of your chunk do you want to give away? And ideally, Matthew, you want to be the one controlling the deal. You would rather be in the position that you’re contacting the realtor or you’re contacting the seller. You’ve run the numbers and you know what you want to leverage out. I don’t want to manage the rehab. I don’t want to do the design. I don’t want to figure out the money. You want clarity on what you actually need. It’s not an even 50 50 thing. It’s Matthew has a hundred of it. He’s willing to give away 37% of whatever those things are that you don’t want.

David (08:25):
Okay? Now it comes to what are you going to pay to get that? I would look at it and say for your partner, if we’re assuming that they’re money, don’t say, what is a fair percentage of this deal? Say, what is a fair compensation to them based on what the market is paying with the risk involved in this? So if they can go get 6% money in a CD or 10% money in the stock market with very little risk, maybe you give them a 20% return on their money because there’s some risk in this, they could actually lose it, right? Maybe it’s a home run deal with a ton of equity and there’s almost no risk. You offer ’em a 14% return, but the idea here is to set a baseline of what they could make somewhere else and make it better with you. When you’re controlling the deal, you are responsible for making sure that it makes sense for the other partner also. But don’t just default to 50 50 is what I’m getting at because that makes everybody feel good. You want to weigh in on that, James?

James (09:20):
Yeah, no, I completely agree. And I think when you’re looking at partnerships, don’t rush in because everyone gets excited about the deal and they’re like, I got this deal. I got to go get it done. And they get deal goggles and they forget about what actually they have and what they should be offering. And it is really important for you to walk through the numbers and play with the percentages. What is a great return for that investor and what are you happy with? And at the end of the day, it has to be both. And so when we talk about doing partnerships, we don’t ever ask what people want. We provide them with the opportunity, we know what their return is going to be and we say, Hey, look, do you want to invest in this deal and make an 8% pref with a 20% equity position? Your return should equal out to 25 to 30% over the next three to four years. And when you come with a plan saying, Hey, if we look at this on a one year, two year, three year basis, here’s your return. And if it’s beating where they can get, like David said, it’s a good investment for them, especially if they want to get interested. And the problem being is for them is they’re a W2 employee. They don’t have the time and you have the time, and so they need you.

James (10:37):
So don’t undervalue those services and just make sure it’s worth, if you’re giving someone a 20% return, like David said, that’s a huge return, you might be able to keep 90% of the equity and then as they participate more, maybe they’re signing on the debt instead of you. Maybe I give ’em more because they’re taking on risk. And so just looking at each one play with, and then I would suggest come up with two formats. I have an equity with a fee split that I do with people, and then I have a straight equity and they’re weighted differently depending on who the investor is and how they want to participate. And when you model it out, when people talk about me investing with me, I have three things that I offer. That’s it. I don’t make different types of side deals because different types of side deals also require different types of paperwork is really important as you’re working with new investors in the real estate space that everything’s documented with a lawyer set up correctly, whether it’s a lender agreement, an LLC, a joint venture agreement, and an understanding so they know exactly what’s going on because I have had a lot of partnerships in life, some have been amazing that have last almost 20 years, almost no issues, and some have been short-lived and nonstop issues.

James (11:50):
But what saves those partnerships at the end of the, is it all put down on paper so people really know what they’re getting into because people rush into deals and they’re like, Hey, how is this working? And explain the risk. Put it on paper. Have professionals prepare that paperwork after you’ve kind of allocated all your fees and then get your partnership going,

David (12:12):
And that will help you psychologically too. Matthew James is advising on a practical purpose, which is really good, but most people will go into whatever partnership they think is fair, and if no one proposes what is fair, then they’re going to say 50 50. We always default to that. But if you’re bringing them something that’s already been written up because controlling the deal and you’re saying, well, this is what I’ve offered to other people, and then maybe you sweeten it a little bit better just for them, you’ve now set a baseline of what is fair because that’s what the market is offering according to you, and you’ve made it even better so that of course they’re going to be happy doing it. When you don’t do that, their mind is like, well, I don’t want to get less than I deserve, but I also don’t want to get more.

David (12:50):
And there’s no baseline with which people can operate. We talk about that on the David Greene team all the time. The importance of setting a baseline, right? If I am trying to get you to buy a house, Matthew, and you don’t want to go over asking price, it’s because you’ve set a subconscious idea in your head that the asking price is what the house is worth and that’s where your baseline is. But if I can convince you that that house is worth more than the asking price, now you might be paying more than the asking price, but less than what it’s worth. I move the baseline to whatever the appraised value is or the market value. Humans need that in order to navigate these relationships with a lot of fear being taken advantage of and greed of wanting to get more of what they want. So James’s advice is awesome, right? You be the guy to do the work to draft up those documents and then say, Hey, here is the way that I do things. Tell me if you want to do this. And they’re going to look at it and say, well, is this better than what I could get in the stock market? And if so, you’re going to have yourself a partnership where you’re controlling it. Love

Matthew (13:45):
It. Love both of the responses, both five stars. Thank you, David.

David (13:49):
Thanks Matthew. Appreciate you man, and thanks so much for being here with us today. At this segment of the show, I like to review some of the comments that y’all have left on YouTube, as well as some of the reviews that our loyal followers have left for us on the podcast app itself. And then sometimes we get into some forum questions from BiggerPockets. So let’s see. These YouTube comments come from episode 8 97 where we interviewed my homie Felicia Rexford, and if you haven’t seen that episode, I highly recommend you check it out after this one. Alright, our first comment comes from ais Mendoza Trust made me feel at ease that my kids will not be homeless when my husband and I are not around anymore. Different generations have different struggles in life, but I want to make sure that my kids have strong foundations to deal with it. Oh, the mother’s love is something else, isn’t it James? It

James (14:35):
Is. Nothing Trumps that.

David (14:37):
Now be ulu. He says, my husband sent me this episode and he loves learning from your podcast. Thank you for continuing to show us how to diversify our incomes and the steps that you provide for us to get there. And Florian Iwo says, excellent content, just placed my home and real estate investments into a revocable living. Trust brains develop around the age of 26. So think about legacy planning. I appreciate the honesty and pivots and these ideas in turbulent times. And last but not least, we have a comment from the Apple podcast app that says, excellent resource. I stumbled into the real estate game after buying a duplex without realizing how much it would change my financial future. Ain’t that the truth? I remember I bought my first house, James, I had no idea what that was going to do for me. I found BP and dove into all the content they produce and have since used the equity in the duplex to buy a new primary. And I’m working on my first off market seller finance deal. I don’t claim to be an expert, but I’m amazed how confident I am working through this new deal because of my familiarity with real estate, which is in large part due to the education I received through bp. Thank you for all the hard work from redeemed Ski Bum via the Apple podcast. Such

James (15:45):
Nice things and we appreciate all the feedback. I know for us as hosts, we love getting the feedback so we can actually start other types of conversations too.

David (15:53):
That’s right. If you would like to be on Seeing Green, simply head over to biggerpockets.com/david and leave us your question because one, we can’t make the show without you, and two, we just want to get to know you. So let us know what struggles you’re having, what questions you have, what you’ve always wanted to know. If you bumped into David Greene or James Dainard in a bar at a conference, at an event, what would you say? What would you ask it here because here for you. Alright, let’s get into our next question. Good stuff. So far, this question comes from Jamie Dusa in Boston, Massachusetts.

Jaime (16:26):
Hi David. My name is Jamie Dusa from Boston Mass, and my question for you relates to loan pay down. I have a property that I will finally be able to pay off next year. I owe about 170,000 on the mortgage. I have a 4% interest rate and I’ve been into this loan for about eight years now. The property rents for 1850, the mortgage payment is 1400. So when you consider repairs, it doesn’t cashflow very much. The property itself is worth about 450 K as is. So I feel my return on equity is very low. If I paid off the mortgage, this would clear up about $12,000 a year. If you would not consider doing this, what would you think about doing instead? I don’t have access to wholesale deals and I feel the MLS is quite overpriced. Finally, the 1850 I charged should be likely closer to 2,500. What are your thoughts on raising rents? I’ve never done so on current tenants. Thanks.

David (17:23):
All right, Jamie, I’ll give you some practical advice here. First off, check out BiggerPockets podcast episodes 4 48 and the rookie episode 360 9 where we interviewed my buddy Dion McNeely and he has some advice there that just might help you, especially when it comes to raising rents. Second off, I’m in the same struggle. James is in the same struggle that all of you are in. Cashflow is very hard to find and the methods that we’ve utilized to try to find cashflow often end up with you getting a less than desirable property, a less than desirable location, or trading in your W2 for a full-time job trying to find cash flow real estate. And so you didn’t really get a net positive there. How I’ve adapted is I’ve started buying in properties that I believe will appreciate more than the national average. I call this market appreciation equity.

David (18:08):
So I look for literal market, cities, neighborhoods, areas where I think, look, if I’m not going to get cashflow, this needs to make up for it by getting more appreciation than I would get somewhere else, as well as adding value to properties. I have a new book coming out in August. I’m probably going to be calling it better than Cashflow that details some of these strategies. So think about that. If you can’t get the cash on cash return you want, how can you add value to real estate in other ways by buying it under market value, by adding value to it, by buying in better locations where you look back or five or 10 years and say, wow, this thing has performed so well. I don’t even care about the cash flow. Alright, our next question comes from Melissa Alejandro in California. David, I’m stuck in limbo.

David (18:49):
I have two properties, one I live in and one I just got in a trust that belongs to my mom. My goal is to buy a ranch at house, hack my home and maybe sell the house in the trust. The only problem is that my son, his family and my brother all live in the home that is in the trust. I need to buy a ranch first to put them in, then figure out what to do with the trust house. Both houses have equity and I’m not sure I want to use it. I’m thinking a hard money loan for a down payment on the ranch. I need help. After I get situated, I want to invest. I appreciate your time. Alright, so we’ve got some good real estate dilemmas coupled with some mom guilt, giving us a nice little cocktail. James, what are you thinking so far?

James (19:25):
The family guilt’s a real thing. My mom lives in one of my duplex units and I bring in $0 a month in rent, so it’s a great return, but it’s well worth it. And that’s the one beautiful thing about real estate is it can give you financial freedom to where you can help your family out and that is the power of real estate. But we all go through these different transition periods as investors, we have assets we might not want to touch them, especially with low debt on ’em right now, we don’t intend on selling them because maybe they’re not traders like I am, they want to keep ’em in their portfolio or they have a reason to keep in ’em, but they’ve created enough equity that they want to go and acquire more property, but they’re low on liquidity. And so it’s that bridge financing that you’re looking for.

James (20:14):
And there’s two great options for that. One is hard money. You want to find a cross collateralized lender that’s a hard money lender that is going to take your equity position, which will be in second position, and that’s a harder loan to get. Hard money. Lenders will give you cross collaterals. If you own a piece of property free and clear, that’s a really easy thing for them to put a loan on as you’re buying that next property. When it’s in second position, you have to really clearly state what the equity position is, what the cashflow is, and you want to make them feel comfortable. But you can find a hard money lender that will take your equity position and they’ll look at that and they’ll consider that as your down payment for your farm property. In addition to, as you’re a real estate investor, I’m a firm believer working with local banks, local banks look at you as like an asset rather than just a person that fits in a square box like many of the big banks.

James (21:06):
If you move your deposits and banking over to these smaller banks that are local to where your real estate is or where you’re buying and you move deposits over, they will work with you and help you put your plan together. So they will also look at giving you a bridge loan based on your deposits and your properties that you have with equity in ’em, and they will bridge it with a construction loan or a bridge loan at that point. So really you want to talk to these local lenders that are more creative because when you’re dealing with those bridge loans, you have to have them be able to see the big picture, not just what’s on your W2 or your tax

David (21:41):
Return. And I think that Melissa here has the right idea. Get another property, move my family into that one, then figure out what to do with the equity. I love these issues that we’re trying to struggle.

James (21:52):
And David, I like what you said about equity, right? As we build this equity, equity’s really a bank account and people kind of hoard it and they’re like, oh, this is my special thing. I have all this equity, I have all this net worth, but it’s just a number on the paper and if you don’t use it, you can’t really ize it. And the purpose of building equity is building a bank account. If I want to go make cashflow, that usually requires money. If you go buy a standard rental property, you’re putting 20% down to make a six to 7% return, or maybe even 10 if you’re buying a good deal. Equity is the same thing. You’re just utilizing, instead of transferring your bank account, you’re transferring property to property. And as long as you’re increasing your position, that is a smart move. And so I think a lot of people need to treat your properties like an ATM, don’t go buy boats, but pull the cash out when you need it and then go reallocate and go buy some more investments. And that’s how you scale and grow.

David (22:47):
Good deal there. In pillars of wealth, I talk about how equity is a form of energy, financial energy that you have wrapped up in a property. Cash in the bank is a form of financial energy that you have stored at a bank account. Your 401k is a form of financial energy that you have stored. Now, different forms of energy have different pluses and minuses. Money in the bank is very liquid. You can use it in a pinch. Energy in a 401k is going to be efficient because it’s not being taxed, but you can’t use it as easily. So understanding the pluses and minuses, the pros and cons of all the places where you can store energy will sort of give you an advantage when you’re playing this investing game. But to your point, James, yeah, if you’re an active investor who’s trying to find deals, who’s trying to put them under contract, you need a bigger proportion of that energy where you can get to it via money in the bank, via a HELOC on a property where you can quickly take the energy out of a house.

David (23:39):
So Melissa, thank you very much for your question here. I think you just need to get a little bit more clarity on what the next deal’s going to look like. Then you’ve got lots of options. You can throw a HELOC on the property that you have right now and use that for the down payment. You could do a cash out refinance if you wanted. I know you didn’t want to take out debt, but you’re going to need to get the money for the next house from somewhere and we’ve got more in store for you. So stay tuned right after this quick break. Welcome back to the BiggerPockets Real Estate Podcast. Let’s jump back in. Alright, and our last question of the day comes from sar. Has Mohammed David, in your episode 8 97, James Dainard mentioned about a hard cash investment that returns 13% per year. Can I please get more information on that investment? Thank you. Well, Sarda, yes. So politely that I brought James in himself. Just to answer your question, BiggerPockets with the white glove treatment. So James, what is this 13% annual return that you speak of and how might one partake?

James (24:35):
When I started preparing for my kids, once you have your kids, you start thinking about my whole mindset changed. You got to worry about 10, 20 years down the road, not just for yourself but for them. And as I saw education in college just skyrocketing the last 10 years since they were born, I wanted to be proactive and kind of stay up with those costs, right? Because the point of investing is to hedge against inflation, hedge against rising costs and to keep you in the game. And I started looking at the 5 29 plan where it’s a great plan, you can invest in it. It goes into the stock market, gets you steady growth, it protects the money. But the issue for me is I’m a high return person. I don’t like to do it traditional. And that has not worked well for me over 18 years.

James (25:19):
The way I do it seems to work for me, which is high risk investments with high returns. So then I started exploring, well, what can I do better that maybe isn’t a shelter but I can get a higher return? And that’s where I looked into a hard money lending fund and you have to be very careful about who you’re investing with. But I basically deposited $20,000 for each kid. And those compound at 10% annually and over 10 years, that $20,000 is going to turn into almost 275,000. And that’s how you keep in. That’s how you keep in the game and you keep up with those rising costs, but you want to make sure you’re doing it the right way and with the right company. The first thing is, many times when you’re investing in these types of hard money funds, they’re going to pay you a return eight to 10% roughly, or depending on what they’re lending it at.

James (26:13):
But you have to be accredited. Now, my kids are not accredited investors, so I did put the money in accounts under their name, my name for them. And so in this hard money fund, I have my own investment and then I have two separate accounts that are for my children that are compounding regularly. You need to vet these operators. There is all sorts of syndicators out there. There’s all sorts of hard money shops that have popped up and they’re newer to the market. And when you’re working with an operator that is not used to market condition changes, that’s where it can be a lot higher risk. And so things you want to do is how long has the company been in business for? What is the operator’s experience? What do they lend on? Is it a high risk investment? The fund that my kids are in with me, it’s a first position deed to trust with intrust funding.

James (27:02):
And so they only lend on properties with first position deeds of trust in a specific area I know well, and the average loan to value is at 65%. And so it’s a safe fund for me to stick my kids’ future in because I know what they’re lending on. So you want to find out who the operators are, how long they’ve been operating for, what they lend on, and then what is the requirements for them to lend because you don’t want to give your money to, whether it’s your kids’ money or money to hard money lenders that are just trying to push money out the door nonstop because that’s how they get into riskier loans. But there’s so many different things that you can do with your kids. You can buy a house in their name, you could buy a piece of raw land for 5,000 and put it in their name and let it grow over 20 years. That’s also going to get you a high return if you buy in the right area. And so just don’t look at just the traditional ways all the time. If you want higher growth, look at what you can execute on. I mean, you can go buy land for five grand, take that money, let it grow, and then let ’em sell it to fund their college.

David (28:01):
I think when people hear the ROI, in this case 13%, there’s an assumption that it’s passive. Especially because traditionally most investment options anybody got involved in, we’re all passive. Do I buy stocks? Do I buy bonds? Do I put my money in a cd? Do I give a personal loan? So we created this idea of ROI to compare investment options, apples to apples. Well, if I give them my money, how much of it will I get back every year? But real estate investing is not passive. A business is not passive. We’ve now kind of created a spectrum of passivity and the higher returns tend to come with either more risk or more work. So if you don’t want the risk, you can get a better return by taking on more work. If you don’t want the work, you can get a better return by taking on the risk.

David (28:42):
And if you don’t want either one, you’re going to get a lower return, which means you need more capital to be able to invest. So this podcast, we typically teach people about how to invest their money and there’s going to be some form of activeness. You’re going to be managing a flip, managing contractors, managing a team of people that’s helping you managing a short-term rental. But there’s always going to be a form of management, which is not passive income. So what I’m getting at here is don’t get tricked into just comparing the ROI on a deal. This one gives a 5% return, this one gives a 15% return, this one gives a 25% return. I’m going to go with the 25. That might be a flip that has a lot of risk and a lot of work associated with it. And the 5% return could have been the opposite of that.

David (29:24):
Alright, thank you everybody. Sarda, I hope you’re happy. We got James himself into answer your question and all the rest of you remember, I need you to go to bigger p.com/david and submit your question to be featured on a future episode of Seeing Green. Also, if you’d be so kind, leave us some comments on YouTube. Let us know what you thought about today’s show and what you’d like to see more of. And if you’ve got a minute, please go leave us a review wherever you listen to your podcast. Those help a ton. James, anything you want to say before we get out of here? No,

James (29:51):
I think these are great. I think keep sending in the questions. I love coming on here with you. Just this is my favorite thing, breaking down the mechanics of real estate. What is that next step? And you don’t know until you ask the question and send in the questions. We will happily

David (30:07):
Discuss ’em. If you want to know more about where you can find James or I, just go to the show notes. You’ve got our contact info on there. So if you’re too embarrassed to ask something on Scene Green, you can send us a direct message on your favorite social media. And if you’ve got a minute, check out another BiggerPockets video. This is David Greene for James, the great dard signing off.

CNBC’s Eunice Yoon joins ‘Squawk Box’ from Beijing with a look at China’s real estate sector.

David:
This is the BiggerPockets Podcast show 911.
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast. For those of you who are new here, welcome. And for all investors today and tomorrow that have been with us for a long time, welcome back. I’m here today with my rad co-host, Rob Abasolo. Rob, how are you?

Rob:
It feels good to be your partner in crime in today’s episode. And listen, if you’ve been a listener of the BiggerPockets podcast for a long time, then you’ve probably heard us talk about this idea of adding value to properties. Today we want to slow down and actually talk about what we mean, what does adding value actually look like, what are the different ways you can increase a property’s value and how you’re going to decide which strategy is going to work for your specific property.

David:
That is right. If you’ve ever heard people talk about value add and thought, “Well, thank you, but what does that actually mean?” After today’s show, you’re going to walk away loving us. This is an emergency in real estate on episode 911, we’re going to be covering it.

Rob:
The listeners have thrown up the Bat Call, so you and I are going to come and squash this one head on. Today’s episode, let’s get into it.

David:
I can’t wait. Let’s get into this today. What do we mean when we say add value to real estate?

Rob:
One of the ways we phrase this oftentimes on the show is forced appreciation, forced equity. The idea of adding value is, how can you come into a property and make it more valuable? I know that that sounds very basic there, but the idea is you got this property that performs at a baseline metric. What can you do from a renovation standpoint? What can you add? What kind of square footage is able to be converted in this property to make it a more valuable asset for you to list it on the market and resell?

David:
That’s right. We typically look at real estate from two perspectives that it values us, cash flow and then the equity that’s in the property. If you can increase the value of the property, you can increase the equity. And if you can increase how much you charge for rent or how much income you bring in, then you can charge the value from that perspective. What do you think are the two most common ways that people think about when they want to add value?

Rob:
Yeah, so it comes out to two very basic principles here. Can you make it bigger? Can you make it better? Right?

David:
Yeah. For a long time, real estate investors didn’t really have to worry about this. Value add was sort of like the icing on the cake. We typically just looked, analyzed for cashflow, bought the highest cash-on-cash return we could. And hey, if you could add some value, a little razzle dazzle in there, that was cool. But in today’s competitive market, you really have to have goggles to look at a property and see how you can take it from zero to hero or you might not be able to make the deal work at all.
Now, Rob, you and I have conversations quite often about what we can do to increase the value of property, really bring it to its highest and best use. Sometimes that means increasing the ADR. Sometimes that means increasing the rent that you can get on a lease. And sometimes that means actually increasing the usefulness of the property. What are some ways that you make a property worth more even if you can’t add to the square footage?

Rob:
Yeah. So this goes into the second category, right? We talked about making it bigger. Category number two is make it better. How can you actually improve the property and make it better so that people are willing to pay you more to stay in that property as a long-term rental or as a short-term rental, right? Obviously, there’s going to be differences in a long-term rental approach. In a long-term rental approach, we’re talking about maybe a minor renovation, maybe we’re talking about a full on gut renovation that modernizes the inside that allows you to increase the overall monthly rent on that property. And then when you’re talking about short-term rentals, I mean, it’s not too dissimilar than that because you still want to a nice modernized place. But oftentimes, you get to this fork in the road, I guess, as a short-term rental where you ask yourself, “Well, do I want to spend my money on the actual remodel of a property or do I want to spend my money on the amenities?” And this is where we start getting into that better territory.
And this is something that you and I have done recently with one of our properties where we invested about $22,000 into our Scottsdale property to resurface our pickleball court. And that makes it better because now people see those photos and are willing to pay more money every single stay. And as a result, we have increased the average daily rate, you mentioned that earlier, the ADR, and our yearly income. And now, overall we make way more money as a result of focusing on the better versus making it bigger. Because that property is already 6,000 square feet, we don’t need to make it bigger, we need to make it better.
So you’re the BRRRR guy, so obviously you’re a little bit more privy to how this works on a long-term rental. How do you go about making properties better from a long-term rental perspective?

David:
Yeah, that’s a framework that my mind is kind of put together at this point. So sometimes you can make it better by adding a unit to it. So you have an entire area that could be rented out that couldn’t be rented out before. But then you got to ask yourself the question of, what does this need to be able to exist as a standalone unit? It’s going to need a separate entrance, it’s going to need its own windows, it’s going to need kitchens, it’s going to need bathrooms. So sometimes just adding plumbing to certain areas and running electrical to it right away makes the property better because now I can add a kitchenette, I can add a bathroom. I have a whole separate unit that can be rented out. You’re also adding bathrooms to the count on the house. And if it’s a nicer house and it doesn’t have a lot of bathrooms, that alone can make it appraised for more.
I also will add bedrooms to a property. So sometimes I find a property that’s like 3,000 square feet and it’s got three bedrooms. Now there’s always bedrooms in that property that could easily be converted they just don’t technically qualify. So sometimes I’ll add closets. Sometimes I’ll frame off like a den or an office or a living room with French doors, and boom, I’ve got another bedroom there. But anything that’s going to make it look on the MLS if I want to go sell that property is having more bedrooms, more bathrooms, more square footage or just more useful space will definitely add value to a property.

Rob:
Yeah. You and I have had some really interesting conversations about what makes it worth it for us to invest into a property. Because for me, I see a lot more amenities in arcades and theaters, but the problem when you start getting into that space on the short-term rental side of things is, it’s not dollar for dollar going to add to your equity, whereas square footage and renovations might. And so this is always like the caveat that I tell people is, if you’re looking to do value adds especially on amenities in the short-term rental side of things, keep in mind that those amenities may not translate to a higher sale price, but it could certainly translate to a higher revenue for that particular property.

David:
Yeah, that’s just understanding, is this improvement, are you adding value to the cashflow of the property or are you adding value to the equity of the property? And ideally, you do things that add both. So when I add a whole nother unit to a property, I’m getting more cashflow and I made the property itself worth more. Now sometimes you can’t, and that’s where in the situation like you or me. We’ve got a 2-car garage in our Scottsdale property. We also have tons of covered parking. And it doesn’t rain a whole lot in Arizona.
And generally speaking, I don’t think people need a garage when they stay at a short term rental. They’ve usually got a rental car. It doesn’t matter, so we’re like, “What are we going to do with this garage? Could we make it into a movie theater?” Yes. We’ve talked about adding a golf simulator into there. We’ve talked about adding arcades. All of those things will probably make it rent for more. And we did add value to the property from that sense. But if you go to sell it, the arcades, the golf simulator, that’s not necessarily adding value to the home. So you spent a lot of money that you’re not going to get back on the equity side. And you just have to balance that like, “All right, how much do I expect to get back in cashflow? And how many years will it take to get that money back?” Versus if you just build an ADU on a property, you’re getting cashflow and you’re getting value back immediately on the equity side.

Rob:
Yeah, it’s a fine line. And so I challenge everyone, when you’re looking at the short-term rental side of things, to keep in mind, it is a bit of a tight rope walk in terms of adding actual equity versus revenue. But to me, I thought it was imperative to add more revenue to that specific property. And so yeah, I think that investment really panned out. February income, just from that value add, was up 200% this year than over last year. So in that instance, I’ll take that all day, whereas adding square footage may not have been the right choice.

David:
And to be honest, in this one, it might actually have added value to the property as well because the sport court when we bought it was in rough shape. It was almost useless.

Rob:
It was useless, yeah.

David:
So if you were looking for a property like this, you were bonded by luxury real estate in Scottsdale, that would’ve been a blight. That’s going to turn buyers away. It was so bad. Now it’s actually usable space.

Rob:
All right, so we’ve defined what we mean when we say value, either increased equity or increased rent. And we’ve talked about why adding value is the way to build wealth through real estate right now, but how can you use this information when you’re looking at potential deals and what are some ways to add value that people might not think about? We answer that right after the break, so stick around.
Welcome back. David Greene and I are here hashing out ways you can add value to a property to make a deal work. So let’s jump back in.

David:
Now we’re talking about this from the perspective of property you already own, but a lot of the time you’re going to be looking at properties that you want to buy and factoring this into your analysis. So I will often buy properties that have a lot of square footage that is not included in the value of the property.

Rob:
Okay. So that’s a very interesting topic. So let’s talk about that for a second and then we’ll dive into the nitty-gritty here. But how can you actually make a property bigger in terms of value even if you can’t literally increase the square footage? You’re saying it’s not included in the county assessor, but give us an example of this.

David:
Yeah. What you don’t want to do is have to build entire structures on your lot. So every time I go to a conference, someone will come up to me and they will inevitably give me the question of, “Hey, I got this property. It’s got a big lot. I want to build an ADU on the property.” I’m like, “Oh, yeah, that sounds great. What’s it going to be?”
“It’s going to be about $150,000 and it’s going to bring a thousand dollars of cashflow.” It’s like, man, for 150,000, that’s a whole down payment on an entire property. You’re going to spend that on an ADU and you’re not going to be able to get your money back out of it a lot of the time, it’s not always a great use of capital.
But what if the house has a detached three car garage that could then be converted into its own space, maybe a two bedroom, two bathroom unit with a full kitchen? Now instead of spending $150,000 to get something that you could rent out, maybe you spend 60,000 to $70,000 to get something you can rent out. That’s a way better use of your capital. And you want to target properties that have what I call low hanging fruit.
Another one would be a basement that’s unfinished. The property that I bought in California last year was a two bedroom, one bathroom property in a really good area that I was able to buy for a little over 800,000 where there’s nothing for sale in that area for less than a million. It was so cheap because it was so small, but it had a massive basement and a 2-car garage attached to it. It was basically useless. It wasn’t being used for anything. So I bought that house and I more than doubled the size of it for about $110,000.

Rob:
Wow.

David:
I got a massive increase in my equity there. And now I have two units that can be rented out in the same property because I looked and I saw something that all the other buyers were passing up.

Rob:
So let’s change the conversation a bit because I think that’s a brilliant strategy. Obviously, if there’s space that’s being unused, I’ve got properties where that’s the case and I see the obvious value add component, but that may not always be the case so I want to talk about what if you can actually add literal square footage, what does that look like? There’s a few different ways to do this, but one of the more obvious ways, which I haven’t really ever gone this route because I’ll talk about this in a second, but additions, which would include more bedrooms and baths. I’ve always just found additions to be relatively costly in just the properties that I’ve had. Whereas another option would be to convert outdoor spaces to ADUs or building ADUs from the ground up.
And for me, in my journey, I was trying to do like the supreme version of a house hack and build an A DU in my backyard, my tiny house in Los Angeles, California so I built that from the ground up. And the reason I didn’t do it attached was more so to build it attached or detached in that specific circumstance. There wasn’t a huge gap in the pricing between all that, and I wanted a little bit more privacy as well. So I found the ADU tactic to be really, really useful for that. And that to me was such a great value add. That’s added a ton of value to that specific property. And not only that, but it actually now cash flows anywhere from the 2,000 to $3,000 a month route depending on how it rents on the different OTAs, online travel agencies out there.
So I know you have a little bit more experience with additions. How do you gauge that if you’re going to do that versus just trying to find a house that has underutilized square footage?

David:
You’re looking for something that has space like we just described that isn’t being useful for the property. Now after a while of doing it, you just sort to see it on your own and you feel sad inside like, “Man, they got all this space.” Like when I walked through that basement, “Why? Why would they have all this here?” It had framing work done, it had electrical work done, and it had plumbing right above it and I’m just walking through dirt. Didn’t make any sense to me. You’re in this grade A real estate in expensive part of California, this should have been converted. We have what are called California rooms out here. So this is an outdoor seating area, basically imagine an entire room, but you took away one wall and that goes into the backyard,.

Rob:
Like a sunroom kind of thing?

David:
Similar, but a sunroom is typically something you’ll see in Florida and the entire thing is covered, but it’s not covered by drywall. It’s covered by some kind of windows or it’s got a wood exterior.

Rob:
Like screens or something?

David:
Yeah, screens, exactly. But it doesn’t have insulation and it doesn’t always have electrical run to it. But that principle works exactly the same. Sunrooms, Florida rooms, California rooms. Can you go in there, add some insulation, reframe it, and then cover it with drywall and have its own unit?
Now, here’s what’s cool. Oftentimes those types of properties that I was buying in California when I was on my BRRRR streak, the kitchen was right next to the sunroom. So I could tap into plumbing and electrical very easily, add a bathroom and a kitchenette, and you could either have a standalone ADU like you just described, or you could add a master suite to the house. So I would go and I would buy two bedroom, one bathroom, or a two bedroom, two bathroom, and then I would add this master suite and I would get another bedroom and another bathroom, and I would pop on another 70,000 to $80,000 of value to spend maybe $30,000 to do it. And that isn’t a huge win, but when you’re racking this up over 2, 3, 4, 5 properties, it starts to become consistent income. And what’s more important is in today’s market, you can make deals work that your competition can’t because they’re not looking at it from this lens.

Rob:
Yeah, totally. I will say, actually I did do… Man, it’s kind of this weird pseudo edition type of thing. We had a sunroom in a property that I just built. I just launched the Pink Pickle, which is my bachelorette party in Austin, Texas. There was this sunroom attached to the back of the property that we were going to convert into a room. And once we pulled to the, I don’t know, the drywall or the paneling, big mistake. We realized how horribly built it was. And basically my contractor was like, “Look, dude, it’s actually going to be cheaper to rebuild all of it and to tear it all out.” And that’s basically what we ended up doing. And so we rebuilt that entire sunroom, which I would say was in the neighborhood of 10 by 20 square feet, so about 200, 300 square feet somewhere in there.
And that to me was like a really big value add because we didn’t actually add a bedroom to it, but we did add square footage, and that square footage became… It’s kind of this weird mixture of both. That square footage became a huge game room with a ton of amenities in it that my short-term rental guest will love the extra space and the ability to hang out in that room and everything like that. So it’s kind of like the best of both worlds in that scenario. So there’s no right or wrong, just kind of what’s right for the specific house that you’re buying.

David:
Now, where this becomes a game changer is when you take this thing that we’re talking about of taking unused square footage and converting it, or maybe building a little bit onto a property but not all the way, and combining that with short-term rental and medium term rental strategies.
So what you just described is a way to make a short-term rental rent for more. You added a game room, you’re getting more guest stays, you can charge more stay. Well, I do this a lot with medium term rentals. So I’ll take that basement and I’ll convert it into its own unit and I will rent that out to a traveling professional that doesn’t need a huge, big standalone space. They just want a place to go lay their head and sleep that’s going to be quiet and clean.
So the standard of performance that that little unit has to meet is much less than if I was trying to like, I don’t have to build a house from the ground up to make a family happy to want to rent it. I’m going to be renting to someone that is not going to be super picky. They just need a clean place to stay. But if they have somebody living above them, it’s not really any different than an apartment complex. Or if the ceilings are a little bit lower than what they might have expected or the bathrooms in a different location, it’s not as important.
So what we talk about on this podcast are all these different strategies and what you and I are talking about on today’s show is how we add these strategies together to make this cashflow casserole so that you can make a deal work that otherwise wouldn’t have.

Rob:
Cashflow casserole, I love it. So let’s get into the nitty-gritty or a little bit of the technical side of this. Because obviously if you’re doing additions, if you’re renovating, if you’re doing all that type of stuff, how can investors determine if they’re even allowed to make changes to these types of properties? Can you even add square footage? Because I’ll say, for example, in Los Angeles, there was a ratio as to how much building square footage could be on the lot. And so my tiny house actually had to literally be a tiny house or else I couldn’t have built anything bigger just due to the ordinances of that city.

David:
Yeah. Some cities are going to be much more vigilant of this than others are. I know some investors doing this in places in the Midwest and the South, and I asked the question you just said, and they go, “Huh?” Then other areas like California where we live, and they’re like, “What? What’s that? Did I just hear a hammer and a nail? Someone sent the city inspector right now!” And they come out with their binoculars and their spy game gear, and they’re looking for every little thing, which is funny ironically because those are the areas that need housing the most where we have the biggest shortage, but you still have the most regulation. So one thing is talking to an experienced investor that does development in that area, that’s one way you can tell. And then it’s not a bad idea to call the city and ask.
Now here’s what we do on our side. We don’t call and say, “Hey, this house that we own on 123 Main Street,” or “Hey, this house, we’re thinking about buying on 123 Main Street, this is what we want to do.” Because now you’ve triggered something where the current owner can find themselves in hot water, or you put yourself on their radar and you maybe didn’t want to be there. Instead, what we’ll say is, “Hey, we’re looking at buying a house in this neighborhood. What we want to do is convert a basement or build out this back room and we want to turn it into extra living for the community. What’s the process like to get that permitted?” And if they go, “Oh, Mr. Greene, it’s not a problem at all. Here’s what’s going to happen. You’re going to meet Inspector Smith and they’re going to come by. They’re going to measure this and they’re going to check for that.” Well, maybe you do that during the inspection period when you have the housing contract. And if there’s a problem, then you back out of the deal.
But if they go, “Oh, well there’s a wait list. You’re going to have to fill out this application. It’s going to be nine months, and then you’re going to talk to so-and-so,” they’re kind of letting you know that this is going to be a much bigger deal.

Rob:
Sure.

David:
When that happens, I bring in the big guns. I call a contractor, ideally one that’s done it before. And they know the city, they know those people. That’s the one you’re looking for at least. And they can tell you, “Hey, this is a bad idea. This is going to get in trouble.” Or, “You know what? I think this will be fine. We’ll just go about it this way.’

Rob:
Yeah, I’m just going to give you one tip on top of that that I think is so important. Just go to the city. I know this isn’t applicable to out-of-state investors. But if you live in the city, you 100% should go to the zoning and planning office because they get a lot of phone calls from people that, “I want to build a tiny house and I want to do this.” They’re just not going to give you the time of day as much as if you just go in person. They’ll still hate you, they’ll just hate you a little less. I don’t typically find the city workers to be the most pleasant group, but in person you’ll have a better chance of building a rapport with them.

David:
All right. So we’ve walked through a bunch of ways that you can add value to a property, but what does that look like in the real world? After this break, we’re going to dive into an example of how to use multiple value add strategies at the same time to turn one property into a highly profitable machine and it’s going to be a deal for my own portfolio.
And welcome back. We’re in the middle of a casserole of a conversation about how to add value to a property. Grab your forks. Let’s dig back in.

Rob:
So David, I understand that you have this property, I believe in California, where you’re sort of using a mixture of these, I think, three different value add strategies on one single property. So walk us through that case study and I guess the super hybrid of value add that you’re doing on this property.

David:
Yeah, this is a good example of how we take all of the ingredients we talked about in the casserole and we put it together in one dish. Now, I wanted to buy this property because of the location. It’s a really good location, and the property was sitting on the market for a long time even though it’s in a great location. And it was priced reasonably because its layout was just a little funky. It’s 5,000 square foot property, and it has a really big lot with two 4-car garages on that lot, but the kind of person that would buy it would only be like a mechanic. It was sold to me by a person who was a general contractor and he wanted all this space for all of his workshops.
Most people that are going to be buying a property that price, it was a little under $2 million and at that square footage, they’re going to be a wealthy family and they’re going to be wanting amenities. They want a really big swimming pool, they want a floor plan with a lot of cool stuff in it. And the neighbors were a little bit close to this house. So it sat on the market for quite some time, but it was one of those properties you want to own because in 10 years it’s going to be worth way more.
The problem is I just couldn’t make it cash flow. I couldn’t rent it out for as much as what the mortgage was going to be. There wasn’t really any obvious way to add value through a BRRRR because it was already in super good shape and a gorgeous property so I had to get creative. What I’m doing with that is I’m using three different strategies on the same property. So I added two spaces in the main house and turned them into bedrooms and I added two bathrooms. So now I’m going to have nine separate rooms that I’m going to rent out by the room like pad split style is what we call it.

Rob:
Wow. Oh, okay. I was going to say like pad split, yeah.

David:
Yep, exactly. And all the rooms are really big so I added their own fridges to it, a little computer desk. I decorated them. I put really big beds and a lot of furniture. Those will be rented out to a combination of traveling nurses and people that just want to rent a bedroom in the Bay Area. It’s almost like having your own apartment especially if it has its own bathroom. Then there’s a huge community kitchen that everybody’s going to share.
Now, there’s also an ADU in the property that’s like a studio and I rent that out specifically as a medium term rental. That’s on Furnished Finder right now and it’s been rented out the whole time that I’ve had the property. Then one of those 4-car garages, I’ve already got permits from the city to turn into a duplex. So now I’m going to have a 4-car garage turned in two different units each that has a two bedroom, one bathroom layout with the kitchen. So that’s going to be traditional rental. I’ve got two units that I can rent out. And because it has all that parking and it has a 4-car garage, I’ve got enough space for those nine people that are living in the main house to be able to all have parking and the duplex is in the back of the property where there’s a separate entrance that comes in from a different area. So they’re going to be able to park in a part of the backyard where I’m just going to lay asphalt down over the grass.
And in essence, I’ve taken all of the strategies we talked about on the podcast, put them together in the same property and ended up in a grade A neighborhood where I’m going to get the best tenant pool available.

Rob:
Dude, that is the craziest casserole of a house that I’ve ever heard. So help me understand, do you know the numbers off your top of your head of what this property will gross or what the gross revenue will be at its peak if everything is booked versus a different use case for it?

David:
So we’re anticipating somewhere for the bedrooms between 1,200 and 1,500 a bedroom at nine bedrooms in the main house. So if we just take even a thousand bucks a room, there’s 9,000 there. The studio as a medium term rental is going to be rented out for about 20,000 a month. That’s what I’ve been getting. So that puts me at 11,000.

Rob:
Wow.

David:
And then each of those duplexes will probably be bringing in somewhere around 2,500 each. So that’s another 5,000 there. So that would be about 16,000.

Rob:
Dude. And then what would it make as a long-term rental?

David:
Probably like 5,200 bucks a month.

Rob:
My goodness. Dude, that’s nuts. Now I imagine probably some management fees and some property managers that need to oversee that, but the point is, you’re going to do about 9,000 or $10,000 more because you got super creative with how you added value to this specific property with its use case.

David:
That’s exactly right, yeah. And having the vision to see, “Ooh, this is a way that this property could work with all of the different techniques we talk about on this podcast.” I think if you take martial arts for a long time, it was, what is your martial arts strategy? Do you do karate? Do you do jujitsu? Do you do wrestling? Do you do Muay Thai? Well, then mixed martial arts came out and it’s like, “No, I got to do all of it, but I just have to figure out which tool to use in which situation.” Real estate investing has sort of become that way. It is very competitive if you say, “I do the BRRRR strategy, I do short-term rentals, I do medium term rentals, I do house flipping, I do buy and hold,” that’s great, but it’s very difficult to make that work when everyone else is trying to do the same thing. But what if you could mix all those together and find a way to execute a plan that the other investors that don’t listen to this podcast as often can’t compete with?

Rob:
So this goes back to the beginning of my real estate story, and we’ll wrap up on this, but for me, when I was looking for a house in Los Angeles, California when I was first moving there in 2017, keep in mind my Kansas City house was $159,000. I sold it for 215,000. So buying a $624,000 house in Los Angeles at that time was embarrassing. I didn’t tell my family, they would ask me how much it costs. And I remember when I told them, they were like, “What’s wrong with you?” And I’m like, “I don’t know.” But the reason I bought this property was initially I wanted to say, “I can’t afford this property,” but what I asked myself instead was, “How can I afford this property?” And I thought of what are the different use cases for this? And so I was like, “If I house hack and I rent out a unit at the bottom, I’ll cover half my mortgage.” And then I thought, “What if I build an ADU in the backyard? Then I’ll cover all of my mortgage.” And then I had this amazing house hack.
And then when I moved out, I turned my main home into I think a short-term rental, my tiny home into a medium term rental, and then the studio at the bottom into a long-term rental. So I actually had the trifecta of rentals on this property. And as a result, it cash flows thousands of dollars, whereas any other investor might look at that and say, “Oh, it doesn’t pencil out. Moving on.”
So you got to really find an opportunity in every house that you’re examining and really just try to hammer what the best possible use case. Because I’ll tell you, David, on that property you just described, 99.9% of people would not have gone down that route.

David:
Yeah, that’s why it sat there for several months. And I also was able to pay less than what it appraised for when I bought it for that exact reason. It sat there for a long time and so the seller kind of had to sell it to me, but everybody else looked at it and said, “Oh, it would bleed money. It’s not going to cash flow.” And it’s not really working for a wealthy family that wants to live in a grade A neighborhood either. It’s sort of sitting in no man’s land. So maybe that’s the moral of the story, how to find deals in no man’s land and turn them into winners.

Rob:
I love it. Well, awesome.

David:
Yeah, I love talking about this topic and I don’t think anybody else is. So if you like this show, do us a favor and leave us a five star review wherever you listen to your podcast. Those help us out a ton. And let us know in the YouTube comments if this is the kind of stuff you like. We talked about how to add value to properties by making them bigger. We talked about how to add value to properties by making them better. And we talked about how to use the mixed martial arts or green bean casserole, if you will, the David Greene bean casserole if I will, into making deals work that other people might miss.
And also, Rob, thank you for staying in the trenches the way you do, looking at a bazillion deals a day and using all of that brain power that God gave you to try to come up with ways to make deals work so you can share it with our audience who’s all on that same journey.

Rob:
Aye, aye, Captain. I think that’s an appropriate thing to say here. Here! Here! Ahoy! All of them.

David:
All. That was our show for today. Thank you for joining us. This is David Greene for Rob, the Value King, Abasolo signing off.

Marty Burger, Infinity Global Real Estate Partners CEO and former Silverstein Properties CEO, joins ‘Squawk Box’ to discuss the commercial real estate market, where he sees opportunities in the sector, the impact of Fed’s rate cuts, and more.

Poor air quality has been in the headlines about U.S. climate change, especially on the West Coast and in Southern states. Increasingly devastating wildfires are becoming a sad fact of life in California, Texas, and Arizona, with many states added to the list of those impacted or at high risk of fire damage each year. 

But one specific wildfire-related factor is affecting the West more than in any other region in the country: smoke pollution. According to recent research from First Street Foundation, the West now has nearly double the maroon air days than it did 20 years ago. The maroon classification is the worst air quality grade there is, defined as ‘‘hazardous’’ to the general population by the EPA. 

Redfin recently took First Street’s data and combined it with U.S. Census Bureau migration data. The result? A significant overlap between net out-migration data and air pollution data. People are not only actively leaving the same areas that are suffering the most from poor air quality; they’re also actively moving to areas that have good air quality. 

Climate Change vs. Costs of Living

Does this mean that all these homeowners have finally had enough of air hazard warnings and worrying about the long-term implications of particulate matter on their health? Somewhat surprisingly, it appears that this is not the case. If anything, the Redfin report suggests that people are mostly moving for reasons that have nothing to do with poor air quality. It just so happens that these areas are also increasingly unaffordable. 

The West has had consistent trouble with its real estate markets since the beginning of the pandemic. Soaring home prices combined with increased worker mobility have reshaped the real estate landscape there, with many areas recording population losses.

Affordability still trumps concerns about climate for the vast majority of homeowners in this region, as it does elsewhere in the U.S. A Redfin survey from May 2023 showed that just 9% of recent homesellers moved because of climate change concerns. The majority moved because they wanted more space (31%), proximity to family (24%), or wanting a better deal on a home (20%).

The fact is, however, that in many cases, the increasing unaffordability of homes in California is directly linked to the persistent wildfire hazard. Redfin chief economist Daryl Fairweather says that ‘‘even when homebuyers do consider climate change, poor air quality often isn’t top of mind because it’s not as visibly destructive as hazards like flooding and fires.’’ 

That is true, but living in an area heavily affected by wildfire smoke almost certainly means being close enough to the more immediate risk of fire damage to property. And that’s where living costs really begin piling up. 

BiggerPockets spoke to Nathaniel Pitchon-Getzels, a licensed real estate professional with the Compass Group in California. He shared some firsthand experience of why people are selling. The picture that emerges is of a state where wildfires have ‘‘undeniably reshaped the dynamics of buying and selling real estate, particularly in high-fire risk zones.’’

Two main concerns dominate sellers’ decisions to move, according to Pitchon-Getzels: basic safety and soaring insurance premiums. These two factors are hitting the elderly and families especially hard, with many deciding that the ‘‘challenges of securing adequate insurance coverage, which has become both scarcer and pricier in these areas,’’ is not worth it.

One of Pitchon-Getzels’ clients relocated from the coast, citing the increased fire hazard as a primary concern. Another client, ‘‘upon receiving an exorbitant insurance bill, swiftly made the decision to list their property for sale. Despite their fondness for the neighborhood, they were unwilling to bear the burden of heightened costs.’’

Pitchon-Getzels says buyers thinking of moving to California have the exact same concerns, ‘‘particularly first-time buyers and the elderly are increasingly wary of high fire risk zones and actively steer clear of such areas.’’ However, wealthier buyers have the resources to absorb increased costs and maximize safety via ‘‘advanced fire suppression systems and fire-resistant upgrades.’’ 

According to Pitchon-Getzels, for California’s luxury real estate market, the priorities are the same as they have always been: ‘‘lifestyle factors such as scenic views, privacy, and proximity to amenities over the associated costs and risks.’’

What You Should Prioritize as a Real Estate Investor

If you are an investor in the West, you will need to do meticulous research into how climate change is affecting property taxes and insurance premiums in the area you’re thinking of investing in. Just because a location isn’t at the epicenter of recent wildfires doesn’t mean it won’t be affected next year. Insurance companies know this.

Obviously, there won’t be a mass exodus of people from California anytime soon, and people are still actively moving to the area. And if you are investing in a higher-end property, you may be off the hook. 

But if you are tackling the affordable segment of the real estate market, you will need to tread carefully. Paying attention to air pollution data, in addition to tracking home and rental prices and insurance costs, is not a bad idea. 

As is so often the case with climate change factors, it may be at the back of people’s minds now, but it could become a tipping point for both homeowners and renters when other pressures mount. As Daryl Fairweather points out in the Redfin press release, ‘‘As the dangers of climate change intensify, we will likely see more people factor air quality and other disaster risks into their decisions about where to settle down.’’

In other words, if an area has exorbitant living costs and people struggle to breathe there on too many days a year, they might just choose to move.

Find an Agent in Minutes

Match with an investor-friendly agent who can help you find, analyze, and close your next deal.

The year-round sunshine, the convenience of direct flights, the incredible food and culture—there’s a lot to love about Puerto Rico. As an American citizen, all the same rules apply for buying investment property in this balmy, seaside U.S. territory as they do on the mainland. 

The Market Details

According to short-term rental tracking company AirDNA, it should come as no surprise that Puerto Rico is a booming and profitable short-term rental market. The capital city of San Juan gets AirDNA’s top score of 100, with average occupancy rates of over 60%, average nightly rates of over $200, and average annual revenue of over $45,000 (up almost 10% YOY). 

Like all Caribbean islands, Puerto Rico has a hurricane season that runs from June 1 to Nov 30, so bookings can be a little softer during August and September, dipping below 50% occupancy rates for these months. That said, during winter months, average nightly rates hover around $325, and occupancy rates bounce up closer to 70%. Investment properties here run the gamut just like any other beach location—huge, multimillion-dollar single-family homes, sweet beach cottages, and condos with wide ocean views.

Snowbirding Has Big Benefits

But there are even more reasons to love investing in Puerto Rico if you’re willing to make some bigger changes. What if you moved there? At least for part of the year? Rather than snowbirding in the usual locations of Scottsdale, Naples, or Tampa, if you elect to spend winters in Puerto Rico, you will be much, much richer for it.  

This is thanks to Act 60, which creates huge financial incentives for mainlanders to move to the island. If you become an island resident, under Act 60, otherwise known as the Individual Investors Act, you benefit from:

• 100% tax exemption from Puerto Rico income taxes on all dividends
• 100% tax exemption from Puerto Rico income taxes on all interest
• 100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains
• 100% tax exemption from Puerto Rico income taxes on all cryptocurrencies and other crypto assets

This means a break on both local and federal taxes, since the U.S. federal government does not directly tax Puerto Rico residents, leaving that up to the local government of Puerto Rico.

To qualify for these amazing incentives and pay zero capital gains on all your investments, whether that’s real estate or stock investments, you do, however, need to actually move to the island for part of the year and purchase a home within two years of arrival. 

There are three tests the IRS requires you to pass to prove this:

1. Presence test: There are many ways to do this, but you basically need to show that you are physically present in Puerto Rico for 183 days (six months) during the year. During 30 of those days, you can be traveling in other countries (just not the U.S.), so it’s actually 153 days (five months), and there are medical and weather exceptions to this also.
2. Tax home test: Your primary or regular place of employment needs to be in Puerto Rico. If you don’t have a regular place of employment (i.e. if you’re a passive investor or retired), this defaults automatically to where you live.
3. Closer connection test: This is slightly squishy but includes things like where your permanent home is, where your cars and clothing are, where your bank is, etc.

The Fine Print

• Currently, Act 60 sunsets at the end of the year in 2035, after which time you’ll owe taxes on any passive income. 
• You have to apply and pay the fees, which are around $6,000.
• You must make a $10,000 charitable contribution.

Final Thoughts

Ready to buy your plane ticket yet? Puerto Rico is win-win, a great vacation market for short-term rentals with high occupancy and nightly rates, but for the right investor, the real home run involves a moving van (or boat?). Incredible financial incentives await investors willing to call this island home.

Get the Best Funding

Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!

Justina Chiu, CEO of Fortune REIT, discusses Hong Kong’s property measures, saying the company is excited to see an effort to “foster the growth of the REIT market in Hong Kong.”

Imagine one day living in a luxurious, spacious house with everything you could possibly want in life. Now contrast that with red and blue lights filling your home, with officers yelling and sirens blaring. Then, envision a SWAT team ripping you away from your parents. 

Although it seems far-fetched, this actually happened. 

By all accounts, John was living a charmed “trust fund” life, but that was quickly all taken away from him. At age 10, that left John Mansor a ward of the state—orphaned and alone, with only his brother, David, alongside him. He’s spent the last 15-plus years climbing back to the top.

Challenges mold you, and John has risen above the challenge each time to oversee a $40 million real estate portfolio with over 600 units under management. Today, he leads a collaborative team dedicated to financial well-being and the liberating power of financial freedom through real estate, specifically focused on multifamily and RV park investments.

The Ebbs and Flows of Fortune

John was born into a loving family who valued success. His father was a successful entrepreneur in construction as well as interior design. His mother was on track to become a CPA. 

Everything changed in the early 2000s when an 18-wheeler T-boned his father’s car, resulting in severe back injuries. As a workaholic committed to maintaining his business and success, John’s father sought ways to get back to normal to override the pain.

He turned to painkillers, and his reliance on them led to a spiral of addictions. Unable to cope with the responsibilities of the business and parenthood, John’s father lost everything. 

Simultaneously, his mother struggled with a silent addiction to narcotics. In the aftermath, John was forced into Section 8 housing and government subsidies, and the family was thrown into challenges they’d never faced. John recounts:

“One night in the mid-2000s, all I heard was a loud bang and unknown voices saying, ‘freeze and get down on the ground.’ Next thing I knew, I had automatic rifles in my face. You see, my mom was involved with a drug dealer.” 

Subsequently, John became a ward of the state and soon found himself in foster care, experiencing the instability of bouncing between housing placements and eventually landing in a group home. 

John says: “At this point, I didn’t care about school. I didn’t feel like I fit in with anyone because I didn’t feel like anyone understood what I was going through.”

A Way Out: Focusing on What Can Be Controlled

Living as a ward of the state, life was a real battle of survival for John as a child. As he entered middle school, an opportunity for a change of scenery changed his perspective on life.

He was granted a scholarship to a sleepaway camp nestled in the Adirondack Mountains called the Raquette Lake Boys Camp. Soon after, John was taken in and adopted. These transformative experiences ignited a spark within him, propelling him to aspire for a better life. 

During this time, he learned many lessons. John says, “I didn’t have to stay at the same station in life that I was currently in.” He realized that there were certain things he could control. Namely, academics and getting into college. 

All of his weight shifted to ensure that he went from a mediocre student to an excellent one by putting in the hours needed to get results. His motivation was to become an investment banker after college. John remembered being fascinated with stock traders when living his early years in New York. 

Hard work paid off when he was accepted to Bentley University. There, he engaged in several stock exchange-related programs the school offered to get firsthand experience.

Preparation Meets Opportunity

Upon graduating, the harsh reality of the job market hit him when many potential employers believed he lacked relevant experience for an entry-level finance job. Undeterred, John entered tech sales.

After some success, John realized something was missing and couldn’t figure out how to get back to the life he used to have as a kid. A W2 job wasn’t going to get him back to the kind of life he knew was possible.

Luck or Fate? Becoming a Wholesaler

There’s a saying that “luck is when preparation meets opportunity.” This is the type of luck that those in search of financial freedom seek. They don’t wait for something good to happen—they find ways to stack the deck in their favor. That’s exactly what John did.

Once John set his sights on earning more, he began researching ways to create passive income, searching the internet for phrases like “how to build generational wealth.” He dug into a variety of topics but was most intrigued by stocks, real estate, and starting his own business.

During the pandemic, he reconnected with Ben Simon, a friend from college. John discovered that Ben, along with partners Carl Venezia and Alex Stanton, were growing a full-scale wholesaling operation in Massachusetts. With his sales skills and eye for value-add investing, John fit right in.

John didn’t just want a job; he wanted ownership. He decided to prove his worth by taking on more work and getting results. Some wholesalers go for volume with lots of deals, even if the fees aren’t as high. John decided to take an entirely different approach: Go after big deals.

Upon implementing this strategy, the average assignment fee grew to between $30,000 and $60,000. After landing a $105,000 fee on a 12-unit multifamily, John became a partner at Archer Acquisitions.

The Value of Active Listening

Early on, John realized that sales is fundamentally about active listening—a skill that involves understanding the other party’s needs, concerns, and motivations. With determination, grit, and an inherent knack for connecting with people on a genuine level, John recognized the power of emotional intelligence in real estate transactions. His ability to make others feel heard and seen emerged as a cornerstone of his success, setting him apart in a competitive landscape. 

Rather than solely promoting his agenda, John embraced a question-based selling approach to unearth the core issues that mattered most to sellers and investors. By genuinely understanding the intricacies of someone else’s situation, he positioned himself as a problem solver. 

This approach became a game changer, especially when dealing with distressed sellers who needed quick solutions. John’s ability to offer sellers a swift resolution—providing them with cash quickly and securing an assignment fee—exemplifies the power of active listening in creating mutually beneficial outcomes. 

By actively engaging with sellers, understanding their unique challenges, and crafting solutions tailored to their needs, John secured profitable deals and built lasting relationships based on trust and empathy.

The Discovery: Real Estate Syndication 

Fueled by a desire for longevity, wealth, and passive income, he knew that there were other opportunities in real estate beyond wholesaling. 

For John and his partners, syndications offered a chance to build equity, the key to generational wealth. So, they identified a property in their pipeline and decided to give it a shot.

From $0 to $40 Million in Assets 

Taking down this eight-unit property marked a shift from quick, active income to a more strategic approach focused on creating sustainable wealth. With a keen eye for acquisitions and a knack for sourcing opportunities, John entered real estate with a commitment to invest back into the business. 

The journey was one of bootstrapping, where each step forward was a lesson in sourcing, acquiring, and operating the acquired assets. This quickly led to rapid growth over a two-year period, where they would purchase RV parks and more multifamily properties, such as a 40-unit townhouse community on Cape Cod.

A pivotal moment came when John and his partners’ investors took what turned out to be a fruitful risk when they purchased their first RV park. John and one of his partners decided to take it upon themselves and moved into their first RV park, gaining firsthand experience that transcended their level of asset expertise.

Although John and his partners were syndicating prior to the RV park, they began scaling their efforts upon seeing the results and returns they were getting. The syndication efforts started out as investments from friends and family but have grown to a new level. John and his partners cater to busy professionals who seek to benefit from real estate without the demands of full-time investment. 

At the heart of John’s real estate philosophy lies a commitment to creating passive, generational wealth that can’t easily be taken away from you.

After a little more than two years, the company has successfully purchased approximately $40 million worth of real estate, with a pipeline closing in on an additional $20 million in acquisitions in 2024. John operates on a low-fee model, where the upside is largely granted to the investors primarily and then to his company. This helps to offer outsized returns to investors, initially friends and family, and now expanding to others.

Informing a Meaningful Mission

In the dynamic landscape of real estate, John’s investment philosophy transcends mere financial gains; it’s rooted in a profound commitment to creating value, providing affordable housing, and fostering enjoyable living and camping experiences for investors and tenants. His specialization in RV parks and multifamily assets is a purpose-driven approach that stems from personal experiences and a desire to give back. 

This firsthand experience of living on government assistance became the impetus for his focus on multifamily assets. By investing in properties that cater to workforce housing and Section 8 multifamily properties, John aims to bridge the gap for those who depend on affordable housing solutions. 

Final Thoughts

In the dynamic landscape of real estate, John’s success and philosophy transcends mere financial gains and is rooted in a profound commitment to creating value, providing affordable housing, and fostering enjoyable experiences. John says: “I am in the position to create a better environment for people like me. Our company wants to work with like-minded individuals who see value in investing in real estate for its long-term benefits and not short-term gains.”

Get the Best Funding

Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!