The notion that investing in multifamily is always better than investing in single-family is false. The goal of real estate investing isn’t to own a particular type of property but to secure a reliable income. The reliability of this income doesn’t depend on the property type but on the tenant who occupies the property.

To show you what I mean, I will compare the financial performance of a typical fourplex in Las Vegas to the kinds of properties we’ve targeted over 16 years.

Typical Las Vegas Fourplex Characteristics

Note: The property cost and rent came from averaging the 36 fourplexes for sale today (Jan. 31, 2024). The typical in-between tenant renovation cost came from property managers who specialize in multifamily properties.

Almost all fourplexes in Las Vegas were built before 1986 and are located in distressed areas. The typical tenant stays less than one year, and the time to renovate and re-rent is three months. The typical cost for the in-between tenant renovation is $2,000. 

The typical unit rent is $800 to $900 a month. The typical cost to buy a fourplex in reasonable condition is $650,000 to $700,000.

Assuming a one-year tenant stay, the unit is vacant three months out of every 15 months. Assuming a higher-end $900/month rent:

• Gross 10-year rent: $900 x 4 units x 12 months x 10 years = $432,000
• Lost rent due to vacancy: Gross 10-year rent x (3 months vacant / 15 months) ? $86,400
• Number of tenant turnovers per unit over 10 years: 10 years / 15 months = 8 turnovers
• The number of tenant turnovers over 10 years for the fourplex: 8 turnovers x 4 units ? 32 turnovers
• Renovation cost for 32 turnovers: $2,000/turnover x 32 turnovers = $64,000
• I will ignore all other costs to keep the example simple.
• Net 10-year rent: $432,000 – $86,400 – $64,000 = $281,600

Our Single-Family Target Property Characteristics

Out of our over 490 properties, the average tenant stays for more than five years. The typical in-between tenant renovation cost is $500. The time to renovate and re-rent is one month. 

For the property segment we target, $700,000 can get you two properties. The typical rent for such a property is $1,800-$1,900/month. 

Assuming an average $1,850/month rent:

• Gross 10-year rent: $1,850 x 2 units x 12 months x 10 years = $444,000
• Lost rent due to vacancy: Gross 10-year rent x (1 month vacant / (5 years x 12 months)) ? $7,400
• Number of tenant turnovers over 10 years for the 2 units: 2 turnovers x 2 units = 4 turnovers
• Renovation cost for 4 turnovers:  ? 4 turnovers x $500/turnover = $2,000
• I will ignore all other costs to keep the example simple.
• Net 10-year rent: $444,000 – $7,400 – $2,000 = $434,600

This means the net rent from the Las Vegas fourplex over a 10-year period is significantly lower than that from two single-family homes. This is due to shorter tenant stays, longer vacancies, and higher turnover/repair costs.

Other Considerations

Here are some other factors to keep in mind.

Low income reliability

The tenant segment that occupies fourplexes in Las Vegas is near-minimum-wage workers. They are typically the first to be laid off and the last to be rehired during economic downturns. 

During the 2008 financial crash, many multifamily properties were vacant and boarded up. Many were foreclosed upon. However, our clients had zero decrease in rent and zero vacancies during the same period. The difference was due to the different tenant segments the properties attracted.

Limited rent growth

Because near-minimum-wage workers occupy multifamily properties in Las Vegas, the rent is tied to the minimum wage, which is currently $12/hour. So, you cannot increase the rent significantly unless the minimum wage increases. 

If you were to upgrade the units in an attempt to increase rents, it would not be effective. Individuals who can afford higher rents typically do not choose to live in distressed areas.

Inability to screen out bad tenants

The people who occupy multifamily homes in Las Vegas typically live cash-based lives. This means there is little financial history upon which to evaluate them for payment performance. 

According to one property manager, any financial history they have is likely to be bad. The screening process for cash-based tenants: “If they have two pay stubs and enough cash to pay one month’s rent, they are in.”

Leases mean little to cash-based tenants

Minimum-wage workers tend to have few possessions, so if there is an issue, they put their possessions on the back of a pickup and go down the street to the next property.

So, Multifamily or Single-Family?

Should you buy multifamily over single-family? It depends on the tenant segment it attracts. The property type does not matter.

My first investment property was a multifamily in Houston. On paper, it was a cash cow. In reality, due to nonperforming tenants, evictions, damage, and other costs, I lost money every year. My cash cow was actually a money pit.

I next bought two fourplexes in a suburb of Atlanta. They performed well, and there were few issues.

The difference was the tenant segments the properties attracted. The Houston property was a C (D?) class with near-minimum-wage cash-based tenants. The Atlanta properties were B+ class, and the tenant segment was credit-based and earned significantly more than minimum wage.

Final Thoughts

The type of property is irrelevant. Choose one that attracts a tenant segment with a high concentration of reliable tenants. In Las Vegas, the properties that attract the tenant segment with the highest concentration of reliable people are single-family homes with specific characteristics.

Buy the type of property that helps you reach your financial goals. Don’t follow others’ opinions.

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Tony:
This is Real Estate Rookie Show 370. Now, over the last year, you’ve probably heard about traditional short-term rental investing and this funny phrase called short-term rental arbitrage. Both of these strategies are better known as traditional Airbnb investing or Airbnb arbitrage. And arbitrage is where you’re renting a property from another property owner and you make the difference between the rent charged and the income brought in.
Guys, I’m Tony. Today, I’m rocking my first solo episode and I want to welcome you to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, rookies there are pros and cons to every investing strategy, but it’s better to know what those are ahead of time before putting your hard-earned money to work and that’s what we’re going to be talking about today. Now, I’m speaking with a rookie investor who has done both of these strategies, the arbitrage and the traditional ownership, and we’re going to hear what he would’ve done differently if he were to start all over again in 2024.
Keron, brother, welcome to the show, man. Super excited to dive in with you today, man.

Keron:
Great. Thanks for having me, Tony.

Tony:
So, we actually go back a little bit. I met you at one of our events back in 2022, and I think at that time you were just getting started, brother, so it feels like a really full-circle moment here to have this conversation with you. So, I’m really excited to hear how things have been for you. Now, give the folks a little bit of background, man. What inspired you to really jump into real estate investing? I know your parents kind of played a role in that, so just what was the big motivation for you to make this whole thing happen?

Keron:
I started my real estate journey technically back in 2015, but I didn’t really start ramping it up until 2020 when COVID hit. So, I started with the traditional house hacking back in 2015, bought a two-family house, lived in one unit, rent the other unit long-term, and that’s kind of where my real estate journey started and ended. And then, 2020 rolled around and something happened that clicked to me and I was like, “I need to really, really hop on this real estate thing.” So, I started deep diving into podcasts, this being the first one. And I listened to you when you were a guest and then when you became a host, which was amazing. So, listening to you talk about short-term rentals, that kind of put the idea in my head of, “Hmm, what is he talking about short-term rentals? I hear Airbnb and I stayed in Airbnbs before, but I never thought about hosting on Airbnb.” So, when I heard you moving away from the long-term rental strategy into the short-term rental, that’s what made me really deep dive into that.

Tony:
I love that, man. And now Keron, you had a very stable daytime job, right? People retire from that after decades and decades. So, what did you do for your day job? And I guess what was that moment to make you say, “I really need to jump into this full time”?

Keron:
So, I’m currently still a law enforcement officer. I’ve been a police officer for the last 12 years, and it’s been amazing. It afforded me the opportunities to dive into real estate and I needed an extra source of income on top of my 9:00 to 5:00 because I’m raising a family and I knew that I needed to do something else. So, that’s when I dove into the real estate game.

Tony:
Now, I just wanted to find some terms for folks that are listening. I mentioned them briefly in the intro here, but there are a few different ways you can go about investing in Airbnbs. There’s the traditional strategy where you own the property, right? You go out there, you get some kind of mortgage, you pay cash, whatever it is, but your name is on the deed, on the title for that property, you have ownership and then you obviously go and rent it out on Airbnb or Vrbo. The other strategy, which is incredibly popular is called Airbnb arbitrage, where instead of you going out and purchasing a property, putting your name on the title, you are renting a property from another landlord. And instead of moving into that property yourself, you turn around and sublease that on Airbnb.
Pros and cons to each, right? With ownership, you get appreciation, you get the tax benefits, and you get cashflow. Pros to arbitrage are you get cashflow, right? That’s the biggest thing for arbitrage. So, the goal of today’s show is to kind of drill down and see which strategy might work best depending on your situation. So, Keron, for you, where did you get started? Did you start with arbitrage? Did you start with ownership? And what has rental arbitrage really done for you done for your business and for your personal life?

Keron:
So, I actually started with the ownership piece. Like I mentioned, back in 2015, I house hacked my property. I’m actually still living in that same property. After six years of having great tenants, they were moving out. And at this point, this is when I was introduced to the short-term rental strategy. So, I said, “Let me turn this unit that I’m living next to into a short-term rental and see how that does.” So, fast-forward two months to set it up, it became a phenomenal, phenomenal short-term rental. It’s over 90% occupied every single month, and it is been cash flowing crazy. It’s been cash flowing crazy. Long-term rents were 1,400 bucks. And then, now I’m averaging anywhere from 3,000 to 5,000 a month.

Tony:
1,400 to almost 3,000 per month. That’s almost or more than double, if you hit 3K. And I think that’s the power of short-term rentals as a strategy. Because you’re house hacking this, so what do the expenses look like? Are you fully covering your mortgage? Is your cash flow on top of that? Just give us your quick numbers on the house hack.

Keron:
Yeah, so it’s actually fully covering my mortgage and expenses. So, heat, electricity, and water. And it’s providing some money in my pocket at the end of the day. So, I’m getting paid to live in my own house, which is insane.

Tony:
One of the biggest expenses for people, aside from taxes, is their living expense. And I think a lot of people when they look at especially house hacking, they feel like they’ve got to make a ton of money on the cashflow side. But even if you’re just able to break even. Now, you’ve just reduced one of your biggest expenses of your living down to effectively zero, which then frees up all this additional capital to then go pour into maybe that next real estate investment. So, it sounds like you absolutely crush it with this house hack. And just really quickly, Keron, what market is that? What market is the house hack in?

Keron:
We’re in Stratford, Connecticut, so Fairfield County, just about an hour north of New York.

Tony:
Okay. I’m from California. I’ve never heard of Stratford, Connecticut in my life, but it goes to show that short-term rentals can be effective in many, many markets across the country. And that’s part of the reason why I have a beef with the whole Airb-and-bust concept. It is true that there is some markets that have been more impacted than others. Our properties in Joshua Tree, we’ve seen revenues get squeezed in that market for sure. Our properties in Tennessee, you wouldn’t even think that there is a difference, right? Everything looks the same out there, so it is very market dependent. So, I’m just happy to hear that you’re not in some big vacation hotspot. You’re in Stratford, Connecticut, which is an hour north of the next biggest city, and it still works well for you.

Keron:
Yeah, it’s crazy because when I first started people were like, “Oh, who’s going to come to Connecticut for Airbnb?” And yada yada yada. And I pretty much shut those people down with the numbers that I’ve posted.

Tony:
I want to get into the transition to arbitrage, but one last question on the ownership piece. What is drawing people into your city? Are you noticing that it’s like folks who are visiting family, do you have a lot of traveling professionals? What is it that makes Stratford Connecticut a healthy market for short term?

Keron:
So, for me, the three major things that I looked for before I started this market was major hospitals, major colleges and universities, and we’re on the shoreline, so I’m five minutes away from the beach. So, those three things alone drive the guests to our property. But I narrowed it down to 18 reasons why people have visited my properties. I’ve literally went through messages and narrowed down 18 reasons why people have come to Connecticut and I’m like, “This is crazy.”

Tony:
So, you’ve got something that’s pulling people in, which is an important part of choosing your market correctly. Now, let’s talk about the transition to arbitrage, and before we even talk about why you made that transition, I just want to know what has that change in strategy afforded you when it comes to your lifestyle and just how things have shifted for you since you made that decision?

Keron:
I retired my wife from her 9:00 to 5:00 job. It was a great way to learn the systems and the processes for my business, and it created cashflow for me.

Tony:
You’re saying it like real calm, cool and collected, Keron. That’s a big deal, man. You retired your wife from this decision to focus on this new strategy. So, I think for a lot of people that are listening, the goal is to allow their spouse to maybe stay home with their growing family. Their goal is to eventually become job optional for themselves. And it seems like you’ve taken that first step, which is incredibly impressive, Keron. So, how did you do it? What pulled you into arbitrage? And then, what has your process been for kind of scaling it up? So, Keron, I want to hear your response to that, but before we do, we’re going to take a quick pause to hear a word from our show sponsors.
All right, so we are back. Keron just shared that he retired his wife by not only investing in this amazing house hack that he short-term rents, but also, focusing on the strategy of rental arbitrage, Airbnb arbitrage. So, Keron, a couple of questions here. First, what prompted you to make the transition into arbitrage, and then what steps did you take to actually build that side of the business out?

Keron:
So, what made me going to the arbitrage route was the barrier to entry with the rental arbitrage, and it was a new strategy that I stumbled upon and wanted to try my hand at. So, the barrier to entry was the low cost it takes than the traditional buy and hold route. So, I tried my hand at it and it was great. The barrier to entry for me for my properties were anywhere from 10,000 to 15,000. And having those low costs still with the cashflow was a win-win for myself and everyone involved.

Tony:
One of the big pros it sounds like then for arbitrage is that the capital needed to get started is lower than purchasing a property in most scenarios. So, you said you’re able to set one of these units up for $10,000 to $15,000, that’s your total investment?

Keron:
Yes.

Tony:
Wow. And what does that $10,000 to $15,000 typically cover? What are the costs associated with standing up an arbitrage unit?

Keron:
They normally require a security deposit and first month’s rent. And then, that also includes furnishing the property, so adding the toasters, the coffee maker, the furniture and everything that you need to run a functional short-term rental property.

Tony:
So, one of the things that people always look at when it comes to a traditional like owning a property for short-term or any other type of investment. Is their cash-on-cash return, or how long will it take for me to get my capital back? So, a 100% cash-on-cash return means that however much money I invested I get back in that first year. A 50% cash-on-cash return means it would take me a year and six months. So, what is the typical timeframe that you’ve seen to recoup that initial investment of $10,000 To $15,000? Is it a year, is it two years, is it three years? What does it typically look like?

Keron:
It’s roughly anywhere from six months to a year.

Tony:
No way.

Keron:
Yes.

Tony:
And I think this is one of the powers of this strategy is that you’re able to start recycling that capital relatively quickly because say you go out and you drop 10K, six months later you got that 10K back, redeploy that to another property, six months later you get that back and now you’ve got two units that are given off cashflow. So, you got more to dump into that third property and that’s snowball effect starts to move a little bit faster. How many arbitrage units do you currently have up and running?

Keron:
Four.

Tony:
And as you’ve set those units up, what was your process for identifying the right city for arbitrage and then identifying the right unit, like the right property itself?

Keron:
It was pretty much just where it’s located. Location, location, location, as is said in real estate. So, hospitals, major colleges and universities, and beaches are the biggest three biggest areas of where I want my rental arbitrage units to be. So, once I identify that area, as long as the rents make sense and I know that whatever I’m going to be cash flowing will cover the expenses and then still leave some money left behind, I know that’s going to be the great area.

Tony:
So, are you investing in your own backyard, Keron, or have you kind of ventured outside of Connecticut?

Keron:
I’m still in my own backyard, I’m still in Connecticut. But I’m looking to eventually branch out now that I created my systems and processes.

Tony:
I mean it’s good that you have been able to scale in your own backyard because your market can support that type of demand, which I think is really great. So, what are some of the other benefits, some of the other pros associated with going the arbitrage route? Obviously, it’s significantly less capital, your payback period is faster. What are some of the other benefits you’ve seen that come along with investing in the arbitrage model?

Keron:
Another pro is not being liable for the property maintenance, which is huge. If a furnace goes out, you’re not coming out of pocket a few grand to fix that. That’s going to be on the landlord, on the property owner. So, that’s a great pro for you because I’ve had that happen in one of my properties that I own and it’s not fun. It’s not fun.

Tony:
So, we launched a few arbitrage units, our first arbitrage units late last year and this last month the HVAC unit went out in one of our units. And same thing, instead of us having to coordinate that, we called up the owner said, “Hey, our next turner is on this day this time, please make sure you send someone,” and someone was there to get it fixed for. So, the property maintenance piece, definitely at least that expense comes down a little bit. Now, we do have an understanding with our landlord that some of those minor expenses we’re just going to fix ourselves. If there’s a clog in the drain, we’ll just fix it ourselves with our handyman. If there’s, I don’t know, a fixture that goes out, we’ll just have our handyman fix that. So, are you doing any repairs yourself or are you pushing everything to the actual property owner?

Keron:
Just the major things, like you said, the low-ticket items, I take care of myself. I don’t want to bother the landlord with that minute stuff, or anything that my guests might’ve potentially damaged, we’ll cover that cost no problem. But as far as the big ticket things that are out of our control, no, sorry.

Tony:
And I think I want to at some point get into how you negotiated securing these units because I think that’s a big part that folks overlook is sourcing, but also, convincing these landlords to accept you as someone who’s going to do arbitrage. But one of those selling points is what we just said is that we’re going to be the type of tenant that’s not going to bother you for all those little things because I have a guest checking in in four hours, I got to make sure it’s fixed before they check in, so I’m not even going to go to you for that. So, you’ll only hear for you if it’s something that’s big. So, I think it’s also a selling point for the landlords there.

Keron:
Big selling point.

Tony:
The reduced cost for property maintenance is something that’s a benefit for arbitrage. What are the things are you seeing that are a benefit or a pro to the arbitrage model?

Keron:
Minimal ongoing expenses. It allow you to build your systems and your processes, so that’s huge, especially for something that you don’t own. You don’t have to worry about coming out of pocket for major expenses for a down payment, and then trying to run a business that you have no business running, or that you have no idea about. And then, it don’t work and now you have to worry about selling a house. At least with a rental arbitrage unit, if it doesn’t work for you, you can simply step away, give the 30, 60 day notice to the landlord if it’s not working and you wouldn’t have to worry about any other major expenses that you can occur.

Tony:
So much truth to that and basically your exit strategy is a little bit cleaner, a little bit easier. I’ve told folks that I’ll only open up a short-term rental in a metro market or a suburban market if I can say one of two things are true, either one, that property also works as a long-term rental or two, I’m doing arbitrage because say that regulations shift in that market and now short-term rentals are no longer legal or whatever it may be, now I’ve only got to worry about breaking a lease and not trying to potentially sell a property at a loss. So, there’s some benefit there to the exit strategy. You talked about being able to build the systems and processes, Keron. What exactly do you mean by that? Maybe you can elaborate a little bit.

Keron:
So, with building that means pretty much automating your business and helping it flow a lot better and easier for you. That way, you’re not running around after every guest and having a headache. So, that means having your cleaners in place, building your automated messages system for your guests, so you don’t have to worry about sending each guest a message every day and then forgetting to send them the code to the door, having your electronic locks and things of that nature. So, sending your automatic pricing, your dynamic tools, so you don’t have to worry about missing a date that you know should have went up on on the rates, but you forgot and now you’re short-changing yourself. So, that’s what I mean by building those processes and systems.

Tony:
And are you self-managing these units yourself, Keron, or do you have a virtual assistant or a property manager? Are you self-managing that piece?

Keron:
Self-managing it every day.

Tony:
Just ballpark, like a weekly basis, how much time would you say actually goes into managing the current portfolio?

Keron:
I would probably say maybe three to four hours a week. Three to four hours, it’s so easy when you automate it and build your systems. It’s so easy.

Tony:
You retired your wife on three to four hours a week?

Keron:
Yep.

Tony:
That’s amazing, man. I love to hear it, brother.

Keron:
Now she takes care of the kids and she’s like, “Ah, it’s great, but they drive me crazy.”

Tony:
That’s how it goes, man. So, Keron, one of the other benefits that I think that comes along with rental arbitrage is that it kind of allows you to move into new markets a little bit easier. We talked about the flip side of that where you can get out of a unit easier, but the inverse of that is true as well where say you want to maybe test out a market and instead of buying a property there first, you can just set up an arbitrage unit for a fraction of the cost potentially and validate whether or not that market works for you. So, I asked a question earlier, have you explored any other markets and you said, “I’m still in my backyard right now, but I’m looking to expand.” When you go into that new market, are you going to focus on ownership? Are you going to focus on arbitrage? And I guess what’s the kind of process you have laid out to validate whether or not it makes sense?

Keron:
So, arbitrage would be a great method to try in a new market to test it out and see if that’s a market that we can move into. So, if I can set up an arbitrage unit and it can give me 100% plus cash-on-cash return within that first year, then that’ll be definitely a market that I would love to go into and potentially buy later on.

Tony:
We talked about all the benefits of rental arbitrage, but there are some limitations to the strategy as well, so it’s not all butterflies and rainbows here. But before we get to that, I just want to ask one final question about the acquisition side. What is your process for actually analyzing a potential deal to know if it’s going to be profitable or not from an arbitrage perspective?

Keron:
For an arbitrage perspective, I use AirDNA, I use Rabbu just to check the market out. The bedrooms and bathrooms, I look at those listings on Airbnb and try to match them up. And then, I look for those hosts in that area and see what they’re doing, see what their average nightly and daily rate is, and see how much they’re charging per night. And then, I can see what other amenities and what they’re providing and their setup and I can calculate it all from there to see if it’s going to be profitable.

Tony:
So, Keron, I want to get into the downside, some of the con difference of arbitrage. But before we jump in, we’re going to take a quick break to hear from our show sponsors.
All right, Keron, so I think you just convinced everyone listening to this episode that they need to jump into arbitrage. But again, there’s some benefits to each strategy. But just like all other types of real estate investing, there maybe some potential cons for arbitrage as well. So, from your perspective, what have you seen as some of the downsides of the strategy?

Keron:
So, one of the downsides I’ve seen from the strategy is the rates, the monthly rates on what you’re paying the landlord. Every year you get a percentage increase in the rent. So, you being an Airbnb host, you’re no stranger to that, just like a regular long-term rental occupant. So, you get hit with those rates and they could definitely cut into your business for sure.

Tony:
I have a friend who really focuses on arbitrage here in California as well, and I don’t know, he has 100 arbitrage units, something crazy like that. And he said he had to let some units go where he had almost an entire floor in a complex rented out. And when the owner saw how much revenue he was actually making from the arbitrage, he unreasonably tried to increase his rent. And instead of accepting that rent increase, he just walked away from, I don’t know, it was like 12 units in one building. So, the landlord definitely does have a little bit more control per se, but what I’ve seen some folks do who focus on arbitrage is that they’ll sign longer leases. So, they’ll enter into a lease agreement instead of it being one year, they’ll do three years to really lock in that low rate, so that way they’ve got a little bit of buffer against the owner, not getting greedy, but maybe trying to capitalize on what you have going on. So, what’s your normal lease length for the four units you have?

Keron:
I do the traditional yearly lease, more so because locking yourself into that two or three year rate could also be a downside, because now, if that rental unit is not working at all as a short-term rental, then you’re kind of locked into that rate and into that unit. So, it might be a little harder to walk away.

Tony:
And then you’re right, I think that works well if maybe you already have executed at least one lease. So, say you’re looking to re-up, instead of re-ing up for another year, maybe you push for that three to five year lease and see how that works. What we did for our first three arbitrage units, it was one building, same landlord, we got three units. And we actually did almost like a profit share, but what we set up was we had a base rent of $1,000 for each of the three units we set up. And then, the landlords get the first 100% of the profit up to, I don’t know, like $1,400 per month. So, they’ll get 1,000 but say that we didn’t perform that month, then they don’t get anything above that.
And if we get anything above that 1,400, then we get to keep that for ourselves. So, that’s how we kind of hedged our best because it was our first time doing arbitrage, it was in a market that we didn’t really know and we didn’t want to set ourselves up for these big expensive leases when maybe they weren’t going to work out. And it did work in our favor because it took us a little bit longer to get those units set up. We had a handyman that we had found and the guy just ghosted us, even kept some of our stuff. So, it took us a little bit of time to get those up and running. And luckily, we didn’t have to pay the full rent, we were just paying that 1,000 bucks per month. So, there are some things you can do on the negotiation side to try and work on that rate piece.

Keron:
$1,000, where’s that at? I need that.

Tony:
But you’re beachfront, right? So, your units are probably a little bit different than ours.

Keron:
Yeah.

Tony:
So, rates potentially changing as one con of the arbitrage model. What else have you seen as a potential downside, Keron, of the arbitrage piece?

Keron:
Another downside is if the owner decides to sell and then the new owner comes in and they don’t like the model, they could pretty much disrupt your whole business. They could say, “Nope, I don’t want any short-term rentals.” Or like you said with your friend, they want to charge you more or do it themselves, and then your units are gone.

Tony:
Yeah, and I think the bigger theme there is just between those first two cons you mentioned is there’s a lack of control that comes along with arbitrage where, yes, you get the cashflow for very little investment, but you also lose an incredible amount of control over how that property operates. The three units that we set up, the landlords actually text me and said, “Hey, we’re probably going to end up selling this unit or this complex.” And it’s a 12 unit, we have three of them. And they’re like, “Hey, if you want it, we will give you the first offer.” But I’m not quite sold on that city yet. I don’t know if we really want to go into it. So, now, like you said, they could potentially sell to another landlord that maybe isn’t as amicable to this profit share setup that we have. And when we renew the lease, they want to charge us an arm and a leg. So, there definitely are some downsides to having that ownership there. Well, any other things that kind of come to mind for you, Keron, in terms of downsides of the arbitrage model?

Keron:
Som, kind to piggyback off the pro where you’re not liable for the large ticket items, at that same token, now you’re at the mercy of the landlord when it comes to those items. So, if a hot water heater goes out and the landlord’s like, “Oh, I’m going to send my guy, but it’s going to take three days.” Well the guest is only here for three days, so you mean to tell me they’re not going to be able to take a shower? And I’ve had that happen to me before on New Year’s Day. So, it was definitely not fun, it was definitely not fun. And that can lead to bad reviews because they don’t have hot water.

Tony:
And how did you manage that? Did you just give the guest a refund? Did you pay out of pocket to get the hot water fixed? How do you manage that when the owner’s timeline for fixing doesn’t necessarily align with yours and the guests?

Keron:
Listen, one thing about me is we are going to get it done. It’s New Year’s Eve, I probably called 20 plumbers and one guy said yes, he’ll come in the morning bright and early. So, he was able to get there and he didn’t charge me an arm and the leg either, which was fantastic. But the great part of that was the landlord, he picked up that bill because I was able to get that fixed.

Tony:
One of my other concerns with the landlord as well is that the ones that maybe want to be too involved, where maybe they want to see your listing, and they want to check in on the property. Have you had any experiences like that where maybe the landlords are maybe overstepping boundaries a little bit?

Keron:
No, no, I haven’t actually. They love the units. They use my unit as kind of the model unit for any potential other long-term tenants that are coming in like, “Oh, look how this is staged.” They’ll show them pictures.

Tony:
You’re the selling point for them, right?

Keron:
Yeah. So, another con is having landlords show up unannounced. In one of my arbitrage properties, I had a landlord just show up, walk in the property and I have guests texting like, “Ah, there’s a strange man walking around the property.” And I’m like, “Oh, no.” So, I looked at the cameras and it was the owner. So, I messaged him, I’m like, “Hey, we have guests in the house, and they saw that strange van outside.” And he’s like, “Oh, no, that was just me checking out the property. It looks fantastic.” And I’m like, “Okay. Well, just let me know next time, so I can warn guests that somebody’s going to be walking the property or just checking it out.” So, that’s another con that may happen. And some guests, they don’t care about it, some do.

Tony:
Yeah, absolutely, man. So, one of the other big things that I see, Keron, and I’m curious what your take is on this… And I guess before we even get into this, what I’ve seen is there are four motivations that really drive people to invest in the Airbnb space specifically. You’ve got cashflow, appreciation, tax benefits, and then vacation. You can subsidize the cost of your vacation spots. But cashflow, appreciation, tax benefits and vacations. When I think about arbitrage, I feel like the only box you can really, really check is that first one for cashflow. So, I guess how do you feel about those other three of the lack of appreciation, lack of tax benefits? Is that a con to you or is it not as important because you’re not as focused on those ones right now?

Keron:
It can be if you want to build on those three other pillars, but if you’re just strictly in it for cashflow and low barrier to entry, arbitrage can be the route for you because you’re only furnishing getting in between 10 and 15. And every year you’re making 30,000, 40,000, 50,000 on that rental unit. So, cashflow, if that’s what you’re into, cashflow, that can be a great strategy for you, the arbitrage route.

Tony:
And that’s why I tell a lot of people, before you even buy a property, you just need to get clarity on why are you investing in the first place? What are your investment goals? If you are someone who’s, I don’t know, maybe you’re 55 and you’ve got a few years to retirement and you’ve got zero retirement savings in place, maybe you’re not as focused on appreciation at that point because you need cashflow today to help supplement your retirement that’s five to seven years down the line. But say that you’re 23, you just graduated from college, you’re a software engineer for some tech company and you love what you do and you don’t plan to retire until you get to retirement age. You’ve got three decades to start building that pot. So, maybe you don’t need the cashflow today and you can buy and focus more so on the tax benefits and the appreciation.
So, for all of our rookies that are listening, you’ve got to really identify what your goals are and if your goal is just to get as much cashflow as quickly as possible than arbitrage might be the best route for you. But if you also want to balance the cashflow with the goal of long-term appreciation and the tax benefits, then you’ve got to weigh those against the pros there. Now, one of the big questions I have, and I’m sure a lot of folks here have as well, is how are you sourcing these properties and what does the conversation look like between you and the landlord to get them to say yes? Because I can imagine, Keron, unless they’ve done this before, there’s probably a lot of hesitation from these landlords to just hand you the keys, knowing that you’re going to have 12, 13, 14, maybe 15 different sets of guests going through their property on a weekly basis. So, how are you sourcing and what does the negotiation process look like?

Keron:
So, I’m sourcing it through my network. Network is huge. Networking, the local [inaudible 00:31:48] and local meetups is very huge. So, that’s how I’m sourcing these landlords. And one of the landlords, he’s a huge apartment building guy. He comes to me with the deals now. I approached him about one property, he actually had a little pain with one of his rental units, and then I came to him with a short-term rental arbitrage. So, I solved his headache and he solved my problem of getting a unit. So, then he’s seen what I’ve done with that unit and he loves it, and he knows that I’m going to take care of it at all costs. So, now he’s throwing, “I got five here. I got eight here.” And I’m just like, “All right, give me those three. Give me those three then. I’ll take those.”

Tony:
Give me a little bit of time, right?

Keron:
Yeah, exactly. So, that’s how I’m sourcing those.

Tony:
So just walk me through. Say I’m starting from zero, Keron, I’ve got no network, I’ve got no relationships, I don’t know landlords that are building a bunch of units. If I’m a complete rookie, what steps should I be taking to find that first unit?

Keron:
The steps that you should be taking is doing your research, doing your homework, seeing what units are out there for rent and seeing how long they’re on those sites as far as days on market, that can be a way for you to get into with those landlords. You approach them with your pitch and with your ideas, and you lay out all the pros for them as a landlord. Most might say no, but all you need is that one yes. So, when you get that one yes, now you have a reference, and that’s what I did. You have a reference now for other potential landlords and now you have this paper trail and this track of what you’ve done with your units. So, that’s how I would get started.

Tony:
Keron, I want to get into how rookies can kind of mitigate their risk as they get into the short-term rental space. Because I’ve heard stories of other investors, and we’ll get into this in a bit, where maybe they over-leveraged themselves or they moved too fast. And guys, we actually have an episode coming up next week with a guest named Nicole Rutherford and she’s going to talk about almost an Airbnb horror story, where she over leveraged herself on the Airbnb arbitrage side and ended up with almost this mountain of debt that she had to climb out of. So, Keron, when you think about trying to mitigate risk as you set up an Airbnb arbitrage business, what comes to mind for you?

Keron:
Mitigating risk? Just not moving too fast. Making sure that that unit that you’re using and that you’re setting up is going to cashflow enough for you to pay off, not just your expenses, but your debts. And then once you get a grasp on that, then you can kind of do the snowball effect and get another one. Do the same thing with that one, and then you could keep going like that. If you have a large amount of capital and you could just throw it at anything then yeah. But I would take it slow and do the little snowball effect to mitigate that risk.

Tony:
And how much do you think your systems and processes you’ve built out have played in the reduction of risk for you? Would you say it’s a big part or are there other things that are driving it maybe more so?

Keron:
Oh, it’s definitely a big part. Definitely a big part. Having those systems in place, you’re able to answer guest inquiry a lot faster and capture those guests within that short timeframe, because without having those systems in place, you might have a guest inquire on a property, and if you’re out doing whatever, it might take you three, four hours to respond to a guest. They might’ve moved on to the other property. So, having those systems in place and answering guests’ questions to capture that lead is definitely instrumental in your profits and your average nightly rates and occupancy rates.

Tony:
So, Keron, we talked about a lot, but before we move on, I just want to understand, I know when I do traditional ownership, one of the things we focus on is reserves, right? We usually want somewhere between, at the low end, three months of our mortgage payment set aside, on the high end, somewhere in that six to 12 month range. How do reserves play into your business of rental arbitrage?

Keron:
Yeah, so reserves are definitely huge when doing the rental arbitrage business because God forbid something happens and your place doesn’t book up for a month or two, then that’s going to be bad for your business. So, what I try to do is upfront I try to front one to two months of those reserves and then the cashflow from the property being rented out, I build that up to another three to six months of reserves. That way, if I don’t have any bookings for a couple of months, I know I’m going to be covered on that end. So, that’s how I handle that.

Tony:
And I think the reserves give you that peace of mind to make sure that if things do hit the fan, if there is some kind of crazy thing that happens, like COVID, you’re not in the cold with four arbitrage that you have to worry about.

Keron:
And there’s other ways as well as far as additional insurance policies that can cover rental loss.

Tony:
Tell me about that, Keron.

Keron:
Yeah, so I have additional insurance… You actually had them on a show, Proper Insurance. Yeah, so I have that on my rental properties. So, if something were to happen fire or just a natural disaster, anything that would prevent me from having bookings or cancel my bookings, I will be covered with that rental loss from that insurance policy.

Tony:
Yeah. So, it’s a great way that’s relatively low cost to kind of give you some additional peace of mind that if things do hit the fan, you can still kind of rust easy at night knowing that you got a little bit of a backup there. Now, before we go, again, we had a rookie posting in the Facebook group and I just want to hear your advice, Keron. And again, this is Nicole Rutherford. She’s actually going to be on an episode that’ll be releasing next week. So, make sure you jump in to see the whole story here. But here’s what Nicole says. She says, “Hey, rookies, I’m in desperate need of help here. I’m doing rental arbitrage for the last year and I’m making somewhere between $1,500 to $2,000 per house, but that was only for the first six to eight months or so. Since then, with the increase of supply in our market, we’re now losing money and then landlords are trying to increase the rent even more, even though they aren’t asking for market rates.”
So, this is one of those risks we talked about where the owners maybe get a little bit greedy and want to gouge the rates there. “We still have significant debt from each home because we use the profits to open even more. What should we do? Option one, my partner just wants to sell everything off and move on. We’ll still owe about 80K between everything we put into the homes. Option two, find a three to four-unit home and use an FHA loan to rent out the other units. If it’s in a decent area, we can move the furniture there to convert to an Airbnb or just use as a long-term rental. And option three is use the furniture from our four houses for a staging company and then just pay down as much debt as possible.” So, Keron, I want to hear what’s your advice to Nicole given that situation? What would you do?

Keron:
If I were in their situation, I would probably go with finding a three to four-unit home and using a FHA loan, and possibly house hacking because that’s how I got started. So, house hacking and using those other units to produce that income that can help them chip away at their debt, and it covers their living expenses on top of that. So, I think that’s the route that I would take.

Tony:
Yeah, you’re the poster boy for that, right? You just crushed it with your own version of that.

Keron:
That was a lay up, man.

Tony:
I definitely like that option as well. I think the other option too, that Nicole could potentially explore is just because… Obviously, this is going to depend on the lease and what it looks like, but if the landlord is trying to increase rents, it sounds like you might be at the end of those leases, just look at exploring, moving into a different property. Can you find a different property, a different landlord that maybe is willing to offer you more favorable terms? And it seems like she’s got homes, single family homes that are, I think she said three bed, two to three baths. Maybe instead of doing three beds, can you just take those and move into one-bedroom apartment units and now you’ve got three one bedroom apartment units that you can leverage as well. So, I think there are some other options there as well, Nicole, to make it a little bit easier for you. But we’re going to find out what Nicole actually ended up doing in next week’s episodes, so let’s make sure we get back to that.
Now, we heard this strategy of rental arbitrage, Airbnb arbitrage, Keron, allowed you to retire your wife while working as a police officer. So, it’s something I just want to drill down on a little bit before we let rookies go because I’m sure they’re all wondering the same question. What kind of cashflow are you actually generating from your arbitrage units on, call it like an annual or monthly basis, however you want to break it up?

Keron:
So, last year we finished with our six properties that we have between the arbitrage and our traditional buy and hold. We finished just around 300,000 gross. And then, net is usually about just below 50%, so around 40%. So, that was about 140,000 net, which is in a matter 18 months we started these properties. So, I can’t complain.

Tony:
Absolutely crushing it, man. Dude, absolutely crushing it, brother. So, again, you’ve just inspired every single person on this call to go out there and build their own arbitrage business. But just to recap some of the amazing things you shared with us today, Keron, we learned about how rookies can jump in with this lower barrier of entry arbitrage model. You talked about the importance of building systems and how that’s allowed you to scale, but also, letting you build this thing up with a little bit of training wheels and a little bit lower risk. And then, obviously the possibility to partner with a great landlord in your market to make it a win-win situation for both of you. So, Keron, appreciate you coming on today, brother. I’m sure folks got a tremendous amount of value from the story. I’m so glad that I was lucky enough to interview you after all… It’s been, what, almost three years now since we first met. And seeing the growth is absolutely amazing, brother.
So, if folks want to get in touch with you, guys, go to the show notes for this episode. We’ll put Keron’s information in the show notes there. If you guys want to get in touch with me, my social handles will be down there as well. But guys, that is it for today. I am Tony J. Robinson, your host for today’s Real Estate Rookie Podcast, and we’ll see you guys on the next episode.

Speaker 3:
(singing)

Brian McCarthy of Macrolens discusses why he thinks Chinese policy makers will continue to struggle to turn investor sentiment around and the why property sector is being left in “no man’s land”

David:
This is the BiggerPockets Podcast show 897. What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast. And if you’re listening to this podcast, you are a part of the growing and thriving BiggerPockets community and a part of the show.
In today’s show, we have a Seeing Greene episode. This is where we get to connect with community members like you directly by answering listener questions that everyone can learn from. And I’ve brought backup. I’ve got Rob Abasolo here with me to start. How are you, Rob?

Rob:
Hello. I’m excited, man. I’m excited because you and I were just discussing our trek out into the snow, into the wilderness to do some snowshoeing in a couple of weeks, so that’s going to be fun.

David:
Yeah, we can’t wait to go snowshoeing.

Rob:
It was pitched to us and I was like, “Does that just mean walking in snow?” And they’re like, “Yes.” And I was like, “I think I’d rather just sit by a fire.” But yeah, if it’s by your side, my friend, then I’m excited.

David:
It’s kind of like when you as a parent try to sneak vegetables into the kids’ food. They’re like, “Hey, do you want to do leg day for four hours, but call it fun?”

Rob:
That’s exactly, yeah.

David:
I’m not falling for that one. Well, in today’s show, we are going to get into some fun stuff. Our first guest has a great question about how to build generational wealth for children through real estate as well as how to get them involved in the business. And we’ve got some really good advice for everybody there. We’re also going to be talking about markets that Rob and I think are some of the safest places to invest in, as well as when investing for appreciation can be smart versus when it can be foolish. All that, plus the affordable housing dilemma, what to do when it’s tough getting started, and what to do when you’re doing well in life but you want to go full-time into real estate investing. All that and more in today’s Seeing Greene.

Rob:
Yeah, it’s going to be a good one. And the first question, we’re actually going to let James in on this, so I’m going to share the mic with him hand the baton, but I’ll be back a little later.

David:
And up next we have Falisha Rexford out of Las Vegas who I like to refer to as the Air Force Angel. Falisha, thank you for joining us today.

Falisha:
Thank you for having me.

David:
What’s on your mind?

Falisha:
Okay, so I’ve got… And again, Falisha Rexford from Las Vegas, Nevada, realtor investor, air force veteran, wife, all the things, but my question is going to circle around being a mommy. So here it goes. And we’re going to incorporate real estate. So a lot of people/real estate investors want to talk the market right now or the deal that they’re working on right now or their next move. But as a mother with a real estate investment mindset, I’d like to change the perspective for a quick moment. What should parents and soon to be parents be thinking in terms of not only real estate investing, but pure ownership of real estate for their kids 20 years from now?

David:
Good question. James, you have kids. What’s your thoughts on this?

James:
I do have kids. I love bringing my kids to the job sites and keeping them around the product. I think this is a great question because I’ve definitely done some things over the last couple of years to get my kids in a better spot because as things get more expensive, it’s like what is housing going to cost by the time they are ready to buy?
So things that I have done, actually everyone does those 529 plans and I have one of those for them to get them going down in life, but one thing I have done is I actually invested 20 grand each into a hard money fund that compounds at like 13%. The goal of this is to just let it compound through their 18 years. And I put it both in when they were one year old and then by the time they’re graduating college, they’re going to have enough for a down payment on a house. And so I’m trying to get prepared to give them the money and the help to get in without also bleeding out my own cash. It’s just investing and letting it sit.
I think one big thing that people should think about when they’re talking about their kids right now is there is a gifting tax exemption that is changing very soon. If your kids are going to inherit property from you, once that property’s changed, they’re going to owe an estate tax. And the thing is, what you can do is right now you can gift 12.92 million to your kids up to. But in 2026, it’s decreasing to 5 million. And so right now, I’ve been rapidly trying to figure out my portfolio, the properties I want to keep, and that’s what I’m looking at gifting to my kids now so they don’t owe a big estate tax later. And it’s about kind of getting in front of that bill and planning that way because by the time they’re ready to buy, the market’s going to be a lot more expensive. But if I can gift them something and they don’t have to pay a tax, it’s a huge benefit.

David:
All right. I’ve got two thoughts on this whole how to bring kids. The first one is practical and the next one is more of an overall philosophy. People don’t realize it, but especially when you are a small business owner, you can actually pay your children a certain amount of money. I don’t know. Do you know how much it is, how much you can pay them per year? It’s like 13,000 or so.

Falisha:
Right. I think it’s also dependent on age and what they’re actually capable of doing. But right now I have an 11 and a 13-year-old and I can pay them about $2,400 a year. It’s not that much right now because you have to make it equal to what they’re physically able to assist with.

David:
There you go. But as they get older, you could pay them more, right?

Falisha:
Yes.

David:
So one thing you could do is to pay your children, put it in an account to the side, use that as a tax write off and let that become the money that they are saving up every single year for the first down payment of their property. And you can use them in your real estate business so that they earn that money, which gets them exposed to what’s going on. Like James said, bringing them to the job site. You can have them helping with various elements. Learning, I mean, just as a kid to get a headstart on how an Excel spreadsheet works is really, really valuable, much more important than learning calligraphy or cursive in school, right? Getting exposed to some of those trends that are going to help them when they get older. Bookkeeping. Can you imagine if we’d been exposed to bookkeeping when we were young? How less scary and frustrating that would’ve been when it happened later.
So I’d recommend everybody with a child who is in real estate investing or some form of entrepreneurialship, definitely talk to their CPA about taking advantage of that. The other is just the overall philosophical approach. Too many people get scared, like you said Falisha, because they’re looking at real estate right now. Like, what is it going to cashflow today? What is it going to be worth in this moment? How much below the appraised value did I get now? But real estate changes, the values go up and they go down. You could get a property that appraised for more than you paid for it think you won. And then when the market crashes, nobody cares what an appraised for six months ago. It’s what it’s worth right now. And the same when it goes up. Rents tend to go up over time.
So I don’t know why we got into this terrible approach of just analyzing a property for day one cashflow when you’re not going to own it for one day. You’re going to own it for a long period of time. Buying an area where you’re going to have restricted supply, but increasing demand is going to lead to a much higher level of rent increases and property value increases. And if you’re turning it over to your kid, this looks obvious, “I need to have a house ready for them in 20 years, where should I buy it?” Are you super concerned with cashflow in that case? Probably not. But your wealth is going to grow significantly more if you’re like James buying in somewhere like Seattle, or you, Falisha, buying in somewhere like a growing market in Las Vegas than if you go buy the cheapest property that you can somewhere in the Midwest where you’re not going to see very much improvement.
What I’m getting at is when you invest for your child, it forces you to take the big picture approach and real estate becomes simple. You lose that fear of right now. And I don’t know why we do it. We don’t analyze a person that we’re going to marry for right now in this moment. You don’t just say, “Well, how do they make me feel right now on this date?” You think about for the next 50 years, “Is this a person that I’m going to want by my side? Is this the person that I’m going to want to choose?” I think it would be better off to look at real estate from a similar perspective.
All right. This has been a great start of the show here with Falisha. And we’re going to be getting back into this forward-thinking conversation right after the break.
And welcome back. We’re here with Falisha Rexford who is taking us through the long view approach to looking at real estate as a mother and an investor.

Falisha:
I think the reason why I brought this question up for myself, watching how fast the market has been moving and knowing even myself, my first home I bought for my personal residence was like $303,000. And then in 2008 when I bought my first investment property, it was 75,000, 85,000. Now, those same homes are worth 375,000 again in Las Vegas. I’m just trying to think 20 years from now, what is the first home that our kids are going to purchase? What does that look like? That could be a $800,000 property. We’re not necessarily seeing income move at the rate that we’re seeing these home prices. So I’m just trying to change my mindset and my perspective. I’m trying to talk to my friends and say, “Hey, do your daughters need the $75,000 wedding?” I don’t think that that needs to be the mindset that we have anymore. We really should be thinking about the now and maybe buying them a condo now, attaching their name to it, renting it out and letting that be the asset that they get down the line to become the down payment for their house versus the $75,000 wedding, right?
So I’m really trying to change my mindset and I feel like I’m kind of talking into a echoey chamber sometimes because the Americanized mindset is so like, [inaudible 00:09:05], “You should do this, you should do that. You should go to college. You should have this beautiful wedding.” I think if we don’t change our mindset now, there’s a lot of people 20 years from now, they’re going to be caught and there’s going to be a lot of kids that aren’t going to be homeowners. It’s just kind of sad what we’re seeing right now, right? So I was just very interested in your guys’ perspective on that.

David:
James, you’re someone that doesn’t… I don’t think you deny yourself of some of life’s pleasures. You always dress really nice, your hair is impeccable. You spend a lot of money on really expensive Mus. You’ve got yourself a nice boat. You live in Newport Beach, but you’re also incredibly financially savvy and you’re still prudent. I think you’re a great example of the person that really handles both sides of wealth well. Your bookkeeping is tight, your businesses are run very well. You pay attention to all the details. You’re not just at the club making it rain. What’s your thoughts on Falisha’s idea here that you could actually buy a property for your child, let it appreciate for 20 years and let them walk into a lot of equity?

James:
I think you could definitely do that. The issue will be is, you can add them to the title, but you’re still going to need to get the financing. And you really can’t buy anything for 20 grand. And so for me, what I’m trying to do, I’m identifying the properties that I want to make sure that they have an option on. Even recently I bought a duplex in a nice area that doesn’t usually hit my normal buy box, but this is my backup plan for my kids because they could have one unit each. We can also condo the building so they could have one unit each. The plan is where I can set it up in a trust so I can gift it to them later and they can avoid the nasty taxes because I’m trying to set it up more for them to work smart because if I pass away and I give it to them, they’re going to owe that estate tax. And just by setting it upright today, they’re not going to owe the estate tax.
And it really depends on also where you are. And as you plan for your kids in Washington, it’s one of the worst states to die in as far as state tax goes. And so as I’m looking at giving assets to my kids and trying to get them set up right, because I think Falisha is right, the wealth gap is widening right now. COVID really helped widen it and it is going to continue to go. And if you don’t set them up, they could be way behind. And so I’m trying to set up my portfolio to where I can keep trading around and gift it to them and then they can avoid the tax and they can get that, but also it’s about reloading assets out of Washington because it’s a gnarly place for taxes.
So it’s about looking at the big picture. Sometimes you can just do your business the way you normally do it and then earmark the ones you want to give them. And then what you want to do now though, because this is expiring soon, is get it set up in that trust. Get it and then gift it to them now, so then you can actually avoid those taxes. And there’s other ways you can leverage those properties too. So you can gift it to them and still set it up to where you can actually borrow against it to continue to acquire real estate and set them up better down the road.

Falisha:
I was going to throw something in really fast just because James was talking about a trust and I have a client that I was trying to sell his house to and it’s going to probate because it wasn’t vested correctly. And that made me and my husband spark the thought of, “Man, we did our trust. It felt like we did our trust last year.” We did our trust, we re-upped our trust like three years ago. And since then we have all these new properties that need to be put back into the trust. I just think that’s a great topic to just throw out to anybody and everybody listening that if you haven’t touched your trust and you have kids as well, kind of along the same lines as we’re talking, it’s probably time to do that, make sure it’s all up to date because probate and all that stuff, it’s sad. It’s so sad, all that hard work and then just to lose it all. So I feel like that’s been in my world this week, so I thought I’d highlight it.

David:
Well thanks for that. I got one last question for each of you if you could briefly answer. Handing 250,000, $300,000 of equity to an 18-year-old might not be the wisest thing to do. So what steps are each of you taking to prepare your children for how they’re going to manage that wealth and be a good steward of it so it’s a blessing, not a curse? I’ll start with you, Falisha.

Falisha:
Well, in our trust, just because we were talking about it, I don’t actually allocate anything to my children until they’re 31. So I definitely took time to think through the age gap. My kids don’t have to go to college. I’m not a huge proponent of people having to go to college. They don’t have to go to college, but they do have to be productive humans in society. They do have to take a drug test. And I did want to wait till an age that I felt like they would be reasonably capable of handling a portfolio and a substantial size of money.
So for me, it’s not an 18-year-old. And I did some self-evaluation with my own self and how much I’ve grown within my age range, right? So for us it’s 31 if we were to die. But from the time that my kids were little, they’ve been in our Airbnb business. They’ve been helping with communication. They’ve been going to listing appointments. I feel like my kids will be a little bit further along than most because we’ve immersed them in this business. So I hope that they’ll be a little bit well-versed to handle this if and when the time comes. So I don’t see myself handing $300,000 over to an 18-year-old, but if they want guidance on how to invest it and how to grow their wealth, I would absolutely be there for that. But I don’t think I would be relinquishing that kind of money to an 18-year-old.

David:
James, what about you?

James:
Oh yeah, they’re not getting that 18. There’s no way. I would not have wanted that money at 18. It would that be still my account. I didn’t mature until 19. But you can put anything in this trust and perhaps certain benchmarks, whether it’s they get this when they get married or they have kids. You can also change it as you get to see your kids grow, right? They’re going to change over time. And I think what Falisha said is really important, exposing your kids. And I think that is fundamental. We do that at our house. They’re active with what we do at work, but then we make them work. Our kids, they don’t really get presents. They can work for an allowance and earn money and then go buy their own presents. So we make our kids buy their own stuff they have to earn the cash. And I think that is really important. I know I got put to work when I was like eight when I was a kid.

David:
Was that when you started at Red Robin? Was that why you were the top waiter in the whole country because you got to start at eight years old?

James:
I think it contributed. I was packing paper in a warehouse. But that work ethic lasts, right? And get your kids to… They can’t live in a bubble. We put our kids to work because it’s just good for them. My son really thinks about what he spends his money on, and that’s the beautiful thing. My daughter blows it. Son? He saves. But it is just a good thing to be dealing with your kids.

David:
All right, BiggerPockets, what do you think? Let us know in the YouTube comments what your plans are to teach your children about wealth and what you’re doing to set them up for success. And as a second question, I’m curious, how many of you think that the job of a parent is to make their child happy? And how many of you think that the job of a parent is to prepare their child for the world that they are going to be entering into as an adult?
And Falisha, thanks for being here today. Please keep us up to speed with how things shake out with what you end up deciding to do is setting up your children and how these thoughts progress through your beautiful mind.

James:
Thank you, guys.

David:
Bye, Falisha.

James:
Good meeting you.

David:
All right. Thanks everyone for submitting your questions to make it work in today’s market. Get those questions in at biggerpockets.com/david, and you too can be featured on an episode of Seeing Greene. I hope you enjoyed the shared conversation we’re having so far and thank you for spending your time with us. Make sure to comment, like and subscribe to this video. It helps us out a ton. And James had to leave. He was late for his hair and teeth whitening appointment, but no fear. I have a man who never needs help with his hair or whiter teeth, Rob Abasolo, welcome. Thanks for stepping in.

Rob:
Ahoy.

David:
Yes, I love it when you show up, you’re like an avenger. You arrive just like Iron Man, you hit the ground and you are ready to help me tackle these problems.

Rob:
Hey. When I sense trouble, I’m there. I’m just a heart tap away, my friend. Just a heart tap away.

David:
That’s right. Now I’m glad you’re here because you and I both have experience in this very topic. In fact, you lived in this area and I vacation there all the time. We are talking about none other than the Smoky Mountains and how to decide if a property is worth buying even if it’s only breaking even in cashflow. This question comes right out of the BiggerPockets forums, which if you haven’t been in there, I don’t know what to tell you, you’re missing out. It’s like never eating at Chipotle. That will give Rob a heart attack and we want him heart tapping, not heart attacking. And so check out Chipotle and check out our answer to this question.
Colin is addressing someone who was having a hard time finding cashflow and they were looking in the Smokies, which has been a solid short-term rental market for a very long time. But the question is, how do you beat inflation through investing in real estate? I think the Smokies are probably the safest market that I’m familiar with in the market today. So this is a great background to explore this question through. What do you think, Rob? Should you buy a property for the purpose of beating inflation if it’s in a solid, defensive, strong likely to never have problems with vacancy? What’s your thoughts here?

Rob:
I mean the Smoky Mountains all in all is a very safe place to invest, but I mean I think that some people are still… I think they’re might be taking a little bit of a haircut there. I don’t think that the prices are really holding as strong with the interest rates. I am not a fan of going all in on one single lever in real estate. When we talk about real estate, we talk about the forward levers, right? Tax write-offs, debt pay down, appreciation and cashflow. I think there are certain levers that are more important at whatever journey that you might be in respective to your experience.
For example, when you get into the real estate game, cashflow, that’s a really important lever for you. And appreciation is not as important for most people because they don’t understand how powerful it is. But as you scale your portfolio and if you have time for your properties to actually appreciate, then you kind of realize that real wealth is built in the actual appreciation side of things. But I don’t ever really pull one lever one way or another. I try to have a pretty equal spread. So I’m not sure that I’m really going into a market thinking that my play is only appreciation. I try to have a little bit of everything. I don’t know. Maybe that’s just a little conservative, but do you typically go into these things all in on one specific lever or do you like to spread it out too?

David:
No. Well, especially in the beginning of your journey, you want to spread it out more and you want to be more heavily weighted towards cashflow. And then later in your journey, you can actually spread it out amongst your portfolio instead of amongst the property. So you may have a foundation of cashflowing properties and then you get into stuff that you could buy for the purpose of depreciation to save money. And then you get into stuff that you buy for the purpose of appreciation. And the cashflow that you bought in the beginning shelters may be cashflow you’re not making on the stuff that you bought in areas that are going to appreciate. And the appreciation shelters the fact that the cashflow properties are never going to make you wealthy and you get a nice, well-balanced diet that turns you into someone who is just as wealthy as you Rob are fit.

Rob:
Yeah. So let’s get into some of the actual fodder that was happening in the forums here because I think people raised pretty good points. Mike said, “I think too many investors justify a poorly performing investment with depreciation.” And then John said, “I strongly disagree with this. It’s not rocket science to pay attention to demographic trends, economic signals, and basic human behavior to figure out what areas are a safer bet for investing.” I agree with that. I think there are certain trends. And so if you want to secure an investment a little bit more than I do, I am a big believer in national park or vacation or destination vacation type of area simply because we know people are always going to spend a lot of money to travel to those areas. Meaning, people will make a lot of money in the rents in those areas, meaning people will always be willing to pay competitive prices for those homes.

David:
There you go. The point here was if you bought a property for 500,000, put 20% down so you’re all in for 100K here, 10 years later let’s say that property’s now worth a million. You’ve made yourself $500,000 in equity for $100,000 investment. That’s a really, really good return. That’s a 20% return year over year. And that doesn’t count the depreciation you might’ve gotten, the loan pay down that you might’ve gotten, and the fact that it may be cash flowing pretty strong 10 years later.
So the point here is there are ways to do this that are safe. The Smokies, in my opinion, are one of the safest short-term rental markets, probably the safest one in the entire country, but they may not be the sexiest, right? But if you’re playing the long game, you’re looking 10 years down the road, this is as close to a turnkey thing as you can get still buying in an appreciation market that you don’t have to worry about the local municipality shutting down short-term rentals. So I like the nuanced approach here like, “Hey, let’s look at 10 years down the road how your investment’s going to do.” A 20% return on your investment only from the appreciation here hypothetically is going to strongly outperform inflation.

Rob:
Yes. Yes, I agree with that. Just keep in mind for anyone listening though, breaking even for most people is not great, right? If you think about it the way you think about your 401k or your Roth IRA and you say, “Hey, I’m going to max that out every year, and I know that I’m never going to get a dime from that until I’m 65,” and that’s your mindset buying property, “Hey, I’m going to buy this break even property in the Smoky Mountains and I’m never going to take a dime from it,” no problem, no harm, no foul.
But I would say the vast majority of people breaking into the short-term rental space do it for one reason and one reason alone, and it’s because they want to cashflow or they might be a little bit savvier and want to take advantage of the short-term rental loophole, get bonus depreciation and all that good stuff. So there’s some valid reasons why one might break even, but I think the Smoky Mountains is like, that’s one market you should be making money. You should not be breaking even in that market of all markets in the country. That’s my opinion.

David:
Ideally, yeah. But sometimes things go wrong. You mismanage things, you miscalculated things, it took longer to get it turned around than what you thought you had.

Rob:
Sure. Sure.

David:
It take some time to build your skills up. So if a failure is breaking even, there is light at the end of the tunnel that you still could be getting… What other asset can you say I screwed it all up and ended up with a 20% return?

Rob:
Yeah, I ended up with half a million dollars in 10 years. Ugh, not a lot. Yeah,

David:
It’s what I love about real estate right there. All right. Thanks for that, Rob.

Rob:
Before we move on, I just want to prompt everybody, look, these are good discussions that are being had every single day in the BiggerPockets forum. So go expand your brain, go get into the conversation, jump in, give your insights, and I promise you’ll become a stronger investor for it. So head on over to biggerpockets.com/forums to get connected.

David:
And today’s Apple Review comes from Dona Videz who says, “This podcast is a life-changing. Longtime listener, and I can’t express how much the show has changed the game for me. I’m now up to six units in my investing journey.”

Rob:
Nice.

David:
Thank you for that review. And if you’re listening to this on a podcast app, we need your review. The Apple is always changing their algorithm, so is Spotify, so is Stitcher, wherever you’re listening. So if you could go on there and leave us a review to keep us near the top, we would love you as much as Rob loves guac and a burrito bowl.

Rob:
Hey, I just want to point out that you called it the Apple. That’s a very boomery way to word it.

David:
If you’re listening to this on the information superhighway, please do me a favor and leave us a review on the worldwide web. It’s hard to read and talk and think and also make up a joke about guac in a burrito bowl at the same time.

Rob:
I know. I know. I wasn’t going to say it because you were so nice, but you said “The Apple” and I had to say something. You’re a millennial, which is very funny to me.

David:
I’m the most grouchy millennial that you’re ever going to meet, but that’s true. Technically, I am a millennial.
All right, we love and we appreciate your engagement, so please continue to do so. Leave us a comment if you’re listening to this on YouTube and let us know what you think about the Smoky Mountains as a market as well as the cashflow versus appreciation approaches. And right after this quick break, we’re going to be getting into how to move past being overwhelmed and an affordable housing dilemma for your first property. So stick around.
Welcome back to the BiggerPockets Real Estate podcast. Let’s jump back in.

Mike:
Hi David. My name’s Mike Fortune. I’m 48 years old from Jarrettsville, Maryland. I’m married with three children, 14, 18 and 20 years old. 20 years ago, my wife and I started a residential design build construction company. And two years ago we decided that the juice just wasn’t worth the squeeze when it came to construction, so we’ve gotten out of that and now I do architectural design work and she’s gotten a job outside of the home with good pay, great benefits. It’s really much better.
Back in 2013, we had the opportunity to start a real estate partnership that we’re 50/50 partners with that has now grown to have six properties, about a little over a million dollars in net worth and zero debt. In addition to our primary residence, we also own a four bedroom single family rental as well as the four bedroom Airbnb. We manage all of these properties ourselves. And together, they net us around 6K a month. So currently, I find myself at an intersection professionally where I’m able to lean into real estate investing more seriously and I’m working very hard to clarify what is the best path or a course of action to get to a point where I can build a legacy level portfolio.
David, I know you always give it your best. I’m so thankful for what you do. I’m really interested to hear what you have to say. Thank you.

David:
Okay, thank you Mike for the question. If I understand you correctly, you had some success with various real estate ventures. You’ve got several different opportunities or paths to take and you’re just trying to figure out what is the best one for you. I typically like to answer this question by looking at the skillset of the individual paired with their long-term goals, paired with the opportunities that they have that are unique to them. Rob, what are you thinking?

Rob:
Well, it seems like he has pretty decent cashflow. I’m not sure if his idea here is to go full-time in the real estate world, but ultimately I would say, what makes your cup full? What are you happy doing? Are you happy doing long-term rentals? Which he has a few of those. I’m not sure he is. Is he happy from the Airbnb side of things? I would really try to look at the spread in his entire portfolio and say, “All right, well what side of this portfolio is making me the most money every single month? And am I happy doing that?” And if the answer is yes, then I would divert 80% of my time to the thing that makes me 80% of my money. Does that make sense?

David:
Yeah, it does. So based on what he said, is anything jumping out at you that we could give him some concrete advice?

Rob:
Well, one thing that was interesting is that he does architectural design work, which leads me to believe that he’s a little bit more in sort of the creative side of things. If that’s what he’s good at, if that’s his skillset, I think that’s what he should be chasing. I think he should be leveraging his strengths. He has obviously formulated a career and his experience around architectural design work. So why would you go and, I don’t know, open up a sober living facility? Not that you can’t and not that he’s suggesting that, but obviously it’s a little disparate, right? So I would probably try to hone in on his creative skills and his design skills to say, “All right, how can I use the current skills that I’m very, very good at to make me more money in my portfolio?” Maybe that’s more Airbnb, if that’s what he’s doing right now. Maybe he likes the creativity side of things that ultimately either push him in that direction or something in the world of utilizing skills, like maybe designing and building his own properties that he can convert into an Airbnb.

David:
I like that. You know those roar shack ink blot things where they put a blot of ink and they ask you what do you see, and it’s supposed to… Yours would always be an Airbnb or [inaudible 00:28:37] Burrito.

Rob:
That’s right.

David:
Everything you look at is going to go that way.

Rob:
Well, doc, I’ve been having these dreams. It’s the same burrito every night.

David:
All right, you ready for a hot take here?

Rob:
Hungry.

David:
I don’t know that we share this information very often especially on a podcast, like this is going to be hotter than a green chili. I think that in today’s market, real estate investing is more challenging than ever, and at the same time, it is more crucial than ever. We have seen interest rates go up to the point that cashflow in year one is incredibly hard to find. It’s so hard to find that the return on your time that you get if you go full time in real estate investing almost is less than what you’d make working at a job. So the whole thing of, “Hey, I don’t like my job. I don’t like hard work. I want to become a real estate investor so I can get easy money and just quit,” we kind of had a window where that was available. Maybe it’ll come back, we don’t know. But I wouldn’t say that overall it’s here right now. It doesn’t mean you can’t find that deal, but you’re not just going to step out there and find that deal. It might actually make you more money to keep working.
Now, in order to get cashflow, you got to put more money down than you had to put before because rates are higher. So it puts us in this dilemma where having capital, having wealth is actually a prerequisite to being able to be a full-time real estate investor or even a successful real estate investor. You just have to have money to put down on these properties. All these creative things like, “Hey, throw a HELOC on this property to buy your next one, and then that one will go up in value and then you could refinance that one and do the next one and you could borrow money from somebody,” that all worked really good when we had this eight year window where properties were going up at value everywhere and rents were going up.
I’m actually getting back to a perspective of fundamentals that I think people like Mike should continue working. You should actually think, “How do I grow a business? I know how to do design work. I know how to do architectural work.” That itself, Rob, is an asset in a sense.

Rob:
Mm-hmm. Good one.

David:
Is that he took a long time to build. Just like if you have a property that you’ve taken a long time to let appreciate, it’s going to be worth more. I don’t want to see people throwing this stuff out the window to chase this dream of real estate investing just to find that it can go sour sometimes. And if you don’t have money coming in, when real estate goes bad, you can get really, really hurt.
So I’d like to see it might continue working in this architectural design firm, but maybe expanding your skills there. Can you hire a couple new promising architects and teach them and leverage them to do some of the work and you can focus on taking on new clients? Can you get into doing more design work for clients that need more money? Can you do what Rob said? Can you get into helping improve people’s designs on their properties to make them worth more money? That’s something that I started doing. People with struggling short-term rentals come to me. I have a design team. We help them improve the performance of the properties, and they pay us to be able to do that. That’s money that you make that can then go into your next deal to increase your down payment.
I know that everybody wants to be the full-time real estate investor. It’s just harder to do than it used to be and I don’t want to see people make the jump prematurely. So don’t worry about, “I don’t have the time to commit to real estate investing.” Hey, money is money. You make it how you can make it. And when you got enough of it, almost all the deals are going to work. You can invest in the better areas if you have more money to put down. Not a popular opinion, it is a hot take, but I think it’s sound advice.

Rob:
Hey, hot tea and hot coffee is a very tasty thing to drink, so I liked it.

David:
Hot coffee.

Rob:
Hot coffee.

David:
All right, we’re getting to our last question of the show, Rob. I’m going to read this one. I’m going to let you take it away. This comes from Bai in Minnesota. “Hey BP, thanks for all that you guys do. I’ve been consuming your content via podcast and YouTube the past year and a half. I’m 26 years old and trying to start my real estate journey using a VA loan. But most properties in Minnesota within affordable ranges that are near me will still need some rehab before I can live in it. The multifamily properties that I’ve seen I’m afraid won’t cover the mortgage payments alone in case of vacancies. I’ve recently decided that I need to buy something that I can afford and pull out a HELOC later for some multifamily investments or just rent it out and repeat. What do you think? Also, most of the nice homes around me are townhouses. Is investing in townhouses a good idea?”
So Bai here has got himself in a bind where the properties that he can afford with a VA loan aren’t going to cashflow. The stuff that may cashflow is not in good condition. He’s in a tough market and he doesn’t have a lot of capital. You love these ones, Rob?

Rob:
I do.

David:
I’m going to let you take it.

Rob:
Yeah, I know. Well, first and foremost, I don’t think that the… I mean, generally speaking when you’re getting into this world of real estate, the first deal isn’t necessarily going to be the sexiest deal. It’s not necessarily going to be the easiest deal. Most of us come into this not being able to afford our first investment, and we’ve got to get really creative with how to make that investment worth it. And so I think first thing that comes to mind here is a live and flip or something where you can live, understand that, “Hey, I need some TLC,” right? We need to work on it. And it’s something that you can make a compromise to your comfort for just a year or two years while you fix it up and force appreciation into that property, build up some equity.
And unfortunately, as much as I want to come in here and say, “Yeah, when you get into real estate, you can scale to 50 units in your first year,” that’s not always the case. We have those stories often on BiggerPockets, but the real story is it’s a slow start. And sometimes you really have to just work hard, wait it out, fix up a property, maybe not have a kitchen sink for a month in your kitchen while you’re a kitchen remodel goes horribly wrong because you’re doing it all yourself, but that’s how we learn the game. And so you might just have to make the sacrifice I think for a year or two while your property appreciates a little bit.

David:
Yeah. And I was reading in the forum somewhere that someone said… It was like a joke, but they were mentioning, “Yeah, David Greene’s advice for everything is house hack.” And I was thinking, “Well, in situations like this, what can you really do?” You’re putting zero down. You’re hoping that something cash flows. It’s in a solid market in Minnesota where you’re going to have some competition. It’s not going to be easy. You’re talking about the best asset class to invest in available to anybody in the country. It’s going to be hard. You’re not going to be able to just step in there and crush it right away.
Most things in life you don’t step out and crush it right away. You’re not going to become a cage fighter and be good at it right away. You’re not going to get in super good shape right away. You’re going to have to put some time in to develop the skills. Well, real estate needs its own time. You have to let it appreciate, you have to let rents go up. So I would be thinking just like you said, Rob, buy something that’s going to be uncomfortable. You’re going to rent out the rooms in a house with the most rooms that you can find.
Guys like Craig Curelop were literally sleeping on a couch when they were 26 years old so that they could rent out the bedrooms for more money. Now, not everyone has to go that drastic, but you see Craig’s career really took off because he was willing to do that. When you find yourself in Bai’s position here and that doesn’t seem like there’s any good options, you got to play the long game. You got to buy a house that you can rent out the room, save as much money as you can. Let what you used to pay in rent become money that you save that’s the down payment for the next property and just let that snowball build very slowly.

Rob:
Yeah. I do want to give a little bit of insight into his last question, which is, “Also most nice homes around me are townhomes.” A good idea. I think if there are a lot of town homes around you, that means that there are comps and there are properties, there are townhomes that are being purchased. I think if you’re the only townhome in the area, then it’s probably something I’d shy away from. But the fact that there is a decent amount of that in your area, I wouldn’t shy away from it per se.

David:
I don’t love town homes for an investment. I don’t love condos as much as I did before. And the reason is inflation has gotten so bad, those costs are getting passed on to the associations that manage them. And people are finding that their HOA fees are doubling or tripling, just like insurance fees are, just like the assessments are. It used to be annoying that you had those fees. Now they can be backbreaking. They can be really bad as they’re going up, especially for a new investor.
What he’s saying here is, most nice houses around me are town homes. Bai, you have to decide if you want to be wealthy or you want to be comfortable, especially when you’re young and you don’t have a lot of money. If you want to live in a nice house, you’re not going to be able to make it a great investment when you start. If you want to become wealthy, you’re going to have to sacrifice the niceness to find something that makes work on the numbers. And at minimum, you can move out of it in a year and you could get another house once you’ve saved up some money. But for everybody who’s finding themselves in a bind, “I want to make money in real estate investing and I want to do it in a great area, and I don’t have any cash,” you’ve stacked everything up against you, it’s going to be harder. You’re just going to have to sacrifice on the comfort level, but it’s okay. It builds character.

Rob:
You’ll get there. You’ll get there, little buddy. Actually, I don’t know. Maybe he’s older than… Oh no, he’s 26. You’ll get there, little buddy. Listen, when I was 26, back in my day, my wife and I, we bought a really kind of dinky home in a neighborhood that we thought had a lot of potential. And we remodeled that house three times to the point where nothing in that house is original. And it was really hard. It was oftentimes created a lot of frustration because I jokingly said we wouldn’t have a kitchen sink. And then we were always remodeling. We’re like, “Let’s try to wash our dishes in the bathtub.” We did that one time and we were like, “Let’s never do that again.” It’s a really tough road, but we stuck with it and it was so worth it. That house is worth double what we paid for it. So I think, yeah, you got to be willing to put the pride aside a little bit and just-

David:
It’s a long game.

Rob:
Yeah.

David:
Remember when we were in LA, we were driving through your old neighborhood, you pointed out that house and you were like, “At one point, that house was listed for so much money.” How much was it listed for?

Rob:
It was listed for 1.2 million.

David:
And you just thought that was insane.

Rob:
Yeah, it was crazy.

David:
[inaudible 00:37:57] ever. And what was it worth when we drove past it?

Rob:
Probably like 2 or 2.2, something like that. And I was like, “Oh my gosh, that was such a deal” and that was like four years ago.

David:
Yeah, I mean, that’s not always going to go up a million dollars for four years.

Rob:
No, no. No, of course not.

David:
But the principle does remain. It feels expensive when you do it. You have to tighten your belt. And then over time, the belt slowly becomes looser and looser. And if you find yourself in Bai’s position, check out our podcast episode number 896 where we interviewed Jesse Rodriguez and get some ideas for what to do to increase the value of your home to build that equity to put into future projects.

Rob:
With that said, David, bye!

David:
To our audience. All right, thanks everyone for joining us. Remember, you can be featured on an episode of Seeing Greene yourself. Head over to biggerpockets.com/david where you can submit your question.
Today we covered several topics including how to keep the youth in mind as you invest, evaluating appreciation markets and when it may make sense to not cash flow, or if it will never make sense, being overwhelmed and how to move past it, as well as getting that snowball started in your real estate journey that will hopefully someday become a juggernaut.
Don’t forget to check the show notes because you can get connected to Rob or I there if you’d like to reach out. This is David Greene for Rob “Bye” Abasolo signing off.

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The significance of earning passive income in today’s economy cannot be emphasized enough. Steady, reliable passive income serves as a cornerstone for achieving financial independence, offering a multitude of avenues for growth and prosperity. 

A plethora of new passive income generation opportunities offered by innovative digital platforms have emerged in recent years. From real estate short notes to high-end art, the landscape is ripe with prospects waiting to be explored.

In this era of ever-evolving digital investment platforms, individuals have unprecedented access to many exciting investment opportunities that provide passive income. We’ll shed light on the most promising passive income investments available now and provide valuable insights and strategies to pave your way toward wealth accumulation in 2024.

Passive Income Uncovered

To embark on the path to passive income, it’s essential to understand the concept first. Passive income represents a steady stream of income earned without requiring traditional work. While it may seem effortless, it’s important to remember these earnings don’t accumulate by magic; initial efforts are necessary to set the stage for accumulation.

Selecting the most suitable passive income investments for your portfolio is pivotal in shaping your financial future. Savvy investors leverage passive income to bolster their traditional retirement savings and expand their wealth.

Diversifying your income streams with passive investment opportunities alleviates financial stress and provides a buffer of protection in case of job loss or other unforeseen circumstances. Knowing you have other reliable income streams gives investors a sense of security through challenging times.

If you aspire to retire early, passive income is a viable avenue to turn that dream into reality. While the prospect of passive income is enticing, remember that building wealth through passive income is a gradual process rather than an overnight success. 

If you’re new to passive income investing, the best advice to follow is to start with small investments, diversify your portfolio, understand your risk tolerance, and exercise patience. These fundamental principles will help you navigate the passive income journey successfully.

Traditional Methods to Generate Passive Income

Some of the most exciting passive income investment opportunities can be split into two categories: your tried-and-true traditional methods, which have been around for decades; and newer strategies introduced in recent years, including most digital investment platforms. 

Here’s a look at more traditional methods.

Dividend stocks

Investing in dividend stocks offers a reliable way to generate passive income. Shareholders receive regular dividends, or part of a company’s profits, which are typically distributed quarterly. 

Investing in dividend stocks with a track record of increasing payouts over time fosters wealth accumulation. Dividend stocks tend to exhibit lower volatility than other stocks, and investors can reinvest dividends to compound growth.

Index funds and exchange-traded funds

Index funds and exchange-traded funds (ETFs) are significant assets for investors who prefer a more hands-off approach. An index fund comprises a diversified portfolio of stocks designed to replicate the performance of a particular index, such as the S&P 500. Similarly, dividend ETFs offer investment opportunities in dividend-paying stocks with low volatility.

Bonds and bond funds

When investors purchase bonds, they essentially loan money to a company or government entity. Depending on your risk tolerance, you can select from company, also known as corporate bonds, which may offer higher yields but more risk; or government bonds, which provide less risk and higher liquidity. 

Despite typically offering lower rates of returns, bonds have specific maturity dates and serve as a dependable, low-risk strategy for generating passive income.

Certificates of deposit

Certificates of deposit (CDs) represent a type of savings account open for a specific duration. For example, opting for a three-year CD will ensure the funds you’ve deposited will accrue a fixed interest rate over three years.

Interest rates are typically higher because you have to lock your money in the CD. Monitoring interest rates enables investors to invest strategically in CDs at their most optimal returns.

High-yield savings account

Distinguishing itself from a CD, a high-yield savings account allows you to save your money without locking it up for a specific duration, bearing variable interest rates that can fluctuate at any time. These accounts are federally insured and boast rates higher than the national average, helping facilitate wealth growth.

Money market fund

A money market fund is a mutual fund that offers attractive interest rates, primarily investing in lower-risk securities such as short-term government debt or corporate bonds. Certain earnings from these investments can qualify for tax exemption. It’s crucial to distinguish a money market fund from a money market account, similar to a savings account insured by the FDIC.

Modern Strategies for Passive Income

Beyond conventional methods for passive income generation, a new world of exciting opportunities continues to proliferate, demanding investors’ attention. With the constant emergence of new digital investment platforms, every investor now has many opportunities at their fingertips. 

Let’s explore a few of these innovative, passive income-generating avenues.

Crypto staking

Crypto staking is like putting your money in a special savings account, but instead of earning interest, you earn more cryptocurrency for keeping your coins in the account and helping validate network transactions. 

Crypto staking is set for a defined period, ensuring a defined exit date. It’s a way to support the blockchain and earn passive income simultaneously.

Peer-to-peer lending

Peer-to-peer lending offers investors the opportunity to directly lend money to private individuals and businesses without involving traditional banks. Platforms such as Prosper and Lending Club assess the creditworthiness of borrowers and manage lending transactions. 

While peer-to-peer lending can yield attractive rates for investors, it also carries higher risks compared to other investment options.

Fine art

Fine art investing has become accessible to a broader range of investors thanks to unique platforms like Masterworks. These digital platforms allow investors to buy shares of fine art pieces, making it possible to invest in prestigious pieces without requiring millions of dollars to purchase them outright. 

That said, investing in fine art carries high risk, including varying levels of liquidity, and should be approached cautiously.

Advertise on your car

Companies constantly seek innovative methods to reach consumers in today’s competitive market. One such avenue is advertising via vehicles, where companies wrap vehicles with their branding. 

Agencies such as Nickelytics, Wrapify, and Carvertise recruit drivers with newer cars and clean driving records to showcase these advertisements on their personal vehicles. This presents an opportunity for the everyday driver to earn significant income, ranging from hundreds to thousands of dollars per campaign.

Affiliate marketing

Affiliate marketing involves website owners, influencers, and bloggers endorsing products or services by sharing product links on their curated social media platforms. Major companies, including Amazon, eBay, and Target, offer well-established affiliate marketing programs. Criteria for joining these programs vary by company.

Short notes

Real estate investing continues to stand out as a premier avenue for passive income. Whether you’re new to investing or looking to diversify your portfolio, entering the real estate investing market might seem daunting, especially if funds and resources are tight. 

Fortunately, Connect Invest offers an accessible solution through its Short Note offerings, granting investors access to a diversified portfolio of over 50 active commercial and residential real estate projects throughout the U.S. These Short Notes represent financial securities issued by borrowers seeking capital, with each note backed by first-position loans secured by real estate assets. 

Not only are Connect Invest’s Short Notes protected by first-position loans and real estate collateral, but every borrower undergoes rigorous vetting, ensuring they meet Connect Invest’s stringent criteria. With investor funds spread across a broad portfolio of real estate projects spanning acquisition, development, and construction phases, risk is minimized to an exceptional degree. 

Real estate debt investing has been made extremely simple with Connect Invest. Signing up is a breeze, and investors can select from investment terms ranging from six to 24 months, ensuring a clearly defined exit date. There are zero account fees, and investors can earn competitive annualized interest rates ranging from 7.5% to 9% APY, depending on the investment term. Monthly passive income payments are delivered straight to your digital wallet, which can be used to reinvest into other Short Notes, compounding your wealth growth.

Final Thoughts

When you’re considering the best passive income opportunities, ask yourself these questions:

• Are other people making money doing this?
• Which passive income strategy best suits me?
• Is there a positive long-term track record?
• Has this idea ever come back and impacted someone negatively?
• After I set this up, how much time will I devote to it?
• In what way is passive income taxed?
• What kind of money can I make?
• Are the rates of return transparent?

Passive income is a cornerstone of wealth-building, and there’s no better time than now to explore which methods align best with your financial goals. Let your money work for you and pave the way to financial success.

This article is presented by Connect Invest

Your connection to private real estate investing.

Connect Invest is an online investing platform that provides opportunities for short-term investments. These investments contribute to a diverse portfolio of real estate projects, encompassing both commercial and residential developments at various stages.

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

Ashley:
This is show number 369.

Ashley:
Today, we are going to be talking to someone who is not just a rookie, but has some great advice for rookie listeners. So father of three, 10 years to financial freedom and how it is possible for you. We’re also going to get an update to the binder strategy. So maybe you guys have heard this guest before on the BiggerPockets’ Real Estate Show, and we are going to get some updates as to how it is achievable for you to do this to get the best rents that the tenant picks. I’m Ashley, and he’s Tony.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, not once, not twice, but three times a week, we’re bringing you the inspiration, motivations and stories you need to hear to kickstart your investing journey.

Tony:
Now, in today’s episode, we’re going to talk to a landlord who says it’s been five years, been inside some of his rental properties. We’re going to figure out how to get your tenants to ask you for rent increases. And most importantly, we’re going to talk about why rookies and how rookies should evaluate a market as a whole and a heck of a lot more. So today we’ve got Dion, who is a boot camp TA extraordinary. He’s helped Ashley a lot of her boot camps. He’s a go-to name in the Real Estate Rookie Facebook group and so much more.

Tony:
Dion, we’re excited to have you on, brother, but we’ve heard that you took on a new strategy, so let’s get into that first.

Dion:
Howdy. I’m so excited to be here. I love that you called me not a rookie because I originally applied to be on the Rookie Podcast. This is where I think my information helps the most. I only have eight properties. It was 16 units when I retired in 2022 that produced a little over $200,000 in profit. So I think I love BiggerPockets. I love being on the BiggerPockets podcast, but a lot of the people that are on there have huge portfolios, have done many massive things, and I think I focus on the person who’s just starting out.

Dion:
And I really take my strategy from the book One Rental At a Time where that book talks about get to four. If you get to four properties or four units, learning those basics, just getting the, how do you find tenants, how do you screen tenants, where do you get a lease from, what’s a landlord utility policy, just the basics down. That’s when a person can decide, “Do I want hundreds of units or am I happy with what my goal ended up being was the right amount of cash flow from the least amount of units?”

Ashley:
Now, Dion, do you suggest getting all of those four units at once or is this, we get one, we get it set up and then we take on the next one?

Dion:
I call myself the lazy investor. I started from a really bad position. I made it to 40 without ever investing. I had been laid off from law enforcement because of the 2008 housing crash. Found out about $89,000 in bad debt in my name I didn’t know existed until the divorce, was a single parent with three kids, started teaching at a CDL school making $17 an hour. So there was no way I was going to acquire four properties all at once. And I think there’s a lot of people that aren’t in a great position, but if you found this is your first time watching this podcast or hearing any information like this and you started today, it doesn’t mean you buy a rental tomorrow.

Dion:
When I started at 40, the first duplex house hack took two years. I had to work in the new industry for two years to become bankable with lenders. I had to save a down payment. I moved from my house into an apartment and rented out the house so that I can get rental income on my tax returns. That got me the bad debt-to-income ratio of all that debt I didn’t know about. And so two years to buy the first duplex and then two years to buy the next duplex. So once I had those two duplexes, I realized this is a concept I think I hear people hope for, is real estate investing is not passive. Real estate ownership is very close to passive. To self-manage my rental properties, it takes less than two hours a month. But to buy that first duplex was hours of podcasts, audiobooks, networking with investors, working on my credit score, learning how to save, working overtime in a side hustle playing World of Warcraft and selling things online to make extra money on the side to get that first down payment.

Dion:
And no, I don’t think it’s something that’s going to happen very fast, but once I got to those four, I really knew that I didn’t want a hundred units. What actually allowed me to retire early was that bright cash flow. And most people focus on their freedom number. For me, there’s really two numbers and I always hear the freedom number. Financial independence happens when work is optional. But I wouldn’t want to retire early. For me to live my life since I house hack, drive paid off cars, takes about $4,000 a month. If my cash flow hit $4,000 a month, the last thing I want to do is retire. One health concern, one major expense, one recession. So the financial independence number can happen when your work is optional. But my retire early happened when my cash flow passed my retire number, which was for me four times my cash flow.

Dion:
When my rental started producing more than $16,000 a month, I felt kind of silly going to work even though it was a job I loved. I just realized there’s all this time freedom. I could have 15 hours a day that were mine where the average person and what I had was about four hours a day. So I was tripling the amount of time that I was going to live in the next year.

Ashley:
And I think there’s a lot of people that are going to want to hear more about how you started and the beginning of your journey. So I’m going to refer them to episode 448 on the Real Estate Show.

Tony:
Dion, first, I just want to give you some kudos, brother, because you said a lot of amazing things in these first three minutes here that I don’t want our rookies to kind of gloss over.

Tony:
First, you said that you’ve got a portfolio that’s doing $200,000 a year in profits to you, which is phenomenal. And I think that’s what everyone’s going to fix it on. It’s like, “Man, Dion’s crushing it, $200,000 a year in cash flow. I need to be like Dion.” But they’re probably going to gloss over everything you said after that, which was, “It took me two years to buy my first rental. It took me another two years to buy the second one. I invested a tremendous amount of time listening to podcasts, reading the books. I moved out of my primary residence so I could get the DTI income calculation to work.” So when you think about that $200,000 in total, what was the total timeframe to get you to that point, from the day you decided, “I want to invest in real estate,” to the day you actually said, “Okay, I’m at a point where I can leave.” How much time did that take in total?

Dion:
Eight years was financial independence where I started making more than 4,000 a month, right? It starts really slow. The first five years suck. It just doesn’t happen fast. We hear of a lot of investors like Cody and Christian from their multifamily strategy where Cody had 30 rentals before he could buy a beer. So I stress often that the first five years are going to suck, but the next five years are worth it when that income snowball kicks in. And it’s not… When I hit the 10-year mark, I’d had that duplex for eight years. Eight years of rent increases, eight years of appreciation and principle pay down. The next duplex that I got when I was four years in had six years of appreciation, rent increases, refinance to lower interest rates.

Dion:
At 12 years, it was a 12-year journey to hit that 200,000. It was 204,000 in 2022 when I looked at my income and I thought for most of my working career, I’ve been in the Marine Corps, I’ve been in law enforcement, I’ve been a truck driver and teaching CDL’s drivers, I usually made around 40 to $50,000 a year and saved to invest and raised three kids. So when it hit 200,000, I was running the CDL squad, been demoted all the way down to the president of the company. I could run my own schedule. I had a job I would’ve wanted my entire working career. But time freedom was more important.

Dion:
So I hope people understand that yes, the end result is completely worth it for me. We can’t stress enough how much time, energy and effort goes into those first five years, and that’s when I think most people quit. Most people want to buy the first rental now don’t realize those first two years to save and invest, you don’t have proof of concept. You think it’s theoretical. You might run into some other people who’ve done it because right now today, if you started today, that means you’re closing in 2026. What’s going to happen to the market between now and then? What’s going to happen to interest rates between now and then? What’s going to happen to your work between now and then? That’s the time commitment that comes in.

Dion:
But when you get close to that 10 year mark, I think financial freedom is possible for anybody in 10 years or less, almost no matter what your starting position is. But what are you willing to do? Are you willing to house? Are you willing to work overtime, change companies for a bigger pay increase, move to a less cost of living area especially with remote work being as optional as it is now more than any point in our lives? And there’s a lot of people who want to make those choices. And because of that, they’ll end up working 20 or 30 years longer than I think they need to.

Tony:
Dion, so much gold in what you just said, brother. And I hope our social team just chops up as much of that as they can to share that message with the world because that’s what I was hoping you would get at, is that there’s this infatuation in our society with getting rich overnight. There’s this infatuation with finding the easiest, the path of least resistance. But oftentimes that path of least resistance leads us to an end result that isn’t necessarily what we want. And a lot of times the true success that we’re looking for takes a little bit of sacrifice, takes a lot of hard work, takes a little bit of doing the things that maybe you don’t want to do today.

Tony:
So if there’s one thing that I hope rookies take away from this episode, it’s first to be patient. Second, to understand what you said. Most people quit before that kind of escape velocity happens, right? And then third, if you stick with it long enough and you follow the right process is your chances of being successful are relatively high. You just got to have the grit to see it all the way through, man.

Ashley:
So we understand you got into a new strategy recently that you haven’t done before. You had to deviate and kind of pivot based on this deal you were working on. So when we get back, I definitely want to hear more about that.

Ashley:
Okay. And welcome back from our short break. So Dion, please tell us about your most recent deal.

Dion:
So whenever I talk about the strategy, I think I offend a few people. I’m not somebody who’s done the BRRRR strategy. One of the reasons I get so much cashflow is I’ve never done a cash-out refinance. I’ve never taken out a home equity line of credit and I’ve never sold to do a 1031. I like to recycle cash flow instead of capital.

Dion:
So after reaching financial freedom and after retiring, I thought, “I could probably do the BRRRR strategy now.” Because here’s a problem I hope everybody has around that 10 year point, I had the rentals, I had the cash flow, work was optional. And that’s hard to say that this sucked, but there was about 500,000, that was $480,000 sitting in the bank that I wanted to invest. But I don’t want a lot more units. I want the right amount of cash flow from the least amount of units.

Dion:
So I was thinking, first I thought, “Why don’t I go and buy in another country? I’d like to spend a few months a year in Colombia, a few months a year in Thailand. I do a lot of scuba diving.” And I thought, “I’m going to try Portugal.”So I thought I’ll go there and I’ll buy cash. And I had a two-month time in Portugal studying the real estate market, realized I didn’t want to buy there. Instead, I used a strategy that I call my travel house hack. Instead of buying in a foreign country so I could travel there, I thought I’d buy a local house hack, add another duplex to my portfolio that I take the income from that duplex and use it to pay for Airbnbs and midterm rentals when I travel. So this is my travel house hack BRRRR.

Dion:
I was looking in my market and I couldn’t find deals that worked, but I’ve seen the biggest shift recently is remote work. I mentioned this, remote work is more of an option now than at any point in our history. So I invest near Tacoma, Washington. Seattle is a very high cost of living area. Real estate’s very expensive. It’s basically, to the people who live in my area, it’s unaffordable. It’s why they commute. Well, remote workers have pushed out how far people will rent. So rents 45 minutes to an hour and a half away from Seattle have gone up 20 to 30%, but home prices haven’t because the remote workers, well, they’ll move further out, rent a bigger place, only have to commute into the office once or twice a week instead of five days. They don’t want to buy, because their office, their company might call them back to the office next year. So they don’t want to own a property. They’re not looking to become landlords.

Dion:
So I looked out, I pushed my market out about another 35 minutes, found 11 new markets, two of them made sense. Found a bunch of deals where with the new increased rents and still kind of last year’s home prices. I found deals and started making offers. The biggest shift was for the last decade, speed mattered. You wanted to make an offer fast. I had several agents with auto searches set up. I wanted my letter of pre-qualification and docu side offer in within an hour of me finding the property.

Dion:
That’s not the case anymore. The big shift now is days on market. I’m watching. I specifically set my searches up for properties that were on the market more than 91 days, meaning the person relisted it. And so I found a couple properties. This duplex that I ended up buying was on the market 147 days. And I figured this is the type of property that can take what Patrick Bett-David calls the disrespectful offer. It was listed for 500,000 so I offered 400,000. So I went in with an 80% offer. They counted it 477,000. I offered 400,000. They said 444,000 and I said 400,000. Back and forth all the way down to where I canceled the deal and they reached out and said, “We’ll take 400,000.” So I closed on it for 400,000.

Dion:
One side is livable, the other side is a rehab, and it’s my first. I usually buy properties, and this is why the binder strategy exists. I buy properties that have tenants in place that doesn’t need a lot of work. Maybe 1,000 or $2,000 because I was working full-time raising three kids and I would fix a few things. I’d put in coded locks, motion sensor, LED lights, ask the tenant if there was anything they wanted fixed. And two months later I’d do the binder strategy and get the rent increased.

Dion:
So this was my first time taking on a project of learning that we have to ask our government for permission to improve our properties, which the permit process is very frustrating with. So I technically call this my first and last BRRRR. This is going to create over $250,000 and I don’t want to do it again.

Dion:
So if there’s somebody out there who enjoys the BRRRR method, this is how I did it. I expanded my market, I watched days on market. I made offers that made sense at numbers to me, got this accepted. I’m doing the repairs while living here, the contractors, the learning, the time schedule. I used my own money. So this is where I think my biggest, my personal problem… Not a problem, but my problem with the BRRRR strategy is, if you use hard money, you’re on a strict timeline.

Dion:
And I looked at this, I had an estimate come in with a contractor. They said, “It’ll take about three months and $30,000.” Well, I’m over six months in now and over $50,000 and it’s not done. So if I had hard money, I would’ve tripped up. But since I’m using my own money, if I refinance at the end, it’s going to end up being about a 12% cash on cash return. If I leave all of the money in, which is what I think I intend to do, it’s going to be about an 8% cash on cash return, but I’m going to use that money for traveling.

Dion:
And so doing the BRRRR method for me, it’s more of an experiment after reaching FI. Had I done this early in my investing, I don’t think I’d be FI now. I think I had so much to learn that learning curve in the beginning of what a repair takes, how to find contract. I used the Thumbtack app to find my contractors. Didn’t know about that for the first probably five years. And I think I’ve hired 11 different contractors to do parts of this rehab all from the Thumbtack app and that I’ve now used on my other rentals since I’ve had this project.

Dion:
It’s not that it’s a new strategy, it’s a new strategy to me being the BRRRR strategy that a lot of other people have had success with and challenges with. My friend Millennial Mike, who is a first responder law enforcement, lives in the Seattle area, but invests in Gary Indiana. His first two BRRRR methods, interest rates almost tripled from when he started his two BRRRR projects to when he finished. He was able to do it because it wasn’t his first couple of deals. He was five or six properties in when he did that. So I waited until I was financially free, had the resources to do it, can completely mess up and won’t have to go back to work.

Dion:
But I think the things that people can take away is if you expand your market, remote work has changed that, change from making quick offers to watching days on market and making offers that make sense to you. Hunt for the deals where someone else misses the value. When I found this listing, this was to me the perfect fine. All of my deals are from the MLS, no driving for dollars, no mailers, no extra. I’m the lazy investor. I was working full-time raising the kids, so I got used to just having auto searches set up. This property came in. And from the listing there was the word duplex in the description one time, but it was listed as a single family house. There were no pictures of two meters, there was no pictures of separate entrances.

Dion:
The one image showed the top half and it looks like a single family small house because it’s on the side of a hill. The whole bottom half of the duplex is downstairs. It’s my first up-down duplex. I literally had to drive to the property to figure out if there was a duplex here or a house and couldn’t tell from the street.

Dion:
So this was an accidental thing. I called the utility companies and I said, “I’m trying to verify. Is this a single family house or a duplex?” And the utility company said, “We can’t tell you. You’re not the owner.” But they told me that the gas service has been off since February due to non-payment. So they weren’t willing to share with me that there were two meters, which there are, but they would share the personal financial information of the owner, which helped me because I knew financial distress, stick to my numbers, they’ll come down to 400,000 eventually. And so there’s a lot of little things in there that are kind of unique but can be applied to almost any property that you’re looking at.

Tony:
Dion, I just want to comment on that because you bring up something that I think is a unique strategy. We had Ariel Herrera back on episode 349. Her entire investment strategy when it came to acquisition was identifying those properties that were misrepresented on the MLS. So like how you said, you couldn’t tell if this was a single family or duplex. That was her whole acquisition strategy to where she would look for properties that were listed as one bedroom, but maybe the square footage was 2X the normal one bedroom square footage. So that was her strategy.

Tony:
Something I want to quickly go back to though, Dion, is you said that you changed your buy box to look at properties that have been on the market for 90 plus days. I think it’s incredibly smart, but I know for a lot of new investors there’s this almost stigma or fear around offering on a property that’s gone stale in the MLS because they just assume, “Well, if other people didn’t want it for the last three or four months, there must be something wrong with it.” Did you question that? Did you worry about that stigma? And if so, what gave you the confidence to move forward anyway?

Dion:
So I make sure, I want to give credit where it comes from. Sean Cannell of Think Media has a YouTube channel on how to grow YouTube channel. So he’s not in real estate. But he says these four words, and these four words I applied to real estate in a hundred different ways. Confidence comes from competence. When you are competent at studying your market, you’ll have the confidence to make offers. When you’re competent at studying a new market… I had to look at 11 to find the two that made sense, then I was confident to make the offer. When I was competent at using the Thumbtack app to find contractors and handymen to do a BRRRR, to do a rehab, then I was confident to do the BRRRR. So it was gaining the competence at the tiny little tactics that come together to make the strategy where the confidence comes in.

Dion:
It’s kind of like for me, there’s six steps to getting starting in real estate and it all comes from when you get good at when you move to the next. We learn to save. Once you know how to save, it makes sense to look at your credit score. Once you know your credit score, it kind of makes sense to go talk to a lender. Once you’ve talked to a lender and you know what your options are, it kind of makes sense to pick a market because you know how much you can borrow. Once you know your market, then you can pick a strategy. Once you have a strategy, now you go talk to an agent. All of those little skills come together when you become competent in each one, it gives you the confidence to go to the next step.

Dion:
And that’s pretty much what brought me into this deal, is in the beginning I didn’t have the Thumbtack app. I didn’t know how to find contractors. So starting a BRRRR would’ve been… I would’ve needed a partner. I would’ve pulled in Ashley. I think reached out there to the person who has the skill set that I don’t and come together that way. I didn’t do that. So once I had the skill, it made sense to I know how to find contractors, I know how to get good quotes.

Dion:
Here’s a behind the scenes thing. Before I joined the Marine Corps, my whole family owns tree services. My dad owned one, my two brothers owned one. I joined the Marines because that was easier work than working in trees. But I was the estimator. One of my jobs was I’d go out and I’d estimate the job. The reason I use multiple contractors for any job with any of my rentals for the last 10 years or this BRRRR that I’m doing is because I know that I would never want to work with one contractor. Because when you’re working with a contractor, your price isn’t determined by the job. Your price is determined by how much work they have on the books.

Dion:
As a tree estimator, if I went and we had two months worth of work backed up, prices went up because if it was going to take me away from another customer, I needed to justify the time. If I was going to have to work on the weekends, it was needed to justify the time. If we don’t have a job tomorrow and then no more work lined up, prices hit rock bottom because we need to eat next week. And that’s how most contractors are. So I want at least three quotes every time I do a project, not because I found a good contractor, I’ve got a roofer that’s done my last two roofs that I had done, he’s probably going to do the next one, but he’s going to have two competing bids. Because what if when I go to do that roof, he’s got six months worth of work lined up and my price will be jacked up? So I hope that answers the question of the confidence comes from competence, learned a little skills, and then the confidence comes naturally.

Ashley:
Dion, back to this deal, what were three things that went wrong with it that our listeners can learn from you? What are three things that mistakes that you made that you can tell them, “Don’t do what I did, but do this”?

Dion:
Three mistakes with this deal, the first one is even when you have a home inspector, you can find things that they can miss, and there’s a valid reason. The previous owner of this house had some rot in the framing that they had repaired. And that’s a two story, so that’s a fairly important one. It’s on the lower floor. And they had the siding done in that area. So the home inspector had no way to know that there was a beam missing that was held up by a 2X4 that had perfect siding cover.

Dion:
It’s a big scary thing when you think of framing, but it was probably one of the smallest expenses that I’ve had here. So expect more expenses than you find in your home inspection. Even when you get a 72-page detailed report, you are going to find things that maybe the home inspector couldn’t find.

Dion:
The second thing is I’ve always… And it’s funny I didn’t think of this. I’ve said this for a decade. All of my properties are between Tacoma and Olympia and Washington, but not in Tacoma or Olympia and Washington. I don’t want to own inside city limits. Different regulations, rental inspectors, those kind of things. Well, I’m in a new town called Port Orchard. I’m inside city limits. About three houses down in the unincorporated area, the permit process would’ve taken four or five weeks. There’s somebody here doing work and they’re done and they were done within a month and a half. Since I’m inside city limits, I’m dealing with a different entity.

Dion:
So before you invest in an area, and I’m not saying invest in or outside of city limits, I would say I would recommend reach out to contractors that work in an area that you’re going to invest and ask the contractors that have had to pull permits, “What’s it like to work with this municipality? Is this somewhere I want to invest or is this somewhere I need to pad my timeline because of that?” So my mistake was not reaching out to… And I’ve said it many times before because I’ve done it in the past, reach out to contractors and say, “What’s it like to work with them here? How long will this take?” And I didn’t do it on a property I was buying, but I’ve done it on properties I already owned.

Dion:
And the third thing, and this is the thing that I can’t stress enough, there’s two times house hacking is really important. There are a lot of people say, “I can’t house hack.” Well, these two times make it more important than others. One, if you don’t make a lot of money. For me to get started to get through that first 10 years since… Until the eighth year, I don’t think I ever made more than 50,000. In the eighth year, I made 61,000 off of my W-two job. It wasn’t until the last couple years they started making good money. As soon as my employer found out I was making more on rentals, they started giving me increases to try to keep me, which is another reason to have rental income. But I actually walked away from $2 million in golden handcuffs and don’t care. That’s how freeing cash flow is. I share that all the time with everybody. They had those handcuffs and I said, “Those are great, but I can do anything I want every day and that’s more important to me.”

Dion:
So house hacking, if you’re not making a lot of money, it’s probably what I would call the cheat code to wealth. And the second time house hacking makes a lot of sense is if you’re in a high cost of living area. So I invest in Washington. I mentioned my friend Millennial Mike. He invested [inaudible 00:25:40] because he can buy a $68,000 triplex and each unit rents out for $1,100. Or I could buy one duplex in Washington where the down payment is $68,000 and the cash flow is about the same.

Dion:
I’m house hacking for the third time. I house hacked a duplex to get started and get around the debt-to-income. About year six or seven, I house hacked a fourplex. I lived in the fourplex until last year and now I’m in this duplex and I’m house hacking so that I can travel.

Dion:
So the people who think they don’t want to house hack because they hear somebody like me, I call myself a serial house hacker, you don’t have to. It might be once or twice to get the ball rolling. But then, the best thing about house hacking is when you move out of your unit into your forever home, you get to rent that unit out, which could be the unit that’s paying your mortgage where you’re living.

Ashley:
So Dion, you’ve touched a lot on markets throughout the episode so far. So I want to get more into what are some tactics you use when you are identifying markets. Do you have kind of a mini little crash course as to some things rookies should look for when they’re identifying a market and trying to find where they should do their first or next investment?

Dion:
So everyone should have an elevator pitch on what your buy box is. When somebody says, “What are you looking for?”, you should be able to rattle it off really quick so that not only you know it well enough to speak it simply. So I can rattle that, but there is one metric that matters the most and I’ll talk about that after the elevator pitch. I want to invest in a market where I keep my properties at least 10 miles apart, so I’m pulling tenants from multiple sources. So I don’t have all of my units close together. They’re all within an hour, hour and a half so I can self-manage. But I want all of my units close to what are called economic drivers, sources of tenants. So a base, a port, college, hospital, Boeing, Amazon, large population, two or three of those at least. And so that’s the market aspect.

Dion:
When it comes to the physical aspects of the property, I don’t like tenant turnover. That’s one of the reasons why I use the binder strategy because happy tenants don’t leave, right? So help limit tenant turnover. I want physical aspects of the property. Normally, I want side-by-side properties because you don’t have noise complaints. You don’t have over-under like the one I’m in now. So I’ll have to be more concerned about sound or a plumbing issue here can impact two units instead of one. I want washer dryer hookups inside the unit because the tenant using shared laundry or a laundromat is waiting for a place to open. I want at least two bedrooms and usually a garage or carport because in Washington, since it rains so much, that becomes storage or gets you a better rent. So those are the physical aspects of the property.

Dion:
But we all have this kind of elevator pitch on which market I’m going to pick, but here’s the metric that matters the most. And this would determine whether I’m going to buy locally or at a distance. And even my friend who invests at a distance, this is how he did it. The most important metric, trusted boots on the ground. My friend that invests in Gary Indiana, you can see a property listing that looks great, but there might be a street that has eight condemned buildings and two good ones and one of those is the one you’re looking at. And the next street over, literally one street away might have 10 properties with two condemned buildings and you’re buying one with the eight that’s better.

Dion:
And so you’ll have less tenants run over better tenants. How do you know that if you don’t have somebody on the ground? I invest locally, I’m the boots on the ground. And I could manage from a distance because I put my systems in place living here. If I was going to invest at a distance, I would do what my friend Millennial Mike did. He had a friend investing for years, watched him, and then piggybacked on his network. So he had the trust of his friend who’s an investor. That person had the contractors, the property managers, the handyman, the agents, all of the elements that you need to have the trusted boots on the ground. So if you can’t go to the market to be those boots on the ground, you need to have somebody there.

Dion:
And the level of trust that I’ve heard referenced in the past probably here on this podcast is somebody you trust so much, you think they’re probably going to be at your funeral. That’s the level of trust that you want. And that’s what my friend Mike did, is he watched his friend for years and then he used his systems so he might not know the people that are in place on the ground, but he trusted his friend that was the investor.

Dion:
One of the main reasons I invest locally is I’m in a high cost of living area. So that’s kind of the last thing to look at, is what are the properties cost. My friend and his name’s literally Millennial Mike, which means he’s a millennial, he’s got that dopamine hit. “I want to buy three, four properties. I want to have…” This feel, he’s only been investing I think five years. He’s got 15 rental units, so he’s going much faster, right? I wanted the right amount of cash flow from the least amount of units, which meant one property, one duplex where the cash flow is over a thousand dollars a unit. So I had 16 units when I retired that were producing over 17,000 a month in cash flow. Less units. But two years between purchases I don’t have, I think, the drive to have the more transactions happening now.

Tony:
Dion, I really want to dive into the buy box piece and just the process for building that out-of-state team once you get back from this ad break. So hold that thought, we’ll be right back after this ad.

Tony:
All right, Dion, you’ve shared so much great information so far. And one of the questions that’s really sticking out to me is the buy box piece because I think for a lot of new investors, they hear the word buy box, they understand that it’s important, but the actual mechanics of creating that buy box I think can be a little confusing. And while you were talking, I actually pulled up the buy box for our first commercial deal that we were trying to buy. We wrote this down last summer, June of 2023. We ended up closing on that first commercial deal in December, so six months later.

Tony:
We wrote down that we wanted to raise no more than 1.5 million. Our market type was either an urban destination or a true vacation market. We wanted somewhere between 10 to 30 units on this commercial property. We only wanted seller financing or assumable debt. We wanted a value add opportunity. And then we had some targets for cash on cash and IRR. We ended up closing on a motel, a boutique property that was a $600,000 capital raise. It was in a vacation market, 13 keys, seller finance the majority of the profits. We checked all of these boxes for our buy box, but it took us failing two times first to try and raise capital for other deals before we really landed on that, that buy box had made sense.

Tony:
So I’m curious. Ash, I’m going to go to you first because I want to know what did your buy box look like and how did you land on? And then Dion, I’d love to hear from you. But Ash, for you, when you’re acquiring properties today, how do you build out that buy box for what makes sense?

Ashley:
Yeah. When I first started out, my buy box was literally what the investor I was working for was doing. So it was a very, very limited mindset as to I need to buy a property in cash because I didn’t know that you could actually go to a bank. But also it was, I knew that I wanted more than one rental unit in the property because I wanted less overhead of having different properties and I’d wanted more under one roof. So having a two to four unit was very important to me. And then also investing in the area where I was already managing properties for another investor because I was so familiar with the market. And also I wanted to be in the affordable housing range because that was the type of area there was more of a demand for housing than getting something luxury. And also starting out, I didn’t know a lot about rehabs remodel, so I was looking for turnkey properties.

Tony:
Dion, just really quickly, brother, just how did you define your buy box? Because I know you’ve got the binder strategy, we definitely want to get into that. Before we do, just really quickly tell us how did you create your own buy box and how can rookies replicate that process?

Dion:
So I think this is probably one of the most important things that we do as an investor. I take this from the Michael Zuber’s One Rental At a Time of learning your buy box, studying it for 60 to 90 days to learn what an average deal looks like so that you can hunt for one that beats it. And the lumberjack landlord told me one time, because I used to say, “Well, that means you get a good deal.’ And he says, “No, that protects you from getting a bad deal.” I thought that was great, but you don’t know if it’s a good or bad deal until you know what the average deal looks like.

Dion:
So here’s my twist on the buy box chronology. When you’re starting out, what are your resources? We talk about the end goal. What do you want? Financial freedom or bragging rights for a unit count? I want it to buy single family houses every couple of years because I understood it. Rent one out, lived there for a couple of years, rent another one. And in 10 years I’d have five properties. Well, in my area, single family houses don’t cash flow. They just don’t. And they didn’t have the resources to save 20 or 25% down for an investment property.

Dion:
So I learned about through BiggerPockets, small multifamily gets single family lending. And I went for the duplex. I didn’t have the funding to do a fourplex. I didn’t want to use FHA. I preferred conventional loans so I could save 5% down for a duplex. And I did a 5% down. So my buy box was duplexes in my area that when I move out and both units were rented, what’s my cash on cash return and does it beat the area average? So in some areas that could be 3%. In my area it was 10. And some areas like the Lumberjack landlord who’s in around the Boston area, he’s getting 25% on some of his deals. And so you have to know what your market is because you can’t say the market because there’s over 300 of them. You know what works in your market and what asset class performs the best.

Dion:
So I house hack and purchased a couple of duplexes, but then my resources increased. So I looked at a fourplex and did 20% down owner occupied on a fourplex. And then as my resources increased, my buy box also changed with all of the things I listed off earlier. But I can buy in more and more expensive places. As my down payment, closing costs, immediate repairs and money for reserves grew, I could increase what I’m searching for.

Dion:
And then as I started having that huge, to me, lump sum of cash in the bank, and to me half a million dollars was a huge amount, I had never seen more than 10,000 until the last few years when the cash flow from rentals was way more than I needed, that’s when I shifted my buy box to, I’m searching for another fourplex or I could self-fund a BRRRR, which is what I ended up doing. And so I think you need to look at what your end goals are, but what are your current resources and how does that impact your buy box because your buy box will shift as your resources grow.

Ashley:
Now Dion, you have mentioned the binder strategy throughout this episode. I know you talk about it on your BiggerPockets episode that you did, but could you kind of give us a brief overview of what the binder strategy is? And then also I’ve been told you’ve did some updates to the strategy too, so new and improved that maybe nobody has heard about yet.

Dion:
I’ve actually made several updates to the binder. So what I did is I spent about 10 grand and made a free course. So there’s no charge. I’m not trying to sell you on something, but if you go to diontalk.com/binder, it actually has how the binder works, how it works with section 8, how it works from a distance, how it works with a property manager when you close on a property, when you should use it again after the first time. My goal with the binder strategy is to share the information with as many people as possible because it helps the tenants and it helps the landlords.

Dion:
Most tenants live in fear of somebody buying their property, coming in, kicking them out, saying they’re going to rehab the property. Kicking them out, saying “I’m going to move in” or raising the rent so much that they have to leave. And so what I have today is I’ll do the quick Cliff notes version so we don’t make the video too long of how the binder works. I actually just did this. And it’s funny, I don’t feel good about this, but I’m doing this because Washington State is threatening rent control. So because of the threat of rent control, I did the binder strategy with my entire portfolio again.

Dion:
And so the threat of rent control is going to make me more money. That’s what I don’t feel good about. But the binder is… I called it a binder because it’s actually done with a three ring binder. Now you can do this through email and you can do it through texts. When I use it with section 8, I’ve done this through emails. I had section 8 actually tell me, “The most we can pay for that unit is 1,800.” I use the binder strategy, they agreed to 2,200. And that was a few years ago. Now that property is listed for 3,000 with section 8 because of the binder strategy.

Dion:
So the idea is the tenants and the properties that I buy are usually I’m buying them because the old landlord doesn’t want to kick the tenant out, hasn’t taken care of the property, probably hasn’t raised the rent. So they’re not making enough money to keep the assets that’s why I’m buying it. So a lot of investors will run the rents at where they’re at and it’s not a good-looking deal. But I’ll run the rents 10% below what area average is and then all of a sudden it becomes a good cash floating deal because so far I have not had an experience where the rent doesn’t go to at least that much.

Dion:
The front page of the binder is, and this could be the top portion of your email as well, is from Redfin or Zillow and it shows the property. It’ll actually show the current estimated value. I share it with the tenants and I say, “This is the property you’re renting. This is what it’s worth. This is what my property taxes and insurance are based on.” The tenant doesn’t care. Our expenses do not set rents. That’s something new investors usually get wrong. They think, “My mortgage is this, I need to charge this.”

Dion:
If our expenses impacted rents, a paid off property and a property with a mortgage would rent for a completely different amounts, but they don’t. The tenants don’t even know if you have a mortgage. I’m sharing this because it’s transparency. This is information the tenant can then go look up when I’m done talking so they can verify my information.

Dion:
The next page in is the fair market rents from housing or HUD and what their current increases for the next year to say, “This is what the housing authority would pay me for this unit.” Then the next few pages are the actual lists of rentals in the area.

Dion:
Now this is an actual binder that I just did about a week and a half ago and I’ll share the actual experience. Tenant is at 1,400, area average rents are 1,900 to 2,100. So if I go in as a landlord and I say, “Hey, it’s 2024, I’m really sorry they’re talking about rent control. So I’m going to raise your rent to $100.” I’m a jerk. $100 increase would make me flamed on Facebook. My tenant might leave, they might break something before they leave.

Dion:
But I go in and I share the binder strategy, I show them the front cover, I show them what fair market rents are for housing authority, I share them the other rentals in the area that are as similar as possible, same bedroom count, garage, no garage, whatever the tenant is in, I’m sharing them what they can then go and look up and I say, “You’re paying 1,400 area average right now. If you moved out, I’d have to spend some money, fix the place up. I’d probably get 2,100 because that would be the newest shiniest rental in the area. I don’t want you to leave and to make sure you don’t get too stressed out. I don’t want to raise your rent to 1,900. That’s not what we’re doing today” because that’s the first knee-jerk reaction they’re going to have as well. “You want to take the rent to.” And I say no.

Dion:
So here’s the magic question. Just say, “What do you think would be fair?” I’ve never had a tenant say, “I want my rent to go down,” or “It should stay the same.” I’ve had a couple of tenants say, “Well, let’s go up five or $600.” And I say, “That would be great. I think that’s too much. Why don’t we go up 400?” Because they see how the disparity is between where they’re at and what it’s going to cost them if they move and what I could get if they move.

Dion:
On average, most tenants will ask for about 60%, that if they don’t quite cut the difference, they get a little closer. Once in a while I’ll have a tenant ask for something less and it’s a conversation I could say, “Well, that does seem fair to you. Do you see how far you are away from area average?” And then they’ll come up a little bit more.

Dion:
It’s more common that they ask for too much. So this last tenant said, “Well, why don’t we go from 1,400 to 1,800?” And I said, “How about we go from 1,400 to 1,700? So we’ll do a $300 increase this year. Next year we’ll look at rents again. Maybe there’ll be a small increase.” Or maybe, and this is what a tenant did when I did the binder strategy about three weeks ago, asked for a two-year lease. It was $250 increase for her, and she said, “But I’ll do this if we do a two-year lease.” I’m totally happy with a two-year lease. I’ve got a tenant longer, less tenant turnover and she is protected from the rents going up next year. The idea with this is, if I went into the tenant or just sent an email to the tenant saying, “Hey, your rents going up a hundred bucks,” I’m a jerk.

Dion:
I have a conversation. Include the tenant in the conversation. Ask them what they think is fair, have educated the tenant on what the rents are. I’ve educated myself making the binder right? If I did the binder strategy, the tenants could use this. If you’re in an area where your rent is 2,000 and you find a bunch of rentals just like yours for 1,800, you should make a binder. Talk to your landlord and say, “Hey, here’s what everyone else is paying in this area. How about this year my rent goes down?” If a tenant approached me with that, I would understand the logic.

Dion:
My goal is I buy properties where the rents are significantly lower. I don’t have to kick the tenants out. I don’t have to do rehabs. Like I said, this is my first and last BRRRR because that’s not what I generally like to do. So this has been used by hundreds, I have hundreds of screenshots of people in the BiggerPockets Facebook forums saying, “Another successful use of the binder strategy.” And it was the most recent one was tenant was at 900, they went to 1,300. A $400 increase, which is in this case click like 30% or so, whatever the actual math is on that, with a happy tenant. Happy tenants don’t trash your property and happy tenants don’t leave. So my goal is to share this. That course, like I said, is free. There’s no charge for it.

Ashley:
And does that include the new updates that you have done to it? What are the new things that you’ve discovered recently for the binder strategy?

Dion:
Thank you. Yeah. So the things that I’ve discovered recently is I wasn’t using the HUD before the fair market rents. Here’s the math on the reason why I hadn’t even thought of it before. As fair market rents were going up 5 or 10% every year, section 8 will pay more, a little bit more. And so there’s two things actually that have changed. The first one is fair market rents. Thank you for asking because I have memory issues.

Dion:
But the housing authority, the HUD uses seven years of data, but they don’t consider the last two. So they look at these five years of the last seven and they get an average and they say, “This is what fair market rents are.” Well, in 2020 we had an eviction moratorium, a rent freeze, and could change rents on 2021. Rents spiked in most markets 30 to 40%.

Dion:
So I did the binder strategy there again because of a black swan event. And I experienced the smallest increase was 20%. The largest increase was 28. So 28 to 28% at tenants request. So watch for black swan events on when you’re going to use the binder again. But this year, look, go to the fair market rents. Maybe I’ll put a link. I can’t put a link in your comments. Maybe you guys can put a link in the description below on where the housing authorities get their fair market rents based on county and based on state. And look at the increase for 2024.

Dion:
I have the binder here. And so here’s one of the biggest reasons why I use the fair market rent now in the binder, is because of that increase in 2024, they were paying 1,643 last year. Because they’re now using 2021 data, it’s going to 1,987 for a two bedroom in my area.

Ashley:
So over a $300 increase per month.

Dion:
And basically how this is going to work is in the next six months, that will impact recycling leases through the year of 2024.

Dion:
And so here’s the second thing that’s changed with the binder strategy as well. If you live anywhere near a base or a college, BAH, basic allowance for housing for military in 2023 went up 12%. It’s going up 3% in 2024. So that’s kind of a big increase that you can also reference with your tenants when it comes to the binder strategy. So also paying attention to those other things impacting your local market that could tell the tenants what a more fair rent for both of you is.

Ashley:
Well, Dion, thank you so much for all of the information that you have shared with us today. This is an amazing episode for rookie investors to listen to.

Ashley:
So I want to recap some of the lessons that I learned. And for other rookie investors, here are some takeaways that you guys should be thinking about as we wrap up this episode. So using days on market as a filter for searching on the MLS, using an app to find contractors. Thumbtack was the example given. And then learning one strategy and sticking to it until you can afford to make mistakes. And in Dion’s example, he was financially free at that point. Creating a buy box pitch that has market and physical aspects to it. And then the metric that matters the most to Dion for analyzing a market is having a trusted boots on the ground. And then lastly, using the binder strategy for raising rates.

Ashley:
So if you want to learn more information about Dion, we’ll link his information in the show notes. You can check that out. You can also find mine and Tony’s social media accounts. You can find those there.

Ashley:
Dion, thank you so much for joining us today on the show. And if you are in the Real Estate Rookie Bootcamp, you may get to know Dion there. You can chat with him in the community member group. So Dion, thank you so much. I’m Ashley. He’s Tony. And we’ll see you guys next time.