CNBC’s Diana Olick joins ‘The Exchange’ to discuss this week’s housing data, including new homes, interest rates, homebuilder earnings and forecasts.

One of the biggest talking points of the last couple of years has been the gap between supply and demand in nearly every industry, from real estate to energy.

Inflation hit 8.6% in May, according to the latest CPI report and gas prices spiked to a record average of $5 and over across all U.S. states for the first time as the cost of an oil barrel climbs to $120. Broken supply chains have caused catastrophic supply and demand issues in nearly every sector of the economy, giving us the perfect storm of inflation. 

However, despite the outlook, AirDNA’s May Review indicated that supply, at least in the short-term rental market, might finally be catching up with demand.

Occupancy Falls By 8.6% As 84,000 Listings Are Added

In data generated by both Airbnb and VRBO, 84,000 new short-term rental listings were added to the market, creating a 57,000 net increase after removing closed listings.

In total, there are roughly 1.3 million listings available for rent in the United States, which is up nearly 25% year over year. This marks a record high for total available listings in the U.S.

While demand has been extremely high, especially as some reports suggest that this will be a hectic traveling summer, occupancy fell to 60.2% in May. 

While there doesn’t seem to be any worrisome signs to keep an eye on just yet, falling occupancy rates aren’t exactly an STR investor’s favorite statistic. Yes, listings were added month over month, but if demand is as high as it is, then you wouldn’t expect a sharp near 10% decline in occupancy heading into the busy season. Instead, occupancy is mirroring 2019s numbers more than 2021, for better or worse.

The fact of the matter is that supply outpaced demand in the short-term rental market, despite this summer supposedly being the season of “revenge travel,” as some pundits have labeled it. 

But when we consider the larger factors at play in the economy: high inflation, expensive gas, expensive goods, expensive flights, and a Fed determined to slow down inflation with historic interest rate increases. These are signs that the brakes need to be pumped on the economy, and it’s already starting. Typically, travel slows down with the brakes.

Understanding the American Consumer

In a survey conducted by Credit Karma in May, 51% of Americans reported that their financial situation was worse off than it was at the beginning of the pandemic. However, 30% of Americans plan to spend more money this summer.

Even more concerning, but adding to the surprising rationale, is that almost 33% of Americans reported taking on debt to afford rising gas prices. Yet, 22% said that they were planning to spend an extra $1,000 more than their typical budget. 

Why? Why do Americans, who are feeling tremendous financial pressure from a variety of directions, feel the need to bloat their travel budgets?

It turns out it has to do with making up for lost time (33% of respondents), taking advantage of normal life again (38%), and the fear of missing out (25%). While living life to the fullest is not bad, there are real barriers to travel that can and will prevent someone from going somewhere if it will result in financial instability when they get home.

This is where short-term rental investors or prospective short-term rental investors need to be careful.

A Warning for Short-Term Rental Investors

I’m not ringing the alarm bells and signaling the end of times. I’m just being cautious about a lot of the news and reports coming out.

While short-term rentals are by no means in any jeopardy at the moment, in fact, STRs can be quite “interest-rate proof” during these times. I will say to be careful of the reports on travel and a booming season.

STRs are rapidly expanding and continue to boast growth. Nor has supply met demand nearly enough to justify lowering prices. But there is a looming recession and clear indications that many U.S. consumers are falling behind in their finances. When you put these two together, one of the first budget items to get cut is travel, regardless of how much people want to get out and about. That’s just how economics works.

As an investor, you should be prepared for the worst. In this case, low occupancy due to a recessionary environment. Depending on your market and the type of rental you’re operating, occupancy varies with the seasons. Do what’s best for your business in the long term. Be prepared for economic fallout and changing STR laws (many local governments have turned their attention towards making it harder for STRs to operate in order to create more housing availability).

Don’t allow yourself to be blindsided. Many investors have enjoyed the short-term rental growth sparked by the pandemic. But now, times are changing again, and we must be prepared for what’s to come, good or bad.

Ready to invest in short-term rentals?

From analyzing potential properties to effectively managing your listings, Short-Term Rental, Long-Term Wealth is your one-stop resource for making a profit with short-term rentals!

Finding cities with the highest rental appreciation is crucial if you want to make a profitable investment in the rental market. Even in an expensive housing market, finding suitable buy-and-hold assets is possible if rent prices are rising. There are plenty of rental properties in great places for investors. 

The hot housing market in the U.S. means that it can be a boom time for investors—if you know where to look. According to Reuters, home prices are expected to rise by 10.3% in 2022. However, some analysts say it may slow down by 2024 to around 4%. Others have different predictions, such as a 10% price correction in either direction.

With rising inflation and the cost-of-living crisis, the rental market in the U.S. is set to grow over the next few years. So, where are the top cities with consistent growth in the rental market if you are considering buying an investment property? 

This article lists the best rental markets to invest in 2022.

The Top 10 Best Rental Markets to Invest In

Rental properties are an excellent way to earn regular income from secure investments. To ensure a high return on investment (ROI), finding affordable properties with excellent cash on cash return is crucial. 

A quick glance at a property value map makes it easy to see where the best investment properties in the U.S. are. For example, Florida, Texas, South Carolina, and Ohio all have cities with affordable housing prices, high rental yield, and tremendous job growth.

1. Orlando, Florida

The housing market in Florida always performs consistently well for real estate investments. High demand for single-family homes and global attractions like Walt Disney World and Universal Orlando means investors can make excellent profits off short-term rentals. Additionally, the amusement parks mean there are always plenty of job opportunities.

The average home price in Orlando is $367,000, and the median rent is $1,820. However, it’s possible to buy investment properties cheaper and lock in the same rental rates in some areas.

2. Tampa, Florida

Like the rest of the Sunshine State, Tampa’s housing market remains excellent for investors. Stock availability is the primary reason Tampa performs well, and home prices continue to rise. In 2022, the median sales price for a Tampa-area property was $390,000, and the average rental rate for a one-bedroom apartment was $1,897. 

It’s good to note that analysts predict that active listings in the Tampa housing market will drop, leading to a surge in rental demand.

3. Salt Lake City, Utah

The Salt Lake City housing market has experienced a boom in home prices and rental rates over the previous few years. Limited inventory, increased demand, and low mortgage rates have resulted in tremendous appreciation. According to some reports, the median home value in the city increased by 24.1% in 12 months. Similarly, rental rates have experienced a 21% increase. 

There is no sign that the Salt Lake City housing market will slow down in the coming months, especially as big tech companies like Microsoft and Adobe move in.

4. Austin, Texas

Austin has been one of the hottest real estate markets in the United States due to tons of investment and explosive job growth. According to the Urban Land Institute, Austin has the highest projected population growth over the next five years. You’d have to put Austin at the top of the list for real estate prospects.

The average cost to buy a home in Austin is $639,900, and the average rent is $1,735. However, it’s good to note that rental rates in the city are increasing at over 15% per year. Rental appreciation and year-round warm weather make Austin an ideal city to buy a residential investment property. The only challenge you may find, especially as a newer investor, is being able to find good deals in Austin.

With a housing market exploding as much as it is there, you’re paying top dollar for most properties.

5. Boise, Idaho

In 2021, Boise was one of the hottest housing markets due to a growth in home sales, a strong economy, and monthly rent prices. Factors that make Boise ideal for long-term investment include:

• Strong population growth.
• Steady growth in the jobs market.
• Low fixed-mortgage rates.
• Low unemployment rates.

Even during the COVID-19 pandemic, home prices in the city continued to rise. 

In 2022, the median house price in Boise was $425,000, a rise of nearly 28% compared to 2021. If you rent a house in the city, you can expect an average rental income of $1,574—a rise of over 50% over the past three years. 

6. Raleigh-Durham, North Carolina

Raleigh and Durham consistently appear on the list of best real estate investment markets. Compared to other cities in the U.S., the rental market in Raleigh-Durham is large—around 43%. In addition, the large student populations from Duke, North Carolina State, and the University of North Carolina at Chapel Hill mean there is always a demand for rental apartments. 

According to some figures, Raleigh and Durham’s homes sell for a median price of $405,000, a 22% annual increase. For interested investors, the average rent price in the metro area is $1,522. 

7. Cleveland, Ohio

Cleveland has an excellent market for investors wanting to invest in apartments. Although Cleveland hasn’t experienced the population growth of other cities, many young professionals are looking for rent accommodations in downtown Cleveland. In addition, in 2021, 10 Fortune 500 companies have a headquarters in the city. 

Cleveland is one of the most affordable cities to buy a rental property. Median home prices are as low as $115,000. With average rental rates of $1,238 in Cleveland, investing in rental properties provides an excellent ROI.

Overall, Cleveland is one of the best cities to find a good deal in. 

8. Houston, Texas

Houston is the 4th largest city in the U.S. and is continuing to grow each year. Excellent job prospects and a vast metropolitan area make investing in Houston real estate a sensible choice. However, investors find that despite the large housing stock, properties sell relatively fast. According to data from Redfin, the median days on market in Houston is currently 13 days.

Median home prices are 21% below the national average, which should make finding a good deal a little more possible. Overall, you can expect an average rental income of $1,263 per month.

9. Atlanta, Georgia

Atlanta offers solid investment opportunities for buy-to-rent investors. Over the past few years, the city has experienced a population boom, growing on average by 14%. Also, a rapid job growth rate—10% above the national average—continues to attract more residents to Atlanta. 

The median listing price of an Atlanta home is $412,000, and the average rent for an apartment is $1,812. 

10. Phoenix, Arizona

Phoenix is an excellent place for buying an investment property because of its affordable real estate prices and tremendous economic growth. Average home selling prices have surged by 17.8% since the start of the pandemic, making it one of the hottest housing markets in the U.S. In addition, the city attracts people from more expensive areas like Los Angeles and San Francisco. 

The median listing price of a home in Phoenix, Arizona, is $392,500 and the average price to charge for rent is $1,547. 

How to Analyze Real Estate Markets

Whether you plan to flip a home or buy and hold a property, an accurate real estate market analysis is key to your success. If all that sounds overwhelming, don’t fear. This guide explains exactly how to perform a market analysis, which will help you decide if an individual property matches your investment targets. 

David:
This is the BiggerPockets Podcast, show 626.

Zach:
I mean, there’s not a lot of difference. Whether you have a $200,000 single family in the Midwest, a $2 million deal in a more expensive neighborhood, you still evaluate the numbers the same. So don’t limit yourself looking at the larger deals and getting scared at participating in those, even if it requires bringing in some private money.

David:
What’s going on, everyone. I am David Greene, your host of the BiggerPockets Real Estate Podcast. Here today with my fantastic co-host, Rob Abasolo, where we get into an interview with the CEO of Rent To Retirement, Zach, was it Lemaster, or how did he say it? Zach Lemaster. You know what’s funny is when Brandon did these shows, he always messed up the last name, and now I, as the host, find myself doing the exact same thing. It’s funny, because when I was the cohost, I always knew what it was and as the host, I don’t.
Well, Zach gives us a great interview from several different dynamic perspectives of real estate investing. So Zach owns investment property himself all across the country, some of it small multi-family. We get in to talk about a luxury property that he actually bought in Colorado in a ski area that he’s going to be renting for $5,000 a night at peak season.
He also owns a turnkey company. You may have heard their name, Rent To Retirement. They are familiar in the BiggerPockets space. You probably heard his ads on our show. And we get into how he runs a company, how he hires, why he believes turnkey could be better for some people. Really good stuff. Rob, what was your favorite part of today’s show?

Rob:
I think it was really nice to hear his insight into turnkey properties. He really spoke a lot on stacking your strategy and staying hyper focused, because he’s had a very cool trajectory in his real estate journey. He went from being an optometrist to going into wholesaling, then to residential, then to commercial, and like you said, incredibly successful business owner as well. So just really fun to always dig into those stories a little bit deeper.

David:
Absolutely. Before we bring in Zach, let’s get to today’s quick tip. Today’s show, we talk about the W-2 mindset and how it doesn’t always fit into the world that we work in, which is an entrepreneurial space, what I call the 1099 environment where you don’t have clear paths drawn out for you for an employer to walk in. You’ve got this huge, immersive 3D environment. You can take any path you want and it can be very scary and unsettling when you bring a W-2 mindset into this world.
So ask yourself, in what ways are you operating in a W-2 mindset, ways that you may be and not know it? Is it a unseen expectation that other people should be telling you what to do? The thought that when something goes wrong, somebody else should be having to fix it and not you? The belief that you shouldn’t have to do work after 5:00 PM, or that during the hours of 9:00 to 5:00, you need to be working all the time?
None of these are rules that are hard and fast, set in stone, they are habits that we’ve created because we’ve worked in a W-2 world for so long. And if that’s you, that’s okay. But if you’re trying to get into the world that Rob and I and Zach operate it on a daily basis, that could be holding you back. So find out somebody, sit down and talk about what ways you might be experiencing a W-2 mindset that’s holding you back. Rob, do you have anything you want to add on that topic?

Rob:
No. I think it’s always very helpful to talk to someone who’s actually made the leap and has struggled with just going full on in the self-employed. And I think one, funny enough, I always used to say that I was unemployed and then Tony Robinson, Rookie host was like, “No, man, you’re self-employed, be proud of it.” And I was like, “That’s right. I am.” So find someone, pick their brain and learn. That’s all you can really do.

David:
All right. Well, that sounds great, Rob. I’d say without anymore ado, we should get into our interview with Zach. Zach Lemaster, welcome to the BiggerPockets Podcast.

Zach:
David, Rob, thanks so much for having me. I’m excited to be here.

David:
Yeah, we’re glad to have you too. So let’s get started by asking you, what does your portfolio look like right now with real estate and business?

Zach:
Absolutely. This is an ever evolving scenario, but today what we’re looking at, we mainly have transitioned to owning a lot of commercial retail space. That’s the majority of our personal holding. So we have 30 commercial spaces or doors, I guess that’s spread out across seven doors. We have 29 residential units. Two of those are single family in Canada that we own. My wife’s Canadian. Majority are here in multiple states. We have a couple duplexes, one fourplex in that. We have one very unique, large short term rental and we have 18 build to rents. Those are all single family.

David:
Awesome. And then what about from the business side?

Zach:
Yeah, on the business side, so what we’re doing is our core business Rent To Retirement, we’re a turnkey provider. And so we work in multiple markets throughout the US, mainly in Midwest and Southeast. We probably do about 50 houses a month. These are mainly single family or small multi where they are rehabbed, leased, and managed for our investor clients. And so that’s really our core business.

David:
Sweet. So you’ve got your wealth in real estate. You make your money and business in real estate. You are like us, a real estate nerd. So how did you get started in this whole space?

Zach:
Yeah. I think real quick to your point, David, it’s interesting is we interview a lot of people that are really successful in real estate and other businesses. There’s so many people that make money outside of real estate and other avenues and put it into real estate. And there’s so many people that flip houses, but don’t hold houses. I always thought that was a very interesting thing.
But going back to our story, so I’ll try to keep this somewhat short for you. We have a background in healthcare, I guess. My wife and I are optometrists by education. We met in school in Oregon. I think I initially got interested in real estate investing, as many people did, reading just Robert Kiyosaki, Rich Dad Poor Dad. That really stuck with me just in the mindset. I continued to always educate myself about different aspects of real estate, although, it took many years to actually take our first step into investing.
So we went to school in Oregon. I was on a scholarship with the Air Force after professional school. So I went in as a Air Force captain for five years, practicing optometry there. That’s where we started investing in real estate. My first house was a house hack, duplex. Used a VA loan to purchase that, excellent loan. We kept that house as a rental for many years, continued to move out of that and scale up over time.
One thing I always tell people is every single year, since that first duplex, which is over 10 years at this point, we’ve bought more and more real estate every single year and that has really allowed us to scale our portfolio where we’re at today. That’s just an internal goal we’ve set, just with that scalability mindset.
One other thing we did early on was wholesaling. We started to explore. Wholesaling we thought was an interesting way to just basically use a side hustle to make money in real estate and was, I guess rather low risk, at least initially. As many people have done, I paid a large amount, $25,000 for a course, money I didn’t have at the time just coming out of school, and so we put it on a credit card. I was very nervous about that, couldn’t sleep, worried about losing the money. I brought in a partner that ended up paying 50% of that and helping us get started with wholesaling.
We grew our wholesaling business to the point where we were probably doing 15 properties a month, decided to keep some of those as rentals and scale that over time, and then decided to also manage those, which many mistakes were made there of course. We started to scale over time, investing in different states throughout the US.
And I think that’s really a pivotal moment for us because that opened up our eyes, when we found out that, hey, you can invest out of state following, it’s really the same process as you can locally. And it’s all about your team and systems in place. And that allowed us to really focus on growing our portfolio in areas that had the best returns.
Some of the first two properties we bought were turnkey properties from a turnkey provider. These were South Side, Chicago, D class assets, numbers looked great on paper, high end rehab. And so it looked all good on the initial investment and they just performed terribly.
And actually the provider we bought them from, who also managed the properties. He ended up dying a year later, had a brain aneurysm. We were stuck with these properties. There was just nothing to do, no one to help us. But that was really the catalyst for us to start our turnkey business is, hey, we can go out there and do this on our own, and develop our own systems just through having to learn through those experiences.
So fast forward to where we’re at today, we’re investing in multiple markets throughout the US, scaling our portfolio and doing a lot of transition into the commercial space. We own a lot of commercial retail and that’s an area that we’re focusing on allowing us to scale up quicker, do the tax advantage benefits of cost aggregation studies on those. So that’s where we’re at today.

Rob:
So I want to jump back just a hair here, and I wanted to ask you … Oh, well, I mean, you mentioned you spent $25,000 on a course and you split it with a partner. A lot of people do this. My question to you is when you’re getting started, do you feel like the success that you had, the boost that you had from this course, did it come from the fact that you just spent money on it and you said, I am financially committed to this thing now, so I’m going to do it, or did the success come from the knowledge that you got from it? I’m always curious to hear, because I think it’s 50-50 for a lot of people.

Zach:
Rob, you hit the nail on the head, it was a hundred percent the financial commitment. It’s like, oh crap, I better do something because I just dropped this amount of money that I don’t actually have. Sure, the course had some educational stuff. You had a little bit of coaching. They reviewed some contracts with us. The reality is all that stuff was available online for free or just networking with the right people. But it’s definitely the financial motivation behind it. I don’t think that’s necessary, but definitely it’s going to light a fire under you to make sure that you do something in that scenario. That’s what happened to us.

Rob:
For sure. And so when you were first getting started, just so I understand the timeline, I know you said you were into the optometry industry, was that what really fueled your, I don’t know, the initial capital to get into this? Or how did that work out when you were first getting started? Or were you using the money from wholesaling to really fund the purchase of all your residential properties?

Zach:
Yeah, it was a combination. I mean, we were also in debt. We had six figure student debt, so that was a little bit of a burden, of course. Having the VA loan allowed us to purchase that first property with no money down. That was an excellent loan structure. But actually wholesaling rather quickly became the main method to fund a lot of the rentals that we were holding.
Wholesaling was key for us because it allowed us to evaluate deals, learn how to find and evaluate deals. And that I guess was crucial in allowing us to evaluate how to take on deals that we were going to buy and hold. But that was a great side hustle, I guess, that allowed us to build capital much quicker than we would just in our typical profession.

Rob:
Are you still in that? I guess it’s a little bit more of a front hustle at this point, but are you still in that world or did you move on once you built your backlog of capital and everything like that?

Zach:
You mean in the healthcare setting?

Rob:
No, no, in the wholesaling setting. Do you still execute that side of it at all? Or are you just now fully into the other niches that you discussed earlier?

Zach:
Yeah. Wholesaling is always an exit strategy that’s a potential. If there’s a deal that we’re not going to take on, we’re going to sell it to another rehabber. So, I mean, that is something we’ve definitely done, but it’s not the core business. Really, now, we buy a lot from wholesalers to actually take on, that we’re going to add to our own portfolio. So it’s something that’s not a main focus, but definitely I think it’s just an exit strategy to be aware of.

Rob:
Totally. Yeah. I guess it’s very rare that we have someone in your position here where you do have a really great business and you also have an amazing real estate empire. So just from a philosophical standpoint, I wanted to dig in a little bit on how you handle your investments and personal philosophy on how you’re funneling money from one side of the business to the other. And so what I was curious is do you take all the profits from your real estate side and just keep reinvesting that? Because it sounds like you’re always just growing your portfolio and buying more and more. Or is there a little bit of reward that you actually take from your real estate portfolio? Or do you live solely based off of business income?

Zach:
I mean, we don’t live huge, lavish lifestyles by any means. It doesn’t take much to replace the income that we have today. But I mean, when we started to earn significant income through our business, the tax burden was painfully real, and so a lot of our strategy now is to reinvest that money and that’s following our philosophy of how you should reinvest your proceeds. And so a lot of our active business we take and we put it into, at this point, now these commercial retail centers, run cost segregation studies on those to reduce our taxable income and just try to keep scaling that way. So I guess the answer, Rob, is just reinvesting it, absolutely.

Rob:
Yeah. This is something that I really find a lot of entrepreneurs and real estate investors struggling with, especially when they do have a business like you’re talking about and real estate and they just don’t know like, how do I pay myself? When do I pay myself? When is that appropriate? Because for me in my personal investment career, I’ve never actually spent any of the money that I’ve ever made in real estate. Not really anyway. I mean, not anything significant. I’ve always taken the profits that I’ve had and I’ve just dumped it back into the portfolio to just keep it growing.
And it’s really hard because obviously I feel like you do have to reward yourself every so often. But I’m in a similar scenario where I have another business outside of that and that’s where I’m … My income is mostly coming from that so that I can just protect the real estate nest egg that I’m slowly building over time.

Zach:
Absolutely. I love that.

David:
When it comes to what you really love about real estate, why you left your former profession to dive into this, what can you tell us? Was there a moment where you saw something that you hadn’t seen before? Was there an element of it you fell in love with? Was it a pure business decision? What got you into leaving your old job and going full steam into this one?

Zach:
I think probably the moment that we were just like, hey, we got to go full blown into this. This makes complete sense. It’s a simple fact that real estate, it’s not time associated. With working in the healthcare setting, you’re compensated based for your time in the chair, right? You can only see so many patients, you can only be compensated … Even owning businesses too, you’re wearing multiple hats. And a lot of healthcare professionals are not great business owners.
But just the ability to create income streams, where you are growing your net worth and providing consistent passive income, whether you’re actually working or not, I mean, once we saw the writing on the wall with that, David, that was very much like, hey, we got to go all in. We’ve seen a successful business model. We have a proven track record.
It was an emotional change though, too. There was a lot of people like, hey, you spent eight years of college going to school for this profession, what are you doing? So, I mean, there’s a little bit of that and it was an emotional change, but the best decision we made, absolutely.

David:
So this is probably a good point to ask you. We’ve talked about what we love about real estate, what are some of the challenges that you’ve encountered that you were not expecting when you first got into it or some of the things that stop you from growing at the pace that you wish you could?

Zach:
It’s an ever evolving world. You really need to stay up on legislation, on financing. I mean, financing is a huge thing. That’s been a big obstacle for us as we’ve grown our portfolio over time. One thing we always do is interview multiple different lenders to try to find the best financing options.
We hit a little bit of an obstacle with some of our commercial properties we purchased where they required … They gave us the best loan terms, but then they stuck us with all these loan covenants and requirements. They wanted a 10% liquidity requirement just sitting in the bank, just letting inflation eat that away. And they check that quarterly. So it’s just a little bit of a hindrance to be able to use that money to grow and scale. I mean, there’s all sorts of obstacles in real estate from all different capacities.
One thing that’s allowed us to be successful, I think is just being creative. And I also like that, that’s a challenge obviously with the obstacle, but being creative to find a solution to those problems, to be able to scale your portfolio, whether that’s a tenant, a financing issue, whatever the case is.
We’ve had some bad partnerships in real estate. I mean, that could be applied to business in general. We’ve lost a lot of money in partnerships that we jumped in too quickly and scaled too quickly with that unwound. But that’s just part of the game and staying out and trying to stay the course.

David:
Rob, as you hear this, what are you thinking about when you’re thinking about what your experience has been, and now we hear Zach’s doing this at a pretty big scale? What kind of thoughts are going through your head as far as the challenges that you’ve had as they compare to Zach’s?

Rob:
Well, Zach, obviously, you’ve scaled up and there’s a really big difference between running a 20 unit portfolio and a 100 or 200 or 300 unit portfolio. It’s a very interesting challenge. I think the scaling is something that a lot of people are … They have a lot of trouble because everybody has a very different idea of what scaling looks like and how to successfully execute it.
And so now that I’ve been doing this and scaling and growing my team and making this work for me, I’m starting to understand, and I don’t say this in a negative way, but it feels like I’m leaving the golden days of when I was learning everything and cutting my teeth and I could still make mistakes and I could still fail really big.
And now I’m really having to hold myself accountable and be like, okay play time’s over, we experimented. It was the wild west for the first five years of my career, but now there are a lot of things that I have to take in consideration and there are jobs on the line and I pay people, I pay employees. And so for me, I’m just in the throes of scaling.
But I know that even five years from now, I’m going to say that right now is the golden days, because I feel like this is going to be the most important period of my life is figuring out how to scale my business. And so yeah, I don’t know. I mean, I have a lot of respect for people that can grow a portfolio past 20 units, 20 doors, just because the team that it takes to do that is very difficult to build. It’s very difficult to find people who are on your page, on the same page as you, I guess.

David:
Yeah. So Zach, what’s your thoughts on that element of what you’re trying to build?

Zach:
Yeah, systems. I mean, systems and scalability is the hardest thing. I think it’s rather easy for a lot of people to scale their real estate business and portfolio to a few million with a handful of employees, but to really take it to that next level of growing your portfolio, where you have maybe 20 plus employees or you’re really making this a legitimate business, and really any business I think for that matter, scalability is tough and dealing with real big issues with employees. I mean, that’s a hard thing, I think we all are consistently facing.
And I haven’t figured that out yet, but every step we take on scalability, you try something out, if it doesn’t work, you try to implement a better system to do that and continue to add the right people to your team. That’s what it’s all about. I mean, we’ve heard the term or the saying of hire slowly and fire quickly. Sometimes we’ve done the opposite. But the right people are really what it’s about, creating those systems.

David:
So another challenge that investors face is where they live can have a geographical hindrance on their investing. So if you live in a great market, you don’t really think about this, if there’s opportunities to buy properties, if you’ve got cash flowing properties that are where you are. But if you’re in a market that’s not so great, you’re painfully aware that this whole investing thing sucks.
So you’ve had to learn how to buy properties in different parts of the country, that’s out of state investing. I mean, you’re actually in other countries with some of the stuff. What are some of the challenges that you encountered when it came to long distance investing and how did you overcome those?

Zach:
Yeah, I think the challenges of real estate really, there’s some challenges that don’t matter geographically because you’re going to have the same issues and then there’s some that are obviously. There’s this comfort, this mindset associated with, hey, if a property’s close by, I can solve this problem, which could be true to some extent, but it can also maybe take up too much of your time.
The reality is if you have the right people and teams and systems in place, it should follow the same process regardless of where you’re at. But investing out of state, I mean, finding good contractors, how do you build that team, whether it’s locally or in different areas? Obviously there’s different state legislation you need to be aware of and tax structures.
It’s like, what are the tenant laws and how do we know that we’re abiding by those? Can we vet tenants the same way that we do in this area? How does the eviction process work? There’s a lot of things to look at as far as managing the properties long term.
Internationally, I mean, constantly. And we have family that owns a property in Australia and many other countries as well. I always love to compare the US to those countries as far as a lending and tax structure, because there’s nothing else that comes close. I mean, there’s no such thing as a 30 year fixed loan in Canada or any other country. Australia does negative gearing where they actually buy negatively cash flowing properties to offset taxes. So that’s a constant reminder that the US has so much benefit to invest in. That’s why we have so much international money coming.
But as far as the challenges, I think they’re all really the same, David. I think you face the same challenges regardless of actual location and that’s why it’s vitally important to have the right people set up.

Rob:
Yeah. So I wanted to dive a little bit into it because I know you’re a big turnkey guy, right? And so I wanted to ask, what does that look like? What do you consider a turnkey property? Do you truly consider that when you’re investing in something that is in that category, a hundred percent done, locked down, ready to go, or do you still go into a potential turnkey property with any kind of renovation budget, whether it’s 3 or 4 or $5,000 just to get it up to your standard?

Zach:
Yeah. Turnkeys, I mean, we could go down many different rabbit holes with this, right? I think there’s a lot of people that have different opinions about turnkey versus doing syndications or something like this. I think in general turnkey, and obviously this is our business, but I think turnkey is an excellent option, if you’re working with the right people to allow you to scale, to allow you to have a little bit of hand holding starting out and allow you to diversify into different areas.
But it doesn’t make you immune to the same sort of challenges that you would have with real estate in general. When we look at turnkey, I mean what our definition is, is a house that’s newly built, because we actually participate in a lot of new construction. That’s about 50% of what we do at this point in time is build to rent.
But we want to see a house that has at least 8 to 10 years of life expectancy. So if your HVAC, your water heater, the roof needs replacing, then definitely those are your CapEx items, those are your biggest items to do that, and then of course lease and manage the property.
But we also, even though we sell turnkey products, we also buy turnkey. A lot of the commercial assets we buy, I would consider those even more so turnkey. Those are triple net leases, management pays our taxes, pays our insurance, pays our mortgage for us. Those are triple net leases often corporately guaranteed. So I mean, there’s a lot of different philosophies about what turnkey really is, but I think it’s really just going and having the right team in place to assist you in learning how to do that.
And I also think that turnkey is not the only option out there. We see so many people that are buying turnkey and this is the exact same thing with us too, Rob, is turnkey is a great way to invest in a certain area alongside what else you’re doing. If you’re doing your own flips, if you’re doing your own wholesaling, whatever the case is, it’s a great way to diversify into these different areas.
But as far as rehab budget, we have an expectation. We have different contracting teams in these different areas and they have a specific budget and line item, as far as what the expectation is. On management, we don’t do any internal management at this point, same sort of thing for property managers. We have a specific process we want the managers to follow as far as vetting tenants and how they’re actually managing the properties.

Rob:
David, are you buying any turnkey these days? Because I know obviously you’re the value add guy right here, Sir BRRRR, and I know that obviously that has been a very big component of your career. But obviously, I know that you’re a very busy and a very successful real estate entrepreneur. So as you grow in your business, I know that your time is more limited, does that mean that you’re typically looking for more turnkey stuff at this point? Or are you still in the value add space?

David:
I think that’s a really good question here. My heart is in the value add space, but depending on what I have going on at any given time, I’ve had to be humble enough to admit if I take on this project, one popped into mind right now, a property I have under contract in Savannah, Georgia that is in the historic district. It’s coming with short term rental permits. There’s a lot, I really liked about it, but in the inspection, it’s got some significant issues, like needs to be torn down to the studs at some point, needs a complete new roof.
And I was thinking, if I’m honest with myself, if I buy this thing right now, I am never going to manage that rehab. I’m not going to know what’s going on. I don’t have a person in place that I trust that could manage the rehab. That’s the wrong move for me, even though it’s got a ton of value add potential. I won’t be able to execute on that.
And I’m probably more geared towards when we say turnkey in the short term rental space is what I’m looking at. I need something that is coming furnished, doesn’t need a whole lot of work, out the box is good to go. And I recognize I’m not getting the built in equity I used to have, but I’m not going to be bleeding, trying to find how am I going to get furniture brought into this place, when we are having the supply chain shortages.
And how am I going to get a contractor in one of these really hot markets where it’s very difficult to find them? It’s going to be 90 to 120 days before someone even starts the project. And then I got to sit in the permit line that’s going to be really long because everybody else is doing the same thing.
So it is a balancing act that you’re constantly having to go through. And at times the turnkey option is definitely better for me, but there could be a moment where everything’s running great with the businesses, I’ve got good hires in place, people are doing good, and I’m going to be like, hey, this is the opportunity to go take on a bigger project.

Zach:
David, I think that’s a crucial point, just being realistic with what your capacity is right at this point in time. And if your time is limited based on other things that you’re doing than your business or building your portfolio, I think a lot of people are looking for … They may get distracted with … If you don’t have the time to dedicate to a deal, then you’re not going to perform on it, to the best of your ability. And so it’s just being realistic with what you bring to the table and what your time capacity is and what fits your goals at this point in time.

David:
Yeah. And that’s an important thing to acknowledge in real estate in general, because there is a temptation … I need to come up with a name for it. This is where I missed Brandon Turner because he was so good at coming up with clever names for things.
But it’s this idea that there’s a part of human nature that wants to ask the question of what am I supposed to do, just give me the blueprint and I’ll just go do it, as if life works that way, as if there’s just a path that everybody can walk, and that isn’t the way that this goes. There are many paths, and depending on your skill set, your time, your goals, they’re all going to be different. And part of, I believe at least, part of being good at real estate is knowing yourself well enough to know what type of properties that you should be getting into and where your time is better spent.
I think that’s one of the reasons that I went out and I built businesses and built teams instead of just focusing on buying a whole bunch of smaller properties is I had a skill set where I like leading people and I’m a visionary, whereas somebody else, that’s not what they’re good at. They’re really good at bookkeeping, and so they just need to be running syndications and buying multi-family properties.
And it’s both frustrating when you’re new trying to figure it out, but it’s beautiful when you’re experienced because all of a sudden the tree explodes into branches and you have all of these different ways that you can walk in that makes your job more fun.
And I know Zach, one of the things that you believe in is this concept of strategy stacking. It’s, hey, you’re good at this asset class, what’s the next asset class that you can bring in that will complement what you already got going on. Can you share what that strategy is and how you’ve worked it into your business?

Zach:
Yeah, absolutely. And I think so many people, especially starting out, David, they get the shiny object syndrome, right? And it’s like, oh, I want to do this, I want to do this. And that’s a beautiful thing about real estate, there’s so many different ways that you can make money investing in real estate and be successful, but you can’t start with all of them at once.
And so you need to stay hyper focused on what makes sense for you and then just understand that as you continue your journey, real estate investing is a lifelong journey, that there’s going to be multiple different ways that you can learn about and participate in. That’s exactly how our business and our personal investing has grown over time.
We bought our first duplex and the next year decided to buy two more duplexes and continued to scale over time. We tried wholesaling. That was a lot more work than we initially anticipated, but that allowed us to learn how to evaluate deals. Guess what? We wanted to decide to keep some of those deals, because we really liked the idea of long term holding. Then we started to build this business and be successful with that, investing in different areas.
Started to make more money. What do we do with that money? We got to put it back into real estate. We didn’t want to own 500 single family houses. I think I heard you refer to your portfolios, like herding cats at some point in time and that’s very much the case. I love single family, but only to a certain degree. And so we needed a place to scale quicker and larger deals takes those tax benefits.
There’s all sorts of different strategies to invest in real estate. And that’s the beautiful thing is you can be successful in multiple at once, but you got to stay hyper focused with one strategy at that particular point in time. Learn it, succeed at it, and grow over time.

Rob:
Yeah. So when you’re entering a new strategy, I guess, because it seems like … So looking at your portfolio, you did wholesaling, residential, now a little bit of commercial, you’ve succeeded at it. Is it a matter of, oh, I feel like I’ve succeeded at this, time to try something new? Or do you think of it as more like, I need to master this strategy before I move on? What’s your mindset there?

Zach:
Yeah. I wish I could tell you that I have this clear action plan, Rob, but it’s more or less learning about a new strategy, being intrigued by it, because if you’re interested, if you’re passionate about it and you’re interested in a strategy, then you’re obviously going to migrate towards that more and want to learn about that and take it on.
I’ve always been attracted to the idea of commercial in general, just because it’s longer term leases. Now there’s a lot of risk and volatility with that as well, make no mistake about that aspect of it. Single family and residential I think is just your bread and butter, solid way to build wealth, at least initially. But that’s been something I’ve always been interested in, just to be really passive and have these long term leases in place. So we decided we wanted to invest in commercial, well, probably five to six years before we even bought our first one, but it was just talking with the right people, learning about that.
But the next and when we hear about different strategies, and this applies to the tax side too, when we learned about cost segregations and investing in opportunity zones and things like this, my mind was blowing because I was like, there’s really ways to completely reduce your taxable liability, if you’re in and invest in real estate doing the same things we were already doing. We love real estate for all these reasons. So it’s learning about it and just continuing down that path until the next thing comes up.

David:
So what are some practical examples that you can think of where the average listener can sort of … Let’s say somebody starts on the small multi-family path. I think that’s probably the most common way everyone gets started. Rob, you were part of the Pokemon generation. So was Pikachu the first Pokemon everybody gets?

Rob:
No, you usually choose between Bulbasaur, Charmander, or Squirtle.

David:
Okay. So real estate’s just like, it’s the same thing. You’ve got the small multi-family road, maybe that’s Bulbasaur. Then you’ve got the single family house hacking road, that’s Squirtle. And I don’t remember what the other one you said was, but there’s another route that-

Rob:
Charmander.

David:
Charmander, right? Maybe that’s going to be like just buying single family homes in cash flowing areas, like Kansas City, lower price point areas. So there’s typically those three passives people start on, you’re going to house hack, you get into single family or small multi-family.
Small multi-family is probably the most common way that people get started. You learn the fundamentals of real estate, the best. Zach, you mentioned you have a lot of duplexes, triplexes across the country. That’s not a coincidence.
So somebody gets 7, 8, 9 of these things and they start to experience what I call that herding cats feeling. It’s like in the cartoons where there’s a leak in the submarine and they stick their finger in it. And then another leak pops out and then they stick their finger in, another one they stick their toe. And then they got to let go of one finger to go plug in another one, and the water’s coming out from there.
And for me, it was like every single day, another little leak was popping up and none of them were going to sink the boat, but they were freaking annoying. And it wasn’t fun to be investing in real estate because I’m dealing with these very small problems of a leak going on, a sewage line breaking, an air conditioner going out, a tenant complaining about something.
And I just thought, I could sell 25 of these houses or replace it with one house 25 times as big or as good or an apartment or something and get the same benefits, but not the 25 different holes that I’m having to plug. So for me, that was my moment where I realized, all right, I need to get into a different asset class.
I guess what I’m getting at here is can you share some practical examples of what a listener who’s got seven or eight small multi-family properties that’s ready to get another stack added onto what they’re doing, some possible scenarios that would work for them?

Zach:
Yeah, absolutely. I think that’s really what a lot of people think about when they’re trying to achieve financial independence or significant passive income is how do I scale up into some of these larger type of deals? And there’s multiple things you need to do to position yourself to really be the most attractive investor.
Biggest thing is on the financing side. I think that’s why starting out with single family, small multi-family puts you … Not only does it give you the experience investing in real estate, but it also positions yourself in the best financing position. When a commercial type of lender, whether we’re talking commercial, retail, office, industrial, multi-family, when they’re evaluating you as a borrower, they’re going to look at your track record and your performance.
Most people are not jumping right into real estate, buying a 50 unit apartment complex. I think it’s a great way to scale up over time and also show the bank that, hey, I can be a successful investor buying and holding these properties and running them successfully. And that’s going to dramatically change the type of lending that you can accomplish. Having that experience gives you the confidence as well, to look at larger scale deals and just changing your mindset about that.
But I think financing is the biggest thing to really look at, make sure you’re having a successful portfolio. Other than that, I mean, there’s not a lot of difference whether you have a $200,000 single family in the Midwest, a $2 million deal in a more expensive neighborhood, you still evaluate the numbers the same. So don’t limit yourself looking at the larger deals and getting scared at participating in those, even if it requires bringing in some private money.
Practical examples though, I mean, running a business successfully with those smaller rentals, that’s huge, and also scaling your team over time. As I mentioned on the managerial side, your management … And David, did you have management on … I mean, you weren’t doing your own management, right? You had employed management? It was still this herding cats feeling, even though you had management?

David:
Yeah. Even with the managers that were in place, they still had come to me and they’re like, “What do you want to do with this? What do you want to do with that?” And it was, well, the bid that you got. I remember one of them, there was a sewage line that broke underneath one of the properties and they came back with a bid for $46,000 to fix it. And I remember thinking like … I mean, I wouldn’t let a house go to foreclosure, but that would make more sense than what they were wanting me to spend on this.
So I said, “All right, well, who did you talk to?” They gave me the name of the company. And I said, “Did you send anyone else out?” No. Would you like us to? I was like, “Oh.” I’ve told this … Here’s a side note. Property management companies go through staff so fast that you can tell someone, this is what I want, and they probably hired three people since the last time you spoke to them and that person has no idea what you had said to the first one. So you’re always reiterating these instructions.
And we sent somebody else out and he said, “Oh, I can fix this for $2,700.” They ran a scope through the line and figured out where the problem was, whereas, the initial bid was, they were just going to rip out the entire floor of the home to try to find where the leak was. And I just remember thinking I could have easily just replied yes, fix it, and threw $46,000 at a $2,700 problem, and that was with property managers. So my issue was more, I needed to hire a person that could manage your property managers, and I wasn’t able. That’s been a very difficult thing to find.

Zach:
So practical examples from that, and I agree with you a hundred percent is yes, knowing how to manage your managers. If you need to hire an asset manager at some point in time, it’s worth doing that because they will also allow you to be more successful and more passive.
But I mean, even in that scenario with your property managers, even if they took care of the issue, which clearly in your case, they didn’t because they just gave you the first, most expensive quote and left it at that, but even if they take care of everything and you’re just hearing about it, that’s just so much noise and it distracts your mindset from what’s actually …
And that could be a super successful property that sell and have huge appreciation in the future, but there’s so many of those issues that are distracting you from being able to focus on your business. So focusing on how to manage the manager, how to find and vet good managers, and how do you solve individual problems when they come up? Sometimes it takes getting on the phone and calling those contractors and being creative and finding the right people to actually solve those problems.
It’s the same type of issues, single family house, it’s just maybe a larger scale issue, but solving those problems is probably one of the best skill sets you can have in learning how to follow through with that.

Rob:
I’m curious, David, what was that job title? Was it property manager, property manager?

David:
Kind of.

Rob:
Or was it property manager, property manager?

David:
So that is another issue I run into in business where your staff is always asking for a title or a job description. There’s this like, I need to know what’s my title, what’s my job description. I was like, well, I’m hiring you to do all the stuff that I don’t want to do and there’s a lot of different things. So I don’t know that I could possibly come up with every possible thing that could come up. But can I just trust that if you have to send an email out through MailChimp, you could do that. Do I need to include that in your job description?
I don’t even think I called him an asset manager, because every time I put something out for that, I got people that wanted $200,000 a year. But basically what they had to do is sit in front of the email that all of the property managers would send the statements and their repair requests to and handle the emails that came in with some degree of common sense. And if you ran into a big problem, no, I need to go bring this in front of David and learn from what he did and fix it.
So I learned quickly that giving the title asset manager was not a good idea, because it was like, oh, well, I’m an asset manager for this huge corporation and they pay me 250,000 a year, so I’ll come work for you. And I’m like, no, this is only like three hours a week of work that I actually need done.

Rob:
Yeah. I sent out an email yesterday that was like eight roles. And I put in the email that each role would require like one to two hours a month. It wasn’t anything. It was to help the people in my program. I’m trying to like expand the capabilities of it. But I had a lot of people that reached out and they were like, “Oh, I want X amount and X amount.” I was like, “Oh, no, no, no. As per my email, it’s like two hours a week, maybe. It’s not a lot.” So I think that’s probably pretty common.

Zach:
Well, no one’s going to care as much as you care about your properties, and so how do you make that hire? How do you find someone that can make those executive decisions for your portfolio? It’s tough. But if you find a good property manager, which that’s a tough job, right? I mean, that’s a tough business. It’s really like you have mad owners and you have mad tenants and you’re just in the middle of it, but there are good ones out there that can usually, if you give them good direction, handle the majority of the issues.

David:
Yeah. I would say to the people listening, if they’re trying to figure out how do I get into the next step, I really believe, and Zach, I’m curious if you would support this, and you as well, Rob, a big hindrance to people being successful in our world, which I’m going to call the 1099 world because it’s just, you’re responsible for your own success here, is they bring a W-2 mindset into it.
They’re expecting structure and rigid rules and a 9:00 to 5:00 schedule and all these things that we’ve been conditioned to expect from grade school, into the workplace, to where it’s just like we almost have a moral system set up around you shouldn’t have to work past 5:00, or weekends you should have off. And if you’re asked to do something outside of that, it feels like you’re being taken advantage of, even if you sit in the office and do nothing for seven out of the eight hours you’re getting paid for, right?
So when somebody comes into our world with those expectations, it’s very difficult to adapt to some … You could have a problem at a short term rental. Let’s say that there’s a mouse running around inside there at 9:00 at night. And the tenant isn’t looking at it like, oh, I’m bothering the person, they’re, I want this mouse out of this house and you don’t want a bad review. So the right thing to do is to jump in and fix it.
If people could have that flexibility with understanding that you are getting paid to solve problems and they could pop up at any given time, but there’s benefits to this as well. I personally think we would have more people in our space that were able to get more involved in what the three of us are doing and therefore, they would learn. Zach, do you take a similar opinion to that?

Zach:
Well, that’s the hardest thing, David, is finding staff that has that mindset. I mean, the entrepreneurial mindset, there is no 9:00 to 5:00, there is no on, off. And that’s a hard thing too. I think that we can probably all attest with this. I mean, sometimes you need to turn off your own mind and focus with your family when you’re at home. That’s a hard thing to do and I’ve struggled with that. It’s like my wife constantly reminds me.
But to find someone that has that same sort of mindset, I don’t know how to do it. I mean, it’s the biggest challenge is finding good people. And if you have someone that has that entrepreneurial mindset and to keep them, I don’t know, they would likely want to be some sort of partner to some degree at some point. How are you going to compensate them and keep them happy to stay? That’s a tough thing. What do you think, Rob?

Rob:
Yeah. This is hard, with the W-2 and the 1099 thing is we want all the good things of the W-2 world when we’re 1099, but none of the bad things. And so it’s like, we want our cake and we want to eat it too. And that this is something I deal with a lot. I’m a podcaster, a content creator, a real estate investor, there is no moment in which I’m not thinking about really those three things, other than if I try to turn off at 5:00 or 6:00. And my wife and I have an incredibly flexible life, and so do the kids, but it is not fun when I come home at 6:30 because she’s like, “Well, you can come home at 4:00, right?” And I’m like, “Well yeah, but if I don’t work, we don’t we don’t pay the bills,” kind of thing.
And it’s really similar even with hiring employees and everything, because I’m the entrepreneur, they’re not. And so the meeting of the minds there can be very difficult because I have to really make them understand, especially my assistant, who she’s my property manager and everything, and I have a lot of sympathy for her because she’ll be messaging Airbnb guests at 7:00 in the morning, 7:00 at night, midnight, 2:00, 3:00, but she might have downtime from 1:00 to 6:00 PM because there wasn’t a single peep on it. So it ebbs and flows.
And I think you’re right. I mean, I think you just have to prep people that it’s like, look, it’s cush when it’s cush and it’s not when it’s not. When it rains, it pours. You have to really understand that with the real estate space, because it’s never a 9:00 to 5:00 thing. It’s a 9:00 to 9:00.

Zach:
But that’s what you’re building. That’s what you’re growing over time. You got to put in that work now. You got to be willing to do what no one else will right now to build that type of lifestyle and portfolio long term. So it’s just part of the game.

Rob:
Although, I will say that when I was living in an apartment and stuff broke all the time and I would put in my maintenance requests, they wouldn’t come fix it for two or three weeks. I wish I could do that, where things go wrong and I’m like, yeah, I’ll give it a couple weeks and then I’ll fix it. I am envious of that.

David:
All right. The next segment of our show is the deal deep dive. In this segment of the show, we are going to dive deep into one of our guest’s specific deals to see how it turned out, how they found it, and a bunch of other juicy details. Remember that you can do more deals yourself with the help of BiggerPockets tools and resources. So be sure to check those out. So question number one is what kind of deal is this?

Zach:
So the one we’re going to be talking about today is right up Rob’s alley. This is a luxury short term rental out in the mountains in Keystone, Colorado. We actually found it basically just through broker relationships. It was listed and poorly marketed and then just became a stagnant listing.

Rob:
Okay. And how much was the deal?

Zach:
So it was listed at 4.8 million and that was far over list price, far over market value. Of course, Zillow has it at 5.5. And I think that they were going off of that as their pricing structure. But no one, there had been zero activity on it, no bids, anything. And it was listed by a broker that wasn’t really, I think checked in and was maybe on the ski mountain more than they were answering their phone. So that’s what it was listed at.

David:
Okay. And then how did you end up negotiating it to get it in contract?

Zach:
So we looked at it. And we don’t have a lot of short term. I mean, we have limited short term space. And so this was really a big learning lesson for us is evaluating it, looking at areas for value add. So this is something we looked at as, hey, obviously we need this, the numbers to make sense, be positive cash flow. We evaluate all these deals, even if they don’t make sense on the surface, just to see what kind of opportunity there is there.
So what we did is we basically gave them an offer. We saw that this is a stagnant listing, no activity. And so we just put an offer in. Our initial offer was 3 million, and so that was significantly less than what they … And especially in today’s market. They told us, well, they didn’t even respond, that’s just insulting. And so that’s what we did. We threw it out at 3 million.
We heard back from them later, I think it was three months later, still no activity on it. And it’s a unique house too. It’s like 9,000 square foot, 8 bedroom, 11 bath, just a very large, unique house, I don’t think a lot of people wanted to take on either. And we ended up going under contract at 3.2 ultimately.

Rob:
Sounds very, very familiar to a deal that me and David just did. How did you fund it?

Zach:
So we actually used a second home loan for this property and this will be a good learning lesson, just on the financing side to look at what different financing options are out there. Because of the price point on it, we were told by probably 20 different lenders that no way can you do a second home loan with 90% loan to value, this is jumbo, this is above our underwriting criteria that we would allow for. And so most lenders were quoting, I think it was a 60 to 70% loan to value on it. They also didn’t know how to value the property. They’re like, well, why are you buying it below market value? What’s wrong with it?
So we actually ended up finding a good credit union locally that had done some financing for us commercially in the past. We got a second home loan with 10% down. They actually waived the mortgage insurance because there was no company that would provide mortgage insurance at that price point.
And the interest rates as well, we almost used an ARM product on that, just because interest rates were a little bit more volatile at this point in time. ARM products were still, I think we got a ARM quote at 3.75, but we ended up getting a long term fixed product at 4.25 on it.
That’s the interesting thing too, some of those larger loans, and on the commercial space, you can actually get a lower interest rate than … I mean, those interest rates have less volatility sometimes than your single family.

Rob:
When was this again, just so that I know?

Zach:
Yeah, so we just acquired this earlier this year.

Rob:
Okay. Yeah, because we just closed our 3.25 million house at, I think six and a half, or no, 6.25. So just a little bit over yours.

Zach:
Yeah, and that’s a tough thing. We were getting a lot of quotes at … So this was obviously a couple months ago, interest rates were definitely different than right now, but still, we’re still seeing some quotes on, again, ARM products below that 4% and it’s just, I think finding the right credit unions and banks to explore with.

David:
So what did you end up doing with this deal?

Zach:
So this is a short term rental. There’s not a huge value add as far as renovation, it was built in 2001. So it is dated and we’ll put some renovation into it over time, but really the opportunity with this one is the property manager, which was also the listing broker on it. So you can imagine how that property was run.
It’s large enough where it’s a wedding venue in the summer, as well as corporate space. So it actually has quite a bit of activity in the summer. But they kept the rental at, I think it’s $1,700 a night throughout the entire year. I mean, I think that’s probably rule 101 with short term rentals is having dynamic rents, especially in peak season. Ski season, that property is projected to rent out between 4 to $5,000 a night in peak season, and she was still renting it out at $1,700 a night.
Now, she kept it rented for 340 nights last year, but obviously there’s much more upside potential. So that’s our use of it is obviously going to keep the short term space, probably do a little bit of value add just in the renovations, but also increase that income significantly.

Rob:
Well, I guess we sort of talked about the outcome. Is there any other specific outcome that came out of that, or we’re still figuring out exactly where you’re going to net out, right?

Zach:
Yeah, this is a new deal for us, so we’ll look at it and see how it performs over time. We’re excited about it. If there’s a huge equity position, maybe we’ll do something with that, or look at 1031 in the future, but I don’t know. I mean, we’ll plan to use it of course maybe a couple times a year when it’s not rented out.
But we’re excited to see how the path goes and just on initial projections, I mean, they did … Just in using dynamic rents and not changing anything else about the property, we were able to increase the income by over 30% on it, and that’s huge.
And so that took it from being a property that didn’t cash flow at all, at 90% loan of value, we would’ve been losing quite a bit of money on that to actually being a positive cash flow, which has been hard to do.
We’ve been looking in this area for short term rentals for probably three or four years now and it’s always a scenario where it’s like, okay, we’ll buy it. If we’re not putting 30 to 40% down on it to make it cash flow, it’s not going to cash flow. We just could not find anything. So I think the ability of finding something at this price point, unique house, undervalued rents, we’re just excited to see how it performs over time. Have you guys out to ski in the winter.

Rob:
Oh yeah, count us in.

David:
So what lessons would you say you learned from the deal?

Zach:
I would say, well, we didn’t really talk about too much of the negotiation. I went straight to the point of what we actually ended up acquiring the property at. There was a lot of tactical conversations throughout the process of, oh, we have this person, we have some people, because they knew we were interested in it. We were the only people that viewed the house. Even though we gave them a low ball offer, it was, hey, we’re interested. We have some other people that are interested. They’re putting in these offers and countering us.
And we just stuck to our guns the whole time. We knew the number. This wasn’t an emotional buy. That’s the biggest thing I think in this one, David, this was not an emotional buy that you can easily get yourself into, I think especially in the Airbnb space, if you plan to use it. But we knew where our numbers were to make it make sense and we stuck to that the entire time and that allowed us to actually acquire it at the price that we needed it to.
It was a waiting game, but we just stuck to the numbers as well as exploring different financing options. That’s a huge thing. I encourage everyone to look at least 5 to 10 different lenders for every deal, even if you have a lender. I think we so often fall into this category of, hey, I want to use a lender that I’ve been using, because I feel loyal to them and I feel comfortable and it’s easy, I don’t have to turn in all my docs.
Well, lenders are not created equal and they’re quite dynamic as well. So if you have a good relationship with someone, absolutely explore that, but every deal is different and definitely be willing to look at different loan options out there. We had so many people that tell us that you cannot finance that, a 90% loan to value. We don’t have mortgage insurance on it and a lot of people said that’s just not possible. So those are the biggest takeaways. Also, just looking for value and sometimes that takes some time, especially in today’s market.

Rob:
Awesome. And lastly, who was the hero on your team for this deal?

Zach:
Ooh, is this a new question? I don’t know if I’ve heard this one before.

Rob:
It is. We’re throwing you a little curve ball, Zach. The old switcheroo.

Zach:
Well, my wife’s a hero. I have to give her the shout out because even though we … I got emotionally attached to … I was willing to pay more than we should have, but she was the one that really reigned us back in and said, “No, we’ll find something else. You don’t need this. Don’t stretch this to make it work just because you’ve been looking for three years for something like this. If it makes sense, it does, and if it doesn’t, we’ll find something else. It’s not a big deal.” And so I think really that is the biggest aspect of just keeping us focused, knowing the numbers and going through our criteria. And so definitely wife is a hero on this.

Rob:
They always are.

Zach:
Yeah. Yeah. She made me say that by the way, she knew that we were recording this.

Rob:
She’s standing on the other side of the camera like, you better say it.

Zach:
Yeah.

David:
All right. Well, that brings us up to the last segment of our show, it is the world famous, famous four. In this segment of the show, Rob and I will ask you the same four questions we ask every guest and we’re excited to hear what your answers would be. Question number one, what is your favorite real estate book?

Zach:
And I don’t have anything that hasn’t already been said. There’s been so many good books. A huge Kiyosaki fan, but probably for right now, The Millionaire Real Estate Investor, Gary Keller. That one’s just huge for me, and I try to read that once a year, section two, talking about the different stages of think, buy, own and receive a million. That’s huge, implementing systems. I mean, that’s just an outstanding book and encourage everyone to read it if they haven’t.

Rob:
Great. Great. Question number two, favorite business book.

Zach:
Business for us, I mean, this kind of goes to what we were talking earlier about the entrepreneurial mindset, so the E-Myth absolutely, or E-Myth Revisited on this one with Michael Gerber. This is definitely something that I try to read consistently as well to remind myself to focus on the business, not so much in the business. I think this is a crucial book for anyone running a business in any capacity and definitely something that is just how to build a team, focus on systems. It’s an essential book.

Rob:
Awesome. And when you’re not building a turnkey empire and a commercial empire, what are some of your hobbies?

Zach:
So as I mentioned to you before the show, we have a one year old, that’s our hobby right now. We’re loving that. We used to travel quite a bit. Right after we got married, we did a seven month honeymoon and visited like 30 countries, scuba dive a lot. We love to travel. We’re excited to get back into that once the kiddo’s old enough to do that. And then other than that, just enjoying nature out here in beautiful Colorado.

David:
In your opinion, what sets apart successful investors from those who give up, fail, or never get started?

Zach:
I think I’m going to say I’m going to use three terms because I believe that all of these are essential for people to be successful in real estate. First of all, they need focus. You got to stay focused on what path of investing you want to participate in. If you’re a new investor, don’t get the shiny object syndrome, choose a path and take action and follow it.
But the biggest thing over time, I think is just staying the course. Tenacity and creativity are the two other keywords. Real estate has a lot of obstacles and it’s not easy, right? This takes a lot of time. This takes work. This isn’t a get rich quick type of scenario and it’s challenging and frustrating, but as long as you can stay consistent to invest in this lifelong journey, generational journey, as you teach your children how to be a successful investor as well.
But you got to stay the course and be creative about solving problems. There’s always a solution, multiple solutions often, and put in the due diligence to find out what those are.

Rob:
Very wise words to live by, Zach. Lastly, can you tell us where people can find out more about you?

Zach:
Absolutely, our YouTube page. Although it’s a newer page, we’re trying to put out as much educational information about all things real estate. So our page is just Rent To Retirement, Rent, T-O, Retirement. They can go to our website as well. That’s renttoretirement.com, to learn more about our team, different things that we have going on. If they’re interested to learn about turnkey investing in any of the areas that we operate in. And that’s got links to all our social media accounts as well, so that’s a great place to start.

David:
Rob, how about you?

Rob:
Well, you can find me on YouTube as well on Robuilt. That’s R-O-B-U-I-L-T. And you can also find me on Instagram, @robuilt, and TikTok, @robuilto.

David:
All right. And if you like the interview that you heard today with Zach, go check out BiggerPockets’ YouTube page. We have a ton of stuff. I guess it’s called a channel, not a page. Tons of stuff on there, different interviews. I’m interviewing people. Rob’s got some stuff that’s on there. Lots of different BiggerPockets personalities that if you want to get deeper into this world, there’s plenty of content. And then be sure to check out biggerpockets.com/podcasts, where you can see the other podcasts that we’ve got for you to listen to on specific topics. If you want to follow me specifically, I am davidgreene24 on Instagram and everywhere else.
Zach, this has been fantastic. We really appreciate you being here with us and sharing your information. Is there any last words that you’d like to leave with our audience before we let you go?

Zach:
Go out and take action. It’s a crazy world right now, high inflation, interest rates are crazy, competitive markets. There’s still deals to be had and people are still being very successful in real estate. Don’t let that stop you. Educate yourself and take action. It’s been fun guys. Thank you so much.

David:
Awesome. We’ll let you get out of here. This is David Greene for Rob power-coif Abasolo signing off.

A perfect storm has been brewing in the U.S. economy. Supply constraints coupled with increased demand built up during the pandemic have led to rapid inflation. The Fed is now taking action by raising interest rates significantly, a move that has many worried about the impending recession soon to follow. While a housing market crash is not anticipated, economists are predicting more inventory and a cooling market due to the interest rate hikes. 

In an episode of BiggerPockets’ On the Market Podcast, we spoke with Nick Timiraos, Chief Economics Correspondent for The Wall Street Journal, to get his thoughts on the Fed’s plans now that the Fed has increased its interest rate by 0.75%, the most aggressive increase since the 1990s.

The Difficult Task of the Federal Reserve

Timiraos says to think of the Federal Reserve System as “a bank for banks,” because the Fed controls short-term interest rates. The Fed doesn’t directly set mortgage rates but determines the interest rate banks pay to borrow from their reserves overnight. 

The Fed is charged with the difficult task of monitoring and maintaining the economy’s health in a couple of ways. “They have two goals assigned to them by Congress: to maintain stable prices and to have maximum employment,” explains Timiraos. “And you could think of that as the most employment possible without having inflation. And those are their two goals. And then, in addition to all of that, they’re charged with regulating the banking sector.”

When the Fed reduced interest rates at the onset of the pandemic, they were trying to stimulate the economy. As they increase interest rates like now, they’re doing it to slow down inflation, which inevitably slows down the economy. 

What is Causing Inflation?

The problem started with the $5 trillion stimulus package for pandemic relief. The federal government’s response resulted in much higher inflation than we currently see in other countries. In the short term, it may have appeared that they achieved the intended result of providing more financial stability to families. But national debt must be repaid. The government must, at some point, tax more than it spends. Federal Reserve economists estimate that pandemic spending contributed about three percentage points to the inflation we are experiencing now. 

In the long run, any government attempt to stimulate the economy by creating money without also increasing production leads to harmful inflation. But the impact of the pandemic was so swift and far-reaching that it would have led to deflation if the government hadn’t stepped in. And meanwhile, food and housing insecurity was rising. About one in five children may have experienced food insecurity during 2020. So despite knowing that distributing more money into the economy would debase the currency, the federal government was most concerned with the greater implications of starving children and broad housing insecurity.

Then, when lockdowns were lifted, there was a pent-up demand for goods and services, along with extra money for consumers to spend. “You have a lot of demand. You have more people working, making more money, spending money on things,” says Tirimaos. 

But, at the same time, global supply chain issues have prevented producers from keeping up with demand. That’s pushed the inflation rate to 8.6%, according to May’s CPI report, and now the Fed will do whatever it can to keep that rate from rising. 

“The Fed can’t do a lot in the near term about the supply side of the economy,” explains Tirimaos. “They can’t create more oil, they can’t create more houses, their tools just don’t do that. So when they talk about bringing supply and demand into balance, they [need] to get lucky, they need to get supply chains moving again.” 

Or, they need to do something to curb demand so that a balance between supply and demand can be achieved. 

That’s the goal of raising the benchmark interest rate. When the Fed’s rate rises, its effect spreads into the mortgage market, the auto market, and increases the cost of borrowing business loans. Overall, people become less likely to borrow and purchase homes or vehicles. “And also businesses hire fewer workers. And so people have less overall income. And so they don’t spend as much money,” says Timiraos. 

Why the Fed is Taking Action Now

If inflation has been a problem since last year, why is the Fed suddenly getting aggressive with interest rate hikes? 

During the pandemic, specific supply-constrained industries, such as new and used cars, saw the highest price increases. “And so for a while, of course, the Fed infamously said, and a lot of private sector economists agreed that this was transitory,” says Timiraos. “The idea behind that was that inflation was really driven by the pandemic. And assuming the pandemic was over with quickly, inflation would be too.” 

But more fuel has been added to the fire since then. The war in Ukraine caused inflation in the global energy market and supply chains never recovered as well as they needed to. The problem no longer seems transient, which has the Fed concerned. 

“They’re worried that one year of high inflation is okay, but if we have a second year of that, people are going to begin to build expectations of higher prices into their wage setting and price setting behaviors. And that psychology is something the Fed really strongly wants to avoid.”

The Fed’s goal now is to achieve a neutral interest rate, says Tirimaos. “A neutral interest rate is the level the Fed thinks isn’t providing any stimulus to the economy. If you think of the economy as a car and the Fed is the driver, they’re taking their foot off the gas. They’re not pushing on the brake, but they’re trying to find that place where they’re no longer pushing on the gas, not necessarily stepping on the brake.”

The Fed is “not trying to induce a recession,” says Federal Reserve Chair Jerome Powell. But it will do whatever it takes to slow down the overheating economy, which could very well implicate a recession.

What About Asset Prices?

Real estate appreciation isn’t factored into the Fed’s assessment of inflation, but the Fed is charged with overseeing the financial system’s stability. So in that way, Tirimaos says, they’re concerned about rapidly rising asset prices. “Now, there’s been a big debate over the last 10 years which is: should the Fed raise interest rates even if inflation’s contained and even if they’re meeting their mandate unemployment, but to prick a bubble? Because an asset bubble could jeopardize their ability to achieve both of their other goals. And the argument has generally been, no, we shouldn’t use interest rates. We shouldn’t raise interest rates to prick asset bubbles.”

But in 2022, inflation is so high that the Fed needs to raise interest rates regardless. Curbing the asset price boom simultaneously is a “happy coincidence” rather than a direct goal. 

Still, a cooling housing market aligns with the Fed’s goals. “They want [economic] activity to cool, they want to remove some of that excess demand that you have right now. And so if you’re in situations where homes that used to be getting 10 or 30 offers are now getting three or four, for the Fed, that’s probably a healthy development.”

What This Means for Consumers and Investors

The Fed is attempting a “soft landing” that won’t result in a recession, but the chances of this are slim, with history as a guide. Dave Meyer, VP of Analytics at BiggerPockets, writes, “As the Fed raises rates, many parts of the economy will be negatively impacted.” These include a falling stock market and a loosening labor market. “With all these factors converging, I believe a recession will likely come in the next couple of months.” 

The best thing Americans can do in preparation for a recession is to save aggressively and invest for the long term. Experts recommend adjusting your budget to bolster your emergency fund in anticipation of layoffs. Once your emergency fund is adequately funded, invest in the stock market while prices are low—or invest in real estate, which is typically more stable. 

Investors relying on mortgages to make deals will have their margins constrained by rising mortgage rates, so they’ll need to factor that into investment decisions. Make sure the deal is profitable with the current rate, but remember that refinancing may help increase your profit margins later on if we see interest rates fall again.

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If you’re anything like me, you grew up believing rental properties were inherently profitable. Within that belief, you likely didn’t know how they made money, just that they did.

Well, in this article, you can learn precisely how rental properties make money. Overall, they make money in five different ways.

Cash Flow

Cash flow is what’s left over from the rental income after all expenses are paid. Cash flow may also be referred to as “net income” (as compared to “gross income” which is the income before expenses are taken out). 

Cash flow can be positive or negative. Positive cash flow means there’s excess income after the expenses are paid, and that income gets to go right into your pocket as profit. Negative cash flow means the costs have exceeded the income, and you now have to pay out of pocket to cover those.

You can calculate your cash flow on a monthly or yearly basis. Decide which you want to look at, total up your expenses for that period, and subtract that expense total from the rental income total. What’s left is your cash flow. 

A nice thing about positive cash flow is that it can act as a tremendous buffer against shifting real estate market dynamics. For example, suppose the real estate market crashes and the value of your property decreases. As long as you’re still collecting cash flow from the property, you can wait until the market corrects and the value of your property goes back to where it was. 

In that situation, you wouldn’t even know we were experiencing a recession since you’d still make the same amount of money from the property each month. 

Compare this to a negative cash flow situation and the market tanks. You may get stuck in a position that forces you to offload the property at a loss because you can’t afford to maintain it through the recession.

While not the highest profit center of all, cash flow can serve as a critical foundation for successful rental property investing.

Appreciation

Probably the most popular form of profit when people think of rental properties, appreciation has been a consistent performer over time and one of the biggest players in what makes people so wealthy from real estate.

Appreciation is when the value of a property increases due to various factors. 

The three main causes of appreciation are:

1. Improving a property
2. The location

Improving a property

Rehabbing a property will create appreciation because that rehab has now increased the property’s value. In most cases, the increase in the value of the property will be more than what the investor had to pay to complete the rehab. 

For example, let’s say you buy a $100,000 property and put $30,000 into a rehab. With all of the improvements, the property is worth $150,000. You only put in $130,000 ($100,000 plus the $30,000 rehab), but now the property is worth $150,000. There’s an extra $20,000 in free money thanks to the appreciation generated by the rehab. 

This kind of appreciation is called forced appreciation.

Location

The location you bought the property in will also be a primary driver of appreciation. If the demand for housing in the area—the broader market or the specific neighborhood—rises, so will property values. Demand may rise due to general market growth, or it may be because you bought in an area that got intentionally gentrified, which could force quicker and more dramatic appreciation. 

In addition to improvements and demand increasing the value of a property, an investor may likely also experience appreciation in the market value of rental income. Rents inevitably increase over time due to several factors, but what causes appreciation to the value of a property will usually trigger appreciation in rental values as well. When the rents increase, your cash flow will increase proportionately.

While appreciation is one of the highest profit centers of a rental property, it’s also speculative. It’s never a guarantee that the reason you believe a property will appreciate will pan out as you assume it will. You should always consider contingency plans on how you expect a property to profit should the appreciation strategy fold. 

The other consideration to remember is that rental properties are long-term investments, and often true appreciation potential is experienced over the long-term rather than the short-term.

Building Equity Through Mortgage Payoff

One of the coolest things about owning a rental property is that your tenants’ rent check is most likely covering your mortgage payment! Hopefully, it’s covering more than that, but if it’s at least covering your mortgage payment, it means that you aren’t the one paying down your mortgage—they are.

Here’s an example: You buy a $100,000 rental property with 20% down. That means you paid $20,000 upfront and the remaining $80,000 is the balance on the loan, in addition to interest payments. 

Over 30 years, the mortgage balance is paid down every month through the income you receive from your tenants. At the end of those 30 years, $80,000 has been paid off and you now own the property free and clear. The $80,000 isn’t immediately liquid because it’s in the form of equity, but it’s your money, and you can either keep it as equity or pull it out of the property and use it however you wish. 

The bottom line is that you turned $20,000 into $80,000, plus any appreciation that’s most likely occurred over 30 years.

Tax Benefits

*Disclaimer: I’m not a tax expert. You should consult your CPA for all tax matters involving your real estate investments.

Rental properties are among the most advantageous investments within the IRS tax code. Essentially, rental property income can wind up being tax-free income when filed correctly.

While that may not sound like profit in your pocket right away, think about how much you end up paying in taxes on your normal income. If you’re in the 33% tax bracket, you could pay $33,000 in taxes on a $100,000 income. 

What if you were able to keep that $33,000? Isn’t that a hefty amount of money? The tax benefits aren’t exactly black and white, but they should at least give you a perspective on how substantial the profits from these benefits can be. 

The primary way rental properties generate tax breaks is through write-offs. When you write off an expense, it decreases your taxable income, decreasing how much you owe in taxes. If you have sufficient write-offs to decrease your taxable income enough, you could bring your tax liability way down or even zero it out.

The write-offs for rental properties come from two primary sources:

1. Expenses. Most of your expenses on a rental property can be written off. For example, property taxes, insurance, management fees, repairs, maintenance, mortgage interest, etc. How these are written off is specified and you should consult your CPA for help on those.
2. Depreciation. The IRS assumes that a rental property will degrade over time, so they allow you to write off perceived wear and tear on your property. The IRS provides a specific equation to be used for depreciation. 

With the expense and depreciation write-offs reducing your taxable income, you stand to receive a notable amount of money taken off your tax liability each year, which in turn equates to profit in your pocket.

Hedging Against Inflation

Inflation, possibly one of the most hated words in the English language, tends to strain our lives in myriad ways. But is inflation always bad? When it comes to rental properties, inflation is actually a good thing. The more inflation, the more profitable your rental property may be.

Inflation causes the dollar to become worth less than it used to be. Assume you get a fixed-rate mortgage today on your $100,000 rental property. While $100,000 is worth $100,000 today, what if $100,000 is only worth the equivalent of today’s $70,000 at some point in the future when the dollar’s value goes down? That’s how inflation works.

As mentioned earlier, rent increases are caused by a lot of different factors, and one of those additional factors is inflation. When a tenant’s rent payment increases due to inflation, your fixed-rate mortgage payment doesn’t change, resulting in even more cash flow.

As with appreciation, inflation helps with both the overall equity in your property and the tangible cash flow hitting your pocket.

Applying the Five Profit Centers

It’s exciting to know how rental properties can make money, especially since the profit comes from five different directions. Having owned my rental properties for 10-12 years, I can personally vouch for all five profit centers. I vaguely understood them when I started investing, but it wasn’t until I owned my properties for a substantial amount of time that I could see how lucrative each profit center is.

One of the best things you can do as an investor is to understand each of these profit centers and apply the knowledge to your analysis when looking at prospective rental properties. 

There are two keys that you should know when beginning to analyze the profit potential of a rental property:

1. Contrary to what a lot of us were taught to believe about rental properties being inherently profitable, not all rental properties are. This is important to know so that you are prompted to analyze the profit potential of a property stringently. But also, if you run across a rental property and your analysis of it doesn’t suggest a profit, it may not be that you’re doing your analysis wrong; it may just be a property that doesn’t stand to be profitable.
2. Every rental property you look at may create a different balance between the profit centers. For example, an extremely high cash flow property may not come with much, if any, appreciation potential. Or the nicest house with the highest appreciation potential may not offer much in the way of cash flow. Or maybe cash flow is low, as can happen with higher interest rates, but you’re investing in a time of extremely high inflation, so suddenly, the inflation profit center takes the lead.

No two rental properties will make money in the same way at the same rate. In most cases, there is a risk versus reward trade-off. Mismanagement of a rental property can cause even the best property to not see a profit. But when you take the time to understand these dynamics and how rental properties make money and apply that to your buying decisions, you stand a much higher chance of experiencing noticeable profit from the properties you invest in.

If you’ve owned rental properties for a significant amount of time, what has your experience been in seeing returns from these five profit centers?

Find financial freedom through rentals

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Dave:
Welcome to On the Market, everyone. Today, we have certified deal junkie, James Dainard, joining us to talk about a super important topic that is on most people’s mind right now, which is what does a good deal even look like in 2022. But before we jump into that super interesting topic, James and I are going to be talking about some confusing and often contradictory data coming from the housing market right now.
Hey everyone, welcome to On the Market. I’m Dave Meyer, real estate investor and VP of Data and Analytics at BiggerPockets. Joining me today from Seattle, we have James Dainard. James, how are you?

James:
I’m doing well, man. Just try to keep up with this market right now.

Dave:
Yeah, it is a little confusing, and we are definitely going to get into that today. But before we do, I’m sure everyone who’s been listening to this podcast for the last couple weeks knows who you are. But if we have any newcomers with us today, could you just give us a quick explanation of your experience as a real estate investor?

James:
Yeah, of course. Like you said, I’m a certified deal junkie. I’ve been an active investor now for, and I can’t even believe it, like almost 20 years. I started when I was 23 years old as a wholesaler knocking doors in Seattle, Washington. We only buy in the Pacific Northwest, King, Snohomish, Pierce County. And we’ve gone from wholesaling. We used to wholesale 5 to 10 deals a month, and now we’re buying about 5 to 10 deals a month, and we’re a very active flipping company developer up in Washington. We usually flip about a hundred homes a year, build about 30 to 40, and then we lend money up there. And then we’re very active buying whole departments indicators where we’re doing a lot of value-add construction on the multifamily side.

Dave:
Yeah, James is a super experienced investor, and you should see his face when we talk about deal analysis. He just lights up. He gets so excited about it. So we are lucky to have him on the show today to talk about how to underwrite deals right now in 2022.
But before, James, we’re going to jump into some of our headlines. And as you said, we have some really confusing headlines. So I want to play a new game. I made it up. It’s just called Market Forces. I’m going to read you two market forces that seem to be opposites, but are existing at the same time right now, and I’d love to hear your opinion on which one is more important or which one’s going to win out. There seems to be these tug of war between opposing market forces, and I’d love to hear your opinion.

James:
I would love to hear what these questions are. That is the truth. Everything’s being contradictory right now. One thing says this, the other says this, and it makes it very confusing.

Dave:
It absolutely does. Okay, so let’s start first with demand versus supply. This is classic economic question. For anyone who hasn’t been paying attention to this, demand has been dropping off. You see that mostly reflected in… The data I like to look at is the Mortgage Banker Association Survey. I’m not sure if you follow this, James, but they actually just came out yesterday and said that mortgage demand reached a… I think it was like a 22 month or since 2019, it hasn’t been this low. So we’re seeing demand really fall off. But at the same time, so demand is low, we are also seeing supply remain pretty constrained. And as of this recording in early June, we still only have housing market data, really reliable data from back in April. But at that point, active listings were also down 10%. So we’re seeing lower demand and lower supply. So it’s unclear, in that kind of condition, where prices are going to go. So which one do you see winning out, lower demand or lower supply, in the battle for housing prices right now?

James:
I mean, demand is always key in anything that is moving in the market, whether it’s housing or… If demand is at an all time high or low, the transactions just don’t move in general. I believe demand is more important than inventory, because inventory can change with seasons, it can change with what people are actually doing right now. I think there’s a lot of things as we go into a different type of economy, and we possibly could be going into a recession, those are things that are still forecast down the road. So I do believe that the inventory is going to adjust up as demand starts to fall.
Cost of money, it gives people that reason to really slow down and think about things now, where if it’s really cheap, you always make that impulse buy or whatever it is, right? If something really pops up on Amazon, I’m going to be like, “Oh,” and it’s that impulse click buy. I do it a lot quicker. But if it costs more and I have to think about it, it just causes everything to slow down.

Dave:
Yeah, I think that’s a really good point that especially with inventory, demand, it’s not just like… Inventory is not a reflection purely of supply, like long-term supply. Inventory is a reflection of both new listings, how many new listings are coming on the market, and how many people want to actually buy that. So as demand declines, and I did misspeak, it’s a 22 year low for mortgage demand, not a 22 month low, that the mortgage bankers just announced. Yeah, it’s pretty big difference. That could mean inventory is on the rise.
That brings me to my second question, which is a little bit confusing to me. So Redfin came out with some data that on June 2nd, so it’s pretty recent here, that shows that as of June 2nd, the number of listings that had price dropped had doubled since February. So back in February, it was about 2.5% of listings were seeing price drops. Now it’s at 5%. Which historically, let’s be honest, is still not super high, but doubling is pretty significant.
But at the same time, 57% of properties are still selling for above list price, and the average list to price ratio is still 103%. So we’re still seeing most things go over asking, but at the same time, we’re seeing price drops. Super confusing market dynamics. What do you make of this? And which one do you think is going to be more important over the rest of 2022, let’s say?

James:
Well, the first thing, I think the data’s just a little bit behind right now. And part of that data that’s been recorded actually was on a lower interest rate. Because the rates were about four and a half to four and three-quarters when that data started recording. And when we started seeing the transition with a lot of our fix and flip… Because we get a very good basis of what’s going on in our market. We’re in affordable markets, we’re in expensive markets. And as we saw the transition, we were still getting a lot of movement. Because I think the buyers in that market were so beat up and they were so trained mentally that if anything popped up on market, it was going over list.
Because we’d have brokers… We would list a property and we’d have a review period. And we would miss our review period in that transition, and we would still have brokers call us saying, “How many offers do you have?” And we are like two or three days out past a review period, so that means we have no offers. And the next phone call will be from a broker, going, “How many offers do you have on the table? Do you have a pre-inspection? Do we need to waive? Do you take escalators?” And we’re going, “Wait, but we missed our review period.” So I think it’s just buyers in the market were getting trained, so it started recording more.
What I’ve seen recently in the last week or so is I have seen a lot of price drops. I’ve been seeing that, and so I do think that that 103% data point is going to change next month, when it all records out.
And the pending sales, they are selling. The properties are selling. They’re selling quickly, but we’ve seen a couple things. Either people are pricing about 5% to 10% lower off peak right out the gate, because they kind of have FOMO right now. They just want to make sure their house gets sold. Or I’m seeing these 7 to 10 day price drops, which, in my opinion, as a real estate broker, doesn’t make any sense. If you price your home and you run your analytics and you come up with your comparable value, you need to feel good about that number. And if they’re not selling in the first 7 to 10 days, brokers and sellers are getting a little bit of panic and they’re cutting price pretty aggressively because they’re just not used to these market conditions. They’re used to seeing 40, 50 people come through their house on a weekend, and now we have four to five, and they’re getting concerned. It’s causing a little bit of market irrationality and it’s causing the whole market to kind of cut, because everyone’s starting to chase each other, which is going to affect these data points.
But I do think price drops are going to be, as people try to figure out where the magic sweet spot for affordability in the market is, we’re going to see it a little bit at irrational, which is going to throw all these data points off. That’s why it’s really important for any listener is look at the data and hear the information out of it, but take a step back and always look at the big picture. Like if I hear inventory doubles, I’m not that concerned, because that means we went from two weeks to four weeks, and four weeks is still four months lower than the normal amount of inventory in the market. So don’t get caught up on these crazy little headlines, because the headlines can freak you out, but then you really have to take a step back and go, “Okay, what does that really mean?”

Dave:
Well, that’s why we brought you here for, Between the Headlines segment every week, James. Thank you. That’s super helpful.
One question before we move on is can you help ground us? You’re saying that a 7 to 10 days price drop is crazy. Back in 2014, 2015, whenever there was a more balanced market, what would you expect, as a broker, for the amount of time for a home to sell? Or how long would you wait before dropping price?

James:
We always factored in at least 45 to 60 days on the sell back in 2000… I would say from 2009 to ’12, we would actually factor in 90 days. And then from ’12 to ’16, we were really factoring about 30. We got our craft pretty dialed in at that time to where we were coming out as the nicest product in the market, so we would factor about 30 to 45 days, maybe 60 in a slower market. But that’s a normal amount of time. I think over the history of real estate, the average market time is like four and a half to five months. That’s normal, right? And it really should be, right? Buying a home is a huge decision for somebody. This could be a house that they’d live in for the rest of their life or raise their kids.
People started rushing so much because they had more FOMO rather than looking at what their long-term goals were. They had the FOMO of, “I’m going to miss out on the cheapest money that’s ever been out there in the world. I’m going to never have a house because there’s no inventory for sale.” And then they came off the pandemic and they were going stir crazy, so they wanted their own place to have to be more settled. So this mindset has really caused the market and the rules of the market to change, and you have to be patient.
So when we go out on a price, no matter what, unless I get zero showings or one showings, I’m not making a price adjustment. I have to run a very in-depth CMA on the property, go through the comparables, feel good about my price, mark it at that price, and then judge inventory. But I’m not going to cut price for at least three to four weeks, unless I dramatically overprice out the gate.

Dave:
Okay, thank you. That’s super helpful because I think when you see people… This increase in price drops, it’s not necessarily because they’ve been sitting on the market. Days on market is still 15 days right now. It’s still incredibly low. Some of the lowest that we’ve ever seen. So as James said, you see these headlines, it’s tempting to get sucked into this and be fearful, but do your due diligence, understand what the data is actually saying before you make any decisions about this.
Before we go into our due diligence part of the show, I do want to just ask you, it seems, in the last couple shows and today, you’re… Would it be fair to say that you are a little bit bearish in the short term about the housing market right now?

James:
I think everyone should be bearish on all investments, to be perfectly honest. I think the amount of money that got pumped into our market and the amount of assets they got inflated is just concerning. And it didn’t inflate just gradually. It hockey sticked up everywhere. So anytime there’s a hockey stick, I’m a little bit more bearish.
But at the same time, when I think the market is bearish and people are getting a little bit of caution and there’s some… There’s definitely investor fatigue out there right now. People have had this wild 24 months, and people are starting to pull back. That is also when I’m trying to buy the most, because there’s always this over-dip in correction, where everyone’s trying to figure out what’s going on, everyone wants to sit on the sideline. Well, if everyone’s on the sideline, that allows me to run the run on the field pretty freely. And yes, we’re being bearish in our underwriting, but we are still being aggressive on our purchasing. I think we did… I mean, we’ve closed like $5 million or $6 million in real estate in the last 45 days. So we’re still actively buying, we’re just buying under a new mindset.

Dave:
Well, that is a perfect segue to our due diligence topic for today, which is what is a good deal in 2022. Very excited to hear what you have to say about this, James. We’ll be right back after this.
All right, James, let’s get into your favorite topic. Let’s talk about deal analysis and what deals you’re doing right now. I’d like to break this down, because I think for different strategies, deals obviously look differently. What’s a good buy and hold versus what’s a good flip or a good wholesale or maybe even a syndication or passive deal. So let’s just start with buy and hold investing. Are you doing buy and hold investments right now? And what are some of the key metrics that you’re looking at or rates of return that you’re targeting in your deals, given this confusing market we were just talking about?

James:
Yeah, I’m definitely still looking at purchasing property and keeping them in the long… I mean, we just closed a nine unit in Renton, Washington. I just closed a triplex in Issaquah, Washington. And for me, I’m aggressively looking for rentals right now, because I do believe that rent is going to still go up. I know it had a huge jump the last 12 to 24 months. But with the cost of housing, I think rents are naturally going to get pulled up. And for me, I always like to know where is the upside, where’s the opportunity. So buying real estate right now, even with rates high, is a great idea for people. It’s a heads against inflation. It gives you a place to park your money, so you’re not losing money on your dollar right now.
And when we’re looking at these rental properties though, because we have that big inflation factor, we are looking for… For me personally, I won’t buy any deal unless the cash flow is higher than the inflation rate by two points. So if I think the inflation… For me, I don’t believe the national reported inflation rate. I think it’s right now around 8%, based on what I’m paying for things. So I’m targeting everything at least at 10% to 11% on my cash-on-cash return.
If I don’t have that, I don’t want to be cash flowing less than what the dollar could be going down at, because I just don’t think… You’re not getting ahead of the market. And for me, as a… I’ve been doing this now almost 20 years, so I feel like I’m getting old. But I still have a lot of runway, I think, and I want to stay ahead of the market and keep growing rapidly, because I’m not at that kind of, I would say, stabilization phase as an investor where I can passively just kind of invest and live off that. I’m still trying to grow. So for me, it’s really important to be ahead of the inflation rate.
I’m also looking at what kind of finance am I having. Commercial banks right now are being pretty aggressive, and so we are still able to get very good lending out of our local banks and they’re cheaper rates. So right now, as we’re looking at properties too, we’re going towards those 5 to 10 unit buildings, because the bigger players aren’t really aggressively looking at those, and the small mom-and-pops investors, they’re kind of getting locked up a little bit and they’re afraid because… They’re so used to this mindset of, “Hey, this property’s for sale for this price, and it’s going to sell because the market’s so hot, so I’m just going to sit off the sidelines.” Whereas what we’re doing is we’re looking at what’s not selling and we’re going to aggressively go after that with the right metrics in play. And because there’s no demand, we’re able to actually get these properties under contract right now at numbers that we haven’t been able to do for the last 24 months.
So we’re making sure that we are above the inflation rate and we’re going where our banks are being loose with the money that gives us the best financial performance. Those assets that we can get the cheapest money on with the lowest demand is going to be the best possible deal.

Dave:
There’s so much to unpack there. Let’s start with the inflation rate. How did you come up with the 2% above the rate of inflation as your metric? Is that because you expect inflation to go up another 2%? Or is that just sort of like a bare minimum you’re looking for because you need some real cash-on-cash return?

James:
I’m a cash-on-cash return junkie. That is my main metric. And a lot of people don’t use it as heavy as I do, but I mean, for me, as a simple investor, is I have this much capital, how much is it going to make me every year? I just like keeping things simple on that route. That’s done really well for me over the last 15 to 16 years. But yes, I want to be ahead of the inflation. I want to be making that cash-on-cash return.
Also, I think at some point, we could see a hockey stick in inflation too, with all the supply chain issues. I mean, we could have food shortages. There’s some other impacts that we’re reading in the market that could make it jump again. Again, I don’t want to underestimate the jump. So if I core believe that, then I need to plan accordingly for that and really put it inside my metrics. So it gives me a little bit of padding on the 2% in addition to… I just want to make sure I’m beating inflation. I don’t want inflation pushing me around. If I can outsmart inflation and out-return it, then I’m okay.

Dave:
Yeah. But I think that there’s probably… I’m thinking one, if you’re finding 10% cash-on-cash return deals, give me one, and I’m curious how you’re finding those. But two, is that a good return? Would that have been a good return for you in a less inflationary environment, or is this an adaptation that you’ve made based on what you’re seeing in the market?

James:
I constantly… Every quarter that I was… Even every six months or so, I really look at what I’m doing with my holdings. The most important thing any investor can do, including myself, because it helps keep me focused, is narrowing my buy box. What is my expected returns in certain areas? So in areas that were more B2C rated, I was always going for 10 to 12, because I think it comes with more of a hassle. It requires more management, there’s more expenses. So I always want that extra padding in there.
In better neighborhoods… For example, I purchased this triplex in Issaquah, Washington, or I have one in Queen Anne, Washington I recently purchased as well. They’re really good neighborhoods. So I dropped my cash-on-cash return down to like 6%, because I had such a high appreciation factor in there, and I was buying in the neighborhoods that were moving the most. These are also neighborhoods that aren’t going to have as much movement on the drop either. This is where people want to live. But right now, if I’m buying that same deal that I bought five months ago at a 6% return, I’m going to be… In my opinion, I’m losing money, because the inflation’s beating it out at that point.
So I’ve adjusted even in the good neighborhoods. Now I’m at more 10% on the good neighborhoods, and in my B2C rated neighborhoods, I’m actually dealing with more 15%. The reason that’s even higher for me is because in those neighborhoods, I’ve had more wear and tear on my properties in general, and construction costs are also a lot higher. So my maintenance repair costs have jumped up quite a bit as well. So I factored in the extra return there also to offset costs that I have to keep up with in the inflation.

Dave:
That’s fascinating because I have typically taken a similar approach where if you’re in a good neighborhood where there’s a good prospect of appreciation, willing to take less cash-on-cash return, because your maintenance is probably going to be less. You probably might have less turnover between tenants, and there’s costs associated with that. But does that mean that you’re… Are you able to find deals in good neighborhoods with a 10% cash-on-cash return now? Or are you focusing more on different neighborhoods that have higher cash-on-cash return, but may be less desirable to live?

James:
No, we are definitely seeing the transition over… Right now, I would say the buy and hold hasn’t quite, quite got there, but we’re seeing it on the fix and flip for sure. But again, it comes down to that perception of what the market is. So everybody is getting… They’re pulling back a little bit. It’s like they’re getting all the bad media. They’re paying more at the pump. They’re paying more at their grocery store. And everyone’s seeing the signs. I think a lot of people that were investing in the last 5, 10 years also went through 2008, whether they were growing up and they had a bad experience at their own household, or they were an investor or homeowner that it maybe didn’t go so well, and there’s that whiplash in the market.
So as people are pulling back, we are definitely seeing more opportunity. Because the thing is construction’s gotten way more difficult, things are harder, it’s harder to find guys, things cost more and it’s became a pain point for a lot of investors. So value-add has already had this pain point where people are like, “I don’t really want to deal with this. It’s giving me that floating target. The construction’s hard. It’s just such a headache for me. I don’t want to do it.” So that was already in the market.
Now the money makes all list prices look bad too. When you really put the numbers on most stuff that’s listed, it does not make sense at all. But as those days on market start to accumulate, that’s where sellers start really fluxing. And we have contracted some fairly good buys recent… I mean, we just got one in Everett, Washington for $50,000 a door. We haven’t been able to buy at that price range. It was a nine unit. It needs a lot of work, but stabilized, it’s going to be a 9.9 cap. The cash-on-cash return is going to be over 20. Those things usually trade at about 150 to 175 a door. We’re at 50. That was stuff that we would get back in 2012 to ’14. Heavy fixers didn’t people want to do with it. Higher rates back then, so people didn’t really want to mess with it. But we were able to get that deal now. And it really comes down to, again, just cost of construction, the processes behind it, and then a little bit of fear in the back of the mind where people now are not pulling the trigger.

Dave:
So was that sitting on the market? Is that where you attribute the… Is that why you got the deal for such a good price?

James:
Well, that one was actually an investor bought that one six months ago, couldn’t figure it out, and then now they are like, “I just want to get rid of this.” Because they’re in the planning process and because they’re nervous, they were willing just to kind of cash the deal out and call it good. They’re taking a little bit of a haircut too.
And that’s the thing. When people get nervous… I think for the last 24 months, people thought they… Or not thought. They’ve obtained a lot of wealth through equity, and in their brains, they feel like they’re way wealthier than they actually are. Equity is only good when you realize it. And then what happens is as people are seeing their bank accounts go up with this equity and they’re feeling better and better, they’re spending money. They have real wealth. And once it starts coming down, people start really freaking out, and they want to capture that wealth right now. They don’t want to go back to not having as much money again. So it kind of makes people be a little bit irrational. But I would say we’ve been able to do this in the last two weeks. It’s really on these current transactions.

Dave:
Wow. That recent.

James:
It’s very recent.

Dave:
Are you getting deals on the market too? Like that nine-plex was an investor deal, but are you finding things on the MLS too where people are selling for under that list price? Because you just said that with the list price on a lot of these doesn’t make sense. So how are you making them make sense?

James:
We are actually getting more on market deals done than off market, because-

Dave:
Really?

James:
Yeah, because here’s what’s going on right now is these wholesalers, for the last 24 months, they’ve been… I mean, they’ve been getting paid.

Dave:
They’re having good times. Good times for wholesalers.

James:
They have been crushing it. And every investor, wholesaler, it’s like you’re courting them every time. How do I get in bed with you so you bring me that deal first? What do I need to do? I mean, that’s what we do a lot in Seattle. We help wholesalers because we just want them to bring us the deal first, because we don’t want to miss out.
So these wholesalers have also been trained that if they get anything under contract, they can sell it to anybody. But what’s happening now is they’re turning around to these investors and there’s nobody taking it, because the margins aren’t there anymore. And a lot of wholesalers are also newer to the market, so they haven’t been through any kind of life cycle of real estate, and so they don’t understand that people buy differently at the time.
So the wholesale deals are actually still pretty heavy. Also, these sellers have been getting harassed for 24 months, so they haven’t… And the transition’s so recent, they haven’t really caught on either. We have been getting more calls from off market sellers re-engaging. Those leads are up probably four times of what they used to be.

Dave:
Wow.

James:
We use a room called Call Magic. They call out… They do mass amounts of contacts. We used to get about five to six leads a day, or I would say every two days. We’re up to like 15 leads in those two days. So people are definitely calling more, but they’re getting a gauge really on what it is.
The on market’s beautiful because a seller gets it listed. They see how many people are coming through, right? They get the reports. They get to see what’s happening in real estate today. They know that homes were selling in five days, 90 days ago and selling way over list. And then they roll their house out on market, and nobody wants it and no one’s even looking at it. They get real very quickly. I like doing transactions with people that are real on their numbers. So we’re able to use a lot more logic on the market based on days on market, showings, inspections, and data points, and we actually get a better margin on market than we do off market right now. Substantially better margin, to be honest.

Dave:
That’s fascinating. I mean, you are ahead of the data right now. As you were saying, most real estate data comes a month, six weeks in arrear. So we’re sitting here in the beginning of June, we’re looking at a last full month of data in April. But what you’re saying is just in the last two weeks, things are already starting to shift. So this is super valuable for our listeners, so thank you for sharing all this with us.
So you basically said cash-on-cash return in terms of a buy and hold is your main metric. Do you ever factor in appreciation into a buy and hold deal? And if you do normally, are you doing it right now?

James:
Any property I buy, and I’ve always trained myself this way, I look at it on a 10 year basis. So in our rental pro forma… Because we want to see how well does this deal do over 10 years. If it’s commercial, what’s your principal buy down. What’s your accumulated cash flow over the 10 years?
And then we always put in two standard metrics, but we don’t use the high ones. Appreciation. For the last 30 to 40 years, real estate has appreciated, I think, an average of like 3.5%. It’s been crazy the last two. So that’s what we put into our appreciation box. We use the average over the last 20 to 30 years. So we factor in a 2% to 3% appreciation over 10 years. I don’t think I’m going to get that over the next two, but I will get it over the time. So I just use a normal metric.
Same with rent increases. I think rents will pop even higher over the next 12 months, but we do a standard 3% rent. It depends on what your market is. We kind of just put in 3%. 5% is kind of standard right now. So we pro forma that over a 10 year basis. A 3% rent increase on the growth as well. So we just use standard. We won’t factor in short term.

Dave:
Got it. Okay. So one rule of thumb in the buy and hold world that a lot of people are familiar with is the 1% rule. Which if you’re not familiar, or the rent-to-price ratio, basically it says, if you divide your monthly rent by the purchase price of a property, it should equal 1%. So as an example, you buy a place for a hundred grand. The monthly rent should be at least a thousand dollars a month. The theory is that this is a good proxy for cash flow. If you hit that 1% rule, you’re going to have a good cash flow.
I’ve actually done some data analysis into this, and there’s truth to that. There’s about a 0.85 correlation between the rent-to-price ratio and your cash flow. So that’s pretty good. Pretty strong relationship.
I’ve written extensively about the 1% rule and my own opinions about that. But I don’t know if you know my opinion about it, so I’m going to ask you first. Do you think the 1% rule is a good rule of thumb or represents a good metric that people should be using in today’s day and age when they’re looking for buy and hold deals?

James:
I think on a general, I think it could be usable. And I think your numbers at around 85, that’s about dead on, because your cost of mortgage on that is going to be about, let’s say… That’s going to be about 0.65% of that. Roughly in there. And then your other expenses is going to get you around that 85%. I think it’s a safe way to look at things on a broad basis to help you get through that first step of underwriting.
Would I ever buy a deal based on that? Absolutely not, because each market is so… There’s so many variances in each market, depending on where you’re investing or I’m investing, it can have a lot of variance in it. But as a quick rule of thumb, I do think it works fairly… It’s like my first set of scrubbing. Does this work real quick? Okay, let’s take it to the next phase. Because also as an investor, your time management is such a… I’m a huge deal junkie. I’m looking at 40, 50 deals a week, minimum.

Dave:
That’s crazy. That’s awesome though.

James:
That’s why I was emailing you so late last night. I was just crunching… And there’s so many more to look at right now too. So it’s like a kid in a candy store. But it’s a good first way to do it. And I think as a general, it has enough padding in there, and it also doesn’t have too much padding to where you’re going to get frozen up every time. So it’s a reasonable rule to use.

Dave:
All right, I like it. My general thinking is that it’s a good way to screen neighborhoods. Like if you wanted to pick a whole market, like if you wanted to say, “I’m interested in finding a neighborhood in Texas,” it’s a good way to sort of zero down. But when you get to the actual deal level, I think it really kind of falls apart.
So what I’ve recommended to people is if you see a rent-to-price ratio that’s like at 0.75 or even 0.8, that’s worth considering. Again, you might not want to pull the trigger on a deal that has a rent-to-price ratio that low. But it’s not worth writing off a deal just based off of the 1% rule until you fully underwrite a deal. Because I’ve seen deals as low as 0.75 rent-to-price ratio deliver really strong cash flow depending on taxes and insurance and maintenance. There’s just so many variables that rent-to-price ratio doesn’t account for.
So I generally think that these rules of thumb are helpful, but a lot of times, it frightens people because they can’t find that 1% rule. But they’re not fully even underwriting these deals and don’t actually know what the cash-on-cash return would be at the end of the day.

James:
Yeah, and there’s so many things that factor in that too, like how much work do you have to put into it, what kind of… If it’s turnkey, move-in ready, then it’s probably going to work fairly well. But you have to factor in your time, your money, and your resources in there. Those are the things that that’s not going to capture very well.

Dave:
So if you had a rule of thumb to use for buying in 2022, would it be 2% above inflation? Is that sort of your north star right now?

James:
Well, a combo, because I’m still that walk-in equity guy. A great equity position is a great equity position. But yes, that’s my general rule on cash flow. I want to be at least at 2% above inflation, and that’s minimum too. I do shoot for higher, but I’m also prepared to do a lot of construction work and heavy lifting to get me in a better position too. So the more work you get, the more cash flow you get too.

Dave:
Yeah, makes sense. All right, great. James, this has been super helpful. So for everyone listening to this, seems like according to James, at least in your market, James, there seems to be some buying opportunity right now. And even on market, there’s opportunities to find the kind of returns that James, as a deal junkie, is looking for. So that’s encouraging. I’d like to switch now to flipping. Because you also are doing a ton of… How many flips do you do in a year?

James:
Too many. I think we-

Dave:
You can’t count.

James:
… do about 150 with our clients a year, where we help them design them, find them, source them, put the plan, implement the plan. And then we do about 50 this… We were doing about a hundred, but now we do about 50, but they’re bigger projects. So it’s about 50 a year. Right now, I think we have like $15 million to $20 million in projects going.

Dave:
Wow.

James:
In flips. But they’re expensive. They’re just more expensive ones. So it’s definitely the most… It’s the fewest amount of deals I’ve been doing, but the most amount of capital for sure that we’ve had out.

Dave:
Interesting.

James:
We’re trying to work smart and not get us spread out.

Dave:
Well, that raises a good question. Well, raises my next question. I’ll just call my own questions good. But raises my next question, which is what is a good flip look like to you in this kind of market?

James:
There’s three major things that we’ve done to transition, and it’s been a pretty rapid transition. We’ve only take these steps about four to five weeks ago. The less people I’m seeing look at houses, the more we’re padding our margins.
The first thing that we’re doing is we’re adding contingencies to all of our construction costs and costs in general. The cost of fuel, the shortage of materials and labor are real things that are not improving. They’re getting worse. So any deal that we’re looking at, we look at our rehab numbers and we add 10% to 20% on. That’s the first thing we do, because that’s our middle core cost.

Dave:
How do you come up with a 10% to 20%? Are you basically taking numbers and comps from your last deal? And then how did you settle on 10% to 20% as your padding?

James:
For the last 12 months, we’ve used 5% to 10%, because it was a little bit less variance. Plus, there was a little bit more appreciation… The market was doing well, so you’re going to be a little bit more aggressive.
As it starts to flat line out… And by all means, I don’t think the market is going to go into a total, total spin, but I do think there’s great opportunities coming. As it flattens out, there’s just more risk. You’re not getting that extra upside that we’ve seen that’s going to pay for those overages. So we wanted to double up our contingencies because also things are just soaring so quickly. So it gives us more padding in our deal.
We use a construction calculator that we built internally that just really calculates per square foot install rates and allowances all the way through our project. So we know exactly what materials we have in our estimates. We know what people are installing them for. So because we have our core… That’s the beginning part of our budget. The budget’s set up right. Usually, we’re going to be within a couple percent of that out the gate, unless we miss something on our scope of work. So by adding that contingency, 10 to 20% on, it just pads in our numbers.
How we get the numbers is we interview contractors in our trades, and we just get the install rates directly from them. And then if we’re putting our own allowances on, we’re controlling what the materials are. So we just add the 10 to 20% on top of that.

Dave:
Okay, so that’s one rule of thumb that you’re following, which is just padding your construction and-

James:
Pad. Pad, pad, pad.

Dave:
Pad as much as you can. What about on the acquisition side? Have you changed anything about the kind of deals you’re looking for or the price point you’re looking at?

James:
We definitely are. We made major adjustments on what our expected returns are. So typically what we’ve been buying for the last 12 months is in really good neighborhoods of Seattle, or the east side. We’ve been buying at a 10% to 12% cash-on-cash return, not including leverage factored in that. That’s just on a cash basis. That typically turns into about a 30% to 35% cash-on-cash return with leverage. Maybe even a little bit higher.
We were kind of in that 30% range at that point. And that we were getting that kind of appreciation factor in there. I’ve never factored appreciation to any one of my deals on a fix and flip. I don’t think it’s a smart thing to do. You’re banking on the market. What I will do is go in with a slimmer walk-in margin. I like the area, so I’ll buy it if it’s a little bit riskier.
In sub-markets, we were buying them at 13% to 15%, which was going to be about a 35% to 42% cash-on-cash return. So what we’ve done is we’ve added about 4% to 5% to each one of those areas. So it’s a huge jump. So if we were buying at 12%, now we’re buying at 17, because it gives us a much bigger padding.
Because as you go through a transitional market, you just don’t know where it’s going to fall, so you have to pad things more. So we’re padding it with 5% on the buy. So we’re going from 12 to 17, roughly. And then we’re adding 20% to that contingency on the construction budget. So we’re just adding in buffers of time.
In addition to, we’ve been able to flip all these homes… What we’ve tracked, all of our clients flips, all of our flips, we average out about 6.9 months for a normal fix and flip for the last year. It would take our clients and ourselves on average 6.9 months to buy it, renovate it, sell it, close it. We’ve added three more months to that now.

Dave:
Wow.

James:
Because as we know, that was also in a market where we were only on market for five days and things were closing quick. So as we go into longer hold times, we’ve just got to account for it. So instead of running our flip calculations at a six month to seven month hold, we’re running them at a 7 to 10 month. So we’re adding more leverage costs, we’re adding more construction costs, and we’re adding a bigger margin, and that’s what protects us all the way through.

Dave:
Okay, I have a lot of questions. The first one is based on that additional time… You said you added three months, and you said that’s because you’re expecting days on market to go up, longer sale time. Are you also anticipating longer construction time with some of the supply chain issues? Or have you been mostly able to mitigate that?

James:
Well, how we’re mitigating that is we’re really staying on top of our budgets and just increasing them dramatically. The more money you have in the budget, the easier you can move. That’s actually why I’m doing a lot more luxury flips is because I can bring out trades that show up, they’re quality workmanship, and they’re more professional. It allows us to systemize it out a little bit more. So if you have the money in the budget, you can pay people a lot better, and they can move a lot faster.
But yes, delays are still happening in cities and permits. Things are starting to fall. I think that’s going to be an issue for another three to five months, kind of in that range. I do think as rates get up, the economy is going to slow down, and I have a feeling… Well, also, investors are getting out of the market a little bit. They’re sitting on the sidelines. There’s general contractors and tradesmen that are calling me right now that haven’t called me in a while.

Dave:
Really? That’s a big change based on where we’ve been the last couple years.

James:
It’s been a huge change. And to be honest, I kind of put them on the sideline right now. I said, “Hey, look, you kind of left working.” So we kind of ice them out a little bit longer too.

Dave:
We’ve got to play hard to get now. They’ve been ignoring you.

James:
The things I’ve had to do for these contractors for these last 12 months, I feel abused. It’s like you just have to be so… So I have a feeling as things slow down, the trades are going to show back up a little bit more. So I do see that… And that’s why I’m a buyer right now. Things are going to improve in certain segments. And as long as I have those big pad in, walk-in margins, and I think they’re going to improve, then it’s almost like I can pick it up on my construction cost and timing, and put that back in my pocket from the padding. So instead of getting appreciation, I could pick up extra costs based on efficiencies.

Dave:
Got it. That makes a lot of sense. But in general, so it sounds like over the last two years, you were targeting an unleveraged cash-on-cash return of, you said, about 12%.

James:
Correct.

Dave:
Which would net you a levered return of mid 30s. And now in order to protect yourself, be a little bit more conservative, you’re looking at 17% unlevered in… You said it was in the mid 40s on a levered return?

James:
Yeah, it’s, I would say, 38 to 45 on average.

Dave:
Okay. Just out of curiosity… So that’s super helpful for anyone listening to that, is that’s what you’re targeting. What were you getting on a leverage return basis over the last two years on some of your flips?

James:
Oh man. Some deals, we were making 100% to 150% returns. I mean, there’s that expensive flip we did where we pro forma-ed the deal at 3.95 mill as our exit. We sold it for 6.5.

Dave:
No.

James:
I’m sorry. 4.95. 4.75 to 4.95. We sold it for 6.5, and that was in a five month period.

Dave:
50% over what you pro forma-ed it.

James:
It was unreal. But we were seeing that. Our clients, we were getting offers 200, 300 grand over list. Bellevue appreciated 50%, 60%. So we saw these huge swings, and they’re unrealistic returns.

Dave:
So that’s exactly why I asked you this question, because one thing I hear continuously is the deals aren’t as good as what they were a year ago or two years ago or 10 years ago, whatever it is. But you’re still buying deals. So how mentally do you handle that? You were getting maybe 50% cash-on-cash, 100% cash-on-cash. Now you’re saying, “All right, I’m okay with 38%.” How do you rationalize that to yourself, and why are you doing that and why do you think listeners should consider sort of readjusting their expectations in the way that you’re doing that?

James:
The first thing that I would always tell people is if you were getting those kind of returns, that is not normal. Like for me, I’ve been doing this for a while and I’ve seen ups and downs. I’ve taken pretty major losses, and I’ve done very well. So I just know at the end of the day, it’s going to balance out. A great year could lead to a flat year the next one. And if I look at a two year basis, it usually kind of levels itself out.
What I like to do is I look at my pro forma and how well did I execute if I would’ve hit my pro forma numbers. How well did our construction do? What was our carry cost time? Because that tells me the efficiency of my business. And when I underwrote that deal, the numbers were probably right. The market dictated the return in the upside. So I have to remember that I am not… The most important factor in this is economic conditions and market conditions. And no matter what I do, I can’t beat the market. The market will always beat me. I have to plan accordingly for the market, but I also have to set my expectations that way. At no point did I ever think in my pro forma that I was going to hit a hundred percent return on any of those deals.

Dave:
You’d be insane to think that, right?

James:
I would never get a deal.

Dave:
Yeah, you can’t go in… Yeah, exactly. You would never do anything. But I think that’s sort of what happens to some people, at least, is it’s sort of paralyzing, because you hear these stories about these incredible returns or buying in 2010 and these amazing opportunities. But in some way, at least this is my opinion, a good deal in 2022 is anything that’s better than doing nothing, right? In the simplest way of looking at it, you have an option of losing money to inflation. You can invest in the stock market if you want. Or you can go and find what the market is giving you right now, which what you’re saying is maybe an 8% to 10% cash-on-cash return on a buy and hold, or a 40% levered cash-on-cash return on a flip. Both, to me, sound considerably better than doing nothing or any alternative asset classes.

James:
Yeah, and that’s the thing. People just need to remember what’s normal. I have to always remember that we did very well the last two years. All of our businesses did. But I think any business that was operating well was doing well. It wasn’t just because of what we were doing, it was the market and the economy helped us do that. But you have to always remember what’s normal.
That’s what I was telling my clients for the last two years. You guys, this isn’t normal. Just remember. They call me, they’re all excited because we just sold their home for a quarter million dollars more than we thought. And I’m like, “But remember, that’s not normal. What that should be is a reminder to stay as a consistent investor,” because those people were not making the same amount of money 24 months ago to 36 months ago. But if they would’ve never started in a market where they were making average returns, they would’ve never been in this position in the first place.
So the more you go in and out of the market, the less opportunities you’re going to have. That’s why I’m always consistently buying. Some years, it’s going to be better. Some years, it’s going to be worse. And some years, we’re going to absolutely crush it. But you have to consistently stay in the market. If you’re jumping in and out and trying to time everything, you’re going to miss all the opportunity. So you just have to be realistic.
And then one thing that I like to do too is I look at myself on a 24 to 36 month basis with all of our numbers. How did our flipping business do over a two year basis, not just the last six months? The historical numbers are going to really tell you what to forecast correctly, because that shows you different market conditions and cycles.

Dave:
Yeah. What you said, I think, is super important because there is a distinction between timing the market, which is what you’re cautioning against doing, which is like jumping in and jumping out and adjusting to the market and trying to make the most of what the market is giving you at this time. And as you said, you are making adjustments to the market, and that’s wise and you’re being conservative. Because I agree with you. No one knows what’s going to exactly happen to the housing market on a national basis, but there is a good deal of market risk right now, far more than I think we’ve seen in 15 years or whatever. So you’re being conservative, which makes sense. But that doesn’t mean you’re trying to time the market and saying, “I’m going to completely stop. And then once there’s a crash, I’m going to get back in.” You’re taking a much more consistent approach, similar to like dollar cost averaging in the stock market, right?

James:
Correct. Yeah, right now, we have a certain amount of inventory going. We could take a step back and go, “Well, if the market’s going to be flat, do we want to refi it and keep it?” No, we have a certain goal that… We know what we’re doing with that asset already. It’s going to sell for what it’s going to sell for, or it’s going to rent for what it’s going to rent for. It’s going to cash flow for what it’s going to cash flow. If it doesn’t meet my expectations after I’m all done, then I need to sell it off or move on to a next asset. But consistency is key. The more irrational I’m pulling in and out, the less money I’m going to make.
And just adjust and pad your numbers, and then you can… As long as you have that padding in there, you’re mitigating your risk and you’re still going to keep yourself at the returns that you want to be. And if you don’t get those numbers, then wait or ask more people. You’ll find it if you ask enough people.

Dave:
That’s great advice, James. Is there anything else that you think our audience should know about what constitutes a good deal in this type of market condition?

James:
I mean, the biggest thing is just padding the pro forma, making sure everything’s good. One thing I like to do too, and if people are really worried about risk or when I get worried about risk, I like to buy cheaper deals that can cash flow or flip.
When you have multiple exit plans that you can put on a specific house, that’s your safest investment. And that’s going to be tell me… When we were doing this in 2009, that’s what we were buying, because A, we just got our… It was not a fun 2008. We got smacked good. We had lost most of our liquidity. So we couldn’t just put it into the market, we had to kind of build it back up. So every deal that we were buying, because we were so shell-shocked from that, it was a very risky market where it was falling extremely fast, is we were targeting properties that we knew, no matter what, if it didn’t flip and we couldn’t make our minimum return, we could refi it and rent it out and put it into our portfolio. Some of those houses that we couldn’t flip turned into some of the biggest profit-makers that we’ve had over the last 15 years. So just having a multipurpose, multiple exit strategies on your deal, that would be another way you can mitigate risk.

Dave:
All right. Thank you, James, so much. This has been enlightening. I’ve had a lot of fun learning a little bit about flipping. I’ve never flipped a house, and so I’m very interested in learning from you. This is really helpful. We will be right back after this for our crowdsource segment.
Welcome back, everyone, to our last segment of the day, where we interact with our crowd. James, for today, I would love to hear from you about your clients and some of the people you’ve been working with, specifically about 1031s. There’s a lot of chatter about selling now when it’s high, and what do you trade into. So can you tell us a little bit about how you’re advising your clients and the people you work with?

James:
Yeah, it’s kind of confusing right now because a lot of our clients and ourselves, we’ve been buying properties for the last two years and we’re obtaining money at very low rates. So you buy these properties, you have very low debt on them. Typically on commercial, it’s going to be a 5 to 10 year note anyways. But they’ve got a lot of equity in them, they have good money on them, and they’re happy with their cash flow. But they have worked through some of the depreciation schedule, like the cost segregation. They’ve gotten a lot of the benefit out of it. They’re also worried that their rates might reset in three to four years at a higher rate at that point. In addition to, they might just want to move into a different asset class too.
So as markets transition, the question always is, “What do I do with my investment money and portfolio before it goes through that transition?” Because once you fully go into the transition, it’s harder to move things around. So a lot of the question right now is, “What is my current portfolio doing?” And then also what we’re telling everybody to look at is, “Is it beating the inflation rate?” If it’s not, you might want to look at trading some things around. Look at what your true equity position is. And then we can look at how to increase your cash flow to beat that inflation rate or to increase it naturally at that point.
Where people get hung up, or I even can get hung up on, is being so obsessed with their rate. They’re like, “Well, yeah, I have all this equity, but I’m only paying 3.5% on this rate,” and they don’t want to move. But they might only be making a 6% cash flow position, and they have all this equity in the building. What we’ve done is we’ve actually audited our whole portfolio. We saw what deals we’re looking at that were lower than the rates, and that’s what we do for our clients. Where is your cashflow dragging the most with the most amount of equity? And then trading it. And it doesn’t matter what the interest rate is down the road. It could be double. But our cash flow position is going to double up at that point.
So right now, a lot of the question is, “Do I make that trade, and what would I trade it for?” Now, for me, I will only make the trade if I can double up cash flow right now. I do have low rates. I’ve got good stabilized buildings. You’re going into kind of a more transitional market in general. But with the amount of equity that we’ve made, I can double my cash flow on almost every apartment building and house that I own if I 1031 them out correctly.

Dave:
Wow. So are you seeing clients do that right now? And if so, is there a limited window in which you can keep doing this before the market shifts even further?

James:
Yeah, to be honest, I do think the two to four units, you might have missed your window. Because those rates are 6.5%, and it dramatically affects the cash flow. So if you have all this equity in your property, or you might have lost some because of rates, when you run that true, true cash flow position, it’s going to naturally bring your price down.
What recommendation I would have is because rates are high, affordability is in high demand, is if you are going to sell your two to four unit, get one unit vacant, because the owner-occupied buyer is still out there, because they’re looking for a way to cut their expenses, especially with the inflation right now. So that’s the best way for you to trade it.

Dave:
That’s great advice. To basically make it appealing to someone who wants to house hack.

James:
Yes. And there’s so many people out there. I mean, BiggerPockets has done a really good job teaching people that that’s a very effective way to reduce your expenses and grow wealth. Investors are only looking at the cash-on-cash return and how that building’s going to perform. If your rate and your money’s really high, you’re not going to perform that well. But an owner-occupied owner, I mean, they can move in and they can go, “Hey, I can cut my mortgage cost by half by buying this unit instead.” So I would say leave one open.
There’s still a really good opportunity to trade your five units at above right now, because the money’s still cheap and it’s… Or it’s not cheap, but it’s four and a half. It’s cheaper than the alternative. It’s 4.5% to 5%. And I think there’s more qualified investors in that realm too. A lot of times, two to four is your mom-and-pops that are a little bit newer in the industry. Not always, by any means. I still own two and four unit buildings. But a lot of that’s what it trades.
The guys that are selling the bigger stuff have gone through more market conditions, and so they’ll sell and they’ll trade things around a lot better. But you can still trade those out. Right now, there’s still demand to buy those if it’s stabilizing good, because people do want to park their money, beat inflation. The rates are a little bit lower, so it’s not affecting that equity position as much. And then you can trade into more of a value-add.
So just you’ve got to be careful about what you’re trading in money. Just see how liquid can that product be traded around, and then make sure you’re maxing out. There’s certain properties that I’m looking at selling right now, but we have that bottom line number that if it goes below that, we’re keeping it for another five to 10 years. Because we’ve already done all the hard work. It’s not worth trading at that point. So we’re listing four of our buildings very shortly, and I know we’ve listed like six units for our clients recently as well.

Dave:
Because you believe you can double up your cash flow.

James:
Yeah, double up the cash flow, especially for our investors that are more passive. Their cash flow has been hit dramatically with inflation. Their cost of living, things that they’re living off of. So right now, it’s the perfect opportunity to realize the equity before it could possibly get reduced, and then go get more cash flow to offset your cost.

Dave:
All right. James, you have been dropping some knowledge on us today. Thank you so much. If our listeners want to hear more from you or interact with you, which I’m sure they do, where can they do that?

James:
You can do that… So on Instagram, check us out on jdainflips. We talk about all this stuff daily in the field. And then also on YouTube, at ProjectRE. We’re constantly putting out free education for everybody. So make sure you check us out.

Dave:
All right. And I’m Dave Meyer. You can find me on Instagram, @thedatadeli.
And just a reminder before we go, if you want to interact with James, myself, Kathy, Jamil, Henry, or any of the On the Market crew, you can do that on YouTube. James has been putting out some great videos there. We have a lot of really good YouTube videos that don’t make it to the podcast feeds. So if you want more information like that, check out YouTube, subscribe there.
And if you are listening to this right now, please, if you like this kind of information, leave us a five star review. It really helps us out. Thank you all so much for listening. We’ll see you all again next.
On the Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett. Editing by Joel Esparza and Onyx Media. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team.
The content on the show, On the Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Mindy:
Welcome to the BiggerPockets Money podcast show number 310, Finance Friday edition, where we interview Jill, and talk about what to do with your primary residence after you move out.

Jill:
Now, I don’t know if I just keep that going with my investments or I try to cashflow all these renovations as quick as I can and, I guess, scale back on the investment piece. So I guess, how do I balance the retirement accounts, the after tax brokerage account, 529s, all these other things we invest in with the real estate piece now?

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and with me as always is my real life actual human being never going to ask you to IM him about crypto cohost, Scott Trench.

Scott:
With me as always is my spamming me with a new intro, Mindy, every week, but seriously, the spammers on these Instagram things are nuts. Please know that me nor Mindy, nor BiggerPockets Money Instagrams, none of those accounts will actually reach out to you and then ask you for Bitcoin or any other types of money or whatever from that. Please just report the fake accounts if one of them happens to try to go after you.

Mindy:
Yup, and feel free to send me a note or post a copy of it in the Facebook group, so that we can all report them and get that mess off of our sites. Thank you because I hate them. Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly, truly believe that financial freedom is attainable for everyone no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or to make the decision between you selling and renting your home, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I am super excited to talk to Jill today. She makes a good income. She has her expenses fairly under wraps. She is buying a second home and considering turning her first home into a short-term Airbnb.

Scott:
Yeah. I think it’s a good discussion and it’s a situation that probably a lot of people are going through. She has a good problem. She has a lot of equity in her primary residence and she needs to figure out how best to deploy that, whether it’s by keeping it as a rental and generating income or redeploying it.

Mindy:
I really like that you threw that out there, Scott, and gave her something to think about, “Hey, it seems like a no brainer, but maybe you could take this equity and this money that you have tied up in this house and do something else with it. Maybe you could redeploy it in a way that would generate even more income.” I really like the way that you gave her things to think about.

Mindy:
Before we bring in Jill, let’s note that the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal tax and financial implications of any financial decision you contemplate.

Mindy:
Jill and Joe are preparing to move to a new house that they plan to live and flip while turning their old home into a short or midterm rental. Debt is not Jill’s friend. So there’s a bit of anxiety surrounding this move. Even though she realizes that taking on this low interest debt can help her family realize their long-term goals, it’s still weighing on her just a little bit. Joe is newly self-employed, so they’re still navigating the fluctuating income while he stabilizes his new business. Jill, welcome to the BiggerPockets Money podcast.

Jill:
Thank you. So excited to be here and actually talk to you guys live.

Mindy:
I’m super excited to have you. I am going to say that Jill lives in a medium cost of living area and in the Midwest. So that gives you a framework for where these finances and this information is coming from. Let’s jump into your numbers. What do you make and where does it go?

Jill:
So I make 250 W-2 income. That’s straight, I would say, biweekly income, but then I do get a fluctuating bonus. That can be anywhere from 50,000 up to 100,000 depending on what’s going on. Then my husband has a new business that he started. He started it before COVID, but we had to put it on hold with COVID. We also were living abroad. So this is, 2022, his first year fully doing this. So it’s between 1,000 per month and 5,000 a month. I think there will-

Scott:
You make 250K base salary plus.

Jill:
I make about 200, yeah, 200 base, and then plus bonus, which averages about 50K.

Scott:
Okay. Got it.

Jill:
Then my husband’s around 1,000 to 5,000, I would say, per month. I think conservatively will profit about 30,000 this year.

Scott:
Great. This is all pre-tax.

Jill:
Yup.

Scott:
Awesome. So post-tax, we can plan on 175 to 200 maybe in post-tax dollars.

Jill:
Yeah. So I guess monthly, I get about $10,000 a month, and I take everything as much as I can out of my paycheck. So I’m a very automated person. So I take my 401(k). I actually do my auto and home insurance through work because I have a group plan and it’s discounted. I do a flexible spending account for dependent care. All of that is taken out of my paycheck before I actually get the money. So monthly, I have about 10,000 to work with.

Mindy:
Okay. I want to pause here and praise you for that because that’s awesome. You never see that money. When you take it out of your paycheck and you put it someplace else, that’s money that you can’t spend. I’m saying spend in air quotes for those who are just listening and not watching on YouTube. You can watch on YouTube if you want to see all these fun faces that I make all the time we record, but this is money that you’re not spending because you’re not seeing it. So it’s not there.

Mindy:
I think that’s really, really cool when you can do that. I don’t know that I have that option to pay my insurance, but there are things that I have pulled out of my paycheck ahead of time, and there are things you can have pulled out of your paycheck. If this is an option for you, if your expenses are a problem, if your spending is your big issue that you’re trying to tackle, see what you can pull out of your paycheck before you have to spend it because that’s a check you’re not writing. I’m so old. I write checks. That’s a check you’re not writing to pay the bill, but that’s also money that’s not available for you to spend. So it never hits your bank account and maybe goes someplace else before it gets to where it needs to go. So I love that idea.

Jill:
Yeah, and there’s a huge discount if you do payroll deduction. So I actually talked to the insurance to switch it at one point and it would go up $1,000 or something. So they really like that. If it’s through a payroll deduction, they give you a huge discount. So if your company offers it, try to go for it because it’s also a group plan so they give you lots of discounts.

Mindy:
That is an awesome tip. We were just saying, we learn something every show and that is awesome. Okay, Scott. Now, we got to talk after the show, maybe HR. Anyway, okay, let’s look at-

Scott:
Well, let’s go through expenses next and say where’s all that money going. How much are you spending per month and where is it going?

Jill:
So right now, we did make an offer on another house, but I won’t talk about that yet. So our current house that we live in, we have a mortgage. With the mortgage and taxes, it’s 1690. Childcare is 1200. I give a decent amount of donations to different organizations per month. So that’s about 300. Gas and car maintenance is 150. Medical is 350. I have an HSA. So I’m a big fan of the high deductible plan. So I try to cashflow anything we have going on with doctor’s appointments or prescriptions, and then just save the HSA. Clothes, kids’ activities, personal care, pets are about 300 per month.

Jill:
I know this is bad, but groceries and eating out is about 2,000 total per month for a family of four. All the home stuff, we do have someone who cleans our house, the lawn, garbage pickup, recycling, house items is about 600 a month. Then we have a few other bills, cell phones, streaming, which is 300. I’m down to one student loan, which is 160 per month, and we’re only keeping that just in case Biden forgives loans. We will try to take advantage of that, but it’s low interest. Travel is 400 per month. Then I do have a few investments that I put 200 into a 529 for my girls, and then another about 1,000 in a brokerage, after tax brokerage account.

Scott:
Awesome. So where are your assets and liabilities? How much cash do you have and what do you invest in?

Jill:
So I have a 401(k) through work, which is 440,000. Most of it’s pre-taxed. Recently through listening to your show, I switched to Roth. So about 10% of it is Roth now. I also have a Roth IRA that’s 40,000, a rollover IRA that’s another 40,000. I just set up a SEP IRA because of my husband’s self-employment. So we only have $650 in there, but we just started it last month. I have an HSA that has 10,000 in it, 529 plans for both my girls that total about 15,000 total. After tax brokerage is 33,000. Then I have about 60,000 in cash, and that’s going to go towards a down payment on a house. Then our current house mortgage is 200,000. We have about 250 equity into it and we just refinanced our mortgage last year for a 15-year mortgage and it’s 1.875 interest, which is unbelievable to me.

Scott:
Awesome.

Jill:
Then we have two cars that are paid off.

Scott:
Great. So what is your total net worth here?

Jill:
I didn’t total it up. So math is not my strong suit.

Scott:
Okay. So we got … Let’s do some quick math. We’ve got what? 500, 520, 550-ish in retirement accounts. We’ve got 565 retirement accounts and 529 plans. We got 33K after tax, $60,000 in cash, and 250 in home equity. So what is that? A little under a million dollars in net worth.

Mindy:
I have 839.

Jill:
My used cars are apparently very valuable these days. So maybe that gets me up higher.

Scott:
Great. Awesome. Okay. So what’s the best way we can help you today? What are your goals?

Jill:
So I mean, we have had a lot of debt. So graduating, my husband and I had between the two of us probably about 90,000 in student loan debt. So we’ve been plagued with student loan debt for a very long time, and we finally got to the point that we got completely, pretty much out of debt and we can really take any bonuses I get and my husband’s income and just use that towards investments.

Jill:
We’ve been wanting to get into real estate for a very long time, but because of the debt, I was never really comfortable doing this. So my last bonus that I got, I paid off all of my student loans, most of my husbands, and we also had a construction loan on this house that we had to make our HVAC. Well, we didn’t have an HVAC so we had to put one in. We had to make our house a bit more energy efficient. So I paid that off as well.

Jill:
So I finally got to the point I’m comfortable buying a second house, and we want to convert this house into an Airbnb. We live about a mile and a half from a very, very popular college football stadium, which is in walking distance. So people during those six home games, it’s about $1,000 a night on average that people get for their houses.

Mindy:
Wow.

Jill:
So even if we just rent for the tailgating for the home games, plus graduation and some of the big events, we think we could profit about $30,000 on this house. Our house right now is not in the best. We bought it before we had kids. So we didn’t think about neighborhoods, sidewalks, busy roads. So it’s not in the greatest place for us. We want to be in a neighborhood, but it’s really cheap here. We live right outside of the very popular town. So our taxes are lower. So I’ve been really reluctant to buy another house, but I think now with my debt situation, I’m comfortable.

Jill:
So we found a great house, one that needs a lot of work, but the bones are really good. I actually got advice from one of your recent shows about it’s a house that had no pictures online, just the front of the house, and we went to look at it and it’s dated, but the bones are really good. It’s all cosmetic work that needs to be done, and nobody was looking at the house. It was horribly marketed. So we made a low ball offer on it and they took it.

Jill:
So now, we have the second house. So we think we got a really good value in it. We can renovate it, live in it, which it has a neighborhood, and I think it’s the right place for us to be, and then try to really make profit out of the Airbnb on this house, but it’s still really scary to me to go there, but I still think all the planning and all the numbers work. We just have to go for it. So I guess, yeah, I just need advice on how to get started and how to make the most out of going in this direction.

Mindy:
Jump in with both feet and don’t look back. No, that’s awful advice. The video you’re referring to is my leftovers video, where I talk about in this market nothing is sitting around except every once in a while something is sitting around and it could be a disaster or it could back up the train tracks or it could be overlooked, and those are the properties that you look at.

Mindy:
I just today closed on a property for a client that was a leftover that is going to be gorgeous in about 15 hours of elbow grease. That’s probably what you’re going to be in too, maybe a little bit more than 15 hours of elbow grease, but I love a good live and flip.

Jill:
I think a little bit more, but our inspection was yesterday. The guy couldn’t believe that everything works. Appliances that were 50 years old still work, but the roof is redone. The HVAC is brand new. All the big stuff was done. It’s just shag carpets and wallpaper.

Mindy:
Oh, my good. Okay. Oh.

Scott:
Well, let’s take a step back here. Your current home is going to become the investment property.

Jill:
Correct.

Scott:
Right? Let’s start with analyzing that one. So the mortgage is 1690 per month, which you have a great rate.

Mindy:
She can rent it out six weekends a year for $1,000 a night, approved as a short-term rental stamp.

Scott:
So that’s 12 grand for 12 nights, 1,000 times 12. Okay. So that is a big chunk of your mortgage.

Jill:
Correct.

Mindy:
There’s other opportunities. It’s not just those, but those are the big ones. So I don’t like jumping in with both feet and not really running the numbers, but with this property, if you can rent it for $1,000 a night and your mortgage is 1650 a month or 1690 a month, you’re going to rent it for two nights for the weekend easily, maybe three nights, but probably two night minimum. That is a no brainer to just look at that and be like, “Okay. There are other opportunities as well. I will, at the very least, be able to cover my mortgage on this,” but you’re going to be able to do way more than just cover your mortgage on this.

Mindy:
There are setup costs. I mean, you have to furnish the whole thing and that’s something that I think that a lot of people who are considering short-term rentals don’t necessarily think about, and that’s going to be, Scott, have you set up a short-term rental yet?

Scott:
Well, I think we start with, Jill, have you analyzed this property? What is your analysis? We probably have more than, “Hey, I can get a thousand bucks on six big weekends.” What is the income you think that the property will generate? What are the expenses? Have you run that analysis?

Jill:
So my husband did some analysis. Yeah. He got on your website. He’s run a few numbers. So he thinks that we can have monthly, if we rented it out, 1800 a month if we did between home games, all the big events at this university that’s very close to us. Then we’ve also dabbled with sabbatical homes. I don’t know if you’ve ever heard of this.

Scott:
Right. How much per month?

Jill:
1800.

Scott:
1800 per month in income, in short-term rental income.

Jill:
Yeah. This is after taking out the mortgage, having extra costs for renovations or fixing up the house. He thinks it can cash flow 1800.

Scott:
What would be the gross short-term rental income before expenses?

Jill:
I don’t know. He ran all the numbers. So I don’t have it in front of me.

Scott:
Okay. I’m going to put in 3,500 as a placeholder there. I’m going to say you’re assuming you can get $3,500 a month, and then 18 of that will pass through as cashflow per month after your mortgage expenses, after cleaning fees or maintenance repairs, all that kind of stuff probably with … I’ll assume for now that we’ve got conservative allocations there for capex, handyman expenses, those types of things in there as well. Okay.

Scott:
You have $250,000 in equity and you’ll be generating about 20,000 to 25,000 in cashflow per year with 1800 per month in cashflow. So that’s not bad. That’s a reasonable investment opportunity. Let me ask you this. How long have you lived in that property?

Jill:
We are going on 10 years now.

Scott:
Okay. Would you buy another identical property and do the exact same thing with $250,000 down?

Jill:
I don’t know. This house is a difficult house. So to get it to this point, we had to do a lot of work on it, I guess. So I don’t know. It’s on septic. It’s well water. There’s a lot of things that we had to go through first time home buyer education to get it to the point that it is today. So I probably wouldn’t go for this exact house, but something similar.

Scott:
Okay. So here’s why I’m asking this is because you have 250,000 in equity that you can sell and tap into right now tax-free. You will lose that advantage if you move out of the place after two years. So my bias, in general, sorry, three years, that’s right. I have to live there two over the last five years. Thank you, Mindy, for correcting me there. So my bias is almost always to have a strong preference towards selling a primary residence rather than keeping it and reinvesting or keeping it as a rental.

Scott:
I think your situation might be different, and this is where I’m going to have to … because you have a 1.875% mortgage, but you’re on a 15-year term. So I wonder if you replicated this exact same project with another property if you wouldn’t have approximately the same cashflow because your payment will be smaller, but you’ll have a higher interest rate, for example, with it.

Scott:
So I think there’s some puts and takes here that make this really interesting from an analysis standpoint, whether to keep an Airbnb or sell because you could just sell and then redeploy into an even more ideal Airbnb investment, for example, and you get your gain out now tax-free and get a new basis to start with the new project with.

Jill:
Our reason for keeping it is this side of town has continued to develop. So when we bought it, it was farmland. People who had been here for 70 years live off the land type neighbors who shoot squirrels in the backyard, but we have … Definitely, the area is developed. So they’ve built really fancy condos on one side of us that are going for $600,000. They’re building a very nice pub in a historical barn across the street from us. So we keep thinking this side of town is developing more and more, and we really like this town.

Jill:
There’s not a ton of properties that you can have. The tax is this low in this location that, yeah, you have the same value out of it that we have here. So we’ve always wanted to hang on to the property because we actually have a decent amount of property as well. We have about an acre. So we wanted to see how this side of town developed, and I think our equity will keep going up on the house.

Scott:
Absolutely. What I’m trying to say, though, is you have 250,000 in equity in this property. You’ve done well, and it sounds like you believe it’ll be a reasonable investment going forward. Your problem is that in three years from now, if you sell the property, you’re going to lose. Right now, you have 250,000 in equity that you can harness and sell, probably all gain, but let’s assume it’s all gain. If you sell it in three years from now, you’re going to pay tax, 25% capital gains tax on that, and that’s going to cost you $62,500, right?

Scott:
If you sell this property and then redeploy it into an identical investment property down the block, you’re going to get a new mortgage and reset, but you’re going to harness that gain and have a new basis that you’re going to take advantage of that tax break with it.

Scott:
So that’s what I’m talking about here and that’s the decision you have to make. From there, we can say, “Okay. My property is good for Airbnb.” We know that. We’re happy with that. You’ve obviously done the analysis and you’ve got good, but can you do better or about the same with a nearby property, for example, right? I think that’s your challenge that you need to go through here because your strategy might be the right one.

Scott:
It just might be, “You know what? If I actually optimize … I bought this house to optimize for my family in our situation, and it happens to be a good Airbnb, but this one, a few blocks down the road, is actually even better from an Airbnb perspective with current market values, and for the next 10 years, I’ll be better off with that, make more return, executing the same strategy but just taking advantage of my tax break.” That’s what I’m trying to get at with these questioning, with these questions.

Mindy:
So you said well water, and I don’t know how sulfury your well water is, but when you say well water, I think sulfur water. I’m wondering how much of an attraction that is going to be as an Airbnb. Is there any plan to bring city water to the property?

Jill:
Not at this moment, but we do have lots of filters on it. So you don’t notice it now, but it took us a while to figure out the right combination of filters and softeners to get it.

Scott:
I grew up on well water. Do people not like well water?

Jill:
Yeah, we drink it.

Mindy:
No, it’s disgusting.

Jill:
No.

Scott:
Oh, it’s totally normal for me.

Mindy:
If you didn’t grow up on it, and there’s different kinds of well water. No, you’re weird. There’s different kinds of well water, Scott, and some of them are like, “Oh, okay. I didn’t even know this was well water,” and some of them are like, “Is there a dead mouse in this water?” It’s disgusting. My grandma had that kind of water. I never wanted to drink water at her house because it was just so gross.

Scott:
I always look forward to having a big glass of water at home, parents’ house.

Mindy:
You probably have. Yeah, there was something dead in my grandma’s well, I think. Anyway, yeah, so if you’ve figured it out, I would just be really, really sensitive to any reviews that you’re getting about that, and maybe have a trusted friend come over and taste that water, but like Scott is saying, you didn’t say that this is … I just always assumed that it’s in the middle of town when people are talking about this. It’s got an acre of land. Who’s going to take care of that acre of land. What is going on with that acre of land? Since it is near a place that holds football games, are people going to host big parties at your Airbnb? Could you be making your neighbors really upset?

Scott:
If she got an acre, then she’s got a big plot of land and they can throw even bigger parties. She can charge more.

Mindy:
Yeah. Absolutely.

Jill:
They’re very like “It’s your land. You can do what you want” kind of person.

Mindy:
Okay. Okay. That’s good.

Jill:
They’re shooting squirrels in the backyard. So it’s no problem. Yeah, no, we’re right over the border into the township let’s say, and it changes pretty fast, but because this town is so popular, it’s spilling out this direction. So there really is no more land in the town. Everybody has to buy land out here. So that’s why we think it’s valuable, but I think a lot of those concerns you have are something to consider.

Scott:
I think you got a great thing here I would consider. I would sit down and do the exercise and let your math tell you what it needs to, but I would consider selling the property, harvesting your capital gain, and then buying one or maybe two additional Airbnbs that are perfect for your strategy, right? Maybe there are other properties nearby even closer that don’t have a yard to maintain and all this other stuff and your yield goes up even further with that if you’re able to redeploy the equity into that. Just go through the exercise. You may determine, “Let’s keep it,” with that, but that’s a big lever in your financial position right now.

Jill:
Yeah. The other thing is within the town, you’re not allowed to have Airbnbs unless they’re part of your house, unless you’re living there. So that’s another thing. So there’s a limitation on how many Airbnbs can be in this town, which is maxed out, and now, you have to be living in the house. You can rent part of your property. So it’s actually-

Scott:
So if you’re one block away from the town, you’re not subject to that law and you have-

Jill:
Correct. So I have some loopholes, but yeah, I totally get what you’re saying.

Mindy:
Another thing to think about is the cost of furnishing it. I would definitely go after the college clientele and the college decor, which should be actively available in thrift stores and garage sales in and around. I don’t know if you guys have, do you call it hippie Christmas where all the college kids throw all their stuff away at the end of school?

Jill:
Yes. Graduation weekend is one of our favorites. We get lots of new stuff.

Scott:
A long thin table. Okay. Great.

Jill:
Beer pong tables, yup. We got it covered.

Scott:
Perfect. Well, great. So let’s talk about the new property that you guys are buying and your intentions with that one. Is that just going to be your primary residence or is there longer term plans for that?

Jill:
For now, yeah. Well, I mean, it’s a little bit of a question mark. I don’t like to be locked into places very long. So I mean, we’ve gone abroad twice now. If it was up to me, I would probably never settle into one place, but I think for my family, they need stability. So I want to get to a neighborhood, but I’m not sure if I want to stay there forever.

Jill:
So our idea was to buy this house, renovate it, make it either sellable or rentable, either one. We were open to either. Live there for the two years and then either rent it or sell it and then move to the next property or abroad or wherever we want to live at that point.

Scott:
Can’t argue with the live and flip. Sounds like you’ve really done your work and it’s mostly cosmetics. You’ll be able to move through it really quickly. Mindy is an example of how profitable that can be.

Mindy:
I’m going to change your mind a little bit and say you only have to live there for one year if you are going to rent it out. You have to live there for, well, you don’t have to live there, you have to live there for two years to get all of the capital gains exclusions fully tax-free, but if you’re going to rent it out, it doesn’t have to be a full two years. It can just be one year.

Scott:
Can you move in and then immediately rent it out for six months while you travel the world, that’s still your primary residence, your mail goes there, then come back and spend the next six month? Does that technically meet the requirements of that being your primary residence during that period?

Mindy:
I would not say to do this because that sounds a whole lot like mortgage fraud. It has to be your intent to live there, and maybe you could have a roommate, but if you rent the entire house out, then you have no place to live and therefore it isn’t your primary residence.

Scott:
Yeah. Obviously, we don’t want to do anything illegal. I’m just asking the question because I know that some, I have friends and family, for example, who live abroad and they need a US residence because they need to pay taxes in the US and get their mail to the US and stuff. So one of these individuals literally rents a place nearby to be his house while he is abroad.

Mindy:
That’s not mortgage fraud because he’s renting.

Scott:
Fair enough. Yeah. I don’t know the answer to it.

Mindy:
Spare bedroom.

Scott:
Just something to explore. Yeah.

Mindy:
I could rent him a house.

Scott:
Maybe you can have your cake and eat it, too, as long as you’re traveling or vacationing for a portion of the year and not living in these other places and are there for the most of the year.

Mindy:
Yeah. Well, I think she just needs to have a place to come back to. So if she rents the entire house out, then she doesn’t have a place to come back to. Whereas if she rents one bedroom out, she has a place to come back to.

Scott:
… or if it’s prepared for short-term rental.

Mindy:
Yeah. You can short-term rent your house out. You happen to not be there so you’re making money while you’re gone. That’s different. Let’s see. Yeah. Let’s talk about this new house. You have basically cosmetic stuff to do. That’s very exciting. The big things are done. That’s super exciting because, A, it’s really expensive with inflation and, B, you can’t find anybody to work on anything. So the fact that you have all the big stuff done, I mean, anybody can install flooring. It’s not that hard.

Jill:
Yeah. So it’s mostly floors, walls. The kitchen’s dated, but actually, everything works in it. So it is usable. It’s just we probably want to get, yeah, just facelift so it looks a bit more updated, but other than that, the outside’s nice. When they did things in this house, they did it high end. The windows are all Anderson windows from seven years ago. There’s no drafts in the house, no creaks in the house. It’s pretty unbelievable, and the neighborhood’s really nice. So yeah, I actually am worried we fall in love with it and never leave, actually, which was not originally the plan.

Mindy:
Well, you have to live someplace. If you like where you live, that’s great.

Jill:
Yup, but we have an out if we want it, I suppose.

Mindy:
I think it’s interesting. I know this is a side note, but I think it’s interesting that they didn’t get any interest on this house. You said there were no pictures up on the MLS. I wonder if they went with an agent who doesn’t offer full service in exchange for a discounted price for the agent agreement and then ended up costing themselves a lot of money because nobody came to see the house. It sounds like a case of what is it jumping over dollars to save pennies.

Jill:
Yeah. I mean, we’ve given offers to other houses and it’s crazy in this area. I mean, it’s down to cash offers, no inspection, and we’ve lost multiple other houses that we just weren’t willing to wave inspections on old houses. This house, there was another offer, but it was an investor and they wanted to go with a family that’s going to actually live in the house, but we had the inspection. We didn’t wave that. Yeah. We made an offer 10% below listing, which apparently the whole realtor office was shocked and celebrated that this went through. It’s the first below offer acceptance that they’ve had in a year. So pretty proud that we got it.

Mindy:
That’s an awesome, awesome story because in this market, yeah, nobody is doing that.

Jill:
Yeah, but it definitely was, I mean, we found a new realtor, so we had a realtor showing us houses that really didn’t know anything about investments and we couldn’t really get any good information. I happen to run into someone at my daughter’s preschool who flips houses and she has seven rentals in town. Within her first three houses she showed me, we made two offers on them. So she knew exactly what we were looking for. She knew the houses that have value in them. So really, finding a good realtor I think makes all the difference.

Mindy:
Yes.

Jill:
If I can give a plug for realtors.

Mindy:
Yes, you can. You should. Finding a great one is the key to your investing success, the key to your purchasing success. You can still find deals in this market. Now, you can’t find deals in this market the day they come on the market. This is a leftover property and it sat there for a while, and the reason that it sat there is because they didn’t get a good real estate agent, and that’s not your fault. That’s their fault. They should have chosen somebody else. That’s exactly what happened with the property that we closed today is that the listing agent didn’t insist that they clean the house. It was so filthy.

Scott:
Well, I think your real estate approach is awesome. You’ve made hundreds of thousands of dollars in your primary residence. You got a great option as an Airbnb. That seems pretty well thought out. I do think you should go through the exercise of at least looking to see what it would look like to sell and redeploy into similar properties, for example, and think about that tax hit, how that would work over a five or 10-year period because you may be able to get what you’re looking for there without that, but it may be that the nuances of your house are perfect being just over the township line and enabling you to Airbnb and having a perfect thing there.

Scott:
So that may be great. It may be an exception to that where you should keep the house. Your new strategy of live and flip, can’t argue with that. It sounds like you really did a lot of research and found exactly what you’re looking for. So I think that’s awesome. Is there another part of your finances or your strategy that you’d like to talk about besides the real estate today?

Jill:
Well, I think, I mean, my strategy before the real estate was just slow and steady, I guess, investing in my retirement, maxing it out as much as I could. We did start the brokerage account because I feel like all my money was tied up in retirement that I couldn’t access until I was a certain age, but now, I don’t know if I just keep that going with my investments or I try to cashflow all these renovations as quick as I can and, I guess scale back on the investment piece. So I guess, how do I balance the retirement accounts, the after tax brokerage account, 529s, all these other things we invest in with the real estate piece now?

Scott:
Great. I think if you’re going to have a rental property, the vacancy is going to kill you from it. So I think you make sure that you can move into your property, the new one, and that your current one is able to be rented out, and that’s the first priority because you’re going to be losing 3,500 a month or whatever your gross rent is every month that that place is vacant. So you have no choice there. That has to be your, I think, your top financial priority.

Scott:
Once that’s done, I think you have, it sounds like, the luxury of going right down the stack of maxing out your 401(k), maxing out your HSA, maybe contributing to other retirement accounts. Your husband has a business so there are options to really stock away a lot of money in pre-tax retirement accounts like a self-directed IRA.

Scott:
So I think those are all options to you, but I would also observe that the bulk of your position is currently in retirement accounts, and then currently primary home equity is soon to be rental home equity. So you’re not able to really access any of that except for the 250 in your house, which is why I think there’s a big decision there for you to sit down and do that analysis.

Scott:
So I think it’s a matter of what you want. Generally speaking, we hear people in a situation similar to yours that parallels yours saying, “I want more flexibility,” in a general sense. If you want that, then you’re going to have to make trade offs by not putting quite as much into the retirement accounts as you are capable of right now, paying taxes now, and generating a liquidity with that.

Jill:
Yeah. I mean, that was my worry because I’ve been working in corporate jobs since a long time. It feels like 20 years, since I was 20, and it’s exhausting, and I work pretty crazy hours. Eventually, I would like to have the flexibility that if I don’t want to work something as intense as I am today, I can do that, whether that’s scaling back and doing part-time or consulting or something more entrepreneurial. I want to have that option. So that’s why I wanted to diversify and have this rental income as well that I can access some of the money now instead of waiting till I’m 59 and a half.

Scott:
Yeah. I think you have to look at it and say, “Okay. Let’s say five years from now, where do I want to be?” You’re going to generate probably $100,000 in investible income after your expenses per year over the next couple of years, right? Right now, huge percentages of that are going to go into your 401(k), Roth IRA, your rollover IRA, all of those different types of things. It looks like maybe, I don’t know, 40 or 50 is going to go into your after tax stuff. So that’s going to give you 250 in cash that you’ll build.

Scott:
So by that point, you’ll have $600,000, $700,000 in assets outside of your retirement accounts in real estate and investments if things compound and go reasonably well, right? I don’t think that that’s flexibility in your situation. I don’t think you’re going to feel comfortable like, “Eh, I’m going to stop working now with that,” based on you’re spending with that.

Scott:
So I think you should back into that and say, “What would flexibility look like to me in five years? Is it a million in after tax investments? Is it a million and a half? Is it whatever? What does that look like? Is my position backing me into that?” I think that will involve hard trade offs about how much you contribute to retirement accounts versus how much you put into real estate versus how much you put into after tax brokerage versus how much you put into cash because you have plenty of income, but you just can’t go quite all the way down in the stack and max out everything in your pre-tax or towns and then have so much leftover that you can still have financial freedom outside of those right now.

Mindy:
Okay. So I have a little exercise based on your 401(k) only. The rule of 72 says that, essentially, your investments will double every eight years. This is rule of thumb. It’s not guaranteed. It’s not set in stone. Past performance is not indicative of future gains. All the disclaimers abound, but in 2022, your balance is $440,000. In 2030, your balance will be roughly $880,000. In 2038, your balance will be roughly $1,760,000. In 2046, your balance will be $3,520,000, and in 2054, in what, 32 years, your balance will be $7 million roughly in your 401(k), assuming you don’t put any more into it, assuming the same returns that we’ve seen historically. That’s a lot of money. Now, you’re getting into RMD territory. That’s just if you don’t put anything else in there. Do you have a company match?

Scott:
Yes, a very good one.

Mindy:
I would continue to put in, if I was in your position, I would continue to put in to get the entire company match. If that is you have to contribute over the course of the year, I would stagger it out over the course of the year. Because you want to invest in real estate, I might pull back a little bit in the 401(k) so that I could invest in real estate as well.

Mindy:
I don’t think that you are set in stone in your 401(k). I would still, I mean, personally, I would continue to invest all. I’m still maxing out my 401(k). Did we ask how old you are? I don’t think we asked how old you are.

Scott:
I’m 40.

Mindy:
40. Okay. So I’m 50, and I’m still maxing out my 401(k) just because there are ways to get to it before you are 55 or 65. The Mad Scientist has a really great article about accessing your retirement funds early. I’ll link to that in the show notes and I’ll email it to you when we’re finished here, but there’s lots of ways to access your retirement funds, the Roth conversion ladder. The 72T is at the separate but equal payments. He’s got three or four different options, including just taking it out early and paying the penalty.

Mindy:
I just still like that original house as a Airbnb with all of the stipulations that you have. It is so close. There aren’t a lot of competition so you would have a lot of demand for it. I think that perhaps your husband’s ideas that $3,500 is the income is maybe a little bit low. Always better to run the numbers with conservative because if he’s right, great, it’s still cash flows. If he’s wrong and he’s bringing in more money, “Well, oh, shucks, I brought in more money than I thought I was going to.” Who’s going to say no to that? “Oh, no, don’t pay me because that’s too much for this month.”

Mindy:
So I think there’s a lot of great options, but it comes down to … We’ve recorded a couple of shows this week and we’ve been using a fun little P word, a fun little four-letter word called plan. So I think it takes some time to sit down and talk about your financial plan, what is it that you want. When do you want to retire? When do you and your husband want to retire? Is it in five years? How much money do you want to have in whatever time? Let’s call it five years. How much money do you want to have in five years? Then you can step it back and say, “Okay. So in five years, we want this. Then we have to step back to these are the money moves that we need to make now,” or 10 years or 20 years or whatever it is, but sitting down and having a plan will help.

Mindy:
It’s not a five-minute plan. It’s not a come up with it in five minutes sort of thing. It’s not even a one day plan. Just start having the discussion with him, “What are you thinking about? What am I thinking about? Let’s get on the same page. Let’s figure out how to work backwards from that,” and then move forward towards that goal and continue thinking about it, continue fine tuning it and honing it depending on, because sometimes the stock market’s going to be down 15% in one quarter.

Jill:
Yeah. It’s rough looking at my accounts. Real estate looks-

Mindy:
Don’t look at them.

Jill:
I try not to, but it’s been bad.

Mindy:
Yes. I hear you. I hear you. I just don’t look at them, but I hear all these people talking about, “Oh, it’s down, it’s down.” I’m like, “Well, I’m not investing for tomorrow morning, so I don’t need to look at them right now.”

Scott:
What else can we help you with today?

Jill:
No. I think it’s this whole planning piece. I think we were just overloaded in retirement accounts, at least in my opinion, and I felt like we couldn’t access them. So I feel good that we’re moving more towards the real estate piece. I guess just planning the next five years, 10 years, 15 years. I mean, we always said 15 years we would try to retire. All of our parents are in their 65, 66 and still working full-time with no real intent to retire, and we don’t really want to do that.

Jill:
We really want to, when we’re 55, be able to scale back. I mean, our kids will be in college. We have lived abroad twice. I want to continue to live abroad and this time get to enjoy it instead of working the whole time. So I mean, I think my husband wants to make sure we enjoy today and I’m like, “Just shoot and do what we need to do to prepare for 55 so we can really completely be financially free and do what we want to do.” So it’s just balancing those two things, I think, and how to do that.

Scott:
Yeah. I think Mindy’s advice is spot on. Put together a plan. Say, “Here’s where I want to be in three years. Here’s where I want to be in five years. Here’s where I want to be in 10. Here’s where I want to be in 15. Here’s a portfolio that is supportive of that, and my current path is pushing me here. What adjustments do I need to make to get to exactly where I want to be backing into that portfolio?” Let’s say it’s two and a half million bucks in 12 years to cut three years off of your 15 with that, right? “What’s what’s that portfolio look like? Probably I’m going to be mostly in retirement accounts,” if that’s the case because you’re going to be close to that 59 and a half age point. You only need to bridge it for a handful of years, less than a decade.

Scott:
So you can go heavy into retirement accounts if that’s the plan and continue doing that. As long as you’re putting 30%, 40%, 50% of that cashflow into your after tax brokerage accounts, real estate, those types of things. I think you’ll probably be able to make it and have a strong cash position. So if it was five years, we need to really shift that, though, and we need to really pull it out the retirement accounts and into stuff that you can access right now, but it’s all about what that plan looks like.

Jill:
Yeah. I can’t get my head around five years, I guess, coming from a family that don’t think vacation days or anything. They’ve never taken them. They’re going to die working. 55 to me seems very early.

Scott:
You can make a step change, function change in your finances in five years with intent and grind, especially with your income.

Jill:
Yeah. True.

Scott:
I could see a situation. How’s this for five years, right? You are going to generate $500,000 in investible liquidity from your job and income and the spread there. Your husband is just starting a business, right? Probably your idea is that business is not going to be terrible and generate very little income for the next three to five years.

Jill:
No. It’s doing pretty well.

Scott:
You’re probably starting it because you think it will do something positive over a period of time. Okay. I’m sitting here in five years. I’ve generated $500,000 in investible liquidity, bought a couple of rental properties and some after tax stocks, continue to take the match in the 401(k). Now, my net net worth is sitting from 800. It’s at 1.3 million. Plus, I get whatever I’m adding to the pile from the business, right? Things may look very different from a five-year perspective of you’re intentional about this as a goal from that point in time.

Jill:
That’s true. It seems aggressive, but I think we could probably do it. It’s just, yeah, I’ve been working so long, I don’t know what it looks like to even think about not working in five years, but-

Scott:
Well, that’s what our job is to do that. Five years, I think, is a really reasonable amount of time in a situation like yours or someone who’s willing to make big changes to get a step function change in your situation. Is it enough to go from zero to multimillionaire retiree? No, but it’s definitely enough to go from zero to maybe a few hundred thousand in net worth for somebody or from a few hundred thousand to well over a million, in your case, with substantial actual passive cashflow if you’re intentional about it and that’s your plan.

Mindy:
Intentional and plan. I like those two words, Scott. Okay. Jill, well, this was a lot of fun. I really appreciate your time today. I’m super excited for pictures of your house. Please send them to me, your live and flip, and hit me up with any questions you have about it because it can be super fun. Every once in a while, you will hit a brick wall and be like, “Oh, what am I getting myself into?” So if you need words of encouragement, reach out because I have them. It’s not always pretty, but it’s a really fun cashing those big checks when you sell it.

Jill:
Have you seen shag carpets that have rakes in the rooms that you have to rake the carpet?

Mindy:
I usually rip those out the day I close.

Jill:
It’s in good shape, but it was funny. I was like, “Why is there a rake?” and the realtor is like, “Yeah. You don’t vacuum shag. You rake it.” So it’s going to be an experience.

Mindy:
Oh, yeah. When you pull it out, have a mask on like one of those big breather masks because all the garbage that they didn’t rake, didn’t vacuum up will be there.

Jill:
Good to know.

Mindy:
Gross.

Jill:
See, learning already.

Scott:
Smells like money.

Mindy:
Yuck. Okay. Jill, we will talk to you soon.

Jill:
All right. Thank you.

Mindy:
Thank you. All right. Scott, that was Jill. That was a lot of fun. I really, really enjoyed your take on where she’s going and I just always get something out of these episodes. I had a lot of fun with her today.

Scott:
Yeah. I think it was a good discussion. I think that she’s made a lot of really smart decisions. It sounds like they’ve really come into a really good income situation. I’m excited to see how her husband’s business takes off. I’m excited to see what they decide with the primary residence that they currently have, what they’re going to do with that. I’m excited to see how they’re new live and flip goes. So I mean, they’re doing all the right things and I think they’re going to build wealth a lot faster than they think over the next three to five years.

Mindy:
I agree. I think they have a lot of things going in their favor. Number one is that they don’t have debt and they have a great income. They spend less than they earn. She has an impressive income, and then she has things being taken out of her check before she even sees it. I love that tip. That tip right at the very beginning of the show, love that. Talk to your HR department and see what you can get taken out of your paycheck and see if there’s a discount for having that done.

Scott:
Yeah. By the way, let’s call something out here. She just finished paying off a lot of debt, has put everything into retirement accounts at this point, and has the home equity. This is really an inflection point for Jill, where she has created a really good situation, and has a lot of the ability to invest in a go forward basis. I think that she’s like, “What are you talking about? Five years from now I’m going to have a really good outcome here or have a lot of optionality.” Well, I think that’s right. I think you can’t count on it, but you can say looking back at stock market returns over the last 150 years, the compound annual growth rate is close to 10%. It’s a little less than 10%, right?

Scott:
So you say, “Okay. I got 800 grand, right? I’m going to save up 100 grand a year for investible liquidity, and I’m going to make a 10% return. So that’s 180 grand in wealth building going on every year with the 100 that I’m building compounding, right? Then that’s going to go up and then I’m going to increase my wealth by another 18 grand on top of that 180, so just under 200 grand the next year, and then 220, and then 240, and so on and so forth.”

Scott:
That compounding, and again, that’s going to happen in an average long-term environment. It may not happen next year. The next five years might be terrible, but why would you build your model on something that is drastically different from the long-term averages and plan for what you think is a reasonable set of events to happen downstream? If you’re used to having a huge debt burden, the opposite effect is taking place. Interest is accruing against you and you’re pushing the ball up the hill or the rock up mountain. Then when you get on the other side and you start investing, it’s starting to roll down the mountain from that.

Scott:
I think that’s what a lot of people can maybe take away from this is, yeah, it sounds crazy, but once you’re out of debt and beginning the investment process and thinking through it really intelligently, I think you have a really good shot at compounding those gains and snowballing over a fairly, and you should bake that into your plan because what’s at stake here is prime years of your life doing what you want to do. So that’s the consequence of getting this right, right? There’s a consequence to being too aggressive and running out of money and creating a problem. There’s also a consequence to not being realistic and being way too conservative and not doing the things you want to do earlier in life when you want to do them.

Mindy:
I could not have said it better, Scott. Absolutely, 100% agree. What is the opportunity cost of not being able to do the things that you want to do because you’re busy paying off debt? It just goes back to that spend less than you earn, invest wisely, earn more. There’s a lot of things that you can do to game the system just by being intelligent and being conscious with your spending. Okay. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 310 of the BiggerPockets Money podcast, he is Scott Trench, and I am Mindy Jensen saying, “Give me a hug, lady bug.”

David:
This is the BiggerPockets Podcast, show 624. One thing that makes people feel confident and comfortable choosing you as their realtor is when you also own real estate, especially if you own several properties. Now, you can sell someone who’s a little hesitant on buying a house with house hacking, but you can sell it even better if you do it yourself. You can help investors with buying homes, but if you own rental property yourself, you’re much more likely to do so.
When I’m looking to buy in different markets, the first thing I want is a realtor who owns these assets themselves and has connections in the space that I’m going to need. What’s going on, everyone? My name is David Greene and I’m your host of the BiggerPockets Real Estate Podcast. Here today with a Seeing Greene edition, as you can tell from the green light behind my head, if you are following us on YouTube. If you are not following us on YouTube, you probably didn’t just see the hand gestures that I made when I said show 624. And I would advise you to go check it out when you have some time, because shows are more fun when you can see the person who’s talking to you.
In today’s show, we are going to get into questions from the BiggerPockets community. What that means is, you, the people listening to this podcast, the people on the website, the people who will be attending BP CON, the people who love real estate investing, just as much as I do, get to ask your specific questions about what to do in your specific scenarios, as well as overall, general questions to help you Wade through the hurdles that you’re facing, making progress, building wealth. I love doing these. I love being able to help you. And I love you guys for submitting questions. So, if you would like to be featured on the show, just go to biggerpockets.com/david and submit your question there.
In today’s show, we get into some really fun stuff. In fact, some of it I’ve never answered before. We talk about how to help your parents with retirement using real estate investing. We get into what to consider as an investor, if you’re in a different country, that’s real long-distance investing. And we talk about how to rinse and repeat without putting 20% down on every single deal. We also get into, if an ADU should be built, how the ADU should be built, and how to structure, which moves to make, in which orders to make them, for several different callers.
Today’s quick tip, check out the BiggerPockets’ On the Market Podcast. We at BiggerPockets have brought to you a new podcast where we talk about what’s going on in the market and how you can be prepared to make the best choices for your financial future, by being educated. All right, let’s bring in our first question.

Arturo:
Hi, David. My name is Arturo. I am originally from Mexico, but I have been living here in Denver, Colorado for the last seven years. My background is in architecture and I just recently made a switch to real estate development. I have no deals yet, but I’m eager to take action on this in 2022 and get the first one going. My question to you is, for my first deal, should I leverage my knowledge and experience in architecture, project management, and real estate development, and do a more complex, higher risk deal, like a subdivision or a ground up development? Or should I take a more “conservative approach” and try one of the more common paths like wholesaling or a fix-and-flip, or house hacking?
I do know that you guys often recommend just get the first deal going, get some momentum, but I also feel like I have a unique set of abilities and knowledge that I can leverage to my favor and do a more successful deal. Let me know your thoughts. Thanks.

David:
Hey there, Arturo, thank you for the question. That was very well articulated. What I hear you saying is that, “Hey, I understand that the majority of newbies are recommended to get into something that’s a little more low-risk, with less moving pieces. Something like house hacking, low down payment options, but I have a skillset other people don’t have.” You understand architecture, engineering, you’re a builder. And I think this is a really interesting question. I’m glad you asked it, because we can get into some stuff here.
What I would recommend about this, is that you can take on projects that use your skillset more than an average newbie. So, a newbie is just somebody who hasn’t done something yet. They don’t have experience, so they don’t know what they’re doing. It’s not like because you’re new, you can’t do what experienced people do. If you have the experience of what they have, you obviously can. Now with building, you do have that experience.
So, I think you can take on a project that would need a bigger rehab. If I was you, I’d be looking in more expensive areas for houses that have problems, stuff that has foundational issues, roof problems, functional obsolescence. The floor plan is terrible. Something where this house is not very demanded by the rest of your competition and they’re not looking for it. Something that will require more work. But I don’t want you to fall into the trap of thinking that because you understand building, that you can make the numbers work on a property. Those are different skillsets, they’re not the same thing.
You still need to be keeping it easy when it comes to finding something that’s going to cashflow. That’s not going to require a ton of money being dumped into the property, that’s going to make you go broke. So, my advice would be, you find a more simple asset class, a small multifamily would probably be the best way to start, or a house hack. Within that asset class, that’s simple, look for a more complicated opportunity. Something that needs more work, that other people wouldn’t be able to handle. Something where your expertise can save you a lot of money, where maybe somebody else would have to hire an engineer to fix the problem, you can do it yourself. I think that’d be the best way to combine both elements, your strength, which your weakness, which is inexperience. You’re in a really good spot. I really hope to see you do well, continue working and making money and putting that into real estate. Let me know how it turns out.
All right, our next question comes from Justin Tomlinson in Trumbull, Connecticut. “How can I dominate a market as a brand new real estate agent, who is also brand new to the area and does not have the advantage over other agents? As you said in the video with owning properties or other investments. Where is the best place to start to gain the knowledge and market mastery to dominate my market?”
All right, Justin, the first thing I would say is if you want to dominate a market, what you’re really saying is, “I want to help more people than my competition.” You want to work with a lot of buyers and sellers. So, I wouldn’t look at it like how do I go dominate this market? Because you’re not really competing with other agents. This is a common misnomer amongst real estate agents. In their head, they think that they’re competing against the other agents in their office to get the client. But the reality is, very few people ever talk to several realtors. Most people find one realtor that makes them comfortable and they roll with that person and they hope it works out.
So, you’re not competing with the other agents in your office, because you’re not lining up for interviews with the same clients that those agents are going after. There’s nobody stopping you from selling more houses, other than you. So the question isn’t, how do I dominate my market? Or how do I beat my competition? You don’t have competition. The question is, how do I make myself someone that buyers and sellers feel comfortable with? And this is something that I’ve had to learn. If I get out there and I get the word out that I’m a realtor and I make people feel comfortable with me, they’ll use me. But if I start focusing on other things like The One Brokerage or my own investment opportunities, or a new book I’m writing, and I stop talking about what I do, people don’t know who I am. They use other realtors.
The fallacy is, we expect our phone to ring and people to come to us, and that’s not how this business works. You got to get out there and you got to go to them. One thing that makes people feel confident and comfortable choosing you as their realtor is when you also own real estate, especially if you own several properties. Now, you can sell someone who’s a little hesitant on buying a house with house hacking, but you can sell it even better, if you do it yourself. You can help investors with buying homes, but if you own rental property yourself, you’re much more likely to do so.
When I’m looking to buy in different markets, the first thing I want is a realtor who owns these assets themselves and has connections in the space that I’m going to need. If I’m looking for short-term rentals in Arizona with the realtor and they don’t own any, who’s going to answer my questions? It’s tough. Now, if I’m working with an agent that owns some of these asset classes themselves, or has helped so many other investors with that asset class, that they already have answers to the questions I may have, that makes me feel comfortable.
So, start by thinking about with a client, what do they want to see? A lot of realtors will say, “What car should I drive? How should I dress?” The question is, well, what’s going to make your clients feel comfortable? If you’re dressed super nice and a really expensive car, but you’re selling houses to blue collar people, that might make them feel uncomfortable. And likewise, if you’re working with high-level executives in Manhattan, but you’re rolling around in a Toyota Corolla and jeans and flip-flops, looking like Brandon Turner, that might make them feel uncomfortable.
So, the question that every real attorney needs to ask themselves is, “How do I make myself come across what a client is looking for in a real estate agent?” I would definitely get my newest book at BiggerPockets. And I had no idea that this question was going to be asked, so this wasn’t intentionally meant to plug it. You can find it at biggerpockets.com/skill. SKILL is a book that is the sequel to SOLD, that teaches people how to become a top producing real estate agent. And one of the first chapters in that book is all about top producer characteristics. They are the qualities that every single top producing agent has. And if you find those and you emulate those, you will appear to the public as a top producer and they’ll be much more likely to pick you as their realtor. Once you’ve got that down, it just becomes a game of evangelism. Get out there and tell every single person what you do and that you want to help them.

Roy:
Hi, David. I’m Roy Gotasdinar from Tel Aviv, Israel. First, just wanted to give you a fun fact. So, there’s a huge community of real estate investors in Israel, and we all follow BiggerPockets, the podcasts, the forums. And the names David Greene and Brandon Turner are household names in Israel. So, I thought you guys might like to know that, that you’re famous halfway around the globe.
Now a bit about me, I started investing a bit over two years ago in two markets. So, in Ohio and in North Carolina. Right now, I own eight rental units, single-family properties, doing BRRRR. Got another 200 contracts, so hopefully by the time this goes live, the number goes up to 10. Now, my question has two parts. First one is, as a foreign investor, I’m limited in the financing I have access to. So, I’m capped at 65% LTV with interest rates slightly higher than a US borrower. So question is, how would you recommend scaling and growing my portfolio quick, if you know that I’m limited in the financing I can get? Meaning it’s not 75 or 80, but 60 to 65.
Second question is, as I’m growing my portfolio, I realize that I’m getting more debt and I’m more exposed to the risk of not being able to handle my payments. So, I was wondering if you have any rule of thumb or benchmark regarding how much money you should have in reserve, so that if one, two, or three of your tenants don’t pay their rent on time, you’re not at risk of defaulting on your payments? So, thanks again. Really appreciate everything you’re doing. And I would be willing to come and be a guest at the live show. I would love to. Thank you.

David:
All right, Roy. Well, thank you so much. I had no idea that I was known in Israel or that BiggerPockets had a following in Tel Aviv. That is very cool. So, thank you for letting us know. You brought up some really good points that I think applied to a lot of different people. The first was, how do I keep buying properties? Now, I can tell from the questions you’re asking, Roy, that you got the bug. You’re falling in love with real estate. You’re thinking really big plans. You’re like, “I want to own every single house in the world.” And I remember being in that exact same place myself, where, when the man who owns the Keller Williams that I came to work at, sat down with me and we went over what drives me. He’s like, “Oh, you just want to buy everything in the country.” I was like, “Yeah, I just want to own all of it.” That has since changed, but I recognize those same drives in you.
When it comes for a foreign investor buying properties, you gave some really good information and you hit the nail on the head. The biggest hindrance is that there’s higher down payment requirements, often 35%. Now, most of those loans are done on a debt service basis. So, what that means is they’re going to look at what the property makes for income and qualify you based on that, but your rate’s going to be higher. Today’s rates are probably in the 8% to 8.5% range. And you can’t buy a primary residence, you’re only able to buy rental property.
You should also note that the monies that are going to be used for the transactions have to be kept either in an American bank or a bank that’s approved by lenders as American approved bank overseas. But your biggest hurdle’s going to be how much money you have to put down on the house compared to the average investor. If your competition can put down 20%, you got to put down 35. You’re going to scale slower.
So, here’s a few things that you can do to make sure you always have capital. One, I have a different approach. I know this is a real estate investing podcast, but I will still say, for the majority of investors, I am a fan of them continuing to work and actually focus on how to make more money, how to grow a business, how to work better within the business, how to get into a sales position or a commission-based system, do something to put more pressure on yourself, to earn more money, to invest in real estate. Don’t always look to real estate to replace the way that you’re making your money.
Number two, can you flip a couple properties and use that money to fund the down payment of other properties? Maybe not everything has to be a rental. The reality is most of us that are doing business like you, Roy, or we’re scaling fast, some of them are going to be great and some of them aren’t going to be so great. And it’s okay that not every deal is a winner, but if you do well and you hit value add opportunities and you’re buying in the right areas, you’re going to gain equity. And it’s okay to sell the ones that aren’t performing well, but have equity, and use that money to fund future deals.
So, maybe you need to work out a system where for every two rentals you buy, you flip a house. Or maybe every three rentals you buy, you flip one property, or you do something else to make sure income is coming in, so you can keep buying. The last question you asked is another problem that we have when we get crazy and we get the bug and we look to buy every property we can, the question starts to arise, “What am I going to do if I can’t make this payment?” Now, this is especially tricky in the market we’re in right now, because none of us know if it’s going to continue to run up, or if it’s going to stall, or if it’s going to go down. And if it does go down, how long before it goes back up.
There’s a lot of uncertainty in the market that we’re living in. So again, my advice to you is going to be, keep more money in the bank. Now, many people will say, “Put a bigger down payment on the house to decrease your risk.” I just don’t think that’s sound advice. If you put down 50% instead of 35%, it’s not going to affect your payment that much. If you don’t have a tenant in there, the difference in your payment between 35 and 50%, isn’t going to matter if you’re getting no rent. And real estate tends to work where either you’re getting your rent or you’re getting no rent. It’s not like tenants are saying, “Hey, I’m going to pay you 65% of what I owe you.” To where you can try to match that up with what your down payment is going to be.
You’re better off, in my opinion, having that money in the bank, in reserves that you can use it to make a mortgage, to fix up a house, to pay for an eviction. All the things that you need to run your business require liquid capital. So, I’d rather that you have a little bit higher of a loan balance, but more money in reserves to make the payments on it than you throw that money into the house as equity. And when the market crashes, there’s nothing you can do to stop that equity from leaving.
If the market crashes while you have money in the bank, you can either buy more property or you can weather the storm. So, my advice to you, to sum that up, would be to keep working and keep setting money aside. And only scale in proportion to what you can handle, if we do have a correction. Thank you very much for the question, Roy. I love hearing about the influence that we are having at BiggerPockets in Israel. And I hope we hear from you again.
All right. We’ve had some great questions so far and I want to thank everybody for submitting them. I also want to ask you to make sure that you like, comment, and subscribe on the BiggerPockets YouTube channel. Let us know, what do you like about these shows? What questions do you wish that we would ask? Do you think I should have gone into it longer and given a more in-depth example? Or do you think that I hit it just right? What do you think about the level of analogies that I’m giving on a show? Do you want to hear more of them or less? Let us know in the comments, what you like about our show.
In this segment of the Seeing Greene Podcast, we get into comments that other listeners have left in past shows, and sometimes they’re fun, sometimes they make you think, and sometimes they make me cry. The first comes from Dan Mercia, “Love the show. It has opened my eyes to a whole new mindset for my future and goals. My question is one that I haven’t heard yet. Everyone talks about having five, 10, 15 properties. How many mortgages can one have and how does one own more than two?”
Well, Dan, first off, this would be great to go to biggerpockets.com/david and submit as a question there for me to answer in full, but I’ll give you the short answer is, there is no limit to how many mortgages you can have. There is no law on the books in our country that says you can only have so many mortgage, at least not that I’m aware of. There are limits to how many Fannie Mae or Freddie Mac mortgages that you can get, because those are insured by the Federal Government and they tend to limit it to 10. Now after four, it becomes much harder to get the loans, but after 10 you can’t get anymore.
So, once you get 10 Fannie Mae or Freddie Mac loans, that’s where you have to switch and start looking at credit unions, portfolio loans, debt service loans. What we call non-qualified mortgages. Now, that doesn’t have to be bad. My company, The One Brokerage, does non-QM loans all the time, but they’re still 30-year fixed rate, safe loans. It just means that they’re not conventional mortgages. So, don’t despair, you can keep getting mortgages forever, as long as you can get qualified for them, but they won’t have the same terms as the Fannie Mae, Freddie Mac loans we all love.
The next comes from Five Deadly Venoms, that’s the screen name. “Hey, David. Thanks for making time to share all your knowledge. I’m definitely going to have to replay the return on equity versus return on investment part a few times.” Yeah, I don’t blame you for that. That is a complicated topic, but it’s still worth knowing. “I’d love it, if you could expand on that with an example, clearly it would be important to know when to sell. If it’s in a book, blog, or other video, please share and I’ll learn from whatever resource you have. Thanks again. Love your videos.”
All right. Thank you, Five Deadly Venoms. In long-distance investing, I do give examples of what it’s like to sell in one market and then go buy in another, taking the return on equity that may be low in a property you have in one market versus a higher return on investment you can get in another. I’ll give you an example of myself. I recently sold 25 properties in Northern Florida that had a lot of equity, but weren’t cash-flowing as good as I wanted. I’m taking that money and I’m putting it into more properties that I’m hoping will cashflow more.
If I looked at the equity that I had in my Florida portfolio, the return, meaning the cashflow I was making, was very small compared to the equity that I had. As I go reinvest that money, I’m thinking I can get a higher return on investment, ROI, on the new properties I’m buying, as well as taking on more debt, which to many people is bad, but for someone like me, that believes inflation is going to continue to occur, is good. And I’m also going to buy in markets that I think are going to grow faster than the market that I left.
So, if I do this right, these new set of properties I buy will continue to improve in value while giving me more cashflow than I was getting. And at a certain point, their equity will be greater than the return that they’re giving me in cashflow. I will then sell those properties and do the same thing again, years into the future.
Our next comment comes from Alexis King. “Hi, David. I enjoy the longer answers from you. You have so much to share and I like the way you explain things. I bought four properties last year and I’m looking to expand this year. Love the T-shirt since we are in a be comfy at work world, now. Also, I already booked my ticket, flight, and room for BP CON.” Well, Alexis, you sound like a BiggerPockets diehard. And I am going to be excited to see it at BP CON. Anybody else, if you want to check out BP CON, it’s in San Diego this year. You could go to biggerpockets.com/events and get your ticket there. In my experience, they do sell out. So, if you’re thinking about it, you should go grab it now, while you can, and maybe you’ll run into Alexis.
Alexis, thank you for letting me know. I’ve been sticking with the T-shirt vibe. It sounds like more people are liking that look than the more fancy, buttoned-up look. And I appreciate that. Also, thank you for letting me know you like the longer answers. If anyone disagrees with Alexis, let us know in the comments that you want a more concise answer or a shorter show.
Our last comment comes from Angelo. “Hey, David, great answers. Can you please take a second to review the question somehow, when you fire off answers, you miss things. Green Bay, Wisconsin, was the market the duplex was in. The tech industry is the industry the high paying W2 is in. Thanks.” Angelo, you are likely a high C on the DISC profile and you’re looking at the details. Yes, it is probably entirely possible that I said the wrong name of a city when it was Green Bay, and I might have said something else. I try very hard to articulate where I got my thought process from and why I’m giving the answer. So, that if I get a detail wrong, like I say, triplex instead of duplex, or Green Bay instead of Tampa Bay, people can still understand the logic and the principles behind the advice that I’m giving. And I also do try to review the questions where I restate what the person asked. I can definitely keep doing that and try to do better. Thank you for that feedback.
All right. Are these questions resonating with you? Do you like this feedback? Are you liking these Seeing Greene episodes? Let us know when the comments on YouTube, so we know what type of information we should give you. And I want to hear from you, please go to biggerpockets.com/david and submit more questions for me to answer on these shows.

Andrew:
What’s up, David Greene and the David Greene team. My name is Andrew Terry. First of all, I want to say thank you for BiggerPockets, David Greene. Rob, very good addition. I’m really loving what you guys are putting together. The new content is excellent. I have been listening to BiggerPockets since the beginning of the pandemic. So, quick about me, my wife and I have a travel company that we ran for about 10 years, which led us to buy this duplex, which I’m standing in front of, which we house hacked this side right here. We rent out that side right there.
Bought it in 2017, we do trips to Cuba, or were doing trips to Cuba. Pandemic happened, lost the travel company completely. And I was like, “Shoot, what do I do?” So, I started listening to BiggerPockets, watching Robuilt also on YouTube, getting all this different information and inspiration and all this kind of stuff. So, thank you guys very much, you helped me through a very difficult time. My wife was pregnant during the pandemic. We have a year-and-a-half year old baby now, who’s lovely, but dadda didn’t have a job, mamma didn’t have a job. That stuff was rough, dude.
So, I pivoted, I got myself real estate license. Real estate was the only thing that was working while travel was not working, and continues to be really slow. So, I got a real estate license, which is great. I’m here. So, I’m going to give you my breakdown. Ready? This is the question. We bought a duplex in 2017. We house hacked this side. Behind that building right there, there’s a free standing garage. We have a permit to make an ADU from the City of Los Angeles. They approved us and all that kind of stuff. It was a long and kind of expensive process, when I thought it was going to be cheap.
So, we’re able to do this ADU. This is the issue, we have equity in the house that we cannot unlock, so we cannot get to a HELOC. I don’t want to do a cash out refi, I’m going to go in the shade while I do this, because we just did a regular refinance. So, I don’t really want to do a cash out refi. We have a bunch of equity in the house. They will not allow us to do a HELOC because our travel company did so poorly in 2020 that our taxes reflect that.
The other part of it is, so we want to build the ADU to then rent it. We would like to rent our side that we’re now currently living in, that we’re house hacking. Rent the ADU side. So, turn this duplex into a triplex. Move to a single-family home here in LA, where we live, in Highland Park. So, A, there’s that, the ADU question. Do I get a HELOC? Do I just get a traditional loan to build it? We’ve had a couple of people that have said about 40 to $60,000 because it’s just a conversion, not a full build.
Part two of the question. So, an SBA loan for our small business, the travel company, is coming through to the tune of about $250,000, which is amazing. We don’t have to pay the loan back for three to four years. The interest rate on it is super, super low. It’s pandemic rate low. So, it’s around 2.5% on it. What do I do? I can’t really HELOC the house, or can I? Do I wait for this SBA money to do potentially that? Do we buy a single-family home here in Los Angeles?
Or, I’ve been looking into Tucson, Arizona. Do I take that money, invest in Tucson, Arizona, use the cashflow to help us rent something here and rent this out as a triplex? I know it’s a big old question. But, dude, you guys are the best, thank you very much. I was listening to the podcast yesterday and I heard that you’re taking questions. So, let’s see if you guys can help me with my query. Thank you very much. Have a good day. I appreciate what you guys do. Bye.

David:
Boy, Andrew, you have a lot going on in that mind of yours, between those two ears. And I love it, man. These are all really good questions. When I’m listening to you talk, I see a vision in my head of, your plan is not assembled. You’re still in the brainstorm phase. You’re going through all of these possibilities. And while I’m glad you submitted this question and I want you to keep doing so, I also just want to clarify, I can’t give you quick, concise, direct answers when the plan is still being formed.
So, what I can do is maybe try to give you some advice on how to form that plan and what some options could be. And then later, if you get a little bit closer and you submit the same question again, with some more detail and some more structure, then I can give you the specifics of what you’re looking to do.
So, you mentioned that you’re locked on a HELOC, which pardon the pun there, you’re not able to get one, but I don’t think you said why. So, the first question I would ask is, what’s stopping you from getting the HELOC? The next thing I would say is, if you can’t get a HELOC, can you do a cash out refinance? There’s different ways to get at capital.
Now, something you mentioned about the ADU only being 40 to 60,000. I really like that. Especially if you’re in Highland Park, Los Angeles. I have a real estate team there, we can help you get your next home, and we can also help with this ADU that you’re trying to build. 40 to $60,000 is a really, really good return on your money. And you mention this because you’re not building an ADU from the ground up, you’re just doing an extension. And that’s worth noting for all the listeners, if there’s ever an opportunity where you can extend onto a building you already have, not create an entirely new structure. It is much more cost efficient and therefore gives you a much higher ROI on the money that you’re putting in.
So, I think this ADU needs to happen. You got to find some way to do it. If you don’t have the cash in the bank, a good option would be a cash out refinance on your house. If you like your interest rate and you don’t want the rate to go up, because that’s likely why you didn’t propose that in the first place, a HELOC would be a really good idea.
Now, you mentioned the SBA loan, and I’m not an expert in SBA loans and I’m not giving legal advice, so I need to clarify that, but I wonder if you’re allowed to use that money for the ADU? Is the SBA loan related to your travel business or is it related to your rental property business? Because if you’re moving out of this house, at some point that may qualify as a rental property, that is a business, that might be something you could use the SBA loan for. I would definitely check with the person who’s helping broker this loan for you, to find out if that’s the case.
Now, if you can’t use the SBA money for that, but you’re saying that you can use it to go buy something in Arizona, I would wonder is it because it’s your primary residence, it means you can’t use that money? If you moved out, bought the single-family that you wanted to move into, and then used the SBA money to put in the ADU, because it’s a rental, that could be an option for you.
It sounds like you got money coming in from all kinds of different places. So, what we have to figure out is, how are you legally allowed to use the money that you’ve already got? Another thing I would say is, you don’t have to look at it like, “Can I take this money and buy a place in Arizona and use the cashflow to help supplement my mortgage on my home?” It gets tricky when you start looking at, I use this house to pay for that one, and I sold this one to buy this one. At a certain point, you just have to understand, I have debt. I have income. I’m trying to decrease the debt or the money I owe, and I’m trying to increase the income I make. And they’re not always tied to a bunch of other properties. I think people can make this more confusing than it needs to be, when they start looking at linking the chains together.
Now for years, Brandon Turner and I, would describe real estate this way, because it makes sense for a brand new investor who doesn’t have anything to connect the dots. “Oh, if I buy this house, it can pay for that. If I get that, I can go get this.” And it would get them moving in a direction. But once you get a couple properties, you have to let go of that way of looking at things.
When you said investing in another state, because Los Angeles is insane right now, I want to push back a little bit there too. You mentioned investing in Arizona. If you go to Arizona, they’re all saying, “It’s insane right now.” If you go to any of the states that you would think, “Oh, I’ll go there, because California’s too hot.” Prices, proportionally, could be even hotter in some of these out-of-state markets than what you’re getting in Los Angeles. They just seem cheaper to us Californians, because we’re used to prices that are so high.
So, don’t assume that you’re going to go to another market, like when I first wrote Long-Distance Investing, and get a much better return. When I wrote that book, it was a competitive advantage I had, to be able to buy in other markets where other investors weren’t. Based on that book, this podcast, and the popularity of real estate investing in general, the days of that being a competitive advantage are gone. Everybody now is looking to do the exact same thing you are and you’re going to be jumping into a market that’s just as hot or hotter than the one you’re in.
So, I like investing in the market that you’re in, because you can use small down payment loans to give yourself the advantage. If you can go buy another place to house hack, put 5% down and use some of that money from the $250,000 SBA loan, you’re good. If you can use the SBA loan to fund other parts of your life or business and therefore, free up cashflow from your personal self to put into real estate, you’re good.
Sometimes the money has requirements on how it can be used, but if it doesn’t, I definitely wouldn’t worry about where it’s coming from. It’s just money. Now, if the SBA loan comes with an interest rate, you need to be very careful that whatever you go use that money for, will make you more money than what it is costing to borrow the money in the first place.
Generally speaking, I love your energy. I love where your thoughts are. I love what you’re thinking about. Spend a little bit more time, getting some clarity on what you’re willing to do. If you want to turn your current property into a house hack and then move into a new property, that would be the first plan we should come up with, and then we should start talking about if you want to invest out of state. But if you get clarity on the big things, the small things tend to fall into place. And I’d love to hear from you again.
Also, Andrew, super grateful that you’re willing to help plan a trip for my company to go to Cabo. I went there last year and absolutely loved it. I tried to record a podcast with BiggerPockets, and the internet was really bad. It was notorious, it was with Scott and Mindy. And I remember whales spouting in the background behind me, but you couldn’t even see it, because the internet was going in and out. I loved that trip other than the one internet thing. So, I’d love to take you up on that. If you’d like to send me a DM on Facebook Messenger or on Instagram, I’ll do my best to find it. And I’d love your help. Thank you very much. And we’ll hear from you soon.
All right. Our next question comes from Nick E. in Indianapolis. “What are the best ways to help my parents create cashflow for retirement? They’ll be renting in three years and are looking for new ways to put their savings and equity to use. They’ve invested passively in other people’s deals, but are looking to be a little more active on the next round. They’ve got around $50,000 from their HELOC to invest. I was thinking of us going in together on a short-term rental with us both putting 50% and taking 50% of the profit. But I know that financing and operations can be more difficult with partners, especially family. They won’t really do anything themselves, so it would really be me bringing them along. So, I’m looking for something that would be advantageous for us both.”
All right. Well, first off, Nick, kudos to you for wanting to take care of your folks. I like where your heart’s at. I also like that you’re noticing that a partnership can be tricky, and so, in wisdom, you’re reaching out for advice. Let’s start there. The first thing I would say is, though your heart’s in the right place to want to help your parents, your head is not in a point where it really can. It sounds like you’re learning real estate investing at the same time that you’re trying to help them prepare for retirement. And all they have is $50,000 to help them do this. And it’s not even 50,000, it’s 50,000 attached to debt, because it’s coming through a HELOC.
Your parents are not in a point where they can actually make significant steps towards retirement, because they need to improve their financial education as well. Now, if you’re looking to help them, they may not be into real estate like you are, and you might find yourself doing all the work and all the risk. And if it goes bad, they’re going to blame you. So, here’s my advice, before you help someone next to you, you got to help yourself. Just like the flight attendants tell you on the plane, “Before you put the oxygen mask on your kid’s mouth, you need to put it on yourself.”
My advice is that you should buy a short-term rental yourself and manage it and work out a lot of the kinks. You should house hack something for yourself and manage it and work out a lot of the kinks. You need to go make some of the mistakes that every single newbie makes, just when you’re learning to ride a bike, you’re going to fall over a couple times and you’re going to scrape your elbow and scrape your knee, before you get your parents’ capital involved in this deal. They’re probably only going to give you one shot. And if you blow it, they’re going to resent you and it’s also going to hurt their opportunity to retire.
So, before you say, “Hey, let’s all jump in and do this together.” When they’re also inexperienced. My advice is you go do some of this yourself. Now, maybe they co-sign for you on a house hack, if you weren’t able to buy, maybe you let them buy into that opportunity, so they get some of the equity by giving you some of the money for the down payment. But as a newer investor, I’d want to see you do some low-risk, but high work opportunities. I mean, renting out the rooms on a big house that you house hack, or like you mentioned, a short-term rental in a market that does get a lot of people vacationing there, where you’re having to run the operation, but you’re learning a lot. Once you’ve got some experience and a proven track record, then you can talk about trying to help out your parents or using their money in the deal. Hope that helps.
Next question’s from Patrick Manari in Northeast Ohio. “David, I’ve been preparing to get into real estate investing for the last two years and I’m finally ready to get off the bench and into the game. I’m beginning my career with wholesaling, so that I can put together reserves, capital to help me with my long-term goal of buy and hold rentals. My question pertains to direct mail marketing. I have an understanding of the process and I’m prepared to do very targeted marketing, while tracking it to make adjustments as needed. My problem is, how do I find good targeted lists of motivated sellers? For example, bankruptcies, divorce, pre-foreclosures, et cetera. I’d prefer to be able to compile these lists as frugally as possible, as my startup marketing budget is pretty limited.
It’s worth noting, I do have my overhead factored into my wholesale cost and a big part of that is boosting the marketing budget as deals come through. I predicted numbers conservatively and look to come out of each wholesale deal with a 23% profit margin, assuming a very low assignment fee. I love the BP community and really enjoy the overhaul to the podcast format. Thank you very much. Patrick.”
Okay. Full disclosure, I’ve never put together a list. I’ve never marketed that way. I’ve never done direct mail. So, I’m not the best person to answer this question. If I was in your shoes, the first thing I would do is I would Google direct mail companies and I would get a baseline understanding of what they charge and what these lists are made of. The next thing I would do is go into the forums at BiggerPockets and ask this very same question, because many of the people that have experience with direct mail and putting lists together, are doing their stuff through BP and talking about it there.
The last thing that I would do is I would look for a company that offers you a form of a CRS and a list, all in one place. So, I know there are companies that help people do what you’re trying to do. They find the list, they give you access to the list and then they even help you with sending out the cards. If you can find a one-stop shop like that, you’re more likely to have success moving forward, because you won’t have to wonder about, what’s the thing that’s going to pop up that I didn’t see coming?
Now, all that being said, if you’re working on a small budget and you’re trying to make a business out of this, my advice is, don’t just start mailing lists. Everyone else is doing the same thing. They’re getting tons of these things already. This is not a new strategy. The people who are going into foreclosure, who have received notice of default, is getting letter after letter, after letter, from other people that are doing the same thing.
What people aren’t doing is the word of mouth campaign. If you can get ahold of people directly, who are in these situations and make a relationship with them, you’re not just one letter that’s been sent, trying to get a phone call back. You’re a human being that they remember, that made an impact on them, where they are more likely to work with you. So, my advice would be you take the relationship angle. You start telling people everywhere you go, you’re looking to buy houses that you can close in cash, that you can do a quick close, that you want to buy ugly homes. You get the word out there that that’s the case. You start talking to real estate agents who may come across deals that they don’t want to list. And if they can get a commission just by bringing it right to you, they’ll do so.
But look at the personal road before the direct mail road, if budgeting is a problem. The thing I don’t like about the direct mail road for a brand new person who’s trying to build a wholesaling business, is you’re competing with the big dogs that have huge budgets and can spend a lot more money than you can, to get the same result. I don’t want to see you put yourself at a position of disadvantage as a new person. So, work the relationship angle, where you do have the advantage.
Last piece of advice to you, since I know that I’m not the best person to answer a direct mail question, although I’m very grateful that you did send it in, so we can make it part of the Seeing Greene podcast. Check out Anson Young, he wrote the book for bigger pockets, Finding and Funding Great Deals. And he talks about finding off-market opportunities. He does a lot of business in the Denver, Colorado area, which is the mecca for BiggerPockets, where it all got started.
Check out episode 480 of this podcast, where we interviewed Dan Brault, who is a successful wholesaler, who is doing a lot of exactly what you’re talking about. Isn’t it awesome that BiggerPockets has episodes about almost every single question that gets asked and you have a resource you can go right to, that will give you specific help on what you’re dealing with?
Side note, we are trying to do more of that at BiggerPockets, where we are bringing in specialists to talk about specific topics of real estate. I’m talking about a multi-family specialist, a short-term rental specialist, an organization specialist, title specialist, entity creation specialist, and wholesaling specialists. If you like that, let me know in the comments that you prefer that style, or if you like the tried and true method of, I just want to hear a story from somebody. Let me know that as well.

Paula:
Hi, David. First, I’d like to start off by saying thank you so much for hosting this wonderful podcast. I love it so much. I religiously listen to BiggerPockets and it’s pretty much the only podcast that I can bring myself to listen to. So, thank you so much for all your hard work and all of your team’s hard work. It’s so, so appreciated.
But yeah, my situation is that last year I bought my first rental property here in New York City, and it was a huge accomplishment for me because I saved up pretty much my entire life, little by little, till I finally had $50,000. And then, I took all the $50,000 and put it towards a down payment because at the time, I didn’t have a mentor or anyone to really helped me with strategizing this investment or future investments. So, in my head, I thought, “All right, well, the more I put down towards my down payment, the less my mortgage payments will be, and the less debt I’ll have. Sounds great.”
But now I come to realize that maybe it would’ve been beneficial for me to take out an FHA loan or something like that, where I could put less money down, still get a pretty good interest rate and potentially buy a second investment property a lot quicker. So, the predicament I’m in is that now I really want to buy a second property down the line, sooner rather than later, but I’ve pretty much left myself with $0 in the bank account.
So, my question to you is whether you think I should continue working my W2 job and save up little by little, which may take a while. It took me a really long time, the first time around, but it’s doable. And that way I can save up for a 20% down payment on a second investment. Or, if you know of any alternatives for a non-first-time home buyer in terms of getting another mortgage with a lower down payment? Whether that’s an LLC, I’ve heard a little bit about that. I’m not too well-versed, but that is why I’m bringing the question to you. Hoping you have any advice for me. Thank you.

David:
Hey, thank you for that, Paula. Good news is, I do have several pieces of very practical advice I can give you and I think they’ll help a lot. Let’s see if I can remember everything you said here. The first thing I want to address is you mentioned first-time home buyer program or deal. This is a bit of a misnomer in our industry. There are very few actual loan programs for first-time home buyers. That was a big thing, and that phrase first-time home buyer program came around when we had the housing crash, where lenders were trying to come up with ways to help people who had never bought a house before and the government was subsidizing some of those loans.
It’s not called a first-time home buyer program. It’s a primary residence loan that you’re referring to. When you get a primary residence loan, meaning you’re going to live in the house, you get the low down payment options that are much less than 20%. You can get 3.5% down on a FHA loan, five to 10% down or anywhere in between, on a conventional program. And there’s other programs, where if you’re going to live in the house, you can get less of a down payment. That’s what you need to look for.
Now, you can contact us or another mortgage broker and say, “Hey, I’d like to know about primary residence loans.” And they’ll tell you about the low down payment programs that they offer. But the good news is no, you don’t have to save up 20%. You could get in for much less than that. Now, small multi-family tends to have higher down payments, even in the primary residence world, than single-family homes. So, you want to talk to a mortgage broker about your options, and then maybe give us another video and say, “Hey, how can I decide if I should buy a triplex or if I should buy a big house that has a lot of rooms?” Maybe we run the numbers together and see which one works better.
Another thing I want to address is you made the same mistake I made a bunch of times when I was new, and most newbies make, is they assume that they are more safe if they put a big down payment on a property. I did this so many times thinking, “I’m safer if I put a lot of money down.” It’s just not true. What it does is, it makes you more scared because you have less money in the bank in case your mortgage doesn’t get paid or in case something breaks. And when a next opportunity comes, you have less money to put into buying that deal, so you buy less real estate and ultimately, you become a worse investor because you don’t get as much experience.
So, you don’t have to put down the maximum amount you possibly can on a house. In many cases, you’re better to put down less. And if there’s money left over, improve the property, make the property worth more, keep it in reserves. Do something with it, putting it into another property, use it to build an ADU on the property, make the property worth more, rather than just putting a lot of money down on the loan. It sounds like you’ve already realized that though, so good for you.
Another thing I want to highly encourage you, you said it, you scrimped and you saved to get to the $50,000 at your job. And you’re saying, “Should I just go through that again?” Well, the answer is yes, but let’s do it with a twist. My assumption is that you now have more confidence because you’ve gone through this process of buying a home. You are now a homeowner and you should be very proud of yourself, especially considering how hard and how long it takes to save $50,000 in today’s economy.
You also have skills that you didn’t have before, which is probably why you should have more confidence. Use that new confidence and these new skills to go to your boss and say, you’d like a raise or you’d like a promotion, you’d like a new opportunity. If there is no opportunity there for you, start looking at different jobs that you could make more money. Take the new skills you have and find a way to make more money, so you can save faster.
Now, do that in combination with saving up money, to get your next home with the lower down payment. Move out of the one that you bought first, make it a rental, buy another one that will work as a house hack that could be turned into several different units. And now you’ve got another rental property. You can fight this battle on several fronts. Saving more money, making more money, and investing it more wisely. And when you get all three working together, your wealth building starts to skyrocket and be supercharged. Thank you very much for submitting the question. Please submit another one and let us know an update on how it’s been going and what more we can do to help.
All right, everyone. Thanks again for taking the time to send me questions. We could not make this show if you weren’t doing that. So, I’m very grateful. We had a great response from our audience and I encourage you to ask more questions in the future, so we can do more of these shows. I love doing this and from what I’m hearing, you guys love hearing it. Submit your questions at biggerpockets.com/david. And know that I look forward to hearing from you, as does everybody at BiggerPockets, because we would not have a podcast, if not for you.
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We have more episodes other than this Seeing Greene style. So, you can check out some of the interviews that we do with very interesting and successful guests. And let me know what you think there. Thanks again for your time. Thanks for your attention. I know there’s a lot of people you could be listening to, and I really appreciate that it’s me, that we’re taking this journey on together. I will see you on the next one.