Sarah Weaver lives with intention, reacts with flexibility, and practices patience. It’s how she managed to acquire 15 units and travel the world as a digital nomad. It’s why agents hire her to coach them. It’s how she started a company to fill a need in her industry. It’s how she earned the financial position to be able to pursue properties in the Smoky Mountains, an area that would have been out of reach for her just a year ago. 

But her journey wasn’t always smooth sailing. 2020 was a particularly transformational year, she explains on an episode of the BiggerPockets Real Estate Podcast. She admits to doing things the wrong way before learning to do them right. She wasn’t sure how to navigate her relationships with real estate agents or how to narrow her focus to the right investment strategy. That knowledge was, like Weaver’s success, earned through hard work. Now, she has carved a path that other long-distance investors would feel lucky to follow—and there’s a lot to learn from her story. 

Be Intentional

People sometimes ask Weaver how she grew her wealth so quickly. She says it wasn’t easy — but it was most certainly intentional. “I think one thing that I can say with confidence is I live really intentionally,” she says. “Was there a lot of tears and setbacks and frustrations? Absolutely. But I woke up and I was really clear on what my goals were and I didn’t let the little things knock me down.”

In 2015, Weaver wrote in her journal that she wanted to be location-independent. Within eight days, she had a job in the real estate industry that allowed her to work remotely. “And that was this ‘aha’ moment of manifestation. And so, ever since then, I’ve just been really diligent about writing down what I want in life and then not really taking no for an answer.” She knew she wanted to live in Buenos Aires. So three years ago, she bought a one-way ticket to Argentina. When you’re intentional about the life you want, you understand that obstacles are par for the course—and you don’t let them turn you around. 

Where to Start

A lot of success in real estate comes from starting with the resources you have. Weaver was living in Denver, Colorado, in 2017. The area was cost-prohibitive for her at the time, so she drove to Kansas City, knowing she could get a better price. “And so I house-hacked in Kansas City in 2017.” She went from single family to duplex to fourplex, house-hacking in different markets each time. It was never an accident that she would become nomadic. She built her investment strategy intentionally for that lifestyle. 

Co-host of the BiggerPockets Real Estate Podcast, David Greene, echoes that a lot of success in real estate and business is built in small steps. “It’s that incremental systematic progress where you’re not trying to just knock your opponent out in one punch,” he explains. That kind of patient escalation is something that Weaver has done very well. 

The Perks (and Challenges) of Long-Distance Investing

“I think long-distance investing is the absolute way to go even from day one. People ask like, ‘What do you do if something breaks?’ And I say, ‘It’s great. You don’t do anything.’” 

Doing nothing, however, requires a lot of proactive work. “ I have what I call the vendor list. And so I don’t just have one plumber. I have five plumbers because of course the day that something happens, the plumber that you love and trust isn’t available. And so that list is crucial.” She starts working on that list as soon as she’s confident she’ll close. It’s how she self-manages all of her 15 units from thousands of miles away. 

Doing nothing also requires that you do your due diligence, she says. “You have to have a team on the ground that you can trust. And so that’s where investor-friendly, investor-savvy real estate agents are absolutely clutch. You need to trust them, but just like online dating, you trust but verify. And so I like to have video tours. I walk the neighborhood on Google Earth. There’s lots of steps in my due diligence process that make long-distance investing possible.”

And though it might go without saying, strong WiFi is crucial. Weaver recommends setting up in a new locale on a weekend day to ensure you can get consistent internet access during the week. 

Though distance can be an obstacle, it also has its perks. Living abroad allowed Weaver to keep her expenses low, save more of her salary, and go from three units to 15 in just 68 days. “And when that happened, I woke up and was like, “Wow, I did it,” like I exceeded my lean F-I number or lean financial independent number. Meaning all of my expenses are more than covered by my rental income. I can easily leave my W-2.” It was always the end goal—and now it’s a reality.

Navigating Relationships with Agents

Working with agents can be difficult even when you’re not in a different time zone. Investing from abroad presents an even greater challenge. But ironically, when you invest from a distance, you rely on your agent the most. Weaver says choosing the right agent is part of the puzzle, and having flexibility in your expectations is another. “Ideally, your agent is also an investor, or at least understands investing,” she says. She asks probing questions when interviewing a real estate agent, such as:

1. What does your lead generation look like?
2. What does your portfolio look like?
3. Have you ever done a BRRRR before?

Once you have a good agent, you should, of course, try to keep them. This means setting crystal clear criteria so your agent can confidently find what you need. For example, when Weaver was in New Zealand pursuing a deal in Omaha, she provided her agent with incredibly detailed criteria. “He knew to give me purchase price, current rent, market rent, estimated rehab, taxes, and insurance.” And that information made it easier for Weaver to evaluate the deal. 

Maintaining your agent’s trust also means putting your money where your mouth is. “One of the quickest ways to be sent to the bottom of an agent’s list is to tell them your crystal clear criteria, the agent sends you that deal, and then you don’t write an offer on it.” 

It’s important to be respectful of your agent’s reputation and time. If they’re going to reach out to their contacts for you and find off-market deals that meet your criteria, you need to be certain about what you want and willing to write an offer when you find it, or it will reflect poorly on them. Weaver also has different expectations of how her agents spend their time than she would from a residential agent. “I actually don’t make my agents walk a property unless I’m under contract,” she says, because their time is spent hunting deals. 

If you’re looking for an investor-friendly real estate agent, check out Agent Finder in the BiggerPockets Marketplace to find vetted and professional real estate agents who can help you secure the deals you need.

Choosing the Right Investment Strategy

Weaver’s success was only possible because she focused on one strategy at a time. Currently, she’s finding a happy medium in the medium-term rental strategy. “If you have someone who’s willing to book your place for a month, two, maybe three months, they want it fully furnished. You, the landlord, cover utilities, and you might not get as much rent as you would on Airbnb, but there’s less turnover. There’s guaranteed income,” she says. 

This strategy also allows investors to evade local ordinances that restrict the number or type of short-term rentals allowed, which have become popular in Western states, particularly Colorado. 

Weaver says she’s had success listing her units on Facebook Marketplace and FurnishedFinder.com. But Airbnb can also be a reliable place to find medium-term tenants. Airbnb CEO Brian Chesky says more people are reserving rentals for a longer period because the pandemic has led to more remote work. In the fourth quarter of 2021, 22% of the nights booked were for stays of one month or longer. 

Filling a Market Need

Investors often have the unique ability to recognize the unmet needs of other investors, and that’s the idea behind Weaver’s newest venture. “I am now filling a need in the market. I started a company called Arya Design Services, and we help investors either revamp or fully launch their Airbnb. We can buy all of the furniture remotely, have it sent to the unit, and people on the ground can put it together, or you can fly my team in to furnish it themselves.” 

It’s just another example of the opportunities that can present themselves when you live with intention, react with flexibility, and practice patience. 

Find a Local Agent Today

The BiggerPockets Agent Finder makes it easy to connect with real estate agents who know the local market and can evaluate properties from an investor’s perspective. Here’s how it works:

1. Pick your market
2. Share your investment criteria
3. Match with a real estate agent

Knowing the right tenant screening questions to ask is key to protecting your investment. Tenant screening is vital because you’re most likely renting to a stranger. There is only so much you can tell from first impressions. Therefore, screening is your only chance to recognize a potentially good tenant from a disastrous one. 

Standard procedures for screening a tenant include checking references from previous landlords, employment references, and a credit report. However, interviewing the tenant is just as important. Asking the right interview questions gives you a chance to learn vital information about the prospective renter. You can also gauge their reaction to specific questions—more than you can from a rental application form. 

This article discusses the most important questions to ask tenants to ensure they are a good fit for the rental unit. But, it’s crucial to know why you must ask these questions. 

What Makes the Ideal Tenant?

Three factors help identify the ideal tenant:

1. Their ability to pay rent. Rental income should be three times the rental price.
2. They must have good references. This is because you can often get an idea of future behavior based on previous conduct.
3. They need a decent credit history.

These factors help to ensure three crucial things:

1. The tenant has a reliable monthly income proving they can afford the make rent payments
2. The tenant will pay rent on time
3. There is a good chance they will take care of the property

Interview Questions You Cannot Ask

Although the pre-rental interview is designed to get to know the tenant better, you must be careful. There are specific interview questions you can never ask a tenant. You should stay clear of questions that appear discriminatory or violate the Fair Housing Act. Here’s what you should know about the Fair Housing Act.

Top 10 Screening Questions to Ask a Tenant

Asking questions is the only way to assess a rental applicant. However, to ensure you get the right tenant, you must ask the right questions. And not just any question will do. The better the questions, the better your position to accurately evaluate the potential tenant. 

Here are the best 10 screening questions landlords should ask potential tenants during the interview.

1. When do you plan on moving in?

A good first question for a potential renter is knowing when they plan to move. Maybe they have time left on their current lease and can’t move immediately. In this case, it may be best to find a tenant who can move in immediately to reduce vacancy time.

On the other hand, suppose the current tenant has given two months’ notice, and you have started advertising early. In that case, someone who wants to move immediately wouldn’t be a good match.

2. How long have you lived at your current address?

A basic tenant screening question is knowing how long they’ve lived at their current place. Their answer can give an idea of their stability as a long-term tenant. For example, have they lived there for less than a year? In that case, it’s good to find out why. It may be because of relocating with work or another legitimate reason. 

A tenant who is constantly on the move may be a sign of a problem tenant, and there’s a risk they won’t stay for the entire lease agreement term. 

3. Why are you moving?

Moving can be expensive, not to mention stressful. So, it’s worth asking a prospective tenant their reasons for moving. Maybe their current place no longer matches their needs. Or, they may need to live closer to work or family. Was it an increase in rent prices? Regardless of their reason, always do your due diligence during the screening process. 

It’s always a red flag if the tenant lies about their reason for moving. For instance, they say they need to downsize, but you learn from references that they are getting evicted or regularly miss rent payments.

4. Do you have pets?

If you don’t allow pets in your rental unit, then you must find out about any animals they have. However, even if you have a pet policy allowing animals, you may have restrictions on the size and breed. So, it’s best to find out before signing the rental agreement. Additionally, you can discuss your policy on paying a pet deposit and any additional fees. 

If you allow pet owners to rent, always carry out pet screening beforehand. 

Pro tip: Remember that a service animal isn’t classified as a pet, and you can’t deny housing to someone who has one. You should also check that the emotional support animal letter is genuine.

5. How many people will be living with you?

Rental laws restrict the number of people per bedroom in a rental unit. If you have a multi-tenancy unit, asking this simple question is essential. In any case, anyone living in the apartment permanently should be named on the lease agreement. 

6. Are you or anyone who will be living in the apartment smokers?

A vital rental screening question to ask a tenant is if they smoke. Typically, a rental agreement should state your smoking policy and outline the consequences for violating the lease. However, asking if they smoke allows you to assess their reaction. 

7. What’s your current income?

It’s not impolite to ask a straightforward question about how much a prospective tenant earns. After all, you must know if they can afford the monthly rent or not. Typically, a tenant can afford rent if they spend no more than 30% of their income on housing. According to a Harvard study, the 30% rule “remains a reliable indicator of affordability both over time and across markets.”

If their pay stubs or bank statements reveal a lower amount, you should be extra cautious about renting.

It’s worth noting that reports indicate that nonpayment of rent is the most common reason for evictions. 

8. Have you ever been evicted?

Asking about previous evictions may reveal why they were forcibly removed from a previous rental unit. Of course, if they were evicted, it’s good to be cautious. But were there extenuating circumstances? Or has enough time passed, and the tenant now has a good credit history for a previous eviction not to be an issue? Again, it’s good to find out. 

9. Do you have current or previous convictions?

Before asking about a criminal record, it’s crucial to know if any local laws prevent you from inquiring too deeply into this. There’s also grey area surrounding the Fair Housing Act, and if it’s truly legal to ask this question, as it may turn out to be discriminatory. However, if you can inquire about convictions, it’s good to do so. In addition, their criminal history and type of punishment could indicate if they are a suitable candidate for renting. 

Be very careful not to ask about arrests. It’s generally illegal to ask about previous arrests when conducting a screening interview. Arrests don’t always lead to convictions. 

10. Can you pay the security deposit and one month’s rent at the lease signing?

The last question is to ensure that the tenant can pay the upfront costs of renting. At the same time, you can ask if the potential tenant has any questions for you.

Conclusion

Knowing the right tenant screening questions can help you assess applicants and choose the ideal tenant. However, never take answers at face value. Instead, always do due diligence to check that the tenant was telling the truth.

Ashley:
This is Real Estate Rookie Episode 195.

Craig:
And so, you need to look at the house with the proper layout, so that you can separate the upstairs and downstairs. For example, there’s many houses in the Denver area where the side door that is right where the stairs are to go downstairs. So, all you have to do is put a little wall up or put a little door up and you’ve got two separate units. And that would be perfect to Airbnb the downstairs. We do that. I’ve got many properties that are just that and I think that’s the most efficient way and the way I like to house hack now.

Ashley:
My name is Ashley Kehr and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we give you the inspiration, information and motivation that you need to kick start your real estate investing career. Ashley Kehr, my co-host, what’s going on? What’s new in your neck of the woods?

Ashley:
Well, I’m currently in a stretched position trying to get my knee to stop being painful right now. The six-month, the never ending complaining of me with my knee problems. But hopefully, I just had my last surgery and hopefully, I’m on the mend, but I avoided my pain pill today, which I probably should not have. But I wanted to be of a sound mind for the podcast recording, but I feel like that’s not even possible, even without me on drugs, so yeah.

Ashley:
But yeah, other than that, everything’s good. I’m going to look at a property tonight that could potentially just be a long-term buy and hold and getting excited. I think when this airs, this has already happened, but I’m going out to Boise, Idaho to a conference that I’m going to be the emcee at and speaking at for AJ Osborne. And it is his CRU Circle event, so it’s on mostly about commercial real estate investing.

Tony:
Yeah, it’s exciting. There’s like a loaded lineup of speakers for that one. I think Thatch is speaking there, Brandon is speaking there, so quite a few number of people. When is it again? June, what through what?

Ashley:
June 14th to the 17th.

Craig:
Okay. I think we’re at another conference that overlaps with that, but yeah, I saw the lineup. I thought it was really cool. I wanted to attend. So, you have to give us the full download once you get back.

Ashley:
Don’t worry. Follow my Instagram stories and you’ll be able to see all that.

Tony:
There’ll plenty of that, yeah.

Ashley:
Nothing about the conference, it’s just the after party.

Tony:
Just the yeah.

Ashley:
No, I’m kidding.

Tony:
Yeah. More hula hoops and masquerading views and stuff like that. How cool.

Ashley:
Yeah. Yeah, the last time I went to an AJ Osborne conference, it was in Coeur d’Alene, Idaho and it was a Self-Storage Conference. And I remember the first night, he’s like, “Oh, I’m having just like a small VIP little cocktail hour. It’s just going to be some hors d’oeuvres and cocktails. Just join us.” And it was like oysters, fresh cut prime rib. I’m like, “Wait. What does this cocktails and hors d’oeuvres? This is like a meal, a 10-course meal.” So, the food is what I’m most looking forward to.

Tony:
There you go. All right. Not the networking, not amazing content. It’s the food. I love it.

Ashley:
So, what’s new with you, Tony?

Tony:
Actually, while we were recording this podcast, I got an email that we just closed on another one of our flips, so that’s always exciting. This one’s cool because all of our other flips, we’ve been using that money towards the purchase of more short-term rentals. But this will be the first flip that’s not earmarked for another purchase. We actually get to spend some of it, so that’s always exciting. So, we started flipping houses late last year and we’ve rehabbed, I don’t know, quite a few in Joshua Tree now. So really, really excited that we can continue to grow that part of our business.

Tony:
And we’re flipping these properties as turnkey short-term rental, so even though it’s technically a different type of real estate investing it pretty much is still what we’re doing. But instead of us keeping the property, we’re just selling to someone else at the end. So, it’s been cool to learn this other side of real estate investing and the properties turn out, we get better every single time. So, if you guys want to see the flips or you guys want to maybe buy them from us, you guys can follow on Instagram. It’s @TonyJRobinson. I usually post all the flips we’re selling there.

Ashley:
I think that it’s so cool that you are taking exactly what you’re doing and learning how to have a different exit strategy based off of it. But also helping other people get started. Having a turnkey property is a great way to get started in real estate investing if you know nothing about rehab and especially if you want to get into short-term rentals. A lot of the properties that you have bought purchased out in, and even Joshua Tree, but in the Smoky Mountains, too, a lot of them were pretty much turnkey, correct?

Tony:
Pretty much, yeah, everything we bought in the Smoky’s has been turnkey. It was an existing short-term rental, it came fully furnished and we spent a couple of thousand bucks like replacing linens and missing silverware and stuff like that. But yeah, there’s definitely a gap right now I think in the short-term rental industry, in terms of turnkey opportunities in a lot of markets. If you look at long-term rentals, there’s turnkey operators in almost every major location, but that same thing hasn’t happened yet for the short-term rental. So, we feel like we’re filling a void there, yeah.

Ashley:
Well, today, we are talking about a specific topic and that is house hacking, not short-term rentals. And we have an expert on today, Craig Curelop, who wrote the book, the house hacking strategy. So, Craig joins us from Denver where he has his real estate team, but also recently, we found out just moved to Idaho. So, Craig is coming on today to talk about house hacking, what it is, is it still possible to do in today’s market? What are the advantages, the disadvantages of it?

Craig:
And I’m glad we brought Craig on, because in my mind house hacking is one of the lowest risked ways I think to get started as a real estate investor. And Craig Curelop breaks down his five-year blueprint that most people can probably achieve financial freedom by following or using house hacking as a strategy. So, overall, just Craig is a wealth of information when it comes to house hacking and we hear a little bit about his story, how he got started, how he was sleeping in a cardboard box in his own living room. And how that led to him achieving financial freedom. So, overall, just a really cool conversation with Craig.

Ashley:
Craig, welcome to the show. Thank you so much for joining us, since last time we tried to record with you, you ditched us.

Craig:
I know, I know. Well, I missed the memo. I thought we were doing this podcast in the river in the Grand Canyon on the Colorado River. So, you guys didn’t show up, I was waiting for you.

Ashley:
You know what, I think that is the best excuse to not show up to a podcast recording. And you know what, you’ve definitely left your mark because you’re the first person to not show up to a rookie podcast [inaudible 00:06:41].

Craig:
Really? I’m in the record books?

Tony:
You’re in the record books, man.

Ashley:
Yeah.

Craig:
All right, put me down.

Ashley:
And so Craig, tell us a little bit about yourself. For people who don’t know, you’ve written the book, The House Hacking Strategy. You’ve been a big part of BiggerPockets and you’re a real estate agent. So, just give us a brief backstory on you.

Craig:
Yeah. Really, it all started like a lot of people start out in this industry, just absolutely hating my W2 job before I worked at BiggerPockets. It was honestly-

Tony:
I was I going to say, I was like, “What did you work for?”

Craig:
Yeah. Scott’s in the background there, like yeah. No, so it was when I was in California working like a venture capital job, being an analyst. And just working hundreds of hours a week and looking down the hallway and seeing that my progression would be moving 30-feet down the hall to being my boss. And maybe I worked a hundred hours a week, maybe he worked 80 hours a week, so it really wasn’t a good life.

Craig:
And so, I started getting the idea of a passive income after reading Tim Ferriss’s book, the 4-Hour Work Week. And after reading that book, I was like, “Oh, I should start thinking of my expenses on a monthly basis, my salary on a monthly basis. And then if I can just get enough passive income on a monthly basis to cover my expenses, well, I’m financially free and I no longer have to work.” And that sounds a lot of fun. I get to travel, spend time with friends, do whatever I want and live on my own time.

Craig:
And so, being in Silicon Valley, I was trying to think of dumb startup idea after dumb startup idea and if you didn’t know, Silicon Valley is filled with dumb startup ideas. And so, none of those just worked. And so then, I went back to my house and I looked around and I was living in a 20-unit apartment building. And I was like, “This little Spanish lady, who comes to collect rent every month has probably collect in a hundred grand on the first of every month. And all she has to do is drive her car here.” I was like, “That sounds pretty cool.”

Craig:
And so then, I started diving into real estate. Obviously, I found BiggerPockets, not long after that and then I went down the rabbit hole. And so, within six months of finding BiggerPockets, I found myself working at BiggerPockets, moving to Denver, purchased my first house hack. And that’s where it all started.

Tony:
Craig. I love that you made that observation of, “I’m working a hundred hours a week. Once I get promoted, I get to look forward to 80 hours a week.” Which is, it’s such a weird dynamic, but it’s what so many of us are accustomed to and it was that light bulb that made things go off for you. It’s so funny, man. The 4-Hour Work Week was one of the first books I read about entrepreneurship as well. So, for me, it was Rich Dad, Poor Dad and The 4-Hour Work Week came shortly there afterwards and that’s when I went down the rabbit hole, too, man.

Tony:
But Craig, what makes you unique, man, is that you’ve built a name for yourself around one specific strategy within the world of real estate investing. So, breakdown for us exactly what house hacking is and why you felt it was a good place for you to start your investing career.

Craig:
Yeah. So, I think anyone who’s young or anyone really, in general, house hacking is probably the best place to start. And so, what house hacking is, is the idea that you’re going to purchase a one- to four-unit property with a low-percent down, typically, 3 to 5% down. Because you’re doing a low-percent down loan, you’re required to live there for one year and while you’re living there, you’re able to rent out the extra bedrooms or the extra units. So, the rent that you’re gathering covers your mortgage and you’re able to live rent free.

Craig:
And I would bet that 90% of the people listening right now, their largest expense is their living expense, unless they’re house hacking, of course. And so then, so you’re eliminating your largest expense, you’re investing in a property, you’re living in your investment and so, things aren’t going to go bad when you’re living there, because you’re seeing it every single day. So, it’s like landlording on training wheels and you’re able to do this year after year after year until you have a pretty sizable portfolio. And you can easily achieve financial independence just through house hacking.

Tony:
Craig, thanks for that breakdown, man. So, I just want to recap it to make sure that our listeners are following. So, essentially, you go out, you buy a property and then you rent out the extra space in that property to help offset your cost of owning that home. Did I wrap that up the right way?

Craig:
Yeah, you got it, man.

Tony:
So, Craig, let’s talk about why do you feel this strategy is a great way for newer investors to start. And especially given where the market is at today, there’s a lot of fear, I think, of a lot of people who want to get into investing. Why is house hacking a great place to start?

Craig:
Yeah. It’s a great place to start because you don’t need a lot of money to get started. Simple as that. You need 3 to 5% down. So, if you’re in Denver, buying a $500,000 property, you need between $15 and maybe $30,000 down. That is a lot less than what it would typically cost to buy a $500,000 property over a hundred grand. And so, you’re not putting a whole lot of money down. Because of that, your returns on investment are massive.

Craig:
Like I said prior, it’s you’re landlording on training wheels. You’re living in your investment, so you’re seeing your tenants come in and out. You can stop things and nip them in the bud before they get too bad. And so, I think those are two really big reasons why house hacking is a great way to get started.

Ashley:
Now, you talk about that half a million dollar house that somebody is going to go purchase and maybe they’re buying that because it has four bedrooms, so they can live in one and rent out the other three. How do you get approved for these higher purchase price instead of having to buy a two-bedroom one bath, because that’s what you can afford, but if you’re house hacking this bigger property with more rooms, does the bank actually look at that income that you’re going to be bringing in on the property?

Craig:
So, this seems to change by the month, it feels. Sometimes, the bank will look at prospective rents and take 75% of border income is what they call it. They were doing that at one point. I think they stopped doing that as of this recording. By the time this releases, they may start doing it again. So, my recommendation would just be to talk to a bunch of different lenders and see if they can use any of the expected rent to offset the debt payment to increase your debt to income ratio. Now, you can definitely do that if you use an FHA loan on a two-, three- or four-unit property. I’m just not sure how that works with the bedrooms at this point in time.

Ashley:
So, now, how you talked about things change going on with lenders and definitely, everything in the market is changing right now than what we’ve seen in the past several years. So, has that affected house hacking at all? And is it still possible to house hack a property?

Craig:
So, I truly think that there will never be a time where house hacking is not advantageous. I just don’t see a time. The reason is one, there’s many different types of house hacks. And so, if you’re buying a four- or five-bedroom house, you’re living in one unit, renting out the other. In a bad economy, you’re offsetting your mortgage payment, which will only help you. You’re offering cheaper housing to people who need cheaper housing because obviously people pay less for a room than they will for a full unit.

Craig:
So, I don’t see the necessity for house hacking really going away. I thought, I legitimately thought I was nervous when COVID hit that people may not want to be living in a room with four strangers that they don’t know where they are or how dirty they are. But honestly it’s like it wasn’t even the case. So, because house hacking persisted through COVID, lasted through COVID, I just don’t see any scenario where people wouldn’t want to do that.

Tony:
So, Craig, you also mentioned there’s multiple ways that you can house hack. So, I just want to break down some of those and tell me if these different scenarios work with house hacking. So, you already mentioned you can go out and buy a big house. Buy a five-bedroom house where you rent out the other four bedrooms. What if I want to rent out my basement? Can I house sack my basement?

Craig:
Yeah, we do that all day. So, it depends. Obviously, you have to know what the houses look like in your area. Many houses in the south don’t have basements. In Denver, a lot of houses do and so, you need to look at the house with the proper layout, so that you can separate the upstairs and downstairs.

Craig:
For example, there’s many houses in the Denver area where the side door that is right where the stairs are to go downstairs. So, all you have to do is put a little wall up or put a little door up and you’ve got two separate units, and that would be perfect to Airbnb the downstairs. We do that. I’ve got many properties that are just that. And I think that’s the most efficient way in the way I like to house hack now. Now, that I like to have my own space, now that I’m a few years in.

Tony:
What about like, I don’t know, say I have a detached garage or an ADU in the back. Can I house sack those?

Craig:
Sure. I mean you can house hack anything. You can put a tent in your backyard, you can add storage units. There’s so many ways you could get money out of your house. But people ask me a lot, “Should I renovate my garage and add plumbing and add electrical and add all of these different things?” Honestly, I think it’s going to cost you 75 to 100 grand to do all that. You might as well just buy another house is my thought. It would be less work, less stress, less permits and less time. So, if you got 75 to 100 grand, I would say like, and you get to keep your garage. So, my two cents, I don’t love the garage conversion thing, but it all depends on where you live.

Tony:
Yeah. And I’m asking these questions facetiously. The point I want the listeners to understand is that whatever extra space you have, whether it’s a basement, an ADU in the back, or you buy a multifamily where you live in one unit and you rent out the other three units. Whatever extra space you have on your property, you can turn that into an income generating space as opposed to a liability like it is for most people.

Craig:
100%.

Ashley:
Also, parking for RVs and boats, that’s really big in our area, so a lot of people have these in over the winter. They need somewhere to store it in their driveway in the suburb. It might not be big enough to actually store it and so, they need somewhere else to store it. And a little side note here, our producer also chimed in with a studio space in your kids’ closet, which is how I recorded for the last three years.

Tony:
Yeah. And if you guys don’t know-

Craig:
There you go.

Ashley:
I’m at my kitchen now. No, but-

Tony:
Yeah. If you guys don’t know Ashley’s kids, they’re actually ruthless landlord. So, Ashley pays a premium for recording in that studio every single month. So, she taught them well.

Ashley:
Actually, they did. My one child has a really nice big walk-in closet and I’m forced to take the small bare minimum walk-in closet for my studio.

Tony:
Oh, my gosh. I love that.

Ashley:
The thing is with my knee, with hurting my knee, my knee has been straight for so long, so I haven’t been able to bend it enough to get into the studio…

Tony:
Get back into the closet.

Ashley:
… other than that. So, I should be able to move back in shortly.

Tony:
So, Craig, we talked about some of the benefits of house hacking, some of the different ways you can do it. But what do you think are some of maybe the disadvantages that come along with house hacking? Maybe why is it a bad approach for someone?

Craig:
It is a little bit more work, obviously. You are maintaining a house and you need to get tenants and you need to sign leases and do your diligence and all that. So, it doesn’t come without a cost. Is that cost large relative to what you’re getting out of it? I would say not at all. My story is I went from a negative $30,000 net worth to financially free in two and a half years, mainly through house hacking.

Craig:
And so, it’s not get rich super quick, but it’s get rich pretty darn quick if you want to do it the right way and you want to really be scrappy. And I was really scrappy for those first few years. And so, yeah, I just think that, I think it’s for anyone that wants to, again, expedite their path towards financial independence.

Tony:
All right. So, Craig, appreciate you breaking down some of the disadvantages of that. I think it’s important for new investors to hear both the good side and the bad side of real estate investment, because every type of real estate investing comes with some type of downside. And you just got to make sure that if you choose this strategy that it will align or that you can stomach what those downsides are, I guess.

Tony:
Now for me, Craig, one of the biggest things that I’d be concerned with from house hacking is having to share my personal space with strangers. So, what tips or advice do you have for someone that might be worried about the same thing?

Craig:
Yeah, so we talk in the book about the comfort continuum. On one side, it’s comfort and on the other side is profit. And on the far side of that continuum, the profit side, it’s, yeah, you’re living on the couch in your living room and renting out every other room in your house, so understandable if you don’t want to do that. So, you just move along the continuum towards the comfort side, which is what you mentioned before Tony, about having a house where you just rent the basement. So, that way you have your own space. I’m sure you may hear them come in and out.

Craig:
But honestly, when we’ve done this, I don’t think I’ve ever even seen my Airbnb guests. I’ve heard them walking down the stairs and stuff, but you really don’t see them that much. And so, that usually is enough privacy, so that you can still make some money, you can still cover your mortgage or at least get pretty darn close and you can still make serious leaps towards financial independence.

Ashley:
So, are there a lot of properties out there that have the basements redone or what are some things that me or anybody could look for when they’re looking for a house hack? What do you look for when you’re searching for a property?

Craig:
Yeah, so in Denver, there are a lot of basements that are completed. And so, those are really easy to Airbnb, especially if you don’t care to add a kitchen or anything like that. Obviously, if you add a kitchen, it will get you a little bit more and then you have some more flexibility with maybe splitting it up into two units later on. But if you’re just looking at Airbnb, all you really need is like a microwave and a mini fridge and you’re good to go.

Craig:
I personally like to add kitchens, because I like to have that flexibility in case Airbnb ever goes away or anything like that. And so, what I like to look for is big utility rooms. You’ve got the washer and dryer in there, but you’ve got all the exposed pipes, you’ve got the electrical, so it’s very easy to add a kitchen down there. And usually, it’s about the space that you’d want for a kitchen. And so, it may cost 15 or 20 grand to add that kitchen. And now, you’ve got a house with two kitchens, maybe two laundries. And so, you’ve got this true single family house with a mother-in-law suite that you could rent out both sides. So, it’s like a duplex, but not technically a duplex.

Ashley:
Okay. So, if you purchase one of these properties, are there zoning requirement to say you’re just doing house hacking where you’re just putting maybe a person in each bedroom? Are there zoning requirements for that? And we can talk about the short-term rental side, too, but just for having somebody do long term rental in rooms, does that matter at all?

Craig:
So, each city or each town has different rules for the maximum unrelated people living in a house, so you’ll need to know those rules and my recommendation would be not to break those rules. I would say that most of the time, those rules aren’t super enforced. But again, it’s up to you whether you want to take that risk or not. I know plenty of people that have taken the risk, they have not gotten caught, but it just takes one annoying neighbor to catch you.

Craig:
So, my recommendation is figure out what your jurisdictions laws are, surrounding maximum unrelated tenants, and then you can buy the four-or five- or six-bedroom houses based on what that number is.

Tony:
That’s interesting. I did not know that that was even an ordinance or a law that cities had. But interesting as you go narrow and deep on some of these different strategies, you start to uncover all these different weird nuances. Craig, I want to go back because you said you started off by renting out rooms in your house. That was your first house hack and you’ve graduated to this basement strategy?

Craig:
So, my first house hack was where I was living in the living room behind a curtain in a cardboard box. And then, I went to Rent Find, then I discovered that I could have my own bedroom.

Tony:
Yeah. There was a step-up above that. That’s hilarious, man.

Craig:
Yeah, yeah. Having my own room was a luxury.

Tony:
So, talk us through that. What are maybe some rules. I think it’s a little bit easier if you have separate units. If you’re living in the upstairs unit, someone else is living in the downstairs unit, you’ve got a triplex where there’s two other units. But if you’re in the same house and you’re renting out spare bedrooms, what are some ground rules you should set in place for your tenants? How you screen people to make sure you don’t get some maniac living with you? How do you set yourself up for success?

Ashley:
First, Craig, before you answer that this is bringing you back to college days where this is, house hacking is very common, where you get your group of friends together. You rent a house, each person pays by the bedroom. But I think this is very different is because you’re going and getting your friends to live with you. So, there may not be as many set rules in the house, but you also have that other person as the landlord that collects the rent from everybody, make sure the utility is paid, things like that.

Ashley:
Where now, you are responsible to make sure that everybody is paying and choosing the people to live in those rooms. You may have never have met them before. So, yeah, I’m curious as to what, do you have a rules list that’s posted on the fridge? How do you share the common area?

Craig:
I did have that rules list, but I can tell you, I don’t think people can read. So, this is obviously, it is a thing, but honestly, it’s not as bad as people make it out to be. There’s this common misconception that when you think of rent by the room, you always think first thing is college, living in a five-bedroom place with your buddies. But the thing is you’re not living with your buddies. And so, no one really cares to interact with each other, so there’s not really much like living room, people aren’t really hanging out in their common areas.

Craig:
Most of the time, people are throwing a DiGiorno’s pizza in the toaster oven or the oven, whatever, and bringing it back to their room and that’s it and you’re not. And so, really the rules, we set them right in the beginning. So, I think you always want to make sure that in the beginning and it’s “Clean your dishes, wipe up after yourself.” And then once a month, we’ll get a cleaner to clean the bathroom and the kitchen. And those main areas like that.

Tony:
Craig, did you ever have any instances where people, your tenants weren’t following those house rules that you set up? And if so, how did you go about correcting that?

Craig:
Yeah, tenants, they’re not usually that bad. In my experience, they just haven’t been that bad. Maybe I’ve done a decent job at just screening them. But in the event that something would happen, really, you have to address it soon and address it often before it becomes a habit for them. Habits take a long time to break. And so, if they have a habit of leaving that coffee stir spoon in the sink and that annoys somebody, you say, “Hey, you mind just rinsing that off and whatever, throwing it in the dishwasher?” And just tell them every single time that it happens, so that way they don’t fall back into their habit.

Craig:
And so, if you tell them just once though, you can’t get all mad at them if they do it again a second time. They’re in a habit. You’re helping them break this habit, so you have to realize that it’s going to take time for them to adjust out of that. But to continue to adjust, to asking them and asking them nicely, so there’s no hostility in the house.

Ashley:
Come on, Craig. The answer we wanted to hear is that you laid down the law, you came out, you had your mustache. You had your stored attached to you and walked around the house to make sure all the rules are followed.

Craig:
Yeah, I just walked around with a shotgun.

Tony:
Yeah, Craig, perfect execution. So, you talked about the screening piece, man, so help us understand. For me, I would probably be a lot more stringent for house hacking tenants than I would be for a traditional tenant because I have to share the space with them. So, what did your screening process look like?

Craig:
Yeah, so we would send out an application and that application would basically make sure that they give us their credit score and a background check. Personally, what I looked for was 650 or higher credit score and a clean background check. If there was a DUI like a few years ago or something like that, I would let that go, but obviously, nothing drug-related or nothing violent-related. That’s an automatic pass. And then, you have the landlord references, the employer references, the pay stubs and all that stuff. And so, try to gather as much information as you can about the tenant, verify that information, and then you can go ahead and accept them.

Ashley:
And Craig, there are separate rules for screening a tenant if you are going to be living in the same property, correct?

Craig:
Yes, that’s right. So, if you’re living in the property, there’s the fair housing laws, which you can’t discriminate based on race or sex or family or whatever. But if you’re living in the house, you can basically say any reason that you want. I recommend, just make your life easy and don’t deny somebody because of their race or their religion or something like that. But it could be like, “He looked like a high school bully of mine and I didn’t like that.” And so, that is a perfectly valid reason to not want to live with somebody and so-

Tony:
Craig, was that a real reason? Did you really turn somebody away for?

Craig:
Yeah, I got afraid of one guy. I was afraid he was going to steal my lunch. So, those are like, you can. You’re right, Ashley. You can be a lot more stringent and have weirder answer. If you just don’t want to live with somebody, it’s fine, but I would try to stick to the fair housing laws as best as you can.

Ashley:
And then, what’s a good way to make sure that you stay in landlord mode. And you treat this like a business, so that maybe you’re having everybody pay online or something. It’s just automatically deposited into your account versus getting like, “Oh, well.” Having the person next door to you knocking on your door and be like, “Hey, here’s $100. I’ll deposit the rest later and stuff.” How do you keep that, focus on your business and those systems and processes and it doesn’t get too relaxed into a friendship mode?

Craig:
Yeah, no, that’s great. So, I use a system called Rent Ready. I think I’m sure, I think they were on the bigger pockets podcast and all that. And so, it’s a software that allows the tenants to submit maintenance requests. It allows them to do automatic rent payments and all that. And so, basically you just make sure they set that up in the first month and then you never have to ask for rent ever again, which I think is amazing. As for not getting too friendly with your tenants, that’s a really easy thing to slide into, especially if you’re very friendly.

Craig:
What I would do is I would be civil and cordial with them in the house, but I would never really ask them to hang out, go somewhere to hang out. I would never ask them to go to a restaurant or go to a bar or go snowboarding or anything like that. But that’s just the culture of my house. One way that a lot of people get their houses filled is that they niche out their house, so they say like, “Snowboard is paradise,” or like, “Rock climber haven.” So then, they get a bunch of snowboarders and then they go and they become friends. And that’s actually a really good way to get tenants. So, it really just depends on how you market your house hack and what house hack you want it to be.

Ashley:
That’s cool. I’ve never heard of that before like picking a niche and trying to get people that have common interest into a house.

Craig:
Yeah, it works really well.

Tony:
Yeah. Ash’s would be, “Must have cool hip-hop T-shirts to live in this house.”

Ashley:
Yeah. [inaudible 00:29:10]…

Tony:
Or really bad knees.

Craig:
Yeah. She’s got-

Ashley:
… I should say.

Craig:
She’s got some Kenny Chesney on there now, yeah.

Tony:
So, Craig, one follow-up question to that, so the other thing that always gets me stuck on the house hack strategy is how do you split up utilities, maybe common things like toiletries and paper towels and dish soap? How did you account for all those things? Was it just one flat rate? Was it variable? Switching off month by month? What was your strategy for managing those?

Craig:
Yeah, so when I had these, I would just charge a $75 utility fee on top of the rent. And that would change based on how many bedrooms it was. If it was a four-bedroom, it’d probably be $100. Nowadays, I would actually increase that to $100 because prices are rising. But so, you just have a flat fee. In the winter months, your utility bill is a little bit higher and so, you’re going to lose a little bit. But in the summer it’s a little bit lower, so you’re going to win a little bit. And it nets out within a hundred bucks over the course of the year.

Craig:
And so, that is infinitely easier than going in, splitting it up five ways every single month, adding it all up. It’s a pain. I did that, too and I would just never do that again. And so, that’s what I would suggest, a flat fee, split it that many ways, and you’re good to go.

Tony:
Does that include all the household items, Craig? So, the dish soap, the paper towels, the toilet paper. Everything that’s needed just for the common areas, too?

Craig:
So, when I would furnish a house, I would purchase, I’ll go to Costco and I’d buy a big thing of toilet paper, a big thing of paper towels, a big thing of, like all that stuff. It would maybe cost 100 to 200 bucks and that would be really good for the year. And so, I don’t know if it includes it or not. Sure, but also if things ran out and I wasn’t around, people would replace it. There’s never been a time where we went without toilet paper or anything like that.

Tony:
Yeah. Last question, what about the food piece? Did everyone have their own section in the fridge to say, “Hey, this is Craig’s stuff. Don’t touch it. This is Ashley’s. This is Tony’s.” How was the food handled?

Craig:
Yeah, so there’s specific places in the fridge and also, everyone has their own cabinet. And so you’ve got your dry goods and your stuff you need to refrigerate. There were sections for sure, like section-ish, but sometimes, you put the milks together and you just remember which milk is yours and all that stuff. And we never really had an issue with that. I forgot to say this, if you are going to have five or six people living in the same house, I would probably suggest getting two refrigerators. We always had one upstairs and one downstairs and that way they can store their stuff in the fridge and less time coming upstairs and just more room for everybody.

Ashley:
Interesting. Yeah. I don’t know if I could ever go back to house hacking sharing crisis because I know Tony would yell at me because I’d steal his food all the time. We went to Tennessee together and we stayed at a cabin, a bunch of us. And Tony was meal prepping for his fitness competition and he brought, it’s from California to Tennessee, all of his meals in his little container. And that was the only thing in the fridge, I think that we-

Tony:
And Ash, did you eat one of them or something?

Ashley:
You know what, I was so starving when I got there. I was so tempted to, but Tony, you know how nice him and Sarah are, they actually brought me back some chicken. It all worked out, yeah.

Ashley:
So, Craig, what other tips and advice do you have for rookies that are looking to get started in their house hack? Who are some of the people they should have on their team, maybe? Do they need to find an agent who is friendly to house hacking and knows what that is? Do they need to go to certain mortgage lenders? What does their team look like that they should be building?

Craig:
Yeah. So, I think the first and probably, maybe I’m biased, but the first and probably, the most important person on your team is going to be a real estate agent, because your real estate agent is that node that knows everybody else. And so, if you find a good investor friendly agent that has worked with house hackers before in your area, then make sure they are house hackers, make sure you get along with them, obviously. But if they pass all your criteria, they’ll introduce you to their house hacking friendly lender and contractors and accountants and everything you really need.

Craig:
And so, you don’t need all that stuff up front. Get an agent, find an agent is the first step. After that, they’ll introduce you to everybody else. Let them do the work. And so, I think that’s just the most crucial piece. But I would say take your time finding a really high-quality investor friendly real estate agent and let the rest fall into place.

Ashley:
What about the landlord piece? Is it common for if you’re house hacking, to get a property manager or do you recommend that you self-manage?

Craig:
I think at first it’s best to self-manage just so you know how to do it. And just so you know if your property manager is messing up or not. So, the way I did it was I managed my first two properties myself. Once I got to my third one is when I started hiring property management and I even hired a property manager for the house I was living in to rent out those other bedrooms. And the reason for that was because I was becoming a real estate agent at the time and it just became way more, my time was better served showing people houses versus waiting in the house, having people not show up to see your room. And so, you guys have to figure out what your time is worth. And then, you’ll know when it’s time to hire a property manager. It is very obvious.

Tony:
So, Craig, you mentioned earlier that you’ve essentially achieved financial independence within less than three years through the house hacking strategy. So, what I want to do is, if you can maybe open up the kimono a little bit and give us the behind the scenes. If someone today, they’re working a 9:00 to 5:00 that maybe they’re not crazy about, how can they use house hacking to, maybe not two and a half years, that might be a little bit aggressive, but say they had five years. If someone wanted to achieve financial independence with house hacking over the next five years, what blueprint can you give our listeners to be able to do that?

Craig:
Yeah, so the way that a lot of people in Denver are here doing it is each house hack they buy is going to cash flow them between $500 and $1000 a month. And so, you’re able to buy one of those a year, every year for five years. And so, if get great deals and you can get $5,000 a month in five years, well, that’s financial independence right there. And that, of course, assumes that your rents don’t increase and property values don’t increase, because once you start getting more and more properties that are increasing, you’re able to take the equity from those properties through a HELOC or whatever else. And you can buy more and you can acquire more.

Craig:
And so, I think Brandon has talked about the stack where everybody thinks linearly, but really, it doesn’t work that way. Once you start getting 1, 2, 3 properties, you’ll have more money to then buy 4, 5, 6, 7, 8, 9. And I guarantee you, if you put your head down and buy a property a year, you’ll be very close to financial independence within that five-year timeline.

Tony:
You have my head spin a little bit, Craig. So, I live in Southern California, which is historically a pretty expensive market and a lot of cities here, just buying a long-term rental wouldn’t make sense. And it’s not necessarily house hacking, but just the idea of renting by the room in maybe a more expensive market could be a way to really unlock a different level of profitability. Because if I could rent, maybe a house by itself for $2,700, if you rented the whole house, but if it’s a five-bedroom and I can rent each one for maybe $800 a month, that’s a big difference in profitability there. So, yeah, no, no, just thinking out loud. Maybe I’ll go out and buy a house hack or a multifamily, rent it out by the room now, so we’ll see.

Craig:
Yeah, so in-

Ashley:
I already texted Sarah. She said, no.

Tony:
Yeah. No more deals.

Craig:
So, in more expensive markets, because people always are baffled that I think anyone would say, “Oh, my gosh, I can get a property in Denver,” which appreciates 20% the last two years and still get $1000 of cash flow. I think anyone would take that all day. And I don’t do that by just buying a house and renting it out traditionally. Those are for Midwestern markets and in those markets where you can buy houses for under 100 grand.

Craig:
You have to get a little bit creative in these markets like Denver, Austin, Seattle, I’m not too sure about Southern California, but these tier-two cities, maybe not the LAs and San Franciscos, but what you do. And so, there’s many ways you can do it, whether it’s rent by the room. I’ve been doing this thing now with Airbnb arbitrage. And so, I think a lot of people get excited about finding landlords to rent from, and then put it on Airbnb and keep the difference. Well, I’m just that landlord.

Craig:
And so, if someone comes to me and they want to Airbnb my place out, they pay me $400, $500 a month premium and they take on the management of it. And so, I’m saving. I’m making $400 a month more plus I’m saving on the property management fee, which is about a $600 to $700 difference than I would just traditionally. And so, I’m like all day, I will do that.

Tony:
Craig, you’re going to have so many people, who are fans of short-term rentals, who reaching out to now saying, “Please let me arbitrage your units in Denver.”

Ashley:
Yeah, Craig, let me dig into that. So, you’re not paying a property manager for these fees that the operator is taking over. So, are they taking care of all the maintenance then? Is that included in your lease agreement that they’re in charge of that?

Craig:
So, at least with my agreement, I think every agreement will be different. With my agreement, they take care of the small stuff that the guests will probably do, like little leaks here, little stuff there. If there’s something big, the AC goes, the furnace goes, the roof needs to be replaced, that’s on me, of course. And so, think like most of my maintenance is taken care of.

Craig:
And I’m a pretty nice dude and I don’t want to spoil our relationships, so am I going to let $200 once every four months really destroy a relationship I have with this person who’s given me, say helped me save $600 a month? Of course, not. And so I’m fairly lenient, but yeah, but the agreement usually is they pay for the small things, I pay for the big things.

Ashley:
Okay. So, they would still contact you directly instead of the property manager?

Craig:
Yeah, if something needs to be replaced. Yep

Tony:
Yeah. But so, you have the arbitrage STR operator and you also have a property manager or did you remove the property manager together?

Craig:
I removed the property manager because for me, those things just don’t break that often. Maybe once a year I have to call a plumber and oftentimes, I have an assistant, too. I just have them do it. And so, it’s not really. It’s sure it’s me managing it, but it really doesn’t take much time at all.

Tony:
Cool. Well, thank you for that breakdown.

Ashley:
Yeah. Would you want to go through just the numbers of a house hack for us real quick? You said maybe like $500 to $1000 on average, someone can get from the Denver market. But can you maybe show what the purchase price would be? How much you’d have to put down? What maybe your interest rate would be? And then what they should charge per room? And how much you’d get back in your pocket?

Craig:
Yeah, I can go through my most recent one. Back in July of 2021, I bought this property in a pretty up and coming area of Denver. It was actually a seven-bed, three-bath. And in this, it’s called Virginia Veil. It’s right next to Cherry Creek. It’s a really up and coming area. It’s really nice. What I liked about it’s got that top-bottom setup with that big utility room that I described earlier.

Craig:
And so, I bought this for $585,000. I can’t remember the interest of my mortgage. It was 3 point something, so interest rates were lower back then. And then my mortgage on that is $3,000 a month. So, that was my mortgage. I ended up making one of the bedrooms downstairs into a living room. And so, now it’s a six-bed, three-bath with a living room and I converted that, that downstairs to an Airbnb. I really did not like managing the Airbnb and so, that’s when I got the idea of doing the arbitrage with somebody else.

Craig:
And so, somebody’s renting that downstairs from me for $2,400 a month and she’s putting on Airbnb. And I think she’s making a lot of money because I haven’t heard any complaints. So, that works. So, in Denver, you really can only have one Airbnb per residence. And so, that was an issue in Denver Metro and this one is in Denver Metro versus in the suburbs, the rules are different. And so, the upstairs I have a traditional regular tenant and they pay $2,400 a month as well.

Craig:
And so, you can see the difference there. It’s $2,400 for a top unit, three-bed, two-bath. It’s pretty nice with a backyard versus the same exact amount for a basement unit, three-bed, one bath, no backyard. And so, that is making me $4,800 a month in rent on a $3,000 mortgage, so I’m making $1,800 over the mortgage. And I set maybe $400 or $500 aside for vacancy. Vacancy, I do pay utilities on that one and all the other things you’re reserved for.

Craig:
And so, I’m making a little over $1000 a month on that property right there. And that’s not a home run, out-of-this-world deal. I found that very quickly and just went with it and so, you can get stuff like that all day.

Ashley:
That is so cool. I love that you looked at that property and you’re okay, I want to do short-term rental. And then you’re like, “You know what? It’s not for me. Let’s twist and turn it. And let’s do Airbnb arbitrage.” Especially, that’s one of my favorite things is looking at a property and finding different ways to pull revenue off of it. And also, having those different exit strategies on it where if something’s not working, “Okay, I can do this now with that property.”

Tony:
And Craig, just really quick. You say $1000 pretty nonchalantly, but it’s a pretty healthy amount of cash flow for one property. My first long-term rental, I was making 150 bucks a month, so you did almost 10x that. So, don’t sell yourself too short there.

Tony:
One of the thing I want to highlight. You talked to Ashley about multiple revenue streams, the different opportunities from a piece property. And episode 107, we had Kai Andrew on, and he talked about land hacking, which is similar to house hacking, but his was with land. And he was making 10 income streams off of one piece of land. So, if you guys go back to episode 107 with Kai Andrew, you can hear a little bit more about the cousin to house hacking, which is land hacking and how he set that up.

Craig:
We’re going to have to give that one a listen.

Ashley:
Well, Craig, thank you so much for joining us. We do have a couple segments here to go through. Tony, you want to take the first one?

Tony:
So, Craig, are you ready for the rookie exam?

Craig:
Oh, man, I didn’t study. But let’s do it.

Tony:
The future of your life depends on this exam, so luckily for you, I think you’re going to do well, man. So, three questions for you, same three questions we ask every guest now. So, the first question is what is one actionable thing a rookie should do after listening to this episode?

Craig:
I think you should reach out to a investor-friendly real estate agent in your area. And just start asking questions and start having those conversations, so they can help. if you need some time to prepare, they can help you so that you know what to prepare. And so that way, when it comes time, you’ve got your down payment saved up. You can hit that ground rolling versus getting all the education and getting the team together then. So, start building your team now.

Ashley:
The next question is what is one tool, software, app or system, in your business that you use?

Craig:
For the house hacking piece, I would say Rent Ready is going to be the best thing that I’ve seen. It used to be Cozy, but Cozy got crappy once apartments.com bought them. So, I always recommend Rent Ready now and yeah, they do great for the property management side if you’re going to be managing your house hacks yourself.

Tony:
Awesome. Last question for you, Craig. Where do you plan on being in five years?

Craig:
Man, my future does depend on this.

Tony:
Are you going to chicken on me? We will.

Craig:
That’s always a tough question. We just bought our forever home up in Idaho. And so, I think we’re going to be there. We’re going to be settled in there a little bit more. We’re going to continue to grow the real estate team in Denver and maybe in a few different other markets and just try to help as many people as we can achieve financial independence through real estate investing. And so, similar to BiggerPockets mission, we have a very similar mission. So, yeah, we’re just going to keep taking it day by day.

Ashley:
And even better, I love Idaho. That would be my dream place to live out of all the places that I’ve been to.

Craig:
Yeah. We’ll definitely, come by and hang out.

Ashley:
Yeah, I’ll be in Boise and Coeur d’Alene in June.

Craig:
We are in Coeur d’Alene, so let me know, yeah.

Ashley:
That’s even better. That’s amazing there, so good for you.

Craig:
Yeah, yeah. Let’s at least grab lunch or you can come see the place, yeah. You can meet Grace.

Ashley:
Cool. Well, let’s give out a shout out to our rookie rock star, who is Jason Beckett this week, closed on units two, three, and four. He purchased a triple triplex in an incredibly hot and trendy Tremont neighborhood in Cleveland, and somehow managed to get it below asking with an FHA 203K loan. List price was $329,000. He got it for $290,000, out of pocket $15,200. The rehab was $70,000, which was built into the loan, which is part of the 203K loan. And his expected ARV is to be $400,000. And the rent potential is going to be between 1500 to 1650 per unit. So, congratulations, Jason, that’s awesome.

Ashley:
Well, Craig, where can everyone find out some more information about you and reach out to you besides showing up at your doorstep in Coeur d’Alene?

Craig:
Yeah. Well, you’re more than welcome to Instagram. I’m the Fi Guy. We have a podcast of our own, too, called Invest to Fi. And if you’re in Denver, you can always look at thefiteam.com as well. We’re always happy to help.

Ashley:
Well, Craig, thank you so much for joining us. We enjoyed having an expert on to talk about house hacking. I’m Ashley @Wealthfromrentals, he’s Tony @TonyJRobinson on Instagram, and we will be back on Saturday with a Rookie reply.

Real estate can be one of the most profitable investments, but it’s also one of the most costly and complicated. Not only is a lot of money involved, but real estate tends to move in trends, for better or worse. When you decide to invest in real estate, you want to ensure that you choose a property that will pay off in the long run.

As an experienced investor, I’ve learned quite a bit along my journey. Friends and colleagues often approach me when considering investing in their first rental property.

In this article, I’m sharing the most common questions new real estate investors ask me.

Question #1: Is Now a Good Time to Invest?

Real estate is a tricky business. Knowing what’s in store for the market is extremely difficult, but there are a few key indicators to pay attention to that will give you an idea of which way the market is heading. 

Those indicators are: 

• Interest rates 
• Tax rates 
• Local market trends 

In short, the answer is always yes. Now is a good time to invest. 

As long as you are thinking long term, any market fluctuations occurring today will typically not impact an investment property down the line. Looking at the last few decades of housing prices, you would see that home prices have consistently trended upwards.

The exception to the rule is if you are looking for a short-term real estate investment or if there is a catastrophic change to the market in one way or another. It’s impossible to predict the future, but events like regulatory changes, war, or financial busts can all dramatically and suddenly impact the real estate market. 

Question #2: How Can I Get My Finances in Order?

Before purchasing any property, do the math and make sure it’s something you can afford. 

You should be looking at potential profit margins, mortgage rates, and the average rental rates for the market you’re investing in. Regularly monitor your credit score and work on actively improving it if necessary. Estimate maintenance and management costs, and see how they fit in with your expenses and income. 

Lastly, you should always plan for the unexpected. Build an emergency fund that you can dip into in case of property or personal emergencies that will keep you covered without rocking the financial boat. 

Question #3: Should I Invest Out of State?

If your local market isn’t offering the investment opportunities you want, you might consider buying a property outside of where you live. This strategy can be lucrative, but there are hurdles to watch for. 

Landlord-tenant laws vary from state to state and constantly change. You’ll also need to assemble a team to help you manage your property if you don’t plan on traveling regularly. That being said, looking for investment properties in what may be a more accessible market can provide fewer barriers to entry and help you diversify your portfolio.

So, it’s up to you to figure out if it makes sense.

Question #4: Should I Invest in Multiple Properties?

You might consider adding multiple properties to your real estate portfolio to generate income faster with larger profit margins. In addition to providing multiple streams of income, a larger real estate portfolio diversifies your risk and offers more tax benefits.

I recommend you consider paying down debt substantially on your first property before you jump into a second, third, fourth, or more. While this is a more conservative approach, it will protect you in case of a downward turn in the market. If you are confident you’ll bring in more profits than the interest on your current mortgage and ancillary expenses, you might be able to skip this step. 

Treat every new property as if it’s your only source of revenue. Research your options for securing additional financing, which will vary from conventional mortgages to private loans based on your financial situation.

Question #5: Should I Invest With a Partner?

Coming up with the initial capital to cover a down payment, realtor fees, closing costs, property taxes, home maintenance, and the like can be challenging. To save on costs, many people choose to invest with a partner who can share the finances and responsibilities of owning an investment property. 

If this is a path you’re considering, create a contract or written agreement before taking any official steps. Lay out clear expectations for each partner’s roles and responsibilities, break down each partner’s finances and outline how assets will be protected. 

Look for a partner who complements your skill set. If you excel on the administrative side, look for someone who thrives on repairs, renovations, and maintenance. 

Question #6: Is Turnkey the Way to Go?

“Turnkey” generally refers to a property for sale already in move-in condition. Tenants might already occupy it, or it is ready for occupancy without requiring any updates or renovations. A turnkey property can be an excellent investment, as it usually provides quick cash flow without any upfront costs. 

I would recommend this, especially for new investors. While purchasing a fixer-upper can be a great way to save money on the purchase price, vacancies can quickly destroy your profit margins. 

Question #7: Should I Buy Properties with Tenants Already?

Sometimes the best rental properties are already rental properties. 

If you’re looking to invest in a property that has tenants, don’t make any final decisions until you understand the vetting process the current property owner went through. Please don’t assume that because tenants are living in the building, they are the right tenants for the property. Ask the current owner for as much information and documentation on the current tenants as possible. 

Ask what criteria they used to qualify the renters? What has their rent payment history been like? Are there any existing agreements in place that you need to know about?

Final Thoughts

Good investments require analysis. Setting unrealistic rates of return on real estate is one of the main reasons new investors lose money. Put in the work to understand the different types of rental properties and the different opportunities in your market. You might decide that one successful investment property is all you need, or you might find yourself searching for the next investment.

When running a business, automation and delegation can make your life easier and amplify your success. This is even truer for the real estate industry. If you’re in the short-term rental (STR) business, you might have realized by now that STRs are one of the most management-intensive real estate classes. 

This, of course, is because of the high volume of people coming in and out of your property. But even though STRs require more time and resources to manage, that doesn’t mean you or even someone else needs to be completing those tasks. 

As my business grew, I wanted to see which pieces I could start delegating to other people as most other entrepreneurs would do. 

But, instead of finding the right people for tasks, what if I could find the software or tools that can take over these time-consuming jobs without hiring people?

After all, I wanted to delegate three things:

• Messaging
• Pricing
• Guest Services

All of these can be covered by automated software. In this article, we’ll discuss those applications.

Automated Messaging

When it comes to any online travel agency (OTA) like Airbnb or VRBO, at the end of the day, they are a search engine, and outside of keywords, their algorithm rewards specific behaviors. 

One of those behaviors is how quickly you respond to your guests. The quicker you respond to a guest, the higher your account is placed in the search results. 

So, the first thing I wanted to do was automate the messaging for my business.

Before automating, I would manually send booking confirmations, check-in instructions, a check-up message once the guest checks in, a pre-check-out message, and a review request message. That’s a lot for one property, let alone managing others.

To make my life easier, the first tool I found was Hospitable. For a starting price of $25 per month for up to two properties, this tool allows you to integrate with Airbnb, VRBO, and Booking.com, and it can handle all of your messages automatically for you. They also provide excellent messaging templates, so you don’t have to worry about the specifics of your writing. 

The automated messages through Hospitable auto-fill the guest’s name, date of check-in, and date of check-out. When you are away from work, you can set up an automated message saying you’re not available, which comes in handy at night when you are sleeping.  

Another exciting tool they provide is automated reviews. This allows you to automate all of the review requests to guests. Then, the software will read through the reviews and determine which ones should display first on your listings, which can become very time-consuming after you start managing more properties.

After messaging, the next step is to automate the pricing.

Dynamic Pricing 

When I first started listing properties on Airbnb, I would sit down once every week, pull up my calendar, and assess the pricing of each listing. I would slash prices for dates that had not been booked and increase prices for weekends that I thought would do better. There was a lot of guesswork, and it simply wasn’t scalable. 

Cut to today, and I firmly believe that your property is at a disadvantage if you are not using a dynamic pricing tool for your STR. Automated pricing apps will track the local market’s rental demand and adjust prices based on it, making your listing much more competitive. Another great benefit of automated pricing is that it helps your properties rank better on the OTA search results.

The dynamic pricing tool I currently use is PriceLabs.

Digital Guidebook 

My wife and I recently took a trip to Tulum Beach, Mexico. When we checked into the resort, the front desk agent sent us a link to 4 days worth of activities. We absolutely loved this, and I wanted to see how I could apply that to the STR business. I asked myself, “How can I become my guest’s travel agent without spending too much money, and can I automate the whole process?” 

That’s where a digital guidebook came in.

A digital guidebook is a link you can send your guest that provides information and a short itinerary of things to do in your market. I suggest finding 3-4 attractions and making a daily schedule around them. When your guest checks in, you can have this sent automatically.

For instance, Asheville, North Carolina, is known for breweries, hiking trails, and restaurants. I have three separate days that are planned around those things.

The digital guidebook I use is Hostfully, but there are a ton of other platforms you can use. I recommend having a digital book compared to a printed one you leave at the property for many reasons, including easier access for a guest, ease of updating, and the ability to keep it all automated.

Final Thoughts 

These are the three tools I’ve implemented over the last two years to completely automate the vast majority of my business. Even better, applying all three of these tools to your rental will only cost you an extra $60 or so per month, more or less depending on the number of properties you hold. Regardless, the costs are a drop in the bucket to how much money and time these tools will give you back!

Find long-term wealth with short-term rentals

From analyzing potential properties to effectively managing your listings, this book is your one-stop resource for making a profit with short-term rentals! Whether you’re new to real estate investing or you want to add a new strategy to your growing portfolio, vacation rentals can be an extremely lucrative way to add an extra income stream—but only if you acquire and manage your properties correctly.

Dave:
Hi, everyone. Welcome to On The Market. I’m Dave Meyer, your host, joined today by Kathy Fettke. Kathy, how are you?

Kathy:
I’m doing great. And so excited for this interview. I always learned so much whenever I listened to Logan.

Dave:
Well, I actually remember when we were first reaching out to different people about finding people to be hosts of this show, you had told me that you were a fan of Logan, and I’m a big fan of Logan. And so I knew it would be a great pairing for both of us to get to interview him today. Why have you followed him for so long? What about Logan’s work do you find so reputable and reliable?

Kathy:
Well, he’s accurate. He’s right. And the people I followed for many years, let’s just say they were more in the negative camp, which in some ways served me because I was cautious and careful. And I have people who listen to what I say and I would rather veer on the side of caution. But a lot of these people really were wrong. They were wrong year after year, after year.
So to find somebody who’s been right year after year, after year, and really understands it. And he’s not trying to sell anything. He’s not a real estate agent or a broker or a mortgage broker, he’s retired. So it’s just refreshing and it’s helped me to stay positive at a time when negativity is just everywhere, everywhere and it’s hard to know what kind of decisions to make.
And so for me, when I can see hardcore data, solid data, and when it’s explained to me in a way that I can understand, which is what Logan does, it’s a lot to take in. And so following him on HousingWire’s helpful because it takes a little time to truly understand what he’s saying.
It just gives a lot of relief. I’ve said many times, the more information you have, the less fear you’ll have. Fear usually comes from lack of information. So once you have the information, then you just know what to do.

Dave:
I could not agree more. I think his track record is great. He has such a good way of explaining really complex topics. So if you want more from him after you listen to this interview, you should definitely check out his work on HousingWire. And I’ll also add, he’s just a fun guy to talk to. He’s very enjoyable. He’s got a very good way of making housing market data, which can be dry, very, very interesting.
So with that, let’s just get into this because I want to give as much time as we can to Logan. So with that, let’s welcome Logan Mohtashami, the lead housing analyst for HousingWire. Logan Mohtashami, thank you so much for joining us On The Market today. We are really excited to have you here.

Logan:
It is great to be here with you guys.

Dave:
For people who don’t know you yet, Logan, could you tell us a little bit about your background as a housing market analyst and your current position at HousingWire?

Logan:
Yes. Currently, right now I’m the lead analyst for HousingWire. I joined them toward the end of 2019. My family’s been in banking since the late 1950s. I worked in the mortgage industry all the way up to 2020. I created my own financial blog in 2010 and I just basically talked about the housing market for many years and then made it to a full data analyst of the economy and housing in 2015. And one thing led to another, and now I became a lead analyst for HousingWire. So pretty much all I do is look at charts all day and night and nerd out and nothing else.

Dave:
Well, thank you for joining us. I know Kathy and I are both huge fans. So we’re geeking out to have you here a little bit. You, in a lot of your writing on HousingWire, have a very unique and data-driven opinion about where we are with the housing market. And we want to dig into a lot of the details here, but can you give us just a high level overview of your feelings about the housing market as it sits now in 2022?

Logan:
So when we talk about housing economics, it’s pretty much demographics and mortgage rates, affordability. The previous expansion from 2008 to 2019, I always said, “This would be the weakest housing recovery ever.” And what I mean by that is not prices, it’s just mortgage demand, housing starts, new home sales. These things would not get to certain levels until we get to years 2020 to 2024.
And why I picked that period, household formation works up. People, it’s very easy, they rent, they date, they mate, they get married. Three and a half years after marriage, they have kids. Years 2020 to 2024 was going to be this very unique once in a lifetime bump in the millennials. Currently, ages 28 to 34 are the biggest in US history. So when you put them, move-up buyers, move-down buyers, cash buyers, investors, you got really stable replacement buyer demand there.
The only problem that could happen is that if you look at total inventory data, especially going back to the 1980s, we started to see inventory slowly falling from 2014 all the way down until about 2018, ’19. And then if demand picks up during this period, guess what? We could crack down to all time lows with this massive demographic patch, with low mortgage rates, something that we’ve never seen in our lifetimes. That can be problematic because that could create forced bidding.
And to me that is the primary reason in terms of the growth rate of pricing from 2020 to 2021, and even here in 2022. And the concern was if home prices grew above 23% in a five year period, it could be problematic for my sales forecast. Boy, it got smashed in two years. So when rates rise with that much price growth, you could see a hit on demand.
But even as we are talking today, total inventory levels are still near all time lows and that’s the problem. And I think that explains some of the firmness that we see in the home price data is that we need total inventory levels, this is the NAR data. I know a lot of other people have different numbers. We need that number to get back to 1.52 to 1.93 million. That is a normal sane marketplace.
We started the year, I think at 870,000. We’re a little bit above a million now. Inventory is very seasonal. It rises in the spring and summer, it falls in the fall and winter. So we kept on doing these new all time lows going into the fall and winter months. That was not a good thing.
And we could see what was going on early in 2022. We were seeing forced bidding action, not because there was a credit boom or anything, none of the demand data looks like anything we saw from 2002 to 2005, but it’s escalated prices to the point that it becomes more problematic with mortgage rates rising.
But now we’re not talking about four to 5% mortgage rates, we’re talking about 6% plus mortgage rates. So the savagely unhealthy housing market is now taking another turn and it’s different in the sense that homeowners now on paper financially look great. They have a fixed payment. Their wages have rised every year. Their cash flow is excellent. They have nested equity.
These are not the stressed sellers that we saw from 2006 to 2011. So I think the main discussion or talking points I’ve had is when we talk about inventory credit, credit was getting worse in 2005, ‘6, ‘7, and ‘8. What I mean by credit getting worse, people were filing for foreclosures and bankruptcies all those years. Then on top of that, the job loss recession happened while credit was getting tighter.
So the 2006 to 2011 period, going back to the 1980s was the only time that we saw escalation inventory. So people trained themselves to thinking, “That’s what’s going to happen, people are going to rush to the market and sell their homes and be homeless or rent at a higher cost or…” No.
Traditionally, a seller for the most part is a buyer, right? So they’re going into the selling process thinking, “Well, I’m going to buy X home.” Well, when inventory got to all time lows, guess what? Some of them were going, “Oh, maybe not. I don’t know if I could even get a house, even if I sold mine.”
So we need balance. Balance is a good thing. Early on in the year, I said, “We need higher rates.” Actually in February of 2021, I was talking about we need higher rates, but wasn’t going to happen last year or this year. So we’re starting to get inventory to rise, but we’re still far from the levels that I would unlee or take away the savagely unhealthy housing market off.

Kathy:
Logan, when you explain this, it all seemed so obvious, looking back, that inventory level’s going down, demand… I knew that 2020 was going to be the highest demand because if you look at demographics, you can just see historically, this is when this huge group of people will be at first time home buying age.
But why are you one of the only economists that could see it so clearly? And I mean, even our federal reserve that is supposed to be monitoring this stuff was accommodating the housing market until just this year and rates didn’t go up until March when the damage was already done. So it just like why? What’s going on?

Logan:
So there is a mindset that a lot of people have. It’s what I call the 2008 syndrome. And when you come out of 2008 and you don’t realize the economic expansion wasn’t like 2008, when any kind of recessionary data comes, you believe that we’re going to have this major crisis. So this is why the America’s back recovery model was very important.
COVID came in, everybody paused, but the economic data was actually getting better toward the end of 2019 and actually the first two months of 2020. But everybody’s trained to think that, “Oh, listen, housing’s going to crash, we cannot allow housing to crash again. That created too much damage for families and everything.”
So when I retired my model in 2020, I was like, “Hey, we’re good.” But guess what everybody was talking about? Forbearance. So part of the thing that I did in the summer of 2020 was I created the term forbearance crash bros. It’s a bunch of people that were going to talk about forbearance. None of them have credit profile backgrounds, you could see this.
And I said, “Listen, forbearance is going to come off.” Why? Because if you read the jobs data in October of 2020, majority of people that made $60,000 or more already got their jobs back. A home owner, their financial profiles are a 100,000 plus. So they were good and people are just going to get off of forbearance. So we went from five million forbearance data early. It’s under 500,000 right now. It’ll be under 300,000 soon.
So that was never going to be the issue, but the mindset was, “Hey, guess what? We can’t let housing crash.” And inventory levels were getting worse in 2021. So I think the 2008 syndrome is people were trying to fight the deflationary aspects of having a credit de-leveraging crash.
And that wasn’t here because credit looked excellent. Why? Because mortgage credit looked really good and we never even had a mortgage credit boom. I tell people this, if you look at mortgage debt expansion adjusting to inflation, negative, still from the housing bubble peak. So there wasn’t any kind of this big credit boom, or there’s no exotic loan debt structures after 2010. That’s all gone.
So that’s the aspect, I think in 2021. And I still believe it would’ve been hard for rates to rise without global bond yields and global rates rising together, but people did not understand how bad the inventory situation was.
And then everybody thinks millennials can’t buy homes, nobody can buy homes, home prices are up. And then all of a sudden, guess what? After 2020, after the 10% price growth gains, we were having 15 to 20%. So people weren’t trained to think that way because they’re always told Americans are struggling, there’s no middle class. None of that stuff made sense, right?
We just had the longest economic expansion in history. If it wasn’t for COVID, we’d be still in the longest economic expansion because that 2008 mindset and then the secondary is being really bearish on the internet or on TV or anything that’s really popular, right? So I always say, “My work is boring.”
So two things about me, economics done right should be very boring and you always want to be the detective, not the troll. That’s not very sexy to talk about, but again, math, facts and data matter, the rest is storytelling. We don’t do storytelling here, we are doing boring economic modeling work.

Kathy:
Well, trolls aren’t sexy either. But I worked in the housing… I worked in broadcasting for years. That was my career prior to real estate. And it’s a known thing that if it bleeds, it leads. You got to lead with fear and shock because that’s how you get an audience. That’s how you get people to tune in.
So listen, the headlines are often wrong, don’t put your faith in that. But what’s confusing is when the experts are wrong, Logan, and that’s what I’m saying. Where do you go for data? People are using these charts on FRED, the federal reserve, St. Louis fed with inventory saying nine months. What is that?

Logan:
That’s the interesting part. One of the mistakes I’ve always seen people make, and stock traders do this a lot actually, they go to FRED, FRED is the online website where you could get all the data, and they type in monthly supply. So when they type in monthly supply, they actually see the monthly supply for the new home sales market, which is a very small marketplace compared to the existing home sales market.
So if you look at it and you think, oh no, look, there’s nine months of supply, there’s no housing shortage, it’s all fake news. And then I retweet to them and go, listen, we have two rules, we don’t talk about fight club, and we don’t talk about the new home sales monthly supply data as the existing home sales, because the existing home sales market is at 2.2 months.
And then on top of all that, the nine months of supply, six months of that are homes that are not even started yet. You can’t sell dirt. You got to build it. And what’s the problem we have? Completion data is taking forever. It’s so long to finish a home, so that six months is already gone. You can’t even put that in there. It’s ghost supply.
Then out of the other three months, 2.2 months of that are homes under construction and only 0.8 months of that is actually homes that are finished. That’s it. So that’s not a very exciting story to talk about because you can see the completion data’s taking so long.
I think housing economics is unique in the sense it’s really boring. It’s just demographics, affordability, jobs, household formation and people try to make it into this really Titanic event. And part of the article I just wrote for HousingWire, I’ve documented all the crash calls and the reasons why going from 2012 to all the way to here, to this point, and they were all wrong because they took the headline version instead of looking at the data.
So if you’re going to listen to people, listen to people about data, but you always want to ask for their sales forecast. That’s the trick. No trolling person can hide their housing takes unless they give you a sales forecast. And once they do, boy, that doesn’t sound too crazy.
And if people had done that over the last five or six, seven years, they would realize that when you get that answer, you can’t really hide because it’s really rare in America, post 1996 to have home sales under four million. Authentically, it only really happened one time toward the end of 2008. And you could look at the data going back to the late ’70s that post 1996 is very unique. We have more people, rates are lower.
So this is the world we live in. I’m trying my best to make it as entertaining as possible, but still be my boring self. And hopefully some people have enjoyed it over the years because I would say that the majority of the forecasting and calls have been right, especially in 2020 and 2021, in trying to highlight the concern that home prices can escalate in this kind of environment, not crash 20, 30, 40, or 50%.

Dave:
Well, I find it very entertaining when you call out forbearance crash bros. So please keep that up. I think it’s very enjoyable.

Logan:
Well, I can’t anymore. They’re dead. It’s over. Rest in peace.

Dave:
There’ll be a new one. There will be more people-

Kathy:
Oh yeah.

Dave:
… on YouTube who continue like they-

Logan:
[inaudible 00:17:05] probably a new one, but they were special. Oddly enough, I was actually going to stop writing at the end of December 2020. I was just going to do one economic expansion and a recession and expansion, and then I thought to myself, “Boy, I’m not going to let these forbearances people get off.” I was just bombarded every day, these videos and these YouTubes. And then I went into Clubhouse.

Dave:
Oh, wow.

Logan:
Then they were like, “The people from Arizona in Clubhouse were just living in some alternate universe. And I thought to myself, “You know what? I can’t let them slide. 2021 is going to be like… We have to worry about home prices accelerating.” So when I used to go on Bloomberg Financial in the start of the year, I said, “No, no, no, don’t worry about forbearance crash, worry about home prices overheating.”
And I kept on doing it over and over again and every single forbearance report, it got lower and lower, lower. And finally, it gets to a point where you just say, “Rest in peace, you guys were great entertainment for me.”
Economic cycles come and go. Home prices can fall. At some point I created a model for that on HousingWire recently, but it wasn’t them. They have lost their privilege to ever talk about housing again after being wrong from 2012 to 2022. I call them the housing bubble boys 2.0.
And they’ve always said that prices have to go back to 2012 levels, right? For some reason, 2012 levels were their call because every bubble means price has got to go back. So they started at 2012 and it’s just been a collage of failures, and over and over again. And I’ve documented it. And some of these people are friends of mine. So it’s just fun for me to take a dig at them.

Dave:
Well, thank you for fighting the good fight.

Kathy:
That’s why he came out of retirement.

Logan:
Yeah. So in a sense, I thank them because I really like it. What am I going to do? I’ll work for HousingWire and just talk about economics all the time.

Dave:
So one thing Logan that I’ve learned a lot from you about is just about long-term inventory trends and how important inventory is to the housing market. And I talk about this a lot on various forums and people are always wondering, and I never have a great answer for it, why has inventory been declining over this long-term? And do you think it’s ever going to reverse? What’s going into this long-term trend?

Logan:
Well, when we look at inventory, the long-term of let’s say the NRA’s listing data, two to two and a half million is normal, right? And I’m not one of these people that in the previous expansion, people say, “Oh, we have record breaking.” Yeah, we have no homes to buy. If we had more home sales, we’re going to… I was never one of those people. I was like on eye. I said, no, when demand picks up inventory falls, sales can rise. So historically, those are your levels. The only time we really got down to 1.5 million was in the early ’90s and then rates shot up and then inventory increased. But here it was very unique. From 1985 to 2007, people were living in their homes five to seven years and inventory channels were still normal.
But from 2008 to 2022 people are living in their homes 11 to 13 years, right? In some parts of the US, it’s 15 to 18 years. I know myself, I’ve lived in my home for 18 years. If you look at the structural build out of all the homes in America, there’s a common theme from 1975, the median square foot was 1,500. It got up to 2,700 in 2004. So we’ve been building bigger and bigger homes with family sizes getting smaller. So in a sense, the product that we make has one and done, if the person acquires a home like that. If you’re living in an older home, or of course it’s going to be too small, so naturally people move up in their ’40s, they tend to move out. But because demand is somewhat stable, it keeps a lid on historical inventory between two to two and a half million.
And when you get toward 1.5 million, boy, you’re reaching areas that are not good, except that’s still functioning. Whether, if rates are high enough, there’s no credit boom, so it keeps housing at steady. But here’s 2020 to 2024. It’s different. So inventory just collapsed to all time lows and all of a sudden, here’s this big demographic patch. So you just have simply too many people looking at too few homes. And because of that, because people make money, home buyers make money, dual household incomes, investors, cash buyers, you put them all together, boy, it’s the hungry, hungry hippo game of the 1980s. Everyone is trying to get that ball except there’s only two or three balls out there. So people are left out and you created this force bidding. This is why last year I talked about it. Well, it’s a really unhealthy market.
But when we got past my 23% home price growth level, and then 2020 came and things were getting so bad early in January and February, then you’re going, “Oh God, we’re about to hit another 20% year over year growth metric.” And if you look at the case schuler index, it’s still growing over 20%. Now that data lags a few months. So don’t look at that as forward indicating, but it is. So we literally have basically 40 to 45% home price growth trends in two and a half years. That’s not normal. And that’s not because sales levels are booming. It’s just because we had simply a raw shortage of homes and we got caught. And when you get caught, you pay the price for it. And we all pay the price for it because everyone is happy to sell their homes at the highest price ever, right?
So I got to have said, “As a collective whole, home builders and home sellers have too much pricing power.” And they’re only going to do things for their own interest. That’s what humans do. So for the housing market, it could get really insane in this kind of environment because inventory is too low and rates are too low and mortgage buyers run the show, right? A lot of people think that, “No, this is all investors.” No mortgage buyers run the show. So when rates rise, housing should cool down. And it cool down in the previous expansion, whenever rates rise and here we are, we’re seeing a cool down again, but it just, we got caught. So when you get caught, you pay the price and this is how we have to deal with it. And the historical data always showed this. But again, not the most exciting thing to talk about.

Kathy:
Well, the rate of change is what can be so shocking, prices going up so much in just a couple years time, inventory’s so low, rents going up. And now my goodness, just in the last few months, mortgage rates up so dramatically, I think they are over 6% today. And I don’t know, maybe if they’ll continue, but this is a shock to the system. And when I read Facebook group postings and talk to people at conferences, like I was just at yesterday with 1200 people, people are freaking out because and I’m hearing things like, “Oh my goodness. Instead of selling my house in two days, it’s taking two weeks.” So they’re really-

Logan:
Oh my gosh.

Kathy:
… really freaking out about that. But that is not normal. They just don’t know it’s not normal.

Logan:
So it’s my main talking point over this period of time, when days on market are a teenager, nothing good happens because pricing could escalate. When days on market get above 30, we’re back to normal. It’s like 30 and plus is normal. That was the 2014 to 2019 marketplace. Monthly supply was over four months. That was the normal period. We’re at 2.2 months today, the last report, the new one it’s going to be probably higher than that. And the days on market is still a teenager and we have to find a way to get off of these levels because it’s simply, it’s creating too much price damage. I think trying to explain that to people and some people are getting there, they think housing is like the stock market. What I say is that last year was interesting.
There was a wall street analyst who said we were 20% oversupplied, that when the mortgage rates get to 4%, the dynamics of housing will change. Well, if you look at the history of inventory levels, they don’t really just shoot straight up unless you have forced credit selling. So how I try to explain it is you’re basically saying an educated, positive cash flow homeowner is going to willfully put their homes On The Market to sell at a 20, 30, 40% off the market bid just to get out at all costs, to be homeless or rent at a higher cost. So if you told your wife or your husband, “Guess what? They’re going to slap you in the face.” What are you talking about? Why are we leaving? Because I’m afraid. I’m like those stock traders who as soon as one technical level is broken, I sell. Well, they can sell like this, right? Housing, boy, a willing seller is different because they have to obtain shelter.
An investor is different, investor does not have any shelter tied. So it’s the cost of shelter to your own capacity, to own the debt. So they have to know that they’re going to obtain another house once they sell. And the problem with rent inflation going up so much is that now you’re getting hit on both sides, rental vacancie’s down, home buying vacancies down. So here we are, we’re getting hit on both ends.
And I think that was the shocking thing. It was so hard for me to convince people that prices could accelerate out of control. But trying to explain, I remember telling the Washington Post this early in 2021, I said, “Listen, shelter inflation is about to take off and that’s going to lead the CPI inflation data much higher because 43% of CPI is shelter inflation. 25% of that is rent because guess what? We have 32 and a half million Americans that are right in their shelter age and they need somewhere to live.” So we just got stuck in a really bad area on inventory on both fronts. And people had money and they had to bid up or they had to pay more rent.
And part of the problem with housing in terms of homeowners being so good, talk about the best hedge against inflation is that very low fixed mortgage rate, because your shelter cost as a renter goes up, right? So your energy cost, your food cost or everything rises up, but a homeowner doesn’t have that. So a lot of the charts that I like to show is if you look at your mortgage payment as a percentage of disposable income, all time lows, right? So all these homeowners who are staying in their homes longer, their wages rise every year.
And then there was three refinance waves that happened post 2010. So when we look at how many people, how many Americans have rates under 3%, 12.6% have under 3%, then you look at the next level, three to 4%, how many? 38.2% have mortgage rates between those levels. Then you look at four to 5%, okay, that’s about almost another 30% right there. So everyone has these low rates of their wages of rises. So they’re living a very comfortable life. So when they see these inflationary datas and they see rent inflation pop up like friends of mine’s, boy, five, $600, $700, your rent go from 2100 to 2,822, they don’t have that impact because they have a fixed debt product. So the willingness to sell, you’re really selling because you know you’re going to buy something. So the inventory’s a wash. And that’s why if you look at inventory in the last four decades, it stays within a channel.
And then there’s times that it breaks out. And at times that it breaks low, but really two to two and a half million is normal. The 2006 to 2011 period was historically unique because you had a credit boom, a credit bust, demand getting weaker, credit getting tighter, supply increasing. And not a lot of people know this, the majority of loan delinquents actually came from cash out homeowners, not home buyers. Latin still to this say not a lot of people… The majority of defaults because they were serial cash out refinancing. We call debt on debt transfer and the debt structure was so exotic. And then when home values went down, boy, they were just underwater, flushed out recast rate. None of that is happening at all. So I always show people the credit stress data that the federal reserve shows us every quarter and bankruptcies and delinquencies were falling FICO Score cash flows were great.
I mean majority of the country is over 760. We just have a different homeowner now, and it’s in a sense problematic because these aren’t the stock traders running to sell their growth stocks within two seconds, right? Housing is usually a very long process compared to it. Why? Because housing debt is different. Margin debt with stocks, they move one-to-one, right? Housing debt also prevents you from really like selling your homes at 20, 30, 40% off because you have to negotiate with the bank, right? If you can’t discount your house that much, especially unless you have unbelievable nested equity. Homeowners don’t usually do that in terms of destroying their wealth. So you need a forced credit cell. That’s a job loss recession. That’s a different kind of conversation. None of that was happening here.
And for some reason, everybody started thinking 2008, which my running joke is it was never 2008, it was actually 2005. 2005 is when housing peaked. 2005 is when the credit started getting worse and things were declining. So they don’t even got the year right. They keep on saying 2008 because that was where the reception was. So there are people with economic models who do this, that could actually show and try to explain it. And the doom and gloom took over from 2012 to 2021. So a one-trick pony is always going to be a one-trick pony, right? So you just have to look at the historical data references. And that’s why that last article that I wrote for HousingWire, I literally documented every single thing from 2012 all the way to 2020 and showed why, what they were saying and what actually happened and what the data was. So once people visually get to see that, they go, “Oh, I was lied to for 10 years, they got me.” And I say, “Yep, they got you.”

Kathy:
2005 was also when I was a mortgage broker. So it was a different mentality where our business was just so stable and steady because people would refi every six months to one year. I had consistent business with the same customer who just wanted to do these cash out refis. And many people were just even living off that very, very different today. Who would do a cash out refi today just to take money out at a higher rate? But one of the new… There’s always somebody looking for the thing that’s going to topple the housing market. The grifters will never go away, but for good reason, nobody wants to go through that again. One of the big headlines right now is yes, mortgages are fixed for the most part. But what about those sneaky little property taxes? There’s some areas where people bought 10 years ago and they’re paying a lot more in taxes than they expected.

Logan:
So those people’s wages have also gone up a lot too. So I know this especially in Texas, a lot of people say, “Your taxes have gone up.” The homeowner is fine because their cash flow is fine. This is why the federal reserves, FICO Score data is useful in that, The reason you have a good FICO Score is because your cash flow is good. So whatever increase you’ve taken on property taxes, your refinance that you have done has taken some of that hit away, but also your wages rise every year. It’s funny. It’s like people don’t know that people’s wages rise each year. So what happens in an inflationary market is that your cost of living goes up. So your wages go up as well. So it’s not a one zero negative here. Your cost goes up and you have nothing to offset it.
So the homeowner is still in a really good position. The home buyer now has a problem, right? Because home prices have accelerated so much and now you have the biggest shock. I mean, in theory, I can make a case that mortgage rates have gone up 4% really in a short amount of time, because the lowest rate I remember is about two and a half percent. And you see some quotes at six and a half. That’s not normal. That does not happen. So I never really believed in what do we call the mortgage rate lockdown premise that people just won’t move because they have a certain low mortgage rate. People move every single year for their own reasons. But we’ve gone to the point to where at 6%, that home you want to buy up is a little bit more difficult. So the rate lock in a sense is an affordability lock. That’s part of the issue that I’m seeing that could be the case going out, which means that inventory stays in, right?
And traditional sellers, a traditional buyer, what’s happened in the last few years is that people had all this equity, they sold and they went to areas that were cheaper, right? That’s what the work from home model. I mean, I generally would’ve believed people would’ve moved anyway, even though COVID don’t work from home. But now, boy, you have all this nested equity homes outside of California still looks super cheap to everyone. So theirs was like, “Yeah, this is great. I could put 70%, 80% down, mortgage rates don’t matter to me at all.” Now the question is that, does that homeowner get a buyer of his home at 6% plus mortgage rates so that person could actually go and buy another?
It becomes more problematic now because we have taken such a hit on affordability. It’s something I’ve never seen happen within such a quick period of time. Now, as someone, as part of team higher rates, which nobody likes me because of that, to create balance in the housing market, to get inventory up, four to 5% mortgage rates would’ve done that naturally. That was the summer of 2020 premise of minds, the 10-year yield gets above 1.9, 4%. The rate of change of housing will slow down. Well, now we’re 3.4 and a half percent on the 10-year yield, which means 6% plus mortgage rates. Now the mortgage backed security is stressed. That is a problematic issue for home buyers.
But the home seller is also in such a position that… They’re not going to discount their homes at 20, 30% off. And that’s part of the problem is that it’s going to be a grind. And I think the grind is always my biggest concern because when you have a high velocity housing market, you got to boom and you got a bus you got to crash and home prices are well below per cap income. So you got a stable housing market for many years. Here we’re stuck and stuck to me was always the biggest problem. So I’m looking at this period, everything that I thought that could go wrong has gone wrong and then a bunch of other things on top of that. So for me, it’s just a different outlook, but it was never about home prices going back to 2012 levels or positive cash flow homeowners selling their homes at a major discount. It is just going to be this struggle between really good demographics and affordability now, and a home seller that could just sit there and wait.
And that was part of one of the things with COVID. A lot of people thought, “Oh God, everyone’s going to rush to sell their homes.” Boy, as soon as COVID happened, people took their homes off the market. And then as soon as everyone back… Six weeks later, people got back to living. They put their homes On The Market and the demand was stable, and the inventory level started to break. So that’s the struggle with inventory and demand. And this is the first time that we’re… In recent history, people are going to see how an affordability crisis really impacts the majority of buyers and what does that do for the inventory channel. So I get to nerd out to the other side for the next few years, but it was never going to be what the crash people have talked about for 10 years, different marketplace, different backdrop, different credit setting. It’s much different this time around.

Dave:
So you’re saying that right now you think that we might be entering a period of almost stagnation in the housing market? Is that what you’re saying?

Logan:
Well, purchase application data is backed down to 2009 levels, right? That’s how fast the decline is. Now, I would argue… Lot of people say there’s a 73% peak to bottom drop from 2005 to where we were. Some of that data lines were pushed up higher because there was a surge of makeup demand. So purchase application data is at 2009 levels. Where’s the inventory? I always say people here we’re in 2009 levels again, right? 2008 was your holy grail, okay? We’re here. We’re one year ahead. What happened to the inventory? That’s part of the problem. So demand can fall. I just hope that sellers get realistic with that. So you have some kind of a fluid functioning marketplace. In 2018, when mortgage rates got to 5%, that was ground zero of ish-housing. Really people were talking about 20, 25% home price declines, inventory didn’t grow that year. Purchase application data was never negative really, only three weeks.
So the inability to read data has tainted a lot of views. Now you see a noticeable decline. I mean, the one thing I got wrong this year is that I thought when rates get above 4%, I thought, we’d even have more purchase application demand. So far, it’s held up better than I thought, but we’re now five, 6%. It’s after the home price, this is a serious material change because in the previous expansion rates rise, sales trends fall, rates fall, sales trends grow up. That’s always been the case, right? We had nice little equilibrium. We never had the price growth in the previous expansion like we did now. So there is a material damage done to the housing market when you have 45% home price gains in two and a half years.
So even if rates come back down it’ll be more of a stabilizer effect, but we just got caught and we’re paying the price for it with unbelievable home price or… And again, don’t worry, nobody sheds a tear for our homeowner. They have never looked so good on paper. So they have a good… Home buyer is a struggling person right now, especially a single renter that’s looking to buy, oh man, it’s got to be even more savagely unhealthy for that group. So yeah, there’s issues in the housing market, it’s just different than what people perceive it to be.

Kathy:
I’ve heard some experts say that we hit the peak of inflation, that we hit the peak of mortgage rate increases and that has not proven to be true, at least not this month. So do you see inflation continuing and also mortgage rates increasing?

Logan:
Here’s the interesting dynamic with this discussion. So before the year start, my main thing is that global yields could rise, which that potential to rates will go up. Mortgage rates and the bond yields didn’t really rise until we saw the Russian invasion. And then the long end of the market quickly got up high. The fed is playing catch up to that. The growth rate on core inflation and core PCE is starting to fall. The headline inflation with energy and food, that is starting to pick up. And the reason I’m not a seven, eight, nine, 10% mortgage rate guy, is that I don’t believe the economy’s strong enough to get to those levels, because inflation is too much money chasing two food goods. Well, we don’t have any fiscal disaster relief going anymore, we just have household formation, and we don’t spend like we did during COVID.
So COVID-19, durable good spending just escalated beyond belief, right? A lot of that is buying for your homes. I talk at the Peloton effect. A lot of people want Peloton. It’s the bikes. Nobody’s buying those bikes anymore like they used to. So you have this big durable spike in some of the inflationary data that tends to correct itself, unless you are a really big economic growth person, right? So if economic growth picks up, inflation picks up, there’s no demand destruction done out there. I’m not in that group. So we already see some of the weakness in the data, but the headline inflation is really being pushed by energy prices and food prices. So the core is already starting to fade the headline, is it. In theory when the economic data starts to get worse, the bond yields will go down with it or they’ll get ahead of that. Hasn’t been the case now.
So we’re still in that tug of war. When does this price inflation on goods and services and higher interest rates impact the economy enough to where bond yields start to go down and mortgage rates start to go down. That’s the tug of war. And for myself, I have a six flag recession model that historically we back tested. Of course, you want to take COVID out of the equation. Four of my six recession red flags are up. The last time that happened really was in 2006. The other two came up that year. So there are slowing economic data that we’re seeing, but it’s not to the point to where some people thought we were in a recession in Q1. Well, real sales were positive, production was positive and employment was positive. There’s no time in history we’ve ever had a recession when those three things are positive.
So we don’t have recessionary data yet, but we see softness and weakness in the data. And traditionally, you’d see bond yields go down, but the federal reserve and everybody’s really pressed on doing enough destruction damage to get inflation down, really hard to do with energy prices at food prices on that. Traditionally, what happens is that before the first fed rate hike, the dollar gets stronger. If Peter Schiff’s listening. And then what happens is that the energy gets hit. We saw that in 2015, ’16, the dollar got stronger and oil prices fell. We don’t have that anymore because we have some of the supply issues. So there’s so many different variables that we’re dealing with this post-pandemic economy, but I’m not in the cup that the US economy is that strong to where growth and inflation, and wages, and consumption can just keep on skyrocketing and that will send rates and inflation higher. Population growth has been falling for years, productivity rate or growth has been falling for years.
So there’s limits to what we can do. A supply driven some of these headline inflation data is problematic because even you have declining demand, I say this about housing, right? Declining demand in housing, we have price growth. Some of the data’s still showing 15% of price growth, nothing like what we saw in the previous expansion, that’s supply driven. So some of the inflationary data is supply driven. But when the economy slows in theory, like it always has, bond yields go down with it. But the Russian invasion of Ukraine really put some variables out there.
And also the variables of possible more conflicts coming out. It’s not really talked about much, but we don’t know when this ends and we don’t know if there’s going to be a second front. So everyone has to be mindful. There’s different things right now that are impacting, but we can see it already. Some of the core inflation and core PC data starting to fall, nothing spectacular or anything, it’s still very elevated. But that would be consistent with stable demand, not super growing. Like our real sales, retail sales are high, but they’re not growing like they did in 2021. So there’s limits to what you can do with the US economy and inflation.

Kathy:
If you were a active real estate investor, and I’m not sure if you are, but if you were, what would you be doing and what would you not be doing today?

Logan:
Well, in terms of investment, migration data is really critical because what’s happened is that there’s parts of the US that never had a lot of construction, because not a lot of people live there, right? So people are moving to areas where it’s cheaper because they have money. Now, a lot of those towns and cities have just seen unbelievable rent and inflation growth. So if you’re an investor, I would suppose you first have to look at renting or properties that could rent, especially in areas where there’s not a lot of inventory and maybe the home price have escalated so much that there’s going to be rental demand there. Again, everyone’s costs cooperates that everyone’s on their own on that. But that is where you know there’s going to be either home buying or rental demand. And all these single family rental companies, people say, “Oh, this is crazy or egregious like.” They’re five to 6% of the sales for new homes, they’re not very big.
But as home prices have accelerated and rates have gone up, there is a case to be made about more rental demand than home buying demand. So there’s areas that you want to look at where there is not a lot of construction that have been done for over the years and there’s people moving there, and there you have a demand products. There’s parts of the US that there’s not much inventory but, boy, you got to be really wealthy to buy in there. I was looking at my paying my mortgage and my mortgage lender said, “Oh, look at homes in your neighborhood. The median price is 2.4, five million.” I was like, “Yeah. No, thanks.” So those areas probably wouldn’t touch, but rental demand has a valid case in areas where maybe price have accelerated so much that the local population doesn’t have that kind of supply in there. Home buying, there’s areas where inventories picking up, we’re seeing in California, we’re going to see it in other areas. So there’s supply competition coming up there and the builders are already thinking, “Oh God, rates are at 6%.”
My buyer qualified at 3%, three and a half, maybe 4% pushing it, five or six can’t. So they’ve got to find buyers or they’re most likely just give incentives and get some cancellation. So be careful of certain areas that you’re going to see an increase in supply in if you’re trying to remodel a home and then sell it because there’ll be more competition. But areas that have rental demand picking up that don’t have a lot of supply, that seems safe.

Kathy:
Where? Where?

Logan:
Anywhere where you see migrations, small towns, the Carolinas are still doing well in that. But their prices have gone up so much that you’ll you’ll have spillover, right? That to me is… I’m not a real estate investor, so it’s different in my mindset but supply and demand always works with anything on the investment side. You have to go to where the migration data is and areas that still need a lot of supply. And the areas that have not been built are these kind of small towns. There’s going to be areas in the Carolinas that, cities that nobody have heard of. And it’s going to be really cheap there compared to that. So so much of the action, let’s say Tampa, Aust, all these big cities have already seen so much price inflation. But there’s gyms everywhere, right?
There’re just places that you probably haven’t heard of. I mean, look at Montana. Montana’s prices have gone like 40, 50, 60%, and nobody could even name five cities in Montana. But people [inaudible 00:50:20], the flyover states are called to flyover states for a reason. Boise has been saturated by so much California money, you can see what’s going on there. But there are areas that people can live and still not very expensive, especially from out of town money.

Kathy:
But what areas are, would you say, on the verge of being overbuilt?

Logan:
The areas that you’re going to see the biggest increase in supply are the places that got hit the most on price growth, California, Austin is going to get hit, Boise’s going to get hit in terms of growth of supply from where we are now. So anybody going into those markets that have seen 34, I mean, I think Austin’s up over 100% in two years. Okay? So San Francisco, you want to stay away from that. I think their listing is almost back to 2006, 2007 levels. So the high-cost metro areas that have a lot of mortgage buyers, they get impacted the most when rates rise.
So there’s going to be more competition in the high price, growth cities, especially the ones that people were moving to. Because you now don’t know if that person is going to move to those areas with higher rates. This is something we have to see over the next six months is that, do those home sellers get a buyer they want and that massive equity and go around and purchase homes in cheaper states. But again, the areas that grew the fastest mortgage, demand’s going to slow down inventory, days on market will grow for them more competition there.

Dave:
All right, Logan. Thank you so much for joining us. I know Kathy and I would love to talk to you all day, but we do have to wrap this up. For anyone who wants to connect with you, where can they do that?

Logan:
All my work is on HousingWire, HW+, there’s a Logan VIP 50 code. If you wanted to use that to be a HW+ member, you can get that. On my blog, loganmohtashami.com. It’s free to the public. It just basically has the podcast interviews that we do with HousingWire every Monday. And my name, I’m really am a total nerd. So my Instagram page is just basically stories of videos of going over charts. And my Twitter account is just full of charts and me fighting the American bears all the time. So just my name, you could Google it. HousingWire has all my work there. All the conferences where I speak with other economists, HW+ members get it. My blog is open, it’s just by name.com and you can get some of the podcast hearings there.

Dave:
All right, great. And I personally vouch for the HW+, I am a member and read everything that comes out there. It’s really valuable for anyone listening, who wants to stay on top of all this news. Logan, thank you so much. We would love to grab your phone number so we can call you when Kathy and I have more questions and hopefully have you back on the show someday.

Logan:
Sounds good.

Dave:
God, that was very fun, Kathy. One of the coolest parts of being on this podcast is getting to talk to people who I consider heroes and role models and people who I look up to and was very fun talking to Logan. I know you follow him closely. You’ve you’ve met him before. What were some of your main takeaways from this interview?

Kathy:
Well, this interview and just following him is being able to look at the data the right way. And so many people miss it, even really highly trained economists and experienced economists. Certainly when you see headlines from hedge fund managers, it can be scary, but they’re talking about something different than what we’re talking about here on real estate and in particular flipping or buying old or whatever we’re doing here. So it just hard to sift through all the massive information we get. So to find someone like him, who just… Logan just seems to just plow right through it and get to the gold, and I am truly grateful.

Dave:
One of the things we were chatting before the show started and you were telling me about a conference you were at recently, and we won’t talk about who, but you saw someone that was bumming you out and making you feel bad. I feel like Logan just makes me feel better about the housing market in general. He just has such a command of all the data that it really makes you feel confident that he’s right. I know no one has a crystal ball, but he might have a crystal ball. If anyone does, it would be him.

Kathy:
He has been incredibly accurate, just it. And in my company, we have boots on the street all across the country. So I am able to get real time data like in March of… Maybe it was April of 2020, May of 2020, I would do daily webinars to figure out what’s going on. And the real time data of our property managers nationwide and so forth, they were like, “We don’t know what’s going on. All we know is we have more demand than ever and rents are going up.” And it was contrary to everything we were seeing in the headlines. So for me, that’s where I’ve gotten my information, but it’s really nice to be able to get that verified with these kind of facts.

Dave:
Yeah, absolutely. And it’s really interesting to hear his take on what might happen next, because there’s obviously all these headlines about the market’s going to crash or it’s going to keep going up. But I hadn’t really considered the risk of stagnation and this stuck. Housing market’s definitely something I’m going to be thinking about going forward. Anything you learned here today that you think will impact some of your strategies over the next couple of months or years?

Kathy:
Yeah. His last statement about being really cautious about the markets that have bubbled up. So to speak, the last few years. I’ve been looking at those markets, even though it’s not normally where I look, but I… Again, you got to be careful where you get your data. And when I talk to certain people, they’re just bullish on, I won’t say the cities. But in my gut, that is what I would think is wow. I don’t think I want to be in a place where prices went up 40% last year. That’s usually, you missed it already. You want to go to the place that’s going to do that next year, right? So it is having me rethink where I will focus.

Dave:
All right. Well, just like that. I mean, Logan is such an authority that he might be able to change your mind.

Kathy:
Yeah.

Dave:
Well, Kathy, thank you for joining us. Really appreciate it. If anyone wants to connect with you, where can they do

Kathy:
With me, realwealth.com and also @kathyfettke is my Instagram.

Dave:
All right, great. And anyone listening to this, we really appreciate if you would give us a review on either Spotify or Apple, or if you’re watching this on YouTube, make sure to subscribe to the, On The Market YouTube channel, where we have all sorts of great content from Kathy, myself and our other hosts coming out regularly. Thank you all so much for listening. We will see you again next week. On The Market is created by me, Dave Meyer and Kalin Bennett. Produced by Kalin Bennett. Editing by Joel Ascarza and Onyx Media. Copywriting by Nate Weintraub and a very special thanks to the entire bigger pockets team. Your content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Stuart Miller, Lennar executive chairman, joins ‘Squawk on the Street’ to discuss high mortgage rates and the impact on the housing market.

David:
This is the BiggerPockets Podcast show 627. Recession and market crash are not synonymous. They’re not tied together. You can have a recession without the cost of assets dropping, especially if wealthy people are the ones owning the assets, especially if the assets perform better in a recessionary environment. This is the point I just want to keep hammering is stop thinking that just because we’re having a recession, we’re going to have a market crash. We can, but it often doesn’t happen.
What’s going on, everyone? I am David Greene, and I’m your host of the BiggerPockets Real Estate Podcast here today with a Seeing Greene edition, as you can see from the green halo behind my head if you’re watching on YouTube or Spotify or some way that you can actually see the podcast. We have a great show for you today where different BiggerPockets community members come and ask questions specific to their wealth-building opportunities, how they want to build out their business or where they are stuck, as well as overall strategy.
We get into ways that you can keep your costs down as a new wholesaler, who wants to grow a business. We talk about when to replace the major home systems in your properties, HVAC, roofs, things like that. We also talk about how to deal with a difficult agent or what to look for in an agent so that you don’t end up in a bad spot. And then, we address when it’s okay to lose your earnest money deposit to get out of a bad deal or when you should move forward and stick with it.
We also talk about the economy, different investment options in different economic environments, and my closest guess to what I think is going to go down, looking into the crystal ball that is my shiny head. And before we get to the show, today’s quick dip, go to biggerpockets.com and check out the forums. These things are awesome. This is like being a fly on the wall and being able to listen to conversations between both newbies and very experienced investors, sharing information freely. My advice is go check it out.
And if you see a topic that you find is very interesting, but a part of it or a perspective of it that didn’t get addressed, go to biggerpodcasts.com/david and ask me to clarify whatever you didn’t understand from reading the conversation. All right, let’s get to today’s first question.

Cody:
Hey, David, first off, thank you so much for taking my question. Always get super inspired by the BiggerPockets Podcast. Even some of the topics I don’t even think that are going to pertain to me, I’ll listen to it. And I always come out with a nugget of truth that always helps me and gives me super inspired on the other side. So, thanks for that. So, my first main question is this. I have a buddy, Ryan, he invests in stocks and bonds heavily. He’s very successful with it, and him and I always have this debate on the real estate market and where it’s heading.
I always send him just bits and pieces that I hear on your guys’ podcast. And he’s still not totally sold on the market continuing to go up. And I’m just curious if you could dive further into depth why you feel like the market’s going to continue to go up. I guess the biggest thing he’s opened up my eyes to now is with looming recession. And if you look at the statistics, we’re actually already in recession from my understanding and just where you feel like things are going to go once we continue to travel down that path because it’s like one market goes typically and the other markets are going to go.
So, if you could just dive further into depth with that and really explain more fully why you feel it’s going to go in the direction it’s going to go, that would be amazing. My other question is this. So, right now our portfolio, we have one long-term rental. We’ve done a couple of flips. We now own a short-term rental up north that we’re getting going. And we’re finishing a tiny house that we got.
And also, we’re doing a buildup north with my in-laws. With so heavily involved in short-term rentals, I’m just curious with recession looming and things going crazy with the market. I’m just curious where you feel like the short-term rental, how it’s going to look, how the short-term rental market’s going to look if we go down that road. Thank you so much for taking my question. I really appreciate it, and take care.

David:
Hey there, Cody, thank you for the question. You are echoing the sentiment of just about every single real estate investor or a wealth builder in general in our country right now. So, if you go in the crypto space, they’re asking the same question but from a crypto angle, what’s going to happen with crypto? If you’re talking to stock traders, if you’re getting to any form of people that give financial advice or build wealth through different securities or assets, they’re all trying to figure out the same thing, what’s going to happen with the economy? And real estate investors are no different.
Now, here’s what I can tell you. It’s only going to do one of three things. The economy’s going to get better and prices are going to keep going up. It’s going to get worse and prices are going to keep going down or it’s going to stay exactly the same. We never know at any time what’s going to happen with the economy. Now, what it sounds like you’re doing with your friend is a trap that many people fall into. What they do is they hear a perspective from someone like me or someone else. And they say, “Hey, what he said makes a lot of sense.” That element, that perspective that he provided was really good.”
And then, you go tell your friend, and then your friend says, “Yeah, but did you think about this?” And then, that perspective wasn’t offered when I was talking. So then, you come back and say, “Hey, what about this perspective?” And then, I answer it. And then, you go back to him and say, “Here’s what he said.” And then, they give you another one. And this goes on forever. It’s like a game of ping-pong of Forest Gump versus a wall. It never actually ends.
So, I don’t think it’s healthy for you to keep going back to your friend and trying to say, “The economy’s going to go up or the economy’s going to go down,” because we don’t know. Now, let me broaden the perspective of everyone listening here. Economies will go up and economies will go down. It is going to go down. Okay? At some point, Cody, that’s going to happen. I’m not betting that the economy’s not going down. I’m not betting that the economy’s never going to go down.
I’m betting that when it goes down, it will go back up. I’m betting that when it goes down, I can weather that storm because I didn’t quit my job and go work on the beach. I kept working and I kept money in reserves and I lived a very frugal lifestyle so that I can afford to make some of these payments. I can actually lose money in real estate or on short-term rentals for a period of time. Now, do I want to? Absolutely not. But am I arrogant enough to think that it’s never going to happen and I’m entitled to making money every single month or every single year that I ever own real estate?
That’s insane, but because we’ve seen a run-up in prices for so long, there is a contingency of people that believes it is unacceptable to ever lose money for a period of time on a house. And it’s just not realistic. There’s no relationship that doesn’t hit hard points where people aren’t happy. There’s no child you raise that acts perfect all the time. There’s no investment that never loses money or goes bad. The key to successful real estate investing is to continue to survive when it gets bad, and that’s the advice I continually give. Prepare for the worst, prepare for the worst, prepare for the worst.
I’m not the person that says get four houses and quit your job. That’s very risky to me. I want you to keep that bulletproof vest on in case bullets start flying again. I want you to put a fortress around yourself in case the White Walkers come, the White Walkers of inflation or a recession, and you’re prepared because you’re standing behind the north wall. That’s a Game of Thrones reference. That’s the way that I approach wealth building. All right. So, I don’t know what’s going to happen and I don’t have a crystal ball, but I’ll just tell you what I’m preparing for.
We should have went through a recession when we shut down the country for COVID-19. We destroyed our GDP. We stopped being productive. It makes sense that a recession would happen. As you mentioned, many people show we’re in a recession. And I agree. We are in a recession, but prices aren’t dropping. And that’s what people have to understand. Recession and market crash are not synonymous. They’re not tied together. You can have a recession without the cost of assets dropping, especially if wealthy people are the ones owning the assets, especially if the assets perform better in a recessionary environment.
This is the point I just want to keep hammering is stop thinking that just because we’re having a recession, we’re going to have a market crash. We can, but it often doesn’t happen. And I believe the reason everyone assumes it will is that in the last recession we had a market crash, but here’s why that happened. The last recession was a result of the market crashing. What I’m saying is the market didn’t crash because we had a recession. We had a recession because the market crashed.
The market crash caused the recession and that’s not likely to be the case now. The reason we had the last crash was that loans were given that people couldn’t repay and they all reset at roughly the same time, and you had way too much supply for the demand that was out there. Home builders were throwing up houses as fast as they can and people were buying them based on pure speculation. We had too much supply and not enough demand when all the houses hit the market at the same time. We are in the opposite environment in most markets that I’m looking at right now.
We have too much demand and not enough supply. So, I don’t know if a K-shaped recovery is the right way to explain this, but the way that my crystal ball is working, what I think is going to happen is you’re going to have people at the lower end of the economy that are going to get squeezed very hard, people that don’t have a lot of money. Their gas is going up. Their food is going up. Their rent is going up, but their wages are not going up and they’re not able to make more money at work. Then you’re going to have people at the top of the economy.
And I’m going to describe those as people who own assets, people who have a portfolio and make their money through mostly investing. The people that have followed the cash flow quadrant as Robert Kiyosaki put together and make their money as investors, not employees and not self-employed, those people are going to continue to build wealth because their wealth is coming from assets, not from a W2 job. So, I don’t know what’s going to happen. But what I am guessing is going to happen is that the wealthy are going to grow their wealth through this recession and the poor are going to lose more of it. And it sucks.
This was the problem with printing ridiculous amounts of money is this seems to happen every single time that we do it. It’s like giving a kid sugar. Yeah, they feel really good for a little bit of time. And then, they go crazy and then they crash. And that’s what we’re talking about here is a crash that’s coming. I just don’t know what’s going to affect home prices. So, the best thing you can do, if you continue to buy real estate is to put more away in reserves than what you thought before. Now, the second part of your question had to do specifically with short-term rentals. Are people going to keep traveling?
And I got to say, this is a question that’s at the top of my mind as well. I am worried about this. I think about that. Because I’ve been buying short-term rentals. In fact, if you want to be in the best market, you have to be in the short-term rental game because of this supply and demand problem. It’s the only way to make them cash flow in a lot of cases. What I’m doing to prevent against this is I’m only buying properties in areas where I think more wealthy people are likely to frequent. That’s the way I’m looking at it. If the wealthier people aren’t as affected by the recession, they’re still going to travel.
And that’s why I’m getting into the more luxury space, because that’s where the people who are going to be traveling haven’t been impacted by the economic well is where I think the bottom half is going to. Now to be clear, I’m not some greedy landlord who’s reveling in the fact that the people at the bottom of the economic spectrum are going to get hurt. I’m actually heartbroken about that. It’s very sad. I don’t think this is good. When a lot of other people were saying, “Print the money, print the money, print the money,” I was on this platform saying, “This is going to be worse if we actually do it.”
And now, the worst is coming. Just like someone who runs up a credit card bill and then has to pay it back with interest, that’s what’s happening in the economy of our country because we made those financial decisions. We didn’t want to save up the cash and pay for it upfront like Dave Ramsey. We wanted to run up our debt and now the bill’s coming due. So, to wrap all this up, I would say, I don’t know what’s going to happen. I wouldn’t try to argue with my friend and convince them that prices are going to keep going up.
But what I would say, if that inflation comes and we continue to print money, if we make more decisions to print more money, housing is going to keep getting more expensive. If we don’t do that, or if they actually contract the money supply, if they pull money out of the economy, God, that would be amazing. I would love it. It would cause people like me to lose money in our net worth. My overall net worth would drop if they constricted the money supply because assets would become worth less, but it would be better for the country as a whole.
So, if you see that happening, that’s where I’d say, “Okay, stop buying. It’s time to wait for these prices to come down and a correction to happen before I jump in.” But until I see that happening, pure interest rate increases is not enough to slow the demand that we have for real estate in the best markets where everybody’s moving to. All right, next question comes from Jeff Row in Denver. I’m from Denver, Colorado, and I’m a new real estate investor focused on house hacking using rent by the room and Airbnb. Do you have any tips for what I should do after realizing a buyer’s agent representing me on a deal doesn’t have my best interest but it’s too late to anything about it?
I missed a lot of the warning signs of a bad agent, but now that I’m past the termination deadline and my earnest money will be lost if I walk away to become apparent that the buyer’s agent I’m working with just wants to throw me into a home without understanding my short and long-term goals, what I’m trying to accomplish and why I’m looking to invest in real estate, do you think it’s worth losing out of the earnest money deposit, which is 16,000 to work with a better agent and get a better home for my goals? And do you have any tips for how to prevent a similar situation in the future?
Yeah, this sucks, man. Because as an agent, I understand what it’s like to be an agent. As an investor, I understand what it’s like to be an investor. I think there’s an inherent flaw in the way that agents work or the regulatory environment I should say, the environment they work in. Agents on one hand work on pure commission, meaning you can use them for years and they don’t make any money. They actually lose money to pay for all of their licensing requirements, their time, their gas to show you homes. Just by being an agent, they’re losing money. So, they have to sell a home to make it worth doing it at all.
On the other hand, they’re asked to be a fiduciary, meaning that they have to look out for your own best interest. And that’s crazy. I don’t know why we combine fiduciary with a commission job. A lawyer is a fiduciary, but you pay them by the hour. You have to pay your lawyer. So, it makes sense to ask them to be a fiduciary. I just think that the idea that buyers agents only get paid if you close on a house and they have to be a fiduciary is a massive conflict of interest. It makes no sense that things are set up that way, but that’s the way it is.
And because that’s the way it is, you often get a case where an agent is being trained and taught and motivated to get you into a property and sell something. And you’re looking at it like they’re going to look out for me. There’s an inherent conflict of interest right off the bat. Now, you didn’t mention anything specific that the agent did. And that part concerns me a little bit because I don’t want you to get into the thought of, “Hey, something came up that I didn’t know was going to come up. It’s my agent’s fault.”
There might actually be some responsibility on your end in this case, Jeff, where you just didn’t understand what you were doing or you didn’t get clarity from the agent on what their job was. Now, if they’re making big mistakes, they’re making decisions without talking to you first, they’re telling you, “Don’t worry about things that you should worry about.” Yeah, you got a really good point here, but nothing’s really been mentioned other than they just want to throw you into a home. Now, the specific question of should I lose my money and find a better home, that is oftentimes the right move. Okay. Nobody likes to lose money.
We don’t like to lose earnest money deposit, but it’s the cost of doing business in a way. Nobody likes to pay for a home inspection, right? Like I’m looking at buying a house that is very big where the inspection’s probably going to be $1,500 just to look at it. And the odds are, they’re going to find too much stuff in the inspection to buy the house. So, should I not go after it because I’m going to lose $1,500 or do I look at, “Well, I might have to do this 10 times to get a house so I should set aside $15,000 for inspections?”
And then, when I do get the one house that works, there’s so much equity and it’s such a good deal that it covers the $1,500 I had to spend to get there. You’re in the same situation. So, looking backwards, being mad at the agent isn’t going to help you. You got to ask yourself, “Is this house worth buying or is it worth losing 16,000 to get a different house?” Just look at right where you’re at and say, “This is such a bad deal. I’m going to lose money on it. It’s going to be a headache. I’d rather lose 16,000 than take on that problem.”
And if it’s not that bad, maybe you close on it and you just get a different agent for the next property. But my advice to you and everyone else is the same. When you meet your agent, be very, very clear of what your expectations are and ask them if they can help you. You’ll often find that much of what we think is an agent’s job isn’t the agent’s job or that agent doesn’t believe it’s their job.
And if you don’t get this whole like premarital counseling session going on, it is very easy to end up in this situation, Jeff. I’m very sorry that’s the case. I hope it gets better.

Kris:
Howdy, David, I got my Florida ahead on, I’m moving down to Florida next week down to Fort Walton Beach area. I believe you just bought Apartment Bella there or about to buy an Apartment Bella and something like that. I had a quick question. The question is when do I replace my air conditioning and heating unit or HVAC, whatever you want to call it, and water heater. So, the backstory is I have a place from 2005, which is the one I’m in right now. It’s going to be a rental in Milford, Delaware. It’s from 2005, all the stuff’s from 2005. It’s a gas furnace and gas water heater.
And then, the place I bought in Florida last month, it’s from 2002, just replaced the water heater because the insurance company wouldn’t give me a policy because the water heater was too old. So, do you just replace the one from 2002 and then wait until the one from ’05 cuts out or do you just wait until either of them cuts out? I know you’re probably just going to say build up your reserves and be ready, but I’m already there. I just didn’t know, do you be proactive since it’s a rental, you don’t want it to go out while the tenants are in here? Yeah, basically, the question, when do you replace the HVAC? Thanks, David.

David:
You got to build up a lot of reserves so you can be ready no matter what happens. I’m just kidding. You’re asking really good questions here. And I like that you mentioned something, you said the insurance company, what you’re referring to was the homeowner’s insurance company. And here’s a quick tip for everybody out there. When you’re buying a house that has an older HVAC system or an older support system of any type, see if a home warranty will cover replacing it when it goes out. This is a trick I learned as an agent. So, what will happen is we’ll get into negotiations with a seller and I’m representing the buyer. Or no, sorry, let me rework that.
I’m usually representing the seller and a buyer is saying, “Hey, your air conditioning unit shows that it only has a couple of years of useful life left. We want a credit for $15,000 for another one.” Well, I don’t want my seller to lose $15,000 to close the deal. So, instead we’ll say is tell you what we’ll do. We’ll pay for two years of your home warranty so that if it goes out, it will be replaced by the home warranty. And then, I basically get my seller to have to pay $800 or $1000 instead of $15,000, and we save the deal. That’s typically the cheapest way to solve this problem. So, if you know you have an HVAC system that could be going out, the first thing is, can I get a home warranty to cover it?
Now, you mentioned it’s too old, that’s not going to work. As far as when do you replace it? This is just my personal opinion. You let it go as long as you can before you replace it, assuming you can get another part and put it right back in. I’ve seen stuff that I was told it’s on its last legs that six years later is still running and it’s running fine. That’s one of the reasons I say don’t replace it right away. You’re also a younger guy. It sounds like you don’t have a ton of capital. So, for someone like me, I would probably replace it right now because I just don’t want the headache of a phone call coming in and I got to schedule it maybe when I’m trying to do something else.
But for someone like you, you might want to get some more life out of that thing before you replace it. So, save up the money so you can replace it, but I wouldn’t replace it if it’s working. Now, in a scenario where you can’t get a replacement, there’s supply chain issues. Maybe it’s smarter to just get it now when you’re in control. You don’t want to leave your tenant in Florida without air conditioning. That would be absolutely miserable. So, that’s something that I would consider. I’ll also give you this little piece. I’ve had properties in Florida that when they went vacant, had the air conditioning stolen right out of the property.
So, depending on where you’re buying, they make cages for air conditioning units that you can put in there that make them very difficult to steal. If it’s not an area that you feel really good about, or it’s not an area where there’s neighbors that can see it, oftentimes there are more rural areas out there in Florida where people don’t see what’s going on. Very easy to grab those things, back a truck up into the yard, rip it out, throw in the back of the truck, drive off. They got your air conditioner. Consider getting a cage especially if you get a nice new shiny air conditioner that’s going to be blinging for the entire neighborhood thieves to see. All right.
We’ve had some great questions so far and I want to thank everybody for submitting them. Please make sure to like, comment, and subscribe on YouTube to what you’re hearing. In this segment of the show, I like to go over comments we received from other listeners. I saw Nate Bargatze do this and his people often left very funny comments. And it was funny when he read them. So, if you’ve got something funny to say, I want to hear about it. Go to the comments right now and leave a comment about this show. And I might read your comment on future episodes.
Comment number one from Real Estate Scroggs. I was listening to the podcast in my car as I do every day when David said, “Hey Siri.” The little Siri globe came up on my phone. I thought she only stood your specific voice. I guess I was wrong. LOL. This comes from an episode where we interviewed somebody named Siri and I started the show off by saying, “Hey Siri.” And then, I wondered how many people’s phones just went off. Oh, my Siri is going off right now as we speak. That’s funny. So, apparently, that is the case. I’ve triggered Siris all over the world.
Next comment comes from Michael Batista. Hey, BiggerPockets, would love to see you talk more about flipping lease options. Michael, this was a very popular strategy in the past. Here’s why it’s not as popular right now. Lease options work best when the market isn’t going up in price. When you’re not seeing asset prices inflating, it’s better for the landlord in that situation because they put more of the cost on the tenant. They have to take care of their own repairs. So, cash flow’s higher. The downside is with the lease option, you get an option to buy the house at a certain price and the way that assets have been going up, they’ve been greatly outpacing any lease option.
So, any landlord that did that put themselves in a situation where they were losing massive appreciation and equity, just so they could save on repairs. If we see the market slow down to reasonable levels or even go down a little bit, I think you will see the popularity of lease options return because they make a lot more sense when the asset isn’t gaining value super quick. In that case, you may see people selling their homes directly to the tenants who can’t save up a down payment and take a portion of their rent every month to go towards it. If that happens, I’m sure we’ll be bringing you more of that information.
Stephanie Clemens. LOLs, I’ve been waiting for you to make that leap into your preferred version of the quick tip. Heard that quick conversion many episodes ago. So, Stephanie’s referring to the fact that my previous cohost Brandon Turner used to love to do the quick tip with Josh Dorkin where they would say, “Quick tip.” And four years, Brandon forced me to do this high-pitched quick tip that I staunchly opposed. I tried to work it into my contract and I just couldn’t get it signed. As soon as Brandon was gone, I went the opposite road and I now often do the quick tip in a Batman voice. Quick dip. Where’s the trigger?
First off, it’s good practice for my Batman voice. And second off, it just helps me restore balance of the force because for years, I was forced to do it in a falsetto that I absolutely hated. There is nothing as embarrassing as interviewing Joco Willink on your podcast and being forced to do a high-pitched quick tip with Brandon Turner like you’re in a barbershop quartet. Next comment comes from Jonathan Hawthorne. When is Brandon going to come visit the podcast? I miss that guy.
All right. I wasn’t going to say anything, but because you guys are leaving really good comments like I asked, I feel like you have to, especially because it’s a Seeing Greene episode. Two episodes from now, you will see my best friend, the Bearded Wonder back joining us on episode 629. So, stay tuned. And if you’re not already subscribed to the podcast, please subscribe to both the podcast and the YouTube so you get notified when we bring Brandon back. And from flies on a wall, I guess that comes from, I’d like to be a fly on the wall during that conversation. This is a person that likes to listen in conversations.
How do I submit a voice call in question for the show? Well, we love those. We love it when you make a video of yourself asking the question that we can put it on the show. Just go to biggerpockets.com/david. And if you’re trying to remember, what’s the URL, as long as you remember biggerpockets.com and my name, you’ll be good. All right. Are these questions and replies resonating with you? Have you enjoyed hearing some of the advice that I’ve given? Did you know that you could get a home warranty company to replace your older appliances as long as they approve it when you’re in escrow?
Did you know you can get the seller of a house to pay for your home warranty company to keep the deal alive? I’ve sold a ton of houses on the David Greene team. I’ve done a ton of loans with the One Brokerage and I want to bring you all the experience that I have to help you become a better investor. Also, if you’re in my area, I want to help sell your house or help you buy a house. Please hit me up about me helping you with that and also hit us up at the One Brokerage to help you with the loan.

Ladi:
Hey, everyone, thanks for the podcast. My name is Ladi Sonabari. I’m from Brooklyn, New York, and I’m trying to wholesale my way into my first investment property. Now, I’m not really sure how to do this cost effectively. I’m trying to figure out how best to estimate my after-repair value without having to pay a contractor or an appraiser with every new lead that I get, that doesn’t seem very cost effective at all. And I would likely go broke before I get my first commission. So, thanks a lot for your help, and I’m looking forward to hearing back from you. Thank you.

David:
All right. Thank you, Ladi. This is a good question. There’s a few pieces I’m going to have to pull together to give you a good answer. The first would be often your realtor can provide that for you. If you have a realtor that sells a lot of homes in the area that you’re working with, they can say, “Hey, here’s what your after-repair value would be because they sell a lot of houses.” If you’re going to be the realtor yourself, you got to learn how to run a comparative market analysis. This is where you take a list of homes that are actively for sale, homes that are currently under contract or pending and homes that have previously sold.
And you see what price for what condition and what size the home is in to put together what you think yours would sell for. Now, here’s a caveat that’s not often talked about that you will only hear if you’re working with a realtor who does high volume. Certain markets are much easier to predict the ARV than others. Let me give you an example. When I was buying in Jacksonville, Florida, if I was in a specific zip code and I knew it was four bedrooms and two bathrooms, I could give you a pretty tight range, like 140,000 to 160,000 ARV, unless there was something incredibly unique about the property. In other markets like California, where I sell houses for clients, our ARVs are all over the place.
Big homes, small homes, homes with views, tract homes, custom homes. It’s much harder to track down what the ARVs going to be. And we have a much bigger discrepancy with the appraisers when they actually come back with their appraise value. So, depending on the market you’re in, it could be close to impossible to really nail it down, or it could be pretty simple. Most investors are buying in cash flow markets where there’s not a huge discrepancy in the price of the asset class.
So, here’s what I would do. I would talk to other investors or other real estate agents and I’d say, “Hey, a neighborhood like this, standard three bedroom, two bathroom, not a lot of issues, but not upgraded. What does it sell for?” And they’re going to give you a range. I then go look on Zillow or a Realtor or whatever website you use. Look up standard three bedroom, two bathrooms, and verify if that range they’re talking about makes sense. I would then do the same thing for what’s your standard four bedroom, two bathroom or four bedroom, three bathroom.
And all you’re trying to do is build a baseline understanding of the range that those houses are going for. So, you may say, “Hey, if it’s 1600 square feet or less, it’s going to be worth 180.” If you’re getting into 2000 square feet, they start to bump into 210 to 220 range. Something like that to just get a baseline to go by. Once you have the baseline, then you can actually put together what you think the ARV based on the detail of what you’re going to put into the house. Question five comes from Brandon in Grand Rapids, Michigan. My portfolio is seven doors, single-family rentals, four doors, short-term rentals and eight doors rent-to-own mobile home contracts.
Hey, David, I have an interesting question. Or at least we are perplexed. We purchased a commercial property, a four-unit short-term rental in August of 2020 and a five-year adjustable-rate mortgage at 4%. The total loan was 344,000. Now that interest rates are on the rise, we are concerned about our position and then this loan balloons in a couple of years, but I ran all the scenarios and we decided to stand put with a five-year ARM but looked into refinancing recently at 4.5 for a 10-year ARM. In hindsight, we screwed up on the front end with not securing a 10-year ARM. However, here we are. What is your advice?
All right. So, adjustable rate mortgages are not the worst thing ever. I’m not actually someone who says ARM, bad, but I would say if you’re dealing with adjustable rate mortgages, you need to be in a position where you’re not worried about the rate going up. Based on the tone of your question here, you are worried about the rate going up, which means you shouldn’t have gotten adjustable rate in the first place. You’re playing it fast and loose there, Iceman. So, here’s my advice. You should refinance but not into a 10-year 4.5% rate. You should refinance into a fixed rate.
Now, if you can’t do it because it doesn’t cash flow, the 10-year rate is, or the 10-year period of time is okay, but you’re going to have to be committed to saving the cash flow from that property and putting it aside and not living off of it. You could easily get yourself in a jam again because we don’t know where rates are going to be when that 10-year period of time ends. Now, for anyone else, who’s considering an adjustable rate mortgage or a HELOC, I’m typically advising against that in general and saying you should do the cash-out refi.
And that’s because the fed has come out and said, “We’re going to keep raising rates.” They’ve let it be known rates are going to go up unless something changes. That’s the default. So, getting an adjustable rate mortgage is not very wise if you know rates are supposed to go up and HELOCs are adjustable rate mortgages. So, in general, if there’s no reason to think rates are going to keep going up, I may lean more towards going that road. I’m going to do my first one probably ever myself, but again, it’s like an 8/1 ARM.
So, I have eight years where I can lock in a better interest rate or I can save the money or I can sell the house and I’m having a ton of equity walking into it. Plus I have eight years of time for equity to grow. The odds of that going bad for me are going to be very small, but if rates are low and you can, lock them in on a 30-year fix and just be done with it.

Stacey:
Hi, my name is Stacey, and I’m really excited to submit this question today. David, really appreciate everything that you produce and put out in the world for real estate investors, including the podcast. And I’ve been thinking about this question for a while. And then, I saw that you were going to have Henry on answering questions with you and I knew it was time to submit my question. Henry, really appreciate your approach to real estate investing. And it definitely feels similar to what my husband and I are creating.
Call us a little bit unorthodox real estate investors. And the reason for that is we’ve got five doors in addition to our primary residents, which we have paid off in full. And we tend to look at properties a little bit different than most real estate investors. In other words, it’s not always a hardcore number crunch for us, but we do that because it works for us and our style. And as a result of that, we’re always strategizing about plan B. What happens if, and giving ourselves an escape path.
And so, as a recent example, we dipped our toe into the short-term rental space about five months ago. And we did that and we bought a property that was not in a vacation destination, but we felt comfortable with it for two reasons. One, we actually acquired this property that is zoned residential office. It had previously been an office for a counseling office. So, we knew that if something changed with short-term rental regulations, we could quickly and easily convert that back to an office rental.
The other thing we did is rather than go out and spend tens of thousands of dollars in purchasing new furniture and linens and all of that, we went and bought… Actually, correction, we didn’t buy used linens. That’s the one thing we did splurge on and mattresses, but we went out and bought used furniture, high-quality stuff that we found on Facebook Marketplace or Craigslist because we wanted to not spend a ton of money if we found out that this didn’t work for us.
The good news is it seems to be doing all right. And we’ve been steadily increasing our bookings, especially now that we’re hitting into the summer months. So, my question for both of you today is what are some really creative ways to look at plan B with real estate investors, especially because the market’s changing on us a lot, whether that’s short-term rental regulations or whether that’s the rising cost of rents.
How can a real estate investor incorporate some of these very creative plan B strategies into how they think about real estate investing? Thanks so much for taking the question, hope to hear it on the podcast. And again, thanks to both of you for all you do.

David:
Hey, thank you for this, Stacy. I actually really like this question because it’s on the front of my mind all the time. So, what we’re getting at here, folks, is if plan A is to buy a property, to use it for a specific purpose, but something changes in the economy, in the market, in the laws. Is it okay to have a plan B or a plan C and then a plan D? So, what a lot of people are doing is they’re looking at properties and saying, “Ooh, this one would work really good for this thing. Oh, but what if something happens? Yeah, I can’t buy it.” And they’re skipping onto the next one.
And that’s, I think what Stacy’s getting at when she says pure number crunchers. They’re just looking for what’s the highest ROI that I can get. But Stacy, it sounds like is looking at how do I play defense a little bit here. It may not be the best return ever, but how do I cover my downside in case something goes wrong, where I get a much smaller return but I don’t lose the property, that I think is actually wise. I think that most investors I come across that say, “David, teach me how to invest in real estate.” They’re taking a property. They’re plugging numbers in a spreadsheet, usually that somebody else made.
And they’re trying to just do this over and over and over until they get the highest ROI they possibly can to pop out on the spreadsheet and they go, “That’s the one I’m going to buy.” They’re not asking questions like how much time is this going to take? How risky is this? How likely am I to hit that number? What could go wrong? At this stage in my career, I tend to almost look at defense first. So, rather than saying, “Where’s the most cash flow I can get,” I say, “Where’s the best market I can buy in. Where am I likely to be safe?”
And then, from there, how do I find the best opportunity that I can to cash flow? A couple plan B strategies that I’ve put together for myself. I was actually teaching my mastermind about this not too long ago. And we got into this very topic. The first would be if it doesn’t work for its highest and best use, which in many cases is a short-term rental at least if people vacation there, can you turn it into a long-term rental? So, I want the floor plan of the property to be one where I have separate entrances for upstairs and downstairs. If they have a deck that goes around the upstairs and I can build stairs there, that’s awesome.
If it’s a tract home and there’s no way to get into the upstairs, unless you enter the house and go up the actual stairs that are inside, I probably don’t like that floor plan. Second, I want to buy them in areas that are in general, more business friendly. They’re going to be places that are sometimes conservative minded but really what you want is business minded. They like tourism. They like business. They want short-term rentals in their area because it brings in money.
That is a situation I enjoy because the politicians of the area are less likely to outlaw short-term rentals, leaving me in a bad spot or outlaw rental property in general. Another thing is can you combine them? Can you buy a triplex and rent it out as a short-term rental rather than just as a long-term rental? So, if something goes wrong with your short-term rental, the backup plan is to make it a long-term rental. Another one is all else fails. Can you rent it out by the room? Is it close enough to businesses that people are going to rent a room to live there?
If you buy it in the middle of nowhere, thinking it’s less risky because the price is lower, but there’s no demand for anyone to rent your space. You’re actually taking more risk. So, I like the bigger properties with more bedrooms and more bathrooms because I know, “Oh man, what happens if everyone stops traveling and I can’t book this thing on Airbnb or Vrbo, well, I’ll rent out the bedrooms and I’ll make the best of it. And I’ll weather the storm.” I’m always looking for that. Different zoning options like you mentioned, that can be a good idea too.
But I think something that people severely underestimate and it’s something that on the David Greene team I’m constantly preaching to our clients is the floor plan of the property, not just the price, not just the area. Does the floor plan work for tenants? If you’re trying to get several people in a property that has 1.5 bathrooms and every tenant has to share the same shower, that’s not going to work. If you didn’t make sure that there’s enough parking to have a lot of people in that house at one time, that’s not going to work. You have to actually look at floor plans that are conducive to what you want to do.
Stacy, thank you for bringing up this whole plan B idea, which I think is becoming much more important with the looming questions that are growing in everyone’s mind about what direction the economy’s going. Next questions from Chad Prather. First and foremost, thank you to David, the other BP host and the guests for growing my knowledge in real estate investing. I’ve been looking for that niche that will be my medium to success. David frequently says to turn your learning to action. He also says not to make the jump without reserves.
I respect there is not a definitive line or amount because every circumstance is different, but what advice or goal can be offered to how much of a reserve should be put into a business plan before I get into a deal? I’m ready to get my white belt. Thank you again. All right, Chad. So, here’s what I would say. In general, six months of mortgage payments, utility payments, everything you’re going to have to have to run that house is a good amount to keep in reserves to be safe.
Now, I am okay with it becoming less than six months if you’re a person that lives beneath your means. Now here’s what that means. If you’re saving zero money every month, six months is the minimum that I would say somebody should keep in reserves for a property. But what if you’re saving 5,000 a month and six months of reserves is $40,000? Well, if your reserves drop down to 25,000 or 30,000, but you can save 5,000 a month from money that’s coming in from work, you’re okay to let those reserves come a little bit less than somebody who is living paycheck to paycheck and doesn’t have the ability to earn more income.
Case in point, when I started investing, I was a police officer and one of the ways that I was able to get over my fear of not having enough money to make the payment was that I knew overtime was basically unlimited. Nobody wanted to work as a police officer. So, we were always understaffed. And I knew if I had vacancies, a big repair I wasn’t expecting, some CapEx event, I could just go work overtime for the next several weeks and save up as much money as I needed. So, I was very confident.
Now, I have a friend of mine, Justin, he’s the one that got me in a jujitsu. Well, he’s the one that connected me with my jujitsu academy. And Justin is going to be getting a position as a firefighting captain. And though he’s getting a raise, I’m getting ready to sell his house for him and help him move somewhere else. Though he’s getting a raise, his overtime opportunities are going to be shrinking, which means his ability to generate more money if he needs it is going down. So, we’re actually going more conservative on the house he goes to buy because he doesn’t have the backup plan of earning more income if something goes wrong.
So, also Chad take that into consideration. Six months is a baseline, but if you can make money and save money, you can go below that. If you can’t, you want to be there or more. All right. That is our show for today. I want to thank you all for being here with me and sharing this time, as well as getting your real estate investing education from us at BiggerPockets and me in particular. This is a blast to do. If you would be so kind, please submit me your questions to biggerpockets.com/david. We can’t make these shows if we don’t have you guys asking questions.
Also, if you’re following a cool thread on the forums and you want to take that conversation and bring it here, I think that’s a great idea. So, if you see something on the forums that catches your attention, bring it to biggerpodcasts.com/david and ask the question there. You can follow me online on social media @davidgreene24 if you have to ask question that you’re embarrassed to ask on the show. That’s all we have for today. Please check out one of our other videos and I’ll see you next time.

Mindy:
Welcome to the BiggerPockets Money Podcast show number 312, Finance Friday edition, where we talked to Alexi Horowitz-Ghazi about the buy now, pay leader program.

Alexi:
In the early years of credit cards that led to problems with overconsumption and spending, problems with fraud, that then led to the regulatory framework that now is just kind of normal to us. And so this feels like a new type of consumer technology that’s also started with individual businesses targeting individual demographics and is now expanding. And now the traditional financial institutions are like, “All right, we’re going to start offering versions of this to compete.” But there hasn’t been a full regulatory reckoning. So we’re still in that leading edge moment of kind of new technology.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and joining me today is my military millionaire cohost David Pere.

David:
What’s up? I know, I’m supposed to say something super profound.

Mindy:
That’s okay, you don’t have to.

David:
The sky is blue, because science.

Mindy:
Wow. That’s not why the sky is blue at all. David and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story, even the ones that I don’t love. Because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

David:
Yeah, whether you want to retire early and travel the world, or go on to make big time investments in assets like real estate or start your own business, we’ll help you reach your financial goals, get money out of the way so that you can launch yourself towards your dreams.

Mindy:
David, today, we are speaking to Alexi Horowitz-Ghazi from the NPR podcast, Planet Money. He recently released an episode about the buy now, pay later program, which is also called the point-of-sale loan program. And holy cannoli, I’m going to give you a spoiler right now. I don’t like this program. And I want to talk to Alexi about it because I think he’s got a lot of great insights into this concept and he was the first person to introduce me to this particular idea. I didn’t even know it existed until I listened to his episode. And I was like, “Whoa. That sounds like trouble.”

David:
Yeah, it definitely feels like it’s targeting people who are… I want to say, less well off. But it’s not something that billionaires are running around using. I feel like it’s targeting people who are a little bit less financially educated and they see it, psychologically, as an easy way to purchase something that they want. And it seems like it would be very easy to fall into the trap of doing this too much, and then being just completely overwhelmed.

Mindy:
The exact problem that the heroine of Alexi’s story, that released on his podcast, fell into. She discovered that she could buy this item and it wasn’t this giant price. It was this small price a bunch of times. And she’s like, “Oh. Well, that’s practically nothing. It felt like monopoly money.” So then she goes and does it again, and again, and again. And at the end of the month, she’s like, “Oh, I’ve made a big mistake.” What is that quote from Arrested Development? “I’ve made a huge mistake.” So it feels like people who use the buy now, pay later program are going to be quoting Joe Bluth a lot.

David:
Hopefully not, but.

Mindy:
Please tell me that you got that.

David:
Of course.

Mindy:
Alexi Horowitz-Ghazi is a host and reporter for NPR’s Planet Money and is drawn to tales of unintended consequences. He recently released an episode about the buy now, pay later companies, which are also known as point-of-sale loans. This is a special episode of Finance Friday because I think this is a crisis in the making. And people who are using the service aren’t educated on the downsides. Alexi, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you about this.

Alexi:
Hi, Mindy. Hi, David. Thank you for having me. It’s a pleasure to be here.

Mindy:
I want to thank you for bringing up this topic. Because until I listened to your episode, I had no idea that this thing even existed. I am definitely not the target market for the buy now, pay later companies. So let’s just give an overview about this again. What is the buy now, pay later program?

Alexi:
Okay. So buy now, pay later is a relatively new kind of consumer credit. They’re basically installment loans that are offered to consumers at the point-of-sale. So at the checkout, if you’re buying clothes, or an increasing number of things, airline tickets, even like gas and IRL. It started out as an internet phenomenon, but it’s growing to more and more parts of the economy, including at the real life checkout.

Mindy:
Oh. Oh, that’s even worse.

David:
Yeah, that’s very interesting. I can’t imagine the idea of like, “Oh, I can’t afford gas. So let me stretch the payment out for three months.”

Alexi:
Yeah, yeah. It’s grown to all sorts of different services and products that you can buy. Initially, these companies were relatively narrowly targeted at retail sites for people who either had thin credit histories or bad credit, or otherwise couldn’t gain access to other forms of consumer credit potentially. And so it was pitched as a democratizing way to get people the money they needed now and give them this new way of paying it back later. Generally, the way that works is they’ll front you the money for whatever you’re buying, and then you pay it back in four interest-free installments through whatever their platform is, depending on what the company is. There are other types of loans. There are longer loans with different kind of terms and conditions. But that’s the basic model, is paying for interest-free payments.

Mindy:
Okay. In your episode, you spoke with Amelia who started down the buy now, pay later path by buying a brown and white tie-dye bikini. And I can see this in my head, “Oh, that’s so cute.” But it was a $200 bikini, which makes my frugal heart break. She noticed, when she went to check out, that there was this buy now, pay later option and she clicked it. And she now had the option of paying in four installments of $41.99. And she’s like, “Well, I can do that. I can get $41.99. It’s no big deal.” And I instantly thought of layaway. Alexi, I’m not sure how old you are but I’m very old. And we had layaway. We didn’t have this fancy internet thing when I was growing up, we had layaway. But we didn’t get the items with layaway. You go to the store. You give them all the things you want in the special layaway department, and they put it away for you and you make payments.

Mindy:
I remember I bought a pair of peach overalls that were very hot in 1987 on layaway. And it took me… I had to drive to the store every week for four or five weeks to write out a check or pay cash $20 a week for this. But now, it’s this easy click and it’s not as real. I mean online purchases already don’t seem real because it’s just… My credit card is already in the system. All I have to do is put my fingerprint on my little fingerprint sensor on my keyboard, and now I just made a payment. That’s even less real than having to type in my credit card number at the site. Like it’s so easy to make a payment now. And now I don’t even have to pay the whole amount. I can pay it in four easy installments. This just seems like… This is where to me the crisis is in the making. Because this isn’t regulated, right?

Alexi:
It does. These services kind of fall into a few different regulatory schemes, depending on whether they are run by banks. And regular credit card companies have basically been responding to this new wave of buy now, pay later services which started taking customers from them, taking credit card transaction money from them. And they responded and said, “We can’t leave all of this money on the table, leave this whole consumer group without an option from us if they’re going out and spending money this way.” Ones that are run by banks fall under a different set of regulatory laws. The kind of distinct buy now, pay later companies interact in various ways with credit card regulatory systems.

Alexi:
But it’s still not clear which of those they’re meeting. And so there’s now been this wave of calls for at least investigation from regulators. So the Consumer Financial Protection Bureau started an inquiry last year into how these companies fit into the existing regulatory structures. If there are any rules that they aren’t meeting, if there are new rules that need to be devised to make them safer for consumers. And the House Financial Services Committee also held a hearing on this question last year, last fall, I believe, looking into that question. So it’s still a bit opaque, honestly, what regulations do or don’t apply to them in which they’re hitting, which is part of the reason that this is of concern to a lot of consumer advocates.

David:
Yeah, absolutely. Is there any data as far as how this is impacting different people from different economic backgrounds?

Alexi:
As far as I’ve seen, I don’t have a kind of demographic breakdown. Definitely the pitch to businesses as to why they should accept this type of payment type is because they’ve seen a large adoption by millennials and zoomer consumers. Millennials, for a while, there were kind of seen as less interested, a little more reluctant to use traditional consumer credit products like credit cards. People raise in the wake of the financial crisis, and so this was pitched as an alternative that doesn’t quite a way to get credit, that doesn’t quite interact with the existing credit system.

Alexi:
So you don’t need necessarily very high credit scores to get access to these services. And whatever you do on them for the most part up until now, whatever loans you’re taking out at the point-of-sale are not being reported to credit bureaus. It’s not designed to impact or relate to your credit score. So it’s like credit without the baggage of the current credit system is how it’s pitched. And so the initial uptake in these products were amongst those demographics, but that’s expanded as they’ve gone mainstream in places like Walmart and Target. And a lot of major airlines are now offering these buy now, pay later payment systems at checkout.

Mindy:
Is there anything predatory or detrimental about this practice? I mean, to me, I am… I don’t know if you could tell, but I’m not a fan. I think this plan, this program is… I’m the host of the BiggerPockets Money Podcast. I have my financial stuff together. I can see that a 0% interest loan would be awesome. Why would I pay now when I could pay later and it doesn’t cost me anything? But I’m also responsible with my credit. I can see that this would be really awful for somebody who doesn’t understand the negative consequences of their misactions.

Mindy:
I, in the past, have missed a credit card payment. I remember missing one credit card payment because the statement didn’t come. I’m really old. This was back when we didn’t have the internet and they would just send it to you in the mail, and things would get lost in the mail. And I remember six years later I was getting a mortgage and the mortgage person was like, “Well, what about this missed payment?” I’m like, “What are you talking about? I never miss a payment.” But there are people who don’t understand how this affects you. And you mentioned that it’s not necessarily set up with the credit system, but they are reporting the negatives. When you miss a payment, that’s being reported in many cases. You’re just not being reported when you’re making the payments. So in that regard, it kind of seems predatory on people who don’t know what they’re doing. I don’t know how to phrase that.

Alexi:
I think it’s a hugely mixed bag at this point. I think consumer credit technologies, including credit cards are in part… The point is that it enables people to spend money. The problem comes when people are spending too much money, or get into cycles of spending and revolving debt that make it impossible to dig themselves out of. That’s been true of credit cards and other forms of consumer credit, as much as it is of buy now, pay later. Of course, with credit cards, that stuff happened in the ’50s and ’60s and in the ’70s. A whole series of consumer protection laws were passed that has curtailed some of the outrageous spending and fraud that came about in the wake of credit cards being this new technology for people to buy whatever they want, with the idea that they would pay for it later.

Alexi:
So it’s kind of a similar thing, we’re in an earlier stage of this technology and we’re watching it play out. In terms of the credit reporting, it is true that for the most part, the way a credit bureau would hear about what you’ve been doing using buy now, pay later services would be if you have been unable to meet multiple payments and then defaulted on your payments. So some of those are sent to credit bureaus. So it is easier for there to be a negative effect from these products on your credit score than for there to be any sort of positive. There’s at least one buy now, pay later company that is kind of… To differentiate themselves, they’re offering a way to report your positive payments, making your payments on time to the credit bureau. So there definitely is like a niche in this space to do that.

Alexi:
In terms of the predatoriness or not, it’s hard to make a call about that. There are particular parts of the design that worry consumer advocates. Our protagonist in our story, as an example of this. Part of the pitch from buy now, pay later companies to merchants when they’re saying, “Use our payment service,” is that it causes this kind of psychological trick by making the purchase price of something look a bit lower or feel a little bit lower when you kind of… It’s something that you see in late, late night infomercials, or whatever. Like, “Four payments of 19.99.” There’s something about seeing a lower ticket, even though it’s attached to installment payments and it’ll be following you in the future, that makes it feel a little bit cheaper or at least you’re not depleting all of your income right in the moment. And so you feel like you can make those payments as they come up.

Alexi:
One of the big problems that people point to is that because this isn’t being reported systematically to the credit bureaus, and these individual buy now, pay later companies are not telling each other about your loans with them. There’s no communication here. You could take out a buy now, pay later loan from four or five different companies. And all of a sudden you’re keeping track of four or five different individual payments. Or maybe if you did multiple purchases with each of those, it can kind of turn into this very confusing rotation of various payments that are coming in at different times. And there’s no credit scoring net that’s going to keep you from spending more and more.

Alexi:
There is a kind of internal system within each of the companies that presumably limits the amount that you’re spending. When you apply to buy something through buy now, pay later, generally, they’ll often run a soft credit check. So they’ll look and see what your credit history is. But a soft credit check means that it won’t impact your credit score. Then they have different kind of algorithms that they use to also determine whether they should give you a loan. And then they’ll set a kind of initial spending limit. So they’ll say like, “You can only spend $200 with us.” And once you have proven yourself through that purchase to be dependable by making three or four of your installment payments, they’ll up your limit. So there’s kind of like an internal credit system within each of the companies. But because they don’t communicate, you can easily get into trouble if you’re going on a shopping spree like our character did.

David:
It’s like the exact opposite of asymmetric returns. It’s like you’re investing and you’re like, “Oh. I might lose 10% on this, but my upside is up to 200%. So that’s a win.” This is like the exact opposite, where it’s like, “Hey, they don’t report anything if I’m doing great. But if I mess anything up, it’s going to bite me.” So there’s not an upside for your credit score, but there’s definitely a downside.

Alexi:
Yeah. I will also say, generally, it doesn’t seem like the kind of standard model is based around nailing you on late fees or getting you into a fee trap structure from what I found and from what researchers I saw found. The main thing about this business model, and this may shift as more and more companies take it up and the larger economics change. But right now, they’re able to do this because they’re convincing enough people to buy more stuff and it actually makes sense for merchants to pay higher fees to adopt these services, to offer these services.

Mindy:
That was going to lead into my next… Or that does lead into my next question. The consumer, when they’re using this program correctly, essentially gets an interest-free loan. But in your episode, you mentioned that it costs the retailer 4 to 9%, which is almost double the going rate of credit card charges, which sounds like it would be a negative program all around. But the result when the consumer is spending less in their monthly payment, is that they’re buying more, they’re spending more overall. So the hero of your story is Amelia. She bought a $200 bikini, but it was really only $41. And then the next day she went out shopping again and she bought sneakers and jeans and sweatpants, and her total bill was going to be like $20 or something. And she’s like, “Well, that’s practically free.” “It feels like monopoly money,” I think is the quote that I got from her.

Mindy:
One time is, okay, no big deal. Let’s say she used this and paid $200 for a bikini and made her four payments, and then she was done. And this was like the bikini of her dreams and whatever. I don’t want to say no big deal. I don’t want to say understandable. But that’s not a financial detriment. I think in the story you even asked her, “Did you learn your lesson?” And she’s like, “I still spend. I still buy stuff online.” And I think that it’s going to be… We’re talking about people who aren’t my age. We’re talking about people who have grown up with the internet. They grew up with your life being online all the time. When I was growing up, the phrase was “Keeping up with the Joneses”. That’s just a phrase. But we have a TV show called Keeping up with the Kardashians, and you see their big, beautiful, glamorous life where they have all this amazing stuff. And you’re like, “Wow, they must be happy because they have all this stuff.” So if I have all this stuff, then I’ll be happy too.

Mindy:
And spoiler alert, they have problems just like everybody else. Money doesn’t buy happiness. But when you’re 19 or 25 and you’ve been living in COVID for two years, and you’re not going anywhere, seeing anything. And all you see is this fake life that people are showing you online, you can think, “Oh, well, if I just had that brown and white bikini, then my life would be perfect.” You’re not going to be happy when you have a brown and white bikini, because that’s not the thing that’s missing from your life. So don’t go out there and… I’m not a reporter. I am definitely biased. And I hate this program so much because I just think it’s awful for people who don’t know what they’re doing, and that’s exactly who they’re aiming at. I asked you kind of a leading question, “Is there anything predatory or detrimental about this practice? Is there anything not predatory or good about this practice?”

Alexi:
Well, I was going to just say on the first point, one of the things that feels a little bit dastardly is the way that these have been so seamlessly interwoven with different kind of social media and influencer culture in a way. Our protagonist Amelia found out about this because a lot of the influencers who she follows and aspires to become, were plugging this new technology from a few different companies in their videos. They would do these haul videos, which are when they try on a bunch of different outfits, they order a bunch of different clothes, tell you which ones they like, how they fit. These kind of shopping videos essentially and then they provide a list of where you can buy the things. And now they offer this new payment system there, which was a big part of the strategy of targeting people in this demographic.

Alexi:
So there definitely is something to be said for like this is targeted for people who generally don’t have a high degree of financial literacy. And so there is like an even higher potential for problems there. That said, I think it’s not… As far as I can tell, there is definitely promise here, right? If you’re somebody who doesn’t have access to other forms of credit and you use these things according to their terms and conditions, there’s a way that you can use this to smooth your consumption in a way. Instead of using payday loans and taking on extremely high interest rates that get you into a debt cycle to make a purchase when you’re waiting for your check to come in. If this is an alternative to that, it is pretty promising. In that like you’re going to buy one thing, if you follow the terms and conditions, you can pay for it, and you’ll get the money later down the line and be able to make the purchase even though you didn’t have the immediate amount to spend.

Alexi:
So as an alternative to other forms of consumer credit, I think there is definitely a promise here. There’s going to be a trade off when it is integrated into the existing consumer credit scoring system I think. Because the way it’s designed right now, if you were just to straight up report these types of purchases to a credit bureau, there are all sorts of things that would make it problematic. Because each time you’re making a purchase with a buy now, pay later service, you’re essentially taking out a new little loan, and you’re taking out the maximum you possibly could take out on that line of credit. So what that would look like on a credit reporter to a credit bureau is like a ton of new loans all the time that are maxed out.

Alexi:
There’s maybe a benefit if you’re paying them off consistently. But basically, the credit bureaus need to figure out a way to actually make sense of this data and make it so it’s not like entirely detrimental immediately if it’s reported to them. And as far as I can tell, that sort of stuff is in motion. This kind of movement of the broader financial system to try to make sense of this new product. But yeah, my takeaway was there are definitely a ton of pitfalls. There are easy ways to get into trouble with this, as there were with credit cards, as there still are with credit cards, if you’re just deciding to charge everything and don’t have the means to pay it back. With credit cards, you’re paying interest. It will negatively affect your credit score as well, which will impact your ability to get a car, or get a house, or whatever else. So there are other consequences to going on this type of spending spree with other forms of consumer credit as well.

David:
But you get points.

Alexi:
That’s true.

David:
Okay. So we mentioned if you miss a payment, then it’ll get reported and it can hurt your credit. But is there any other kind of recourse, like let’s say I bought myself a $200 brown bikini, because why not? And I made the first 41.99 payment and then I didn’t make another payment. But I already got the bikini and I look wonderful in it. So who eats… I mean, I can’t imagine that the company calls and says, “Hey, please send that back.” I wonder what’s the recourse look like? Does the merchant eat it? Does the buy now, pay later company eat it? Like someone’s getting hosed in that scenario.

Alexi:
Yeah. So one of the appeals to merchants also of the buy now, pay later service pitch is that they’re essentially being bought out at the moment that the customer buys the bikini. They are out. If the person had used a credit card instead, the consumer would have chargeback protections and other consumer protections that come specifically with credit cards because of some of the regulations that were put in place in the ’70s, which means that if they didn’t like it, they could initiate a charge back and that money would be pulled back from the merchants. So there are kind of financial risks to the merchants and annoyances that come with credit cards and some other payment things that make buy now, pay later a little more attractive.

Alexi:
Well, basically we spoke to a few of our listeners. We did a wide call out. We talked to people on TikTok about their experiences with this. From the people that we spoke to, it seemed like if they missed a payment for organizational reasons, like they just… First of all, most of these payments are automatic. So you put in either a bank account number or a debit card number or a checking number, and they auto draw every two weeks or whatever the kind of payment cycle terms are. So generally, it’s not like, “Oh, it slipped my mind.” Is not the reason you’re going to miss a payment. If you don’t have funds in your bank account, from the folks we talked to, it seemed like the… Also, a lot of these services will send you payment reminders the week of, through text and other forms. And then if you’re unable to pay, a few of the people we spoke to said, they set a new deadline basically.

Alexi:
And they said, “All right. You missed this payment, we’re going to charge you a late fee unless you can pay within…” I don’t remember what it was, maybe seven days, or 10 days, or something like that. “If you do that, we’ll waive the fee.” So they’re not even necessarily charging the fee at the first time the payment has dropped. Because their model is not really about getting you into a cycle of fees. They want you to be consuming more to be boosting the merchant number so the merchants keep paying the fees. So that’s not really the predatory angle of the model, as far as I can tell. But there is a point at which they will send your payments to collections and potentially sell the debt. So these companies are on the hook as far as I can tell if it were really dropped, and then they can go through the traditional kind of trying to recoup their costs methods which would be collections, which is how it would potentially impact your credit score.

David:
Cool. I mean realistically though. I’m torn on this. I like the way that their business model is charging the merchant for the service rather than the consumer. And there’s not an interest rate and there’s not… It’s essentially the same as swiping your debit card. It’s the same cost, just spread out. And so in some ways, I could see it makes sense. The downside I see is, like we talked about before the show, it’s a tool. And if you, realistically, from basic personal finance stuff, if you can’t afford to buy the item right now, then you probably should just wait to buy it rather than doing this. Because what’s going to happen is you do five or 10 of these things and then for the next quarter, you’re monthly expenses have shot up. And if something comes up, now you’re kind of…

David:
That kind of brings up a weird situation, which is… Let’s say I got crazy and I bought $1,000 a month worth of bikinis. And so now I’m on the hook for $1,000 a month for the next quarter, and then it’ll go away, whatever. But if I’m applying for a mortgage, that’s not going to show on my credit report. So it won’t show on my debt to income. So they may be like, “Oh yeah, totally qualified for the mortgage.” And then I can’t afford the mortgage. So it’s kind of weird… Exactly like what you were saying. It’s because it’s not regulated and they don’t really haven’t figured out what to do with it that it’s like there’s some weird ways to fall through the cracks on this that could help you in some regard. But if you overdo it, next thing you know you’re not even living paycheck to paycheck. You’re like, “oh my gosh. I need this next paycheck so that I can pay all this back to zero,” which is just not a fun spot to be.

Alexi:
As you say, it’s a tool. It is a tool designed to get people to consume more than they would otherwise. And a big part of the appeal is that they’ve targeted this demographic of people who might not have been buying stuff on credit before at all. So it’s a tool, but it’s a tool that preys on people’s desire to consume things, which is maybe a broader problem in society and with credit as a larger engine for our economy, but.

David:
It’s the same psychological tool as why on Sunday, when I was in Walmart getting a toy for my five year old, as we’re doing grocery shopping. And you’ve got, whatever. I don’t know, $10. We’ll say 15. And he points at something and he goes, “Oh, well, that one’s only 14. So can I get something that’s a dollar?” And it’s like, “Well, that’s 14.99.” And that’s a psychological game. So it’s the same thing as like a course being 197 instead of $200. And the funny thing is, that stuff works.

Mindy:
That works on me. That works on you. That works on all of us. I bet it works on Alexi too. Alexi, I don’t want to speak for you but I bet it works on you too. Because you see the one, you don’t see the 97. You don’t round up. You see one.

Alexi:
Yeah.

Mindy:
With one, you round down. It’s practically free because it’s only one. You round a zero. And I’ve used things like this. I do a lot of home improvements. And I go to Home Depot, I swipe my card. And if you use the Home Depot Credit Card and you spend X amount of dollars, you get no interest 4, 6, 12, 18, or 24 months. And I make sure that I pay that off before the end of the promotional period. Because if I don’t, then I owe the entire amount of interest on the entire purchase for the entire time even if I only have $5 left at the end of the thing. So I make sure that I definitely pay that off before it’s due.

Mindy:
But that’s an interest-free loan. I would much rather spend $2,000 over the course of 24 months than right now, because I can then go spend $2,000 at Lowe’s as well and buy more stuff. So I can identify with what they’re doing, but also I can afford to buy the 2000. I’m just choosing the interest-free loan. And I think that’s kind of the difference between the way that I’m using it, which is in a more responsible way than this. This girl, I don’t believe could have afforded the $200 bikini. Or maybe she could have paid $200 for the bikini, but then if she had to, she would not have also bought the shoes and the jeans and the sweatpants and all of the other things. It’s set up and in that way I think it is very predatory. You’re tricking people into paying later these little tiny amounts.

Mindy:
I found an article on sfgate.com about this same concept. Because like I said, until I listened to your episode, I didn’t even know this thing existed. This Celesta from the Bay Area, she’s a fashion influencer on TikTok, said people almost like brag or joke, “Oh, it was only 24 payments of $20.” Or, “I got it with Afterpay so it’s technically free.” No, it’s not free. Even if you’re paying $1 for 47 payments, that’s still $1 for 47 payments. It’s only free if it costs you $0 forever. And it doesn’t cost you $0 forever.

Mindy:
I wanted to do this episode and talk to you more about this because I think there’s a lot of people out there who have no idea that this program even exists. And I can see a lot of people who… Because they don’t know what exists, they don’t talk to their children about it. I would have not talked to my children about this because I didn’t know that existed until very recently. And now this is another thing I have to teach my kids not to do, unless they can use it in the way that it will benefit them. And that is to buy things that you were already going to buy and then just spread out the payments. But only if you do it all the way through. I just don’t see a lot of upside for most people with this program.

Alexi:
Yeah. The other thing to mention is that a lot of these companies now become kind of like marketplace platforms. So you can actually go shopping or they’ll send you… You can go shopping through their platforms essentially. So it makes another kind of avenue, another app on your phone through which you can go and find deals and use their service.

Mindy:
No.

Alexi:
So that’s another thing people should be aware of if they’re thinking about downloading any of these apps. And that’s also brings up one other thing. The CFPB is also looking into what type of data is being harvested from people’s phones, and whether and how that’s being sold and packaged. So that’s not clear yet, but because it’s such a kind of digital technology because it potentially interacts with other apps on your phone, like what is tracked is not exactly clear yet. So that’s another thing regulators are concerned about and looking into.

Mindy:
Well, and it’s not all wine and roses for these companies right now. I noted that Klarna just announced that they’re laying off 10% of their workforce, and a firm has lost nearly three quarters of its stock value since the beginning of the year. I mean we’re recording this at the end of May where everybody’s lost a ton of their stock value. So I can’t really say that that’s all due to this. But some of these companies are being sued in California saying that they’re acting like lenders, so they should be registering as lenders and then being regulated as lenders. So I think there’s a lot of… What is it? It’s a learning time and an exploratory time to try and figure out. Because I think it’s kind of funny that Silicon Valley moves so fast and then the stodgy lawmakers have to scramble and catch up. Do you remember when Mark Zuckerberg was in front of Congress and one of the Congress people was like, “Can you tell me why my iPhone does this?” And he was like, “I don’t work for iPhone.”

Alexi:
Those are my competitors there.

Mindy:
Yeah. They don’t understand what’s going on. And because they don’t understand what’s going on, they don’t know how to regulate it. And so it’s this… I’m so flustered, because I’m so frustrated because we don’t have financial education in school. My daughter is a freshman. Tomorrow’s her last day of freshman year of high school. And with her entering class, her high school class is the first class in Colorado that is required to take financial education before she graduates. And she has to take a whopping half semester, and I’m like, “Oh, well, don’t put yourself out.” I don’t even know what they teach in this whopping half semester, which doesn’t come until her junior year. And by that time, she could have already gotten herself into a whole bunch of debt with this stupid Klarna and the firm and Afterpay.

Alexi:
There’ll be four new buy now, pay later and other types of financial technologies we haven’t heard of yet by the time.

Mindy:
Exactly. Exactly. Okay. So the moral of this story is talk to your children about credit and how buy now, pay later, and all this online shopping, and all this craziness. Because you can get yourself into a world of financial hurt even when you think that it’s monopoly money. “I had no idea that I had to pay this, and it’s technically free because it’s only a dollar.” It’s not only anything unless it’s only zero.

Alexi:
Yeah, interest-free does not mean free.

David:
They should make a net worth requirement for teaching that financial class. Because it’s kind of ironic that you know that whoever’s teaching it probably they took a class in college and they may or may not actually know anything about finances. But at least they’re trying, which is cool. You mentioned something, Mindy. I was trying to figure out how to word this. But the idea that they should be regulated as lenders is interesting when you consider that… Like they’re not lending you funds, they’re not charging you interest, and they’re not charging you fees.

Mindy:
Well, what about a mortgage? When I go and buy a house, the mortgage company doesn’t hand me $500,000 and say, “Okay, now go give that to the title company.” They send it directly to the title company, who gives it to the person who pays off their mortgage. This is the same thing.

David:
That’s true. They charge points in interest and fees. So it’s like… Yeah-

Mindy:
Still loaning you the money.

David:
… it’s like this weird loophole that’s just hanging out over here like, “Oh I hope no one sees us.” Like, “Please don’t regulate us Mr. CFPB.”

Alexi:
Yeah.

Mindy:
Well, but they’re point-of-sale loans. Buy now, pay later is a point-of-sale loan. And just because they’re not charging interest, doesn’t mean it’s not a loan. They are giving somebody money on your behalf so that you can buy something that you don’t have enough money to pay for outright, or that you’re choosing not to pay for outright. So that…

David:
You’re right.

Mindy:
Yes. Wow. Could you say that again? I didn’t hear that.

David:
My mic suddenly stopped working. I don’t know what’s happening.

Alexi:
Buy now, pay later is a way of describing any loan also. I mean whether you’re buying the house now and paying for it later, or a car, or anything else, it’s kind of baked into the concept.

Mindy:
Yes, but this is… Now we’re kind of splitting hairs, but I see what you’re saying. Yes, credit cards are buy now, pay later in installments and I don’t have to pay the whole thing all at once. But it’s different.

Alexi:
Yeah, it’s revolving instead of installment basically. They both use fees. But credit cards depend on those interest payments as well to be profitable, whereas this just gets the money for the moment from a different place for the most part. Even though buy now, pay later companies do offer longer installment payments for interest. So they act a little bit closer to what a traditional credit card.

Mindy:
I wonder how they would act if they were regulated like lenders are. If they had to follow all the same rules, would they change their tune? Would they change the way that they behave? I mean they would have to change the way that they behave. I wonder if they would still exist as many of them.

Alexi:
Right. Well, the other thing we didn’t mention too, is that it’s actually even gone beyond personal finance consumer, or it’s beyond consumerism or shopping or something. Now it’s spread to, you can pay for some types of medical bills or dental bills or small business financing or home improvement. You could take out a kind of buy now pay later loan to do some of the work you were describing, going and doing yourself at Home Depot. So it’s expanding to become a model for other types of act of commerce basically.

Mindy:
I think it could have its place, but I think we need to enact more regulations around it. And I really am hesitant to say that because the government’s really good at screwing things up. But I think that they need to do something so that there’s more laws in place so that you have to follow all the same guidelines. So there’s not just this loosey goosey, whatever.

Alexi:
Yeah. Well, one last thing I’ll say is that to me, it felt really reminiscent of kind of the way that credit card spread and were ultimately adopted and then regulated to some degree. Credit card started as, maybe in department stores or to particular business. You had credit within one business. And then eventually, a few of these networks came together to make cards that they could convince merchants across the economy to use and become interchangeable to make universal cards. And then there were all sorts of preposterous ways they tried to get people to use them.

Alexi:
They mass gave out credit cards in people’s mailboxes. And there was all sorts of ridiculous shenanigans in the early years of credit cards that led to problems with overconsumption and spending, problems with fraud, that then led to the regulatory framework that now is just kind of normal to us. And so this feels like a new type of consumer technology that’s also started with individual businesses targeting individual demographics and is now expanding. And now the traditional financial institutions are like, “All right, we’re going to start offering versions of this to compete.” But there hasn’t been a kind of full regulatory reckoning. So we’re still in that leading edge moment of kind of new technology.

Mindy:
Wow. Yeah, I think that’s a really good point. That’s a really good comparison that you’re making. I can see the parallels. That’s very interesting. Well, I’m excited to see how this goes. I’m excited to see some regulation coming, and I don’t really think that that’s going to come anytime soon. So if this is something you’re planning on using, the buy now, pay later, just do it with extreme caution and read the fine print. Oh my goodness. Read the fine print of this thing that you’re doing before you do it. Put it in the cart and then walk away and think about your purchase. Do you really need that brown bikini? David, you would look smashing it and it goes with your beard. But do you really need 20 of them?

David:
No, no, just two or three.

Mindy:
Okay. Alexi, this was so much fun. I really appreciate your time today sharing your thoughts about this program with us. And I appreciate you bringing this up just in general because this episode was really, really, really helpful to keep me informed of all the new crazy financial shenanigans that Silicon Valley is coming up with. I can’t wait to see what else they come up with.

Alexi:
It’s an exciting new world. Thank you guys so much for having me. It’s been a pleasure.

Mindy:
Okay. We’ll talk to you soon. All right. David, that was Alexi Horowitz-Ghazi from NPR’s Planet Money. I really enjoyed talking to him. But I do not like this program, this buy now, play later. I think there’s a lot of potential upside where people could use it responsibly, but like credit cards, like other loans, people are going to use it negatively. And I just think that there’s not enough regulation around it and it’s targeting people who don’t have enough education. But then even as I say that, I’m thinking, “Well, yeah. But what about credit cards? People get themselves into problems with credit cards. Why don’t I have such a problem with credit cards or other types of loans?” I don’t know what it is about this particular program, maybe because it’s in its infancy and there’s no regulation around it. But I don’t like this nearly as much as I’m okay with credit cards and other things, because points.

David:
Yeah. The lack of regulation is definitely something to… I don’t want to say worry about, but to be aware of. And then I think the other thing that got me on this, as far as just not being a fan, is the fact that if you use it, there’s absolutely no upside to your credit or your credit history, or anything of the sort. But if you fail to make a payment, then there is a downside. It’s the exact opposite of what you want as an investor. You want very minimal risk, massive upside potential.

David:
This is very little gain other than whatever item you want, and massive downside potential. Not to say that it’s a terrible… I mean they’re not charging fees, they’re not charging points or interest. So there are worse options out there. But, I would say if you’re looking at doing this, maybe the better bet is to just put that $45 away for four months and then buy it at once. And then you don’t have to worry and run the risk of someone messing with your credit because of a missed payment, or whatever. And then hey, three months, four months down the road, if you still want it, then cool. Go buy it. And if you don’t, then you’ve got 200 bucks that you can now invest.

Mindy:
What a great idea. Save for the purchase instead of making the purchase and scramble to make the payments later. I love it. That was a good point, David. Okay, should we get out of here?

David:
We should.

Mindy:
From episode 312 of the BiggerPockets Money Podcast. He is David Pere and I am Mindy Jensen saying, “Take care, polar bear.”