Ashley:
This is Real Estate Rookie, episode 196. My name is Ashley Kehr, and I am here with my co-host Tony Robinson.

Tony:
Welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and motivation you need to kickstart your real estate investing career. I love Saturdays because we get to switch things up a little bit. Right? We get to dive into some of these questions. But before we do, Ashley, just tell us what’s new with you. What’s going on? What’s new in your neck of the woods?

Ashley:
Not much actually. The last couple of episodes we talked about my knee surgery. We talked about a new deal I’m looking at. So yeah, really nothing else new that I can think of. What about you, Tony?

Tony:
Yeah. For me, we actually just lost out on a property. It was in a new market that we’re looking at and we put up $20,000 as our EMD and with everything that was going on, it’s new construction and the way they set it up was that you had to get a loan to purchase the land and then you had to get a secondary loan to cover the construction. So it was really weird how they had it set up, but with everything we had going on, we totally dropped the ball on remembering that we needs to get this financing for the land because we got this under contract, I don’t know, maybe seven months ago and now it’s like, “Hey, it’s time to start.”

Tony:
It was this mad ground to try and find a lender, but the lender that the builder recommended didn’t want to lend to us because they said that we were overexposed for short-term rentals in our portfolio. They’re like, “This is for someone that this is their first short term rental X, Y, Z,” and it was really weird. We went to three different lenders in that same city and they all said the same thing, but I guess what’s happened is that in that town, in that region, there’s been just this boom of new construction of short term rentals. So I don’t know why, but I guess they feel that there’s less risk lending than someone that doesn’t already have short term rentals. In my mind it would be the other way, because if you have short term rentals, you know what you’re doing.

Ashley:
You have experience, yeah.

Tony:
Anyway, we ended up having to back out of that deal because we couldn’t get the financing in time for the construction start date. Now we’re possibly going to lose our $20,000 EMD, so we’re going back and forth with the builder to see if we can get it back from them.

Ashley:
Okay. Well, first of all, that’s awful. That’s a lot of money to lose, but can you tell everyone what an EMD is? Your earnest money deposit. Explain that, how that process works and why you might not get it back.

Tony:
Yeah. So thank you, Ash, for asking that question. So your EMD stands for your earnest money deposit. So a lot of times when you look to purchase a property, the seller will ask for an EMD, or an earnest money deposit, to show that you have in … even though you’re … let me take a step back. Plenty of people can submit an offer on a property, right? But some people are tire kickers. Some people just want to lock the property up to see what happens. So a lot of times sellers will ask for an earnest money deposit to show how serious you are as a buyer. The way that it works is the earnest money deposit is whatever amount you and the seller agree to. Could be as low as $100, it could be as much as $20,000 or maybe more, and That money gets deposited into escrow.

Tony:
So the seller doesn’t have access to those funds. It’s held in escrow. Then typically there’s a certain point in your contract where your earnest money becomes non-refundable, which means that if you back out of the deal, for any reason, you don’t get that money back to you. It actually goes to the seller. But if you cancel before that date, then you as the buyer get your earnest money back. So we are in a situation where our expiration date for the earnest money deposit passed. So it was considered hard, right? So your money goes hard, your EMD goes hard after that expiration date. So now it’s really up to the sellers to decide if they want to be nice or not, or if they just want to keep our $20,000.

Ashley:
Yeah. I recently did a $50,000 earnest money deposit on a property. They originally wanted $300,000 as the earnest money deposit.

Tony:
Isn’t that crazy?

Ashley:
So we settled on a 50 and what happened was it was a bank that was selling this property and they just wanted to push, “We want this a quick close,” blah, blah, blah. So they’re like, “We won’t accept any more than 30 days due diligence. No more than that.” This was a massive property with so many different avenues. So what my attorney did when he structured the contract is he said, “Okay, the 30 days actually starts when you send us the title work.” So that way it actually gave us so much more time. We ended up taking two months and we still had more time locked because the bank’s attorneys just took so much time to get the title work done and sent it to us.

Ashley:
Then ended up backing out that deal because of multiple issues, but we were able to get our deposit back pretty quickly. That was such a key thing that my attorney did was put in these little loopholes where it’s on [inaudible 00:05:16], “Yeah, we’ll take 30 days due diligence, but that time isn’t going to start until we have all of the information we need to actually understand the property.”

Tony:
Yeah. We did something similar for our Big Bear hotel where we set it up to where the due diligence period didn’t start until we got all of the financials back from the summer. So that ended up giving us an extra, I don’t know, I think 14 days or something like that. So there’s some ways you can structure it. But same for us in that deal, we put up $50,000 in EMD as well and that went hard a little over a week ago. So now for whatever reason this Big Bear dude doesn’t work out, we’re out 50 grand. So we’ll see.

Ashley:
It will, though.

Tony:
Cool. Fingers crossed. We’re making good progress. Awesome. But today’s question actually comes from my DMs and if you guys ever want to get your question featured on the show, you can go to the Real Estate Rookie Facebook group, the Bigger Pockets forms, or you can slide in mine and Ashley’s DMs. We pull questions from all those places. But today’s question, I actually don’t know who this came from. So I apologize in advance if you hear this question and it sounds familiar, because I just took a screenshot of the question, but I forgot to get the person’s name. But it says, “Hi, Tony, I need your advice. I have a good chunk of equity on my home. Do you think it’s why to pull some cash from my home to purchase an investment property? If not, what do you suggest I do with that equity?” Ash, why don’t you kick us off here? What are your thoughts on this equity piece?

Ashley:
Okay, well we know interest rates are going to raise two more times this year. So if you are going to pull any money out, now is the time to do it. So you basically have two options. The first option is you can actually go and remortgage. Get a whole new mortgage on your property. So I would look at what is the current interest rate on your mortgage now. Can you get a lower interest rate if you go and refinance right now, or is it going to be higher? So if it’s going to be in higher interest rate, don’t remortgage, keep the mortgage that you have on the property. Then look at a line of credit. So pulling out a home equity line of credit on your property. Since it’s your primary residence, you’ll usually get good terms, a good interest rate. Some banks will actually do a promotional period where maybe for the first six months, the first year you’re only paying 1.99% or 2.99% on that money for those first six months and then it actually goes variable.

Ashley:
So I would definitely look into a line of credit or to remortgage and refinance and pull that money out. I think it also depends what you’re using the money for too. So if you are going to purchase property and you’re maybe going to flip it, so you’re going to make your money back right away, or you’re going to bur it where you’re going to go and refinance that money and pull it back, then you want that line of credit so you can just pay the line of credit back and then you got that money again to go do the next deal. But if you were looking for a down payment maybe, or maybe you’re looking to just purchase a property in full and with no expectation of going and refinancing anytime soon, then I would go ahead and remortgage the property instead of pulling out that line of credit.

Tony:
Yeah. Ashley, I think you hit everything, just like the nail on the head with everything you said. I probably wouldn’t refinance in today’s environment, assuming that you have a better interest rate. I know for us, when we bought our primary residence, 3% was our interest rate. If we tried to refinance today it’s two and a half points higher. So it wouldn’t make sense for us to refinance our mortgage. So I think your point of if your plan for the capital is something that’s short with a quick turnaround time, like flipping, then a line of credit probably makes the most sense. Honestly, that will probably be my approach right now anyway.

Ashley:
You can get a better loan to value too, because a lot of times they’ll lend you up to 90%, 95% of the loan value. So say your house is worth a 100,00 and you have a mortgage of 60,000 on the property already. They’re going to give you a line of credit for that other … what is that? 35,000? The math right? 35,000, give you a line of credit up to that 95% loan to value. So that’s definitely an advantage too, is that doing a line of credit you’ll be able to pull more money off. You can also do a home equity loan where you’re actually pulling the money out, they’re going to amortize it for you over so many years, you’re going to get a fixed interest rate and then you just make those monthly payments.

Ashley:
So it’s almost like a second mortgage on the property where the line of credit, the money can just sit there on the line, you can pull it off as needed and you’re only paying interest when you use it. Then if you pay the money back, the money is still there for you to pull off at certain times. So you just have to watch when that line of credit expires, when the bank can say, “You know what? We’re actually closing down your line of credit.” I remember during COVID, a lot of people started pulling all their money off their lines of credit, afraid that the banks were going to shut them down and close them off. So they were trying to pull their money off before the bank said, “You no longer have access to this money.”

Tony:
Yeah. Ashley, I think you literally said everything that I was going to say, so I don’t, I don’t think I have a whole heck of a lot more to add. Again, sorry that I didn’t grab your name, but hopefully whoever asked this question, we gave you a good response and now you’ve got some ideas or at least some flexibility in terms of what strategy you can use with that equity you have sitting in your home.

Ashley:
Tony, usually if I pull someone from my DMs, after we record I’ll send them a message saying, “Just so you know, your question was answered on this episode.” So you can send that to them so they can watch you forget their name.

Tony:
I apologize in advance.

Ashley:
Thank you guys so much for listening to this week’s Rookie Reply. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson and we’ll see you guys on Wednesday.

Mindy:
Welcome to the BiggerPockets Money Podcast show number 314, Finance Friday edition, where we interview Rebecca and talk about tracking actual spending, generating income outside a traditional 9:00 to 5:00 and finding your true monthly needs.

Rebecca:
I’ve learned that the money’s out there, you can get it. This job that I’ve had for three and a half years, that’s the first time I’m ever doing it. When I walked in the door three and a half years ago, I had no idea. I didn’t even have a background in it. But up until this point, I was just kind of throwing all this money away. I didn’t know what to do with it. So now that I’m on this track, now that I’m thinking about it in a different way, 10 years ago, if you would’ve said that, I would have been like, “Eh, that’s too far in the future.”

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my goal reframing cohost Scott Trench.

Scott:
That’s right. If the goal’s too far away, just move those goalposts closer to you.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone no matter when or where you are starting.

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

Mindy:
Scott, I love today’s guest. She is in a great position financially. She just wants to speed up retirement. So we have a lot of fun talking to her about her different options today.

Scott:
Yeah, I mean, we’ve had a number of guests recently who kind of all have a similar profile in the sense. There’s all a ton of differences, so I think we had really unique show today, but the similarity or the theme that I keep harping on is this concept of you can’t have all your wealth in retirement accounts and home equity if you want flexibility before traditional retirement age. You must do something different there. And that means hard choices of capital allocation that are not going through this 401(k) and IRA ladder and to your home mortgage payment. It means an intentional shift to putting that money elsewhere and/or redeploying what is likely to be a massive amount of home equity for a lot of listeners into something that can deliver that flexibility. So hard choices. But I think you have to confront that problem, frame your goal very clearly and say, “What do I want?” and then begin actually making those actions towards it even at the cost of perhaps some more tax advantaged wealth at the end of the journey 25 years from now.

Mindy:
It’s all personal. All these options are personal to your journey and your specific position, but there’s a lot of suggestions here, Scott, today. I specifically like you’re reframing goals, conversation that you had with her. You took her $7,200 monthly passive income goal down to $4,000 in about 45 seconds. And that was, I think, hugely helpful to her. I think it’ll be hugely helpful to other people that are listening to this show who may not realize why they have chosen their specific monthly goal. “Oh, I need this much money in income. Why?” Follow Scott’s steps and what he was talking to Rebecca today, follow his suggestions and see if you can’t reframe and cut down your goal and get where you really need to be.

Scott:
Yeah. It’s this paradox, I think, where if you can cut the goal dramatically, if you can spend $2,000 a month, which was something that I was able to do when I was starting out because I was house hacking and I had a paid off car and all this other stuff, I’m spending very little on my lifestyle and now I’m financially free in some very lean sense. Well, now you can begin piling assets on top of that. And then things begin to expand, right? You have the option to work or not work or do all these other different types of things, but you can also just pile assets on top of your position. And then if you want to spend $3,000, $4,000, $5,000, $10,000 a month, you just wait until your asset base grows large enough to be able to do that.

Scott:
But if you can make the sacrifice now or reframe the game, the rules of the game by house sacking or whatever it is to lower your expenses, achieve financial freedom, realize those benefits and then pile on the assets from there, you might be able to get some huge benefits at the… You can’t have everything. You can’t spend $7,000, $8,000 a month and get to financial freedom in 15 years and have it be totally passive in Rebecca’s situation. But you can reframe the goal, make a huge amount of progress in one year, dramatically jumpstart your savings rate, have introduce a lot of flexibility, and then begin piling assets on top of that give you more and more optionality each passing year. That’s an achievable goal.

Scott:
I think that folks kind of struggle to see that if they can make those changes that are unusual like the house hack in the short run and then use that to leverage a lot of wealth later on, you can have essentially all of the things that the huge amount of passive income and the life flexibility and not have to work down the line. You just can’t have it all up front. So you got to prioritize.

Mindy:
Yes. Oh, I could not have said that better myself so I’m not even going to try. And now let’s make our attorney happy by saying the contents of this podcast are informational in nature and are not legal or tax advice. Neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax, and financial implications of any financial decision you contemplate. Also, let’s bring in Rebecca.

Mindy:
Rebecca and her boyfriend make more money than they spend, even after contributing to retirement accounts and brokerage accounts. So that’s good, right? They also have a big challenge and I quote, “We spend a ridiculous amount on unbudgeted things. As of right now, spending is trending downwards this year. But last year we spent almost $40,000 on grocery, Amazon, eating out, Amazon, travel, Amazon, pet care. Did I say Amazon?” So Rebecca, I think I see an area to work on even before we start talking, but welcome to the BiggerPockets Money Podcast. I’m very excited to talk to you today.

Rebecca:
Good. Thank you so much for having me.

Mindy:
Okay. First off, yes, Amazon, everybody should cancel their Amazon Prime account because it is way too easy to click buy. I mean, they set it up on purpose to make it so easy to buy so you would continue to buy. However, it’s so easy. I don’t have to go out. It’s so easy to just buy. So it’s hard to cancel that. I understand where you’re coming from. I don’t want to see how much I spend on Amazon so I just don’t look at it.

Rebecca:
I tried not to.

Mindy:
What a great plan. No, it’s a terrible plan because I have no idea how much I spend on Amazon. So I am going to give myself a research opportunity, which is going to make my heart break and look and see how much I am spending on my Amazon purchases. I’m going to ask people in our Facebook group, which you can join at facebook.com/groups/bpmoney to ask. I’m going to challenge them to look and see how much they spend in their Amazon accounts as well. And I’m an Amazon shareholder so I don’t want anybody to cancel their account, but also I care about people more than the bottom line. So if you’re spending a lot on Amazon, a really great way to stop is to cancel your Prime account because there’s this thing in your head, you’re like, “Oh, it’s free shipping. I can just click buy.” But if I have to pay for shipping, I’m going to say, “Maybe I don’t need it that much.”

Mindy:
So I don’t know. Maybe other people have that same barrier. Maybe they don’t. Maybe I’m just cheap, but I don’t want to pay for shipping and Amazon Prime makes it super easy. So I’m going to go. I will let everybody know. When this show airs, I will let you know how much I am spending on my Amazon Prime. I now have a little bit of heart palpitations saying that because I’ve got to go look that up. Okay, this is not about me. This is about you.

Rebecca:
Great.

Mindy:
Let’s start over. Rebecca, welcome to the BiggerPockets Money Podcast. How are you today?

Rebecca:
I’m doing so good. So good.

Mindy:
Let’s jump into your finances, not mine. And let’s look at your income and where it’s going.

Rebecca:
Okay. So I make about $100,000 a year as a salary W-2 income from my job. I work in local government. I also have a second job as a contract technical writer. That income varies significantly between $35,000 a year and $100,000 a year. Now, something that I may have a question later on is I don’t budget for that income. So all my expenses are covered by my first W-2 salary job.

Mindy:
What do you do with that income? The contract income?

Rebecca:
Well, with my local government job, I have a 457 plan that I’m able to max out. With the second job, I have a 401(k) and I also max that out. I actually just maxed it out on Friday, was our final payday for… Yay.

Mindy:
Yay.

Rebecca:
So up until this point, those paychecks have been, I want to say relatively small, but going forward, they’ll be bigger. Usually, I take about 75% of that and stick it into our brokerage account. And then I’ll use the rest for unbudgeted, I guess, sinking funds. Like we need a bathroom remodel, I need new sliding doors on the back porch, stuff like that that I just don’t want to finance, then I’ll just have the cashing around magically.

Scott:
After working your second job, magically your money appears.

Rebecca:
Yeah. Exactly.

Scott:
I love it. Awesome. Any other sources of income?

Rebecca:
Yes. My boyfriend does have also a job with local government and that brings in about $30,000 a year.

Scott:
Awesome. So what’s coming in after tax?

Rebecca:
After tax, let’s see, and after my 457 plan, I bring home about $4,430 a month. And then he brings in about $1,880 a month. So total about $6,310.

Scott:
Awesome. Plus about let’s call it 40 grand in after tax income from your second job?

Rebecca:
Yeah, we can call it that.

Scott:
Which varies considerably, I think you discussed.

Rebecca:
Yes.

Scott:
Awesome. And where does that money go? What are you spending it on besides Amazon?

Rebecca:
Right. Well, budgeted things go to car insurance. That’s about 120 a month. We do have a Wyndham time share I got roped into about 10 years ago and it’s about $50 a month.

Scott:
Nice.

Rebecca:
Mortgage currently is $1,400 a month. I suspect that will go down a little bit next year, because as I mentioned before, my homeowner’s insurance went up, it doubled. So not only did I have to pay for what’s coming up, but I had to make up for that shortage. So I would guess it’ll go down a couple hundred bucks next year, but not significant. Utilities, which I would include water, trash, electric, internet, and then things like Netflix, Hulu and Amazon are about $475 a month. Cell phones, $125 a month. And then what I call luxury items, which are, we have a house cleaner that comes twice a week, lawn care, and a pool guy, and that’s about $325 a month.

Rebecca:
And then we have the big expense of groceries/eating out/gas and then what we like to call fun money, and that’s $1,800 a month. And those are, I guess, our lifestyle expenses. And then I have my monthly investments that come out after tax, which is $500 in an IRA for both of us, so $1,000 a month. And then a brokerage, $500 a month. And then I also budgeted $100 a month for crypto. Sometimes I do it, sometimes I don’t. If I don’t, it goes into the brokerage.

Scott:
Awesome. So if I’m doing the math here, we’ve got $6,300 in income between you and your boyfriend each month and $4,300 going out every month on average, obviously with big fluctuations in the variable expenses being a major part of that. And that leaves you a $2,000 surplus, which generally gets invested in a combination of brokerages, IRA, et cetera, not to mention that pretax you’re also contributing to your 457 plan. Is that a good synopsis of the situation?

Rebecca:
Yes.

Scott:
Awesome. And then on top of that, we’ve got an unknown factor about the tens of thousands of dollars you’re bringing in after tax from your second job.

Rebecca:
Correct.

Scott:
So we have a really strong cash generation situation here. If we factor out all those investments, we’ve got $2,000 a month coming in steady state after tax and 457 contribution. So that’s $24,000 a year. And we’ve also got about $30,000 to 40,000, I’m calling it $40,000, in additional cash coming in from your second job. So that’s a $64,000, $65,000 per year that we got to play with in order to build wealth.

Rebecca:
Yes, that sounds great.

Mindy:
Okay. So I’m seeing that she’s got all this income. I think that her expenses or her spending has some leaking in it. If you’re not seeing this giant surplus every month, where’s it going? And there is $500… What is this? $500 to the IRAs and $500 to the brokerage. So that’s $1,500. And then an additional $100, but I think that there’s more money available that is just kind of-

Rebecca:
Yes.

Mindy:
… not being accounted for.

Rebecca:
So with that second job that I have, as I mentioned, it does have a 401(k). So up until about this point, about 50% of my money has been going into that as well. And now, I mean, you also made a great point, up until this point I’ve been having about $2,400 a month extra coming in, but I haven’t been saving it. I really am not sure where it’s going.

Mindy:
Okay. So there’s the first research opportunity, is to find out where that’s going and I… What Scott?

Scott:
Well, it’s going to the IRAs and the brokerage accounts.

Rebecca:
No, this is on top of that.

Scott:
Top?

Mindy:
That’s on top of that.

Rebecca:
Yes.

Mindy:
So what I find, remember that A word that I said in the beginning of the show, in my little diatribe or my very lengthy diatribe? I really don’t want to see how much I spend on Amazon every month, every year. But I think that you would be surprised at how much is still going there even when you’re conscious of it. And I started tracking my spending. And you can follow along at biggerpockets.com/mindysbudget. You can watch me really not be doing it right, because everything is a guess. I mean, all of this, even with all of my years of financial experience, it’s still just a guess where my money’s going. And what I have found over the month of May, I actually, wasn’t writing down all of my expenses. So now at the end of May, I have to go back and enter them into the spreadsheet.

Mindy:
I have no idea how much I was spending, but when I wasn’t tracking it, every single time I made a purchase, I didn’t even have a vague running total in my head. I was swiping my card a whole lot more in the month of May than in previous months when I was far more conscious of having to type in the amount that I’m spending. So on the one hand, it’s super tedious to sit there and track your expenses so granularly like I do. But on the other hand, it’s so eyeopening when you do it. Halfway through the month, you’re like, “I’m already in the red in nine of my 10 categories. What is going on with me? I know I want to spend less. I have to make a conscious decision to spend less.” But it’s a work in progress too. Some of them, I’m budgeted too low and I need to realize that I’m spending more money.

Mindy:
If you do enjoy going out to eat, then don’t cut that. You have the money to do that. But every dollar you spend going out to eat is a dollar that you can’t put into your house or save for a down payment on a new house, or do spend in a different way. You can only spend a dollar once. And I don’t want anybody to send me an email about how you can borrow and spend it multiple times. Send that to Scott. He loves it. [email protected] You just have to be conscious of that. I think a lot of people, when you’re not tracking every penny, it’s very easy for lots of those pennies to just leave your wallet.

Scott:
Well, let’s keep rolling for a second here and go through net worth and then your goals. And that will lead us to what we can do about this situation. It could be that your spending is where we need to focus. It could be that there’s other areas we need to focus more on. My guess is spending and getting control of your dollars and having a very clear understanding of what’s coming in, where’s it going, how’s it flowing through your system is going to be the 80/20, at least in the short term here, but let’s kind of press on and make sure that’s the case before going there. What’s your net worth and where does that money go?

Rebecca:
All right. So let’s see. I’ve got a little list here. I guess I’ll just give you number figures. We got about $24,500 in a joint brokerage account, $7,000 in a regular savings. And that’s just for, I guess… I’m not sure what that’s for. But then I have $10,000 in a high yield savings account as a designated emergency fund. My boyfriend has an inherited IRA at $135,000. He’s also got the FRS investment plan, which is a defined contribution plan and it’s locked at 3%. There’s about $5,500 in there. My 401(k) has 56,000, about 3000 in crypto. His IRA has $13,000 and that’s a Roth. My Roth has $16,000. My traditional has $1,500 and then my 457 plan has $34,500. So that’s about throughout $306,000. And then-

Scott:
So of that $306,000, I’m counting that about $40,000 of that is not in an IRA. Is that right? Or similar type of vehicle?

Rebecca:
Yes. You’re talking like savings and brokerage type?

Scott:
Yes.

Rebecca:
Yes. Yeah, you’re correct.

Scott:
Okay, great. So we have $300,000 in net worth in these investment accounts, $40,000 of which is either cash or after tax brokerage and $260,000 of which is in various retirement accounts?

Rebecca:
Yes.

Scott:
And you consider your finances to be joint with your boyfriend?

Rebecca:
And then I have home equity. It’s about $174,000. So I guess that brings us to $480,000.

Scott:
Okay. And what are your goals? What can we help you with today?

Rebecca:
I would like to… Just a quick short term goal would be to save $80,000 this year. I think we’re right around $37,000 so far. But my ultimate goal is to have some passive income of about $7,200 a month. So I guess one of my questions is, can I do this without real estate? Do I need to start thinking about that? But mostly, I need a real fresh set of eyes on this. “Why aren’t you doing this? It looks like you do well to do A or B.”

Scott:
Awesome. So you want $7,200 per month in passive income as soon as possible and you want to save $80,000 this year?

Rebecca:
Yes.

Scott:
That’s what we got. Can I ask how old you are?

Rebecca:
39.

Scott:
And your boyfriend’s around the same age.

Rebecca:
He’s a little younger. 35.

Scott:
Okay, awesome. Well, great. I think we can certainly work with that and begin going there. With the passive income, what’s the goal? What would you do if you had the $7,200?

Rebecca:
I would not work anymore. That would be our PIE income.

Scott:
Okay. So you want to retire essentially as soon as possible from work?

Rebecca:
Yes.

Scott:
Love it. Let’s think through this the first. I want to make an observation for you and get to spending. You may have heard me say this before, but of your $480,000 in wealth, $40,000 of that is accessible and relevant to your goal here of achieving financial freedom. The other $440,000 is in retirement accounts and home equity, which is not going to help you generate that passive income until you reach retirement age. And from the way you phrased your goals, I can infer that you’re not looking to wait until retirement age to retire. You want to retire much earlier than that.

Rebecca:
Correct. Yes.

Scott:
So I would noodle on that and say… Let’s start with this. What does a portfolio that generates $7,200 per month in passive income look like at the end of the day? What does that mean to you?

Rebecca:
I guess I’m not sure. Just something that I don’t really have to work for. It just kind of shows up, if that makes sense.

Mindy:
Well, that’s the definition of passive income, right? I want to look at your second job. How much time does it take you to generate that $35,000 to $100,000 a year?

Rebecca:
It depends on the contract. So right now I’m doing a contract. I make $100 an hour, but I am capped at 20 hours a week. I don’t mind. I love the work. A lot of people are like, “How can you work 60, 70 hours a week? And I’m like, “Well, I work my government job and then I come home. The second job is kind of what I do to unwind.” So that works out well for me.

Mindy:
Could you continue to do that to generate a portion of this income? It’s a lot easier to work when you like what you’re doing.

Rebecca:
Yes. Yeah, I have thought about that. I think I would actually prefer to do that.

Mindy:
Okay.

Rebecca:
I mean, I know I said I would want passive, but I mean, realistically, if I know myself, I would keep doing it.

Mindy:
Okay. So if you are in a position where you’re generating, let’s see, $100 dollars an hour on this contract, can you take multiple contracts at a time?

Rebecca:
No, because it is a W-2 position and they kind of control what I do. Now I could go out into like what they call the contractor pool and take on multiple projects, but I’m not sure I would really have fun doing that.

Mindy:
Okay.

Rebecca:
But I could try.

Scott:
I want to stay focused on the goal here, because I think you’ve created a number there and don’t really have a good framework for how to achieve that. And so, because of that, I think we have an opportunity, with your permission, to reframe that goal to something that is more tangible and that can be achieved in a three to five year period that gives you more optionality. If you’re going to go by the 4% rule and you want to achieve $86,000 in passive income per year, then that says you need to build a net worth of $2.1 million, right? That is a far way off even saving $80,000 per year. But we can get to something that achieves the result of life flexibility and the ability for you to leave your job and have optionality far earlier than that if we back into a reframing of that goal, right? And we think about how to access more of your net worth in the near term than what would currently be allowed with it all being trapped in retirement accounts and home equity here.

Scott:
So I think first of all, if we go back to spending, why do you need $7,200 a month? How do you come up with that number?

Rebecca:
I kind of just took what we spend now on, I guess, a normal month, including all of my extras. And it’s between $6,000 and 9,000. And I was like, “Okay, I don’t need to be buying all this ridiculous stuff.” So I just settled on $7,200 as a happy medium in there. There’s no real science behind that number.

Scott:
Okay. You didn’t list any car payments. You have paid off cars?

Rebecca:
Yeah. We have one vehicle. It’s a 2015 Mazda. It’s paid off. And then with my job in local government, they provide me with a vehicle and gas. So I’m kind of lucky there.

Scott:
Okay. We will, I think, spend a large amount of time tackling the variable expenses, but let’s go back to housing, which for you is $1,400 a month, it may vary when you get your payment reset from the insurance thing. And we’ve got the utilities bills, that’s $1,800 a month. If we were able to drastically eliminate those, for example, now you don’t need $7,200 anymore. And if you’re able to cut out a bunch of that variable expenses from spending from Amazon and get that down, I mean, you could conceivably get your spending down to $3,000, $4,000 a month if we were able to pull those numbers down, is that right?

Rebecca:
Yeah. Seems to be that way.

Scott:
Okay. So now you don’t need $7,200 in income. Now you need $4,000 in income per month or, or $5,000. Maybe you need $2,000 in passive income and you’re like, “Okay, I cannot retire, but I can leave the main job and just do the side hustle, and that will more than cover my expenses,” right? This is, I think, the power of reframing the goals around what I’m hearing is flexibility. You want the option to leave your job at an early time period and you want passive income and flexibility to enable that to happen as rapidly as possible and give yourself lots of options downstream. Is that right?

Rebecca:
Yes, that sounds great.

Scott:
Let’s start with what I call financial runway. Right now you have $17,000 in cash. Is that right?

Rebecca:
Yes.

Scott:
So what happens if you leave your job right now? How long do you run out of, before you run out of cash?

Rebecca:
It depends. If I lost both jobs then about three months.

Scott:
Yeah. I think that’s where I would start. I think you’d feel a lot better if you had closer to six to 12 months in an emergency reserve. You earn more money per hour at your side hustle than your main job. That’s exciting. Something’s there. I think that a runway of putting that cash towards, let’s call it $30,000, $40,000 in that emergency reserve, is going to be really powerful for you because you have the side hustle opportunity. And because it sounds like you’re doing a lot of home improvement projects as well with that. So I don’t think you have enough cash on hand given the opportunities that I’m beginning to smell in your circumstance. What do you think about that?

Rebecca:
I agree with that 100%. Definitely the $10,000 in the emergency fund, it doesn’t make me feel warm and fuzzy. I would feel better just with the emergency fund closer to $15,000 or $20,000. And then maybe having an additional $15,000, $20,0000 and something else.

Scott:
Yeah. I would think about “How big does that emergency plan have to be for me to feel comfortable leaving my full-time job for six months to a year to pursue this side hustle?” You don’t actually have to do it, but I think if you build your position and concentrate the next $40,000 in cash that you’re generating primarily going towards that goal, then things will light up for you in a way that they wouldn’t for somebody. I would not be given the same question, the same thought process, guidance, to somebody who did not have a big side hustle that was so lucrative. But I think in your situation, that’s going to be really powerful.

Rebecca:
Okay. No, that’s a great, great plan.

Scott:
Okay. So second, let’s talk about your home… By the way, that will come at the expense of continuing to stuff dollars into these IRAs. You’re doing this approach where you put a little bit in this one, a little bit in this one, a little bit in this one, a little bit in this one, and then you have very little cash and everything else is going into the mortgage payment and these other expenses. Instead, I think you need to prioritize what you think the best opportunity is. And so far, we have lots of discussion left, but so far it sounds like we’re thinking maybe stuff it into the savings account or the emergency reserve and be willing to use that for some sort of opportunity downstream. So that means you’re going to have to not contribute to all these other areas and prioritize that one until you get to your first goal. But I think that will open up flexibility and options for you. So I would consider that.

Scott:
Second thing. Let’s talk about home equity. Where do you live and how much do you like your house?

Rebecca:
I live in South Central Florida. I like the house. It’s small. It’s a little small for us. I don’t know. I’m open to moving that’s for sure.

Scott:
So you have 174 grand in home equity right now, and that’s costing you $1,400 a month to maintain. I would consider, I would put on in there the house hack, right? Is there a duplex? Is there a place that you could live with… We just interviewed a couple from… Where were Andrew and Hailey from, Mindy?

Mindy:
The east coast?

Scott:
Well, they’re from Florida as well. I think they’re on the west coast of Florida, if that makes sense.

Rebecca:
Okay.

Scott:
They’re in a town where homes are $300,000-ish and they’re able to buy properties with excess units and Airbnb them. And that is more than covering all of their housing costs while they live in a fairly nice unit and rent out the other units. I think you could either consider that long term or short term. That’s super powerful. And if you want to get lots of flexibility very quickly, you can take that $175,000 in home equity, cash out a ton of that, use that to beef up your emergency reserve for example. Buy one of these properties, maybe even a second rental property within six months or year following that. And now you’ve got a potential way to live for much cheaper on average. You’re going to have to do some work managing the Airbnb or the tenants on the side, but that might be a way to jumpstart your rental property portfolio if you’re interested in doing that.

Scott:
You may also find that you’re able to live a very comparable living arrangements depending on how you want to do it. You obviously would generate less income or have less of an advantage if you buy a really nice place and live in the nice unit, versus if you buy a place that has more income potential and live in the garage, depending on your preference there. But I would put that bug in your ear and think about, hey, that’s a big lever in your situation because right now we don’t have much to play with in the form of cash or your IRAs. You can’t do much with those. But we can do something with the home equity. That’s a strategic move you could make in the next six to 12 months to redeploy what you do have.

Rebecca:
Yeah. It’s definitely something to think about. I’ve been in the landlord business before. I’m not opposed to getting back into it. I guess I hadn’t really thought about it too much just because of where the housing market is right now. But that’s pretty much the only reason I just…

Scott:
You’re already exposed to the housing market in a big way with your current property, right? So the disadvantage to what I just said is you’re going to trade your current interest rate for a higher one, right? So it’s up to you to kind of determine, is that trade off worth it because of the income potential I can generate from these properties? But you’ll have the same amount of wealth in the housing market before and after the transaction if you buy a property that’s around the same value as your current home, for example.

Rebecca:
Okay. Yeah, that makes sense.

Scott:
So the risk profile is the same except for the higher interest rate, which you’ll have to grapple with. That’s a challenge for everyone.

Mindy:
I want to make a comment about passive income. There is this idea that passive income means absolutely no work on your part whatsoever. You have two jobs. If you had nothing to do all day, you would be bored. Sitting here for 25 minutes talking to you, I already know this. I just got back from a weekend retreat called Camp Mustache. And all of those people are on their path to financial independence or have got into financial independence. And none of them sit around doing nothing all day long.

Rebecca:
That’s a good point.

Mindy:
That isn’t what they want to do. If you enjoy this technical writing at $100 an hour, that just seems kind of like a no brainer. No, it’s not passive income, but it’s also you’re limited to 20 hours a week. That’s a couple of really long days. And then you’ve got the whole rest of the week to just lay on the beach and do nothing.

Rebecca:
Yeah, that’s exactly true.

Mindy:
Or would you find other ways to fill your day? Having an Airbnb where you are the turnover. Hands down the hardest part of an Airbnb is finding somebody to consistently clean to your standards. People who rent Airbnbs really expect absolutely pristine. And it can be difficult to leave that up to somebody else especially if you’re a control freak like some of us on this call. But it also doesn’t take a ton of time. You’re not doing it every single day. Even if you had a property that didn’t have a minimum, you would still have people who come and stay for three or four nights, and then maybe you would turn it over once or twice a week. That’s something for you to do. You’re going to be working and generate, like filling your days with things.

Mindy:
And I’m not saying this to you, Rebecca. I’m saying this to anybody listening. I think it’s a little bit disingenuous to think that once you reach financial independence, you are only going to have passive income if you’re never going to do anything else. And you don’t get to this place and then just be like, “I’m just going to do nothing for the rest.”

Rebecca:
That’s a good point.

Mindy:
Your drive, your body, your mentality, your makeup is not going to allow you to just sit around and do nothing. So if you like doing this technical writing and it pays super well, pick and choose the jobs that you want to do. It sounds like $100 an hour is the going rate that you make. And they’re capped at $20 for all contracts, or just the one that you’re currently working on?

Rebecca:
The one I’m currently working on is $100 an hour because it’s California money.

Mindy:
Okay.

Rebecca:
But it is capped at 20 hours a week. If I were to, say leave this company and go out on my own, I could probably charge in general, $50 to $75 an hour outside of California.

Mindy:
Okay. So step number one is focus on California jobs.

Rebecca:
Yes.

Mindy:
Step number two is double up on those California jobs. Go out on your own and get those California jobs. I like what Scott did. He took your desired amount and your monthly and reframed it and cut it in half for you in 45 seconds.

Rebecca:
Yeah, that’s pretty-

Mindy:
So good job, Scott.

Rebecca:
Thanks. That’s pretty awesome.

Scott:
Yeah. Well, yeah, I think that if you say, “Great, I can move to a location that I want to move to and buy the same amount of house and get income for it.” You might have a similar lifestyle, or even an improvement depending on how you do it, and now you’ve knocked that down by $1,400 bucks if you could live for free for example with an Airbnb, right? And that just dramatically accelerates this position. So I think that’s where you can say, “What do I really want here?” I don’t think you want $7,200 in income. You want optionality to leave your job as soon as possible. And then you want as much passive income as you can possibly generate over time with that.

Scott:
But there’s a minimum goal here that can be achieved in three to five years with creativity and a little bit of luck versus what you state at the beginning of this is if you save $80,000 a year and you want $7,200 in passive income, and you want to do that through passively managed real estate, long term rentals or stocks, you’re looking at building $2 million in wealth, which is going to take you 10, 15 years. That’s really long to get to what you want, what you really want, I think. And I think there’s other ways to hack around that that are faster.

Rebecca:
Okay.

Scott:
So that’s how I frame that. And the less you spend, the less passive income you generate. One way to think about it is if you go the passive stock bond route, every dollar you spend per year, you got to generate $25 in wealth in order to have the passive income to cover. That’s really hard. So every dollar you cut, reduces that. Every thousand dollars per month you cut in spending is $12,000 per year, times 25 is… What’s 12 times 25? 300 grand in wealth that you need less. So if you can cut $1,000 a month out of your budget, you reduce your journey to financial independence by $300,000 in total wealth.

Mindy:
I’m going to tag on Scott’s rant before we change topics and challenge you to use my spending tracker, emulate my spending tracker, which I got from Waffles on Wednesday. So if you google Waffles on Wednesday mobile spending tracker, Mr. WOW detailed how to do it. If you’re a technical writer, you probably can figure that out yourself. But it’s very easy. You put it on your phone. And it’s really hard to get in the habit of tracking every time you spend, but it will soon become a habit. It’s so beneficial. And almost instantly, you will discover, “Oh, I am spending on Amazon every single day. I am going to the grocery store every single day.” And that was my big one. Whatever it is you’re doing.

Mindy:
And challenge yourself. If you’re going out to eat six nights a week, see if you can do it at five nights a week. Don’t go from six to zero because you’re going to be like, “Wow, my life sucks.” Go from six to five. And then if that’s okay, go from five to four. And if that’s okay, then go from four to three. “Ooh, you know what? Four is really where I want to be.” You’re making good money, but know that every time you go out to dinner is more expensive than cooking at home. And there’s all these trade offs. So it’s not that you’re spending too much money. You’re generating a lot of income. You have this money to spend. You’re not going into debt with the spending that you’re having, but you could live far more frugally and rack up your savings faster by making different choices. And having the information in front of you helps you make those choices a lot easier. You don’t have to give up everything. Scott still goes out for beers and wings.

Scott:
I think that’s right. I think that’s where we’ve now talked about I think the biggest levers in getting you toward flexibility, which is one, emergency reserve. And emergency reserve, I would even relabel it financial runway. I think you need six months plus in your situation because I think that there’s going to be lots of opportunities that are going to light up in front of you when you’re sitting in a really strong, flexible, financial position that you’re going to take advantage of. The second is home equity and getting the fixed expenses down as low as possible. You’ve done a great job by having one car that’s paid off. So you don’t have that in your life. You just have the car insurance payment and then gas for that.

Scott:
And then the next is the mortgage payment. Your cell phones, I assume you don’t want to cut those plans, although you could try the Mint Mobile plan that I think is a lot of people are really powerful. Now we get to what you call the luxury spending, which it includes all of those other items. And so great, now we can attack some of those and think through how we want to handle that. And so let’s go through them line by line. Before we get to Amazon, I want to talk about house cleaning, lawn care, and pool guy, which you said is $325 a month?

Rebecca:
Yes, for all three.

Scott:
Awesome. I like those. And I’d keep them in your spending plan right now. But I would get into a point where I can track my total expenses and I know how much is going to those areas. The reason I’d keep those right now is because your time is worth $100 an hour, $50 to $100 an hour. So you can hire out, I imagine, those services at a lower rate than you currently work for. And you work a full time job and then some, so your time is valuable. And I don’t think that it makes sense to take those into your ballpark right now.

Scott:
If you want flexibility and you want to leave your job, for example, then the value of your time’s going to come cratering down to a large degree. And that would be a time to cut those expenses at that point if you said, “You know what? I can take care of those things in exchange for not having to work anymore.” But you can begin to kind of say, “Okay, that’s a reasonable trade off for now. It may not be later if I wanted to leave my job in three years, for example, on a modest amount of passive income, in a house hack or whatever.” So that would be one thing there.

Scott:
So that leaves us with $1,500 in other variable expenses. I think this is where Mindy’s system can become really powerful for you.

Mindy:
I have a couple of other things I want to talk about. You said your homeowner’s insurance just doubled. I want to tell a quick little story about how I had really low coverage for my automotive and insurance and really low coverage for my homeowner’s insurance, and I decided that now is the time for me to get an umbrella insurance policy. So a friend had just gotten one. She really did a lot of research. She landed on Liberty Mutual. I called them up and I talked to them and they said, “Oh, you know what we can do for you, we can give you more automotive coverage and more homeowner’s insurance coverage and an umbrella policy. Your annual premium is going to be less than what you were paying for your lower amount of auto and your lower amount of homeowner’s insurance.” And I was like, “What? This has to be a catch.” She said, “Nope.”

Mindy:
And I did increase my deductible on my homeowner’s insurance because I don’t really need… I’ve never used homeowner’s insurance in my life, but I’m always going to have it because if my house burns down, I want somebody to come in and rebuild it for me for “free.” I’m doing little air quotes for those listening. But I think that insurance is valuable and I was shocked at how much lower I’m paying now versus before I have the umbrella policy. So I challenge you to get your insurance requoted. You’re in a place where you have to have probably some certain kinds of insurance that other people don’t have. I don’t have to have hurricane insurance over here in Colorado where we have a historically low chance of hurricanes every year, but I do have… Oh, I don’t have flood insurance either. But in another house I had flood insurance because I lived on the lake and it was much more rainy there and there was a real possibility that I would flood.

Scott:
The ocean has to rise 5,280 feet for it to be an issue here.

Rebecca:
Yeah. Right.

Mindy:
And then we’ve got way bigger problems than just having flood insurance.

Scott:
I think that’s right. I think with the insurance, there may be an opportunity to combine those with the car insurance and the home insurance.We are not lawyers. This is for entertainment purposes only of course with all this. But one thought thing to noodle on from an insurance perspective is the concept of, “Do you have assets to protect?” Your assets are almost entirely in home equity, homeowners insurance. I can help with that. And then retirement accounts. You have no other assets outside of that besides the car and $40,000 in brokerage accounts and checking and savings. So I’m not clear on the advantages for you of a big umbrella policy, for example, and other forms of asset protection because you may find that when you self-educate on this topic a little bit more that the retirement account contributions and such are going to be generally more protected from lawsuits and those types of things than other forms of assets.

Scott:
So when you have a huge real estate portfolio that’s in your name or an LLC that you own, or you have other things and you get angry at somebody at the bar and punch them in the face, those can go after you if you don’t have the policies in place, right? Obviously this has not happened, I’m making this up. But that would be a good case for an umbrella policy at that point to help cover some of those higher level things. And maybe not if you punch them in the face. I don’t know if it protect against crimes that you commit. But I think that’s where you’d want to have the umbrella policy I think in place. That’s the thing that can come later. Maybe when you approach $500,000 to $1 million in net worth outside of those areas that you have would be a good [inaudible] to think about.

Mindy:
Yeah. And I wasn’t suggesting that she get an umbrella insurance policy. I was just highlighting that when I had my insurance requoted, I went from two policies, auto and home, to three policies. My auto and home coverage went up, and yet my out of pocket premiums for all three policies is currently less than my out of pocket premiums for the two policies that I had before for lesser coverage. So it was just shocking. I mean, they didn’t raise my insurance rates significantly over time. It was every year it’s like $5. Well, why am I going to go re quote my insurance for $5? Now it’s been a few years and it’s not $5. I think my insurance was $600 for car, and now it’s like $500. So I’m not saving an enormous amount, but I’m saving enough that it makes it worth my while to call up. 15 minutes can save you 15% or more on car insurance. It’s actually not even where I went. That’s where I was. But with all of this other coverage, I’m still paying less now.

Mindy:
So definitely requote your insurance. If you have not requoted your insurance in a year, it’s time to requote. Every year. They have no loyalty to you so you have no loyalty to them. Investment comment, you said that your boyfriend has an inherited IRA?

Rebecca:
Yes.

Mindy:
Are you familiar with the rules around inherited IRAs? There’s a timeline for liquidation.

Rebecca:
Yes. I believe the last week checkout was 10 years. And he got this-

Mindy:
Yes. How long has he had this?

Rebecca:
Since 2020. So only two years now.

Mindy:
Okay.

Rebecca:
I guess… I was just going to say, I think based on her income at time of death, there is no required minimum distribution from my understanding at this point.

Mindy:
Okay.

Rebecca:
But I think that changed.

Mindy:
Do you have a CPA or a tax professional that helps you with your taxes or are you a DIY tax [inaudible]?

Rebecca:
This year was the first year I actually paid someone to do it.

Mindy:
Okay.

Rebecca:
But we’re not married. So that was just for me. So on his end, he’s got a tax guy that I think his dad uses, that he inherited as that as well. So, yeah, hopefully we haven’t had any withdrawals from that account this year, but last year it was minimal and it didn’t really make a dent.

Mindy:
So I just would give him a research opportunity to look into the rules surrounding that, because you don’t want to get to year 10 and say, “Oh, now I have to withdraw all of these funds. And I have this huge taxable event that I wasn’t planning on that I now have to deal with.”

Rebecca:
Yes.

Mindy:
So you have eight years to look into this. Start looking into it now and making plans for it. Maybe keeping it in there is the best choice. Maybe rolling it over is a great idea. I don’t have an inherited IRA, so I don’t have a lot of information about it. I just know that there is a timeline for you.

Rebecca:
Okay.

Mindy:
So I’m going to send you down that rabbit hole.

Rebecca:
I think our unofficial plan is to withdraw the majority of it and do something with it. Be it put it in the brokerage or anything while his income is still low and before we get married.

Scott:
Let’s talk about your incidentals. We said they’re $1,800 a month. And if you pull out the 300 bucks for house cleaning, lawn care, and pool guy, which I think are perfectly reasonable given your income situation, that’s $1,500 for incidentals per month. That is super reasonable at the end of the day. I mean that, like if you say it’s $750 for groceries, then you have $750 between the two of you for life funds stuff and guilt free spending. What is that? That’s 375 bucks per person per month. That would be a very reasonable amount of money to spend, perhaps even on the low end, from a, “Hey, I get to do that guilt free.” I would encourage you to make that guilt free.

Rebecca:
Okay.

Scott:
So I think you have an opportunity to control that grocery budget so you’re making sure that’s going where you want it to go. But at the end of the day, with what I hear here, have that 350, 400 bucks per month be guilt free spending. Just make sure that it doesn’t go beyond $300, $400 per month, which is what I’m hearing might have been happening for the last year or two. So I think that if you can-

Rebecca:
Yeah, that’s the hard part.

Scott:
Great. Maybe it would be helpful to provide a toolkit, some options that could help make sure that that money does not advance beyond $400 a month per person for example. So one simple option would be the money date and the budget, the budgeting process, and saying, “Look, we’re going to have all these other expenses. And then here’s your fund money account and here’s my fund money account. Groceries and household goods are all included in this budget here, but then we are going to track. And all of your spending, boyfriend, I don’t think we’ve said his name yet, is going to be on this credit card. 400 bucks a month. And I’m going to get the same on this credit card, the separate one.” That way, every one of those expenses is tracked by that individual each month in preparation for the money date and you can see where those are going in crystal clear clarity, right?

Scott:
So you can even put a limit on those credit cards that is $500 or $750 or whatever, and then use your debit card or whatever for any bigger purchases if you want to control that.

Rebecca:
Okay.

Scott:
That would be one toolkit for this. What do you think, Mindy?

Mindy:
I think that’s awesome. In fact, I just made a note, “Ooh, put a new card on the Amazon account so that I can track my Amazon spending easily,” because I do think that I am using it mainly for necessities.

Scott:
That’s what my wife and I do. I have my credit card that I put all of my purchases on and she has her credit card which she puts all of her purchases on. We only use the debit card for certain expenses where it’s just really hard to use the credit card or doesn’t make sense. Like right now we’re renting, we wouldn’t pay 3% of the rent in transaction fees in the credit card. But that way, at the end of the month, it’s super easy for me to track all the expenses because it just says Scott’s credit card in our budgeting software. And so I know that I’ve got to put in all those transactions and she’s got to put in all the ones that say Virginia’s credit card. And so that’s really easy at the end of the month and we can tell where the money’s going. By the way, I’m always the culprit on the one that’s spending more frivolously than my wife every month without exception. So yeah.

Rebecca:
I’m right there with you.

Mindy:
Scott, what a surprise.

Scott:
Yeah. Yeah.

Rebecca:
Yeah. My boyfriend’s like, “Let’s just cook in.” And I’m like, “Let’s go out. We haven’t been out in three days. Let’s just go. It’s fine. We have money.” So yeah, it is-

Scott:
And that’s great. Put it on your credit card as like, “Hey, I wanted to go out. It’s going to be my credit card for this one. That’s coming out of my fund money budget. Boom. We’re good to go there.”

Rebecca:
Okay.

Scott:
And then you know at the end of the month, “Okay. Those were all my calls here.”

Rebecca:
That’s my bad. Okay.

Scott:
But that would be a toolkit that we found really powerful because at the end of the month, you just look at it and there’s no guilt. You’re not shaming the other person. You’re just facing the reality. “Here’s what was spent on Scott’s credit card. And here’s how much was spent on Virginia’s with that. We want to make any tweaks? No, we’re good. We’re going to keep going with that.” Or “Yeah, we want to get this expense a little bit more under control next month. Let’s make a plan.”

Rebecca:
Yeah, I like that. We don’t really have any guilt. I wouldn’t use that word, but it needs to get under control. Because at the end of the day, I made a goal for savings. We’re on track to meet the goal. So it feels like anything outside of that is okay. And that’s just it. It’s just okay. It’s not the right thing to do. We should be saving more. So I like that idea of splitting up the fund money.

Scott:
So without reducing what you said, which is $1,800 per month in these miscellaneous expenses, your total spending comes to $4,300 per month, right? And if you were to come out of this in a year from now, be house hacking with an Airbnb or a rental property with that, your expenses now dropped from $4,300 per month to $2,900 per month. And you’re good to go. You can cover that with your second job right now within a year. You won’t be building a lot of wealth on top of that at that point. So you may want to continue that process, maybe buy several properties over three years and set up some systems, maybe think about stockpiling $80,000 or $100,000 a year. 80,000 next year, and then maybe a $100,000 or $120,000 after a year or two if you make some of these moves, grow that income in some of these categories. And that would further cement your position. But I think you can have your goal of flexibility way faster than trying to just work towards this kind of amorphous $7,200 per month in passive income goal.

Rebecca:
Okay. All right. I do have another, I guess, small wrench. It’s not a big deal. I do have a pension with this local government job. The problem is it’s an eight year vesting period. I’m about three and a half years in and it’s already one of the longest jobs I’ve ever held. But if I stay the full eight years and then even at that point wait until retirement age, that will be an extra $1,0000 a month. So if I leave before the eight year, that’s kind of walking away from what? $300,000, right? Is that right?

Scott:
So the $1,000 a month, does that come into play four and a half years from now, or at retirement age?

Rebecca:
That would be at retirement age.

Scott:
Interesting. I have to think about how to value that asset. At retirement age, it would be worth $300,000-ish if you want to call it that, depending on how likely it is that the government is likely to pay out that pension, which is probably fairly likely in Florida.

Rebecca:
Yes. I would say. I would say fairly likely.

Scott:
But that’s discounted by 20 years by a discount rate because you’re not going to access those funds until 20 years from now. Then you’re going to access a $300,000 annuity at that point from the pension. So it’s worth considerably less than $300,000 at this point.

Rebecca:
Okay.

Scott:
Let’s value it at $75,000 for purpose of this discussion. I’m probably off there. You should go and value that by using a discount rate you think is appropriate, but that’s 20 to 25 years from now. Is it 65 or 59 and a half?

Rebecca:
Gosh, I think it’s 65.

Scott:
Okay. So you’re 25 years out. It’s probably worth less than $75,000 in present value right now.

Rebecca:
Okay.

Scott:
So that would be a way to think about that from a valuation perspective when you’re making decisions. So yes, am I going to stay four and a half years in order to make $75,000 in additional value right now? Or I could easily make more than that potentially in this avenue.” But that would be a way to think about it over the next couple of years.

Rebecca:
Okay. Okay. But yeah, that was one of my big questions.

Mindy:
I missed how long you’ve been at this job?

Rebecca:
Three and a half years.

Mindy:
Three and a half. And it has to be a total of eight?

Rebecca:
Yes.

Mindy:
Okay. Do you like your current job?

Rebecca:
I do. I do like it. It’s a higher level position. I’m not a huge fan of the human resource aspects of being a director. I’ve never been the best or most, I guess, interested supervisor. So that part of the job is not my favorite. I would rather be an individual contributor like I am with the technical writing. But right now, I mean, I like it enough that everything makes it worth it right now.

Mindy:
Okay. Then I wouldn’t make a rash decision right now because it’s still $300,000 down the road. If you hated your job, I would say four and a half years is a lot of time to spend at a job that you hate for $300,000 in 20 years.

Scott:
By the way I pulled out a present value calculator because this is fun. And the present of a $300,000 pile of cash in 25 years, 2047, would be at a 5% discount rate is $88,000. So if you think-

Rebecca:
Hey, you were pretty close.

Scott:
If you think you can earn 10% return, it’s going to go down to $27,000. So if you’re using a 10% discount rate, it’s like 25 grand with that. And by the way, you’re not getting a pile of cash for 300 grand in 25 years. You’re getting a set of future cash flows. So it’s even less than that from a valuation perspective. So all of those things, I think will be helpful perspective for you in making that decision. I would not consider… This is less than 10% of your net worth right now. Most likely.

Rebecca:
Yes. Okay.

Scott:
It’s 10% to 20% of your net worth depending on what discount rate you want to use, but probably closer to 10 or less.

Mindy:
In that case, the current life satisfaction and current job enjoyment is going to factor heavily into my own decision if I was in your shoes. If I like my job, why would I leave? It’s hard to find a job that you like, and there’s no guarantee that when you change jobs, you’re going to find one that you like better. If I hated my job, I would start looking. This wouldn’t be enough to keep me there, based on what Scott is saying, it’s-

Rebecca:
Yeah, it’s kind of-

Mindy:
He’s not saying it’s worthless.

Rebecca:
Yes.

Mindy:
He’s saying it’s not worth much.

Rebecca:
Right.

Scott:
Yeah. Well I’m saying there’s a calculable value on this income stream. And at the high end, assuming you are a terrible investor and get 5% returns on your money for the rest of your life, it’s worth 90 grand. But it’s worth less than that because it’s a set of income. It’s income from the future based on that, not a pile of cash. So it’s not worth a lot relative to your financial position, but it is a factor. I would not stay in the job for four and a half more years in order to realize that benefit at the opportunity cost of really doing things you want to do in your life, pursuing investments or other job opportunities in other locations. This is not a powerful benefit relative to your overall savings rate.

Rebecca:
Okay. Yeah, I appreciate that. I was thinking I was stuck on that, what it would take to generate $1,000 in income today. And based on that calculation, I think that’s pretty much a non-factor for a decision making going forward.

Mindy:
No, I was saying that’s really great to be able to realize that a lot of people don’t factor that in. Scott, can you share a link to that present value calculator? We’ll include those in our show notes.

Scott:
Sure. I Googled present value calculator very rapidly and then put it in there and this was one of the first results in Google. So I will go ahead and link that in the show notes at biggerpodcasts.com/moneyshow314.

Mindy:
Yeah. I think that is important to have the ability to realize, “Oh, this is a really great thing that I’m about to give up if I just worked there for another month. Or this is nothing even if I work there for 10 more years.” So it’s when the decision is much tighter than It makes it a lot more difficult to make. But this one I like that you have realized very quickly too. You’re so easy to let go of this weight, this golden handcuffs thing. That’s not the right phrase.

Rebecca:
No, that’s exactly what it is.

Mindy:
Yeah.

Rebecca:
I’ve referred to it as that before as well. No, I think it’s easy to let go because kind of over the years, I’ve learned that the money’s out there. You can get it. This job that I’ve had for three and a half years, that’s the first time I’m ever doing it. When I walked in the door three and a half years ago, I had no idea. I didn’t even have a background in it. But up until this point, I was just kind of throwing all this money away. I didn’t know what to do with it. So now that I’m on this track, now that I’m thinking about it in a different way, 10 years ago if you would’ve said that, I would have been like, “Eh, that’s too far in the future. I’m not going to think about it.” But if you had said it a year ago even, I would’ve been like, “I will never let that go.” But now here I am thinking that maybe not be worth it.

Scott:
I mean, if you’re 62 and you have another year left to vest the thing, obviously like, “Okay, we’re going to do that.” But I think that we can make a different decision or value it differently because of your circumstances. And by the way, I would discount it at a 10% rate of return.

Rebecca:
Okay.

Scott:
That’s because I am perhaps a little arrogant and think I can do much better than 5% return over the course of the next 25 years with my invested dollars with that. So that value then is $27,000, 28,000.

Rebecca:
So now that’s not the maximum I would get. That is basically the minimum if I stayed vested. Now, if I continued working there for another 20 years, which I don’t see happening, it could be quite a big sum money. Maybe $4,000 a month. It just depends on if they take the average of your top five earning years, I believe. And that’s how they base their calculations. But the less you work, the less lucrative it is.

Mindy:
Okay. We did an episode, I just want to remind people, on episode 259, we spoke with Grumpus Maximus and it was called Pensions 101. So this is something to listen to if you’re considering taking a job that has a pension, or if you’re considering leaving a job that has a pension, or if you just want to know more about pensions, because I’ve never had a pension. I didn’t know anything about them. I thought it was a very interesting show. So that’s episode 259 at wherever you get your podcasts.

Mindy:
I think this has been great from my perspective, but how do you feel about this information?

Rebecca:
It’s a lot. It’s interesting. It’s interesting. I knew you guys would-

Mindy:
[inaudible].

Rebecca:
Yeah. I knew you guys would pull out some things that I hadn’t really thought about. Yeah, it’s been really helpful.

Mindy:
I’m glad. This is not meant to be just, “Here’s all those. Problems solved.”

Rebecca:
Yes. Yes.

Mindy:
We’re done.

Rebecca:
You have homework.

Mindy:
Yeah. You have homework. You have things to look at. But it can be really difficult to get outside of your own head when you’re focused on this. It’s hard to see what else is around. So having these other options, you currently have $7,200 in expenses. Therefore, you need to generate $7,200 in expenses to be able to quit your job. And I love Scott’s way of thinking. Let’s reframe that. In 45 seconds, he cut your monthly needs in half.

Rebecca:
Yes. Yeah.

Mindy:
And then you’ve got $2,000 of that already from your current job. So now you’re down to 20 hours a week working and we’ve got to figure out a way to generate 2,000 more dollars and then you can quit.

Rebecca:
Yeah. Then I’m good to go.

Mindy:
Yeah.

Rebecca:
Another thing-

Mindy:
Or not go.

Rebecca:
Yeah, right? Which I probably wouldn’t. You were right about that. There’s no way I could just sit around. But another thing you pointed out was my lack of accessible funds right now, which I really need to think about that. I think I may try to redirect some of this into maybe a one real estate deal or something.

Mindy:
Into a real estate deal, into after tax brokerage accounts, your boyfriend’s inherited IRA. I’m assuming that because you’re not married, you don’t file jointly taxes?

Rebecca:
Correct. Yeah, yeah. Yeah.

Mindy:
So look up the Mad Fientist, How to Access Retirement Funds Early. I don’t know if you’ve ever read that article before. He talks about the Roth conversion ladder in that article. The inherited IRA isn’t a Roth so you convert it to a Roth by paying taxes currently at your current income level. So you want to look up. And this is where a good tax planner will be able to give you great direction. They will look at your situation and say, “Oh, you have this much space between your income and your capital gains tax cap where you can convert and not pay any capital gains on this.” And then once it’s sat in the Roth IRA for five years, you can withdraw the principle. Not what’s grown, but the principle, and everything that you’ve converted over is now principle. So it is an interesting idea.

Mindy:
I mean, he’s got eight years to pull out $135,000. He could Roth convert it little bit by little bit and reduce his taxable income, reduce his tax burden on that while changing it to a Roth. When the market’s low, it’s going to… I can’t guarantee. Past performance is not indicative of future gains. But I think that the market will continue to bounce back and will return. I mean, if you look at the historic market returns, it goes up into the right eventually. So you want to buy low when you can. So when you-

Scott:
That’s fantastic advice.

Mindy:
Thanks.

Rebecca:
Yeah. Thank you very much.

Mindy:
Yeah. If you Roth convert it, then it’s growing. He takes out the principle if he wants. The gains are still there and they continue to grow, or go up and down, whatever. But yeah, I think having a conversation with a tax planner, having all of your numbers out there for them to see, they can give you some really great advice that’s even better than what Scott and I are giving you because we’re not tax planners. We just know enough to give homework. So that’s another homework assignment, is to connect with the tax planner and ask them for suggestions to maximize what you have both pre and post-tax, but more along the post-tax lines and see what they say.

Scott:
What else can we help you with, Rebecca?

Rebecca:
No, I think that’s actually it.

Scott:
Awesome.

Rebecca:
That’s awesome. I got a lot to think about.

Scott:
Well, let’s recap. At the strategic level, most of your net worth is in retirement accounts and home equity. That is not going to get the job done in giving you life optionality and financial freedom. So as you acquire more cash, that needs to go into accounts that can provide that freedom. Options would include after tax brokerage accounts, your emergency reserve which I think is a great starting place because that will help you build financial runway which may create options for you, and you might consider buying real estate. Your home equity is a major part of the equation and you should think through that as part of your journey here to cut costs and potentially think about redeploying that into a house hack or other investments that can bring you this flexibility.

Scott:
You make a great income, so you’re really not at all unreasonable with your month to month spending, even though I think that’s what you thought was your big problem coming in. Although that’s assuming that you keep it at the levels that you stated and have been true in the recent past, it sounds like. So we have some tactics and tips to do that. Maybe consider the credit cards for each of the partners here, you and your boyfriend, to make sure that you are accountable for your own spending and can talk about it in a positive way once a month.

Rebecca:
Okay.

Scott:
And then lastly, Mindy had some great tips for how to think about dealing with the boyfriend’s inherited IRA and rolling that over bit by bit in order to play a really strong tax advantage game. Ideally, parts of that being done before if you guys are considering this before you get married and have to file jointly. So lots of good, I think, hopefully helpful tactics here and hopefully some helpful perspective on reframing the strategy and the overall goals. A lot of homework for you.

Rebecca:
Yes, definitely.

Mindy:
Awesome. Well, Rebecca, thank you so much for your time today. This was so much fun. I really appreciate you sharing your unique situation. I think it will help a lot of people who are in similar situations. I don’t think anybody’s going to have the exact same scenarios, but I think a lot of people are going to have this portion or that portion or that portion. So this is always really helpful. And that’s why we do these shows. I’m so glad for your time.

Rebecca:
Thank you so much.

Mindy:
Okay. We’ll talk to you soon.

Rebecca:
All right, bye.

Mindy:
Okay, Scott, I just want to give you huge, huge, huge props for the reframing idea. I really, really, really like how you gave her different things to think about and were able to basically top her monthly needs in half in such a short time frame. Nice job. That was super helpful, I know, to her.

Scott:
Yeah. I think that the goal usually is optionality and flexibility right now or very soon for most people, right? And so I think that’s-

Mindy:
Of course.

Scott:
And so when you hear a number that is just like, “Okay, we are not going to get you to $7,200 a month in passive income anytime soon with the current way things are structured. Let’s reframe the goal and let’s come up with a strategy that we can use to really jumpstart the journey towards that, by increasing the amount you’re going to save every year, moving more of that wealth into after tax investments like real estate or after tax brokerage and having a bigger runway that gives you some flexibility,” now we can play a game that is winnable in the short term and gives you real life options and improves your life.

Mindy:
Absolutely. I am so excited for her homework assignments and for what she finds out about them, because I think she is going to take this… At the end of the show after we stopped recording, we checked in with her and were like, “Hey, did we get you what you needed?” And she said, “I have so many things to look into now.” but excitedly. Like, “Now I have all these options that I wasn’t aware that I had before,” which is the whole point of this show, is just, here’s things to introduce you to so you can make sure that you are doing all the things that you need to do, that you want to do, that you can do to reach your goal as comfortably as you want, as you can.

Scott:
I love it. Should we get out of here, Mindy?

Mindy:
We should. From episode 314 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen, saying I have no clever line today. Email me, [email protected], with your suggestions.

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.