The travel industry is inherently diverse, with a myriad of niches and evolving consumer preferences. This diversity creates fertile ground for early-stage startups to thrive within specific niches within the broader TravelTech landscape.

Let’s dive into five areas where startups are identifying gaps in the market, leveraging technology to enhance travel experiences, and catering to the increasing demand for authenticity, personalization, and sustainability in travel.

1. Travel Experience Platforms

One of the most significant shifts in travel is the move from destination-focused journeys to experience-centric exploration. Startups are capitalizing on this shift by creating platforms that curate unique travel experiences. For example, Travelstride connects adventurers with a myriad of experiences, from cultural immersions to thrilling adventures.

New innovative startups that are able to tap into this demand have a promising space to innovate because of the multitude of niches within this space. Startups could focus either on locations or on types of experiences in which they are experts to add the most possible value for travelers.

Example business idea – a hyper-local adventure hub: a platform that connects travelers with hyper-local adventure guides who curate experiences based on the traveler’s interests. These guides, sourced from the community, offer personalized insights and take travelers on offbeat journeys, providing a genuine taste of the local culture and landscape.

2. Peer-to-Peer Travel Exchanges

Peer-to-peer travel exchanges are gaining momentum as the sharing economy grows. Platforms like BeMyGuest enable travelers to connect with locals for authentic experiences, fostering cultural exchange and transforming the way people perceive and engage with travel.

The success of these startups is rooted in the desire for more meaningful interactions and a departure from standardized tourist experiences. Travelers are increasingly seeking local insights, and startups facilitating these connections are well-positioned for growth as they have the opportunity to redefine the travel narrative by facilitating meaningful interactions between travelers and residents.

Example business idea – a cultural immersion marketplace: a platform where locals can offer immersive cultural experiences to travelers, from traditional cooking classes to guided tours of hidden gems.

3. Personalized Travel Planning

Personalization is a driving force in the modern digital landscape, and travel is no exception. Startups leveraging artificial intelligence to deliver personalized travel planning are disrupting traditional models. AI is the main driving force behind this trend, as it allows scalable technology to cheaply understand the context and needs of the individual traveler – be it budget, interests, or time constraints.

Despite the relatively recent shutdown of Utrip, the niche is likely to see a lot of growth in the coming months and years thanks to the increasing number of developers building apps on top of the OpenAI API. In our experience, being on the cutting edge of a new technology is one of the best ways to ensure impeccable startup timing, which is one of the most important startup success factors.

Example business idea – collaborative travel planning app: an app that allows groups of travelers to collaboratively plan their itinerary. The app considers each traveler’s preferences and constraints, facilitating a democratic and personalized travel planning process. This ensures that everyone in the group has a say in the itinerary.

4. Digital Nomad Support Platforms

With the rise of remote work, digital nomads are redefining the way people approach travel.

Startups are emerging to support this growing demographic with platforms offering resources such as co-living spaces, coworking memberships, and networking opportunities.

Nomad List is a prominent example, providing valuable information on remote work-friendly cities. The success of such platforms stems from the increasing trend of individuals choosing to work from anywhere, and startups facilitating this lifestyle are tapping into a burgeoning market.

5. Adventure and Expedition Planning

The promise in adventure and expedition planning startups lies in meeting the demand for transformative and offbeat travel experiences. Modern travelers seek more than conventional sightseeing, and startups organizing extreme adventures cater to this desire for unique and thrilling escapades.

A good example is tourradar – a travel marketplace offering extreme experiences, from treks through unconventional landscapes to challenging expeditions.

Business idea – AI-powered custom expedition builder: a platform that allows adventure seekers to build their customized expeditions. Users can choose destinations, activities, and difficulty levels, and the platform connects them with local guides and necessary resources to bring their unique adventure to life.

If you’ve spent any time researching investing in real estate (or stocks), you have probably heard people throw around the phrase: “Time in the market is better than timing the market.”

The old saying originated from Ken Fisher, a billionaire investment analyst and financial advisor, and while Ken was actually referring to the stock market with this now-famous quote, the same concept is very much applicable to real estate investing as well.

Many investors are tuned into cycles enough to where they find success with timing the market, but spending more time in the market is a simpler, more sustainable approach for the average investor.

Why Try to Time the Market?

The primary draw of attempting to time the market lies in the potential of maximizing the profits and cash flow on your deals. By purchasing a property at a low point in the market cycle and selling at a high point, investors will capitalize on significant returns compared to if they were to buy in the middle of a market cycle.

In addition to the upside in profits, a lot of investors are able to mitigate risk when they buy their real estate deals during market downturns. If you can successfully time the market and buy deals close to market lows, you will protect your portfolio from substantial losses.

Risks of Trying to Time the Market

For any investor who thinks they have the ability to time the market, it can come with great risk. None of us have a crystal ball, so this strategy is impossible to execute consistently.

The real estate market is influenced heavily by interest rates, job markets, and other conditions unique to local economies. Most of these factors are outside of an investor’s control and are very challenging to forecast.

To time the market successfully, you need an unemotional approach and a little bit of luck. Anybody who attempts to time the market should not expect consistent results.

Hypothetical Scenarios

To fully understand the impacts of buying at different points in a market cycle, let’s mock up a couple of scenarios. We’ll use the Las Vegas market for this example, as it saw some of the most drastic price swings over the last couple of decades.

Scenario 1: Timing the market perfectly (buying in 2012, selling in 2022)

This example represents an absolute best-case scenario, where you buy at the absolute bottom in one of the hardest-hit markets and sell at the most recent peak.

The median sales price of a previously owned single-family home in Las Vegas was $118,000 in January 2012. Meanwhile, the median sale price of a previously owned single-family home in Las Vegas was $405,000 in August 2022.

Had you perfectly timed the bottom and bought a home in January 2012, and then perfectly timed the top and sold the home in August 2022, you would have realized a 243% return on your investment over approximately 10.5 years. 

Scenario 2: Timing the market horribly (buying in 2006, selling in 2012)

Let’s take a look at somebody’s failed attempt at timing the market. They bought a home at peak pricing, assuming prices would continue to go up, and then sold the home at the bottom. 

The median sale price of a previously owned single-family home in Las Vegas was $315,000 in June 2006. Meanwhile, the median sale price of a previously owned single-family home in Las Vegas was $118,000 in January 2012.

Had you perfectly timed the top and bought a home in spring 2006, then perfectly timed the bottom and sold a home in January 2012, you would have experienced a loss of 62% on your investment over approximately six years.

Scenario 3: Time in the market

In our final scenario, let’s consider somebody who bought 20 years ago and who has simply held on during the waves of the market. 

The median sale price of a previously owned single-family home in Las Vegas was $184,300 in Q3 2003. The median sale price of a previously owned single-family home in Las Vegas was $410,000 in Q3 2023.

Had you bought a home 20 years ago and ignored the several drastic market cycles that followed, you would have realized a 122% return on your investment over 20 years.

Time Horizon

Time horizon is a huge factor here, as the general direction of real estate has always been up.

Looking back all the way to the year 1960, the median home price in America was only $11,900. Today’s home prices, according to the Case-Shiller Index, are about $311,000. So, buying a home in 1960 and holding on to it through 2023 would have generated a gain of over 2,500%!

For the most sophisticated investors, timing the market absolutely can supercharge your returns. But for real estate investors as a whole, each investor needs to carefully consider their financial goals, risk tolerance, and investment horizon to come up with a strategy that makes the most sense for them.

The most successful real estate investors should focus on buying real estate deals at below market value, regardless of market conditions. This way, if they mistakenly buy a property close to a market peak, they will have some equity left in the deal as they weather a downturn.

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Ashley:
This is Real Estate Rookie, Episode 341. My name is Ashley Kehr, and I’m here with my co-host, Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today, you’re definitely going to get a kick to help you get started. We’ve got Dan McDonald coming onto to the podcast, and Dan, I think, is a great example of how to get started as a real estate investor with a low risk strategy in an expensive market. So if you want to check either of those boxes, you’ll really love today’s episode.

Ashley:
Dan will go into how he was open with communication and involving his then-girlfriend, now wife, into the house hacking experience as they toured different properties and finally purchased their first house hack. And so as of this recording, they have had two house hacks, so he’s going to share how he was able to make that possible within two years of purchasing those two properties. He also talks about the renovation on them, how he funded them, how he found them, and other things that you need to know if you are going to house hack.

Ashley:
At the very end of the episode, one of the last questions we ask him is, what are the tips that you would advise someone who wants to get started in house hacking? That, if anything, is the must-listen-to of this episode.

Tony:
Last thing I love about Dan, and you’ll hear this, is why he’s not necessarily planning to quit his job anytime soon and maybe what you can learn from that. So really great episode. Excited to get to it with you guys. Now, if you guys haven’t yet, please do just take a few minutes out of your day and leave us an honest rating and review on whatever platform it is you listen to the podcast, if you’re on YouTube, if you’re on Apple Podcasts. The more reviews we get, the more folks we’re able to reach. And honestly, the more folks we can reach, the more folks we can help find deals just like Dan did, right? He listened to Craig’s podcast episode, then he read Craig’s books, and now he’s doing this thing himself. So the work that we’re doing here on the Rookie show really is changing lives, and we can reach more people when you leave that rating and review. So take a few minutes, do that for us, please.

Ashley:
And also something else really exciting for Tony and I, our Real Estate Partnerships book has released on Amazon and Barnes and Noble and other bookstores throughout the world. So if you have purchased our book, we would love for you to leave us a review on whichever platform you bought it from, the BiggerPockets bookstore, or from Amazon, Barnes and Noble, et cetera. And thank you to all that have purchased it. We’ve heard great feedback so far and really, really appreciate it when you guys share that with us.

Ashley:
Dan, welcome to the show. Thank you so much for joining us today on Real Estate Rookie. Can you start off telling us a little bit about yourself and how you got started in real estate?

Dan:
Yeah. Well, thank you both so much for having me. Definitely excited to be here. So yeah, my name is Dan. I currently live about 30 minutes north of Boston, so pretty expensive market, to say the least. But yeah, I’ve been house hacking for almost four years at this point. Had two duplexes appear, and it’s just been a great experience so far. I still have my W2. I’m not really in any immediate rush to leave that, honestly. I’m one of the few that kind of seems like I want to reach FI, for sure, but I want to reach it while I’m at my W2 and hopefully still happy with that, and then just kind of pile it all on.

Ashley:
Dan, what is your W2? Does it translate to real estate at all?

Dan:
Unfortunately, it doesn’t really. So I have my master’s in marketing research, and it gets confused a lot with actual marketing, but it’s legit the studies behind it more. So I don’t create any campaigns or anything. Everyone will do that for me, or design something, and then I’m getting the research on it. So I’m the guy with the surveys and data analysis and stuff like that. So, it helps to look at numbers.

Ashley:
Yeah, find information on property, analyze a market. I feel like it’d probably be pretty useful with your skillset.

Dan:
Yeah, I do work with one company, I’m not allowed to say which one, but a pretty big home improvement company that I get to, I definitely spend a lot of time myself there, so it’s like, oh, I kind of know why you guys are thinking this stuff, or man, I should suggest something else. So yeah, it is helpful.

Tony:
Dan, I want to ask, you said that you house hack and this is the Rookie Podcast. So for folks that maybe aren’t familiar with the phrase house hacking, what is that strategy, and maybe give some insights into why you chose that as your investment vehicle.

Dan:
Yeah, so house hacking, the reason I love it so much is it’s basically taking a property and essentially living in part of it and renting out the other part, but you can be so creative on what that actually means. So for me, it means a duplex. My wife and I live in a unit, rent the other side, but you could buy single family, rent by the room. You could buy a single family and build a detached garage apartment or something. There’s just so many options. It really depends on how creative you want to be and how uncomfortable you want to be sometimes, too, but my wife and I definitely took the traditional route of duplex. We completely live in one unit with no roommates, and then downstairs is a rental unit, so we feel like we kind of have our own space, which was a big important factor for convincing her.

Tony:
Just one follow-up for you, Dan. I guess why was house hacking maybe the strategy that you chose? Because there are pros and cons to it, and you touched on it a little bit. What are some of the pros you see? What are some of the cons you see? And ultimately, what made you choose house hacking as a strategy for you?

Dan:
Yeah, so I definitely got to give credit where credit’s due. I originally heard of house hacking through Craig Curelop. I was actually in Craig’s fraternity in college. So we both went to school in Boston and knew him for a little while before he graduated. And like you do with all kind of people in your fraternity or whatever from college, you follow them on Facebook and you see what they’re doing and stuff. And I could see Craig starting to build up this real estate empire. And then I saw him working for BiggerPockets and I’m like, what is this company? And then I just went right into the rabbit hole and was like, oh, man, and started to hear more and more about it and then read his book and stuff. So for me, it was really like, and I still really believe this, that it is the easiest point of entry for rookie real estate investors.

Dan:
It’s like, for me, the prices are just insane around here, so it’s very hard for me to come up with 20% on a quarter-of-a-million-dollar house or more is going to take me some serious time. So for this, it was, okay, how do I get something? How do I stop paying rent and build an asset and start to build this business without literally waiting 20 years or something to save up the 150 or $200,000? So for me, that was really the main focus was I need a place to live no matter what. So I’m already paying expensive rent. Why can’t I be paying myself? Why can’t someone else be paying me? So it was really just that point of entry that I think is, to this day, is definitely the easiest route to start off.

Ashley:
I just want to mention real quick that Craig Curelop was a guest on here, too, the Rookie Podcast. He was Episode 195, and you did mention his book, Dan, which is the House Hacking Strategy, which is available on biggerpockets.com and in the bookstore, if anyone wants to check that out after they hear Dan talk about all the amazing benefits of house hacking and want to get started themselves. So let’s kind of go into that first deal of, okay, you’ve decided you want to do house hacking. What are the next initial steps you took? What made you actually start investing compared to maybe somebody who says, yes, I want to start house hacking and then never takes action? Explain those steps for us.

Dan:
Yeah, I think what’s really important, well, for me, one of the biggest first steps was convincing my wife, well, my now-wife. Back then, she was my fiance or girlfriend at the time. I can’t exactly remember, but she was definitely close to me.

Ashley:
Your girl.

Dan:
She was my girl. So yeah, that was definitely set in stone. So convincing her, for sure, because we both grew up the same way, but she’d never heard of this. Real estate wasn’t like her go-to. She sees the benefits, but she’s not obsessive like I am. So convincing her this is what we would do for here and this is why it’s better versus that traditional starter home that everyone wants to buy and then they become house poor and it just seems to drag on and on. So that was definitely step one for me, but really, two, I had to understand my finances. I had to understand what it looked like for me to house hack around here, because obviously if you’re house hacking north of Boston or in Boston or whatever, Massachusetts in general, it’s a much different ball game than maybe Tennessee or Georgia or whatever. So I really had to study my surroundings and understand, okay, what markets should I be focused in? What’s actually realistic for me? Because obviously I would love to house hack and get paid to do so, but is that realistic around Boston?

Tony:
Dan, you hit on something that I’m sure caught the attention of many of our listeners, and you said that you were able to get your fiance on board with this idea of house hacking. Me personally, I think house hacking is probably one of the hardest strategies to get a spouse on board with because at least with non-house-hacking type investments, you’re not sharing walls with your real estate investment itself. There’s a little bit of separation there, but with house hacking, you’ve got one side, your tenants are on the other side. So what steps did you take, Dan, and what was that journey like for you and your fiance at the time to get her from maybe knowing nothing about real estate investing to saying, yes, let’s move in next door to our tenants. What was that conversation like?

Dan:
Yeah, so one of the bigger things, not to make it a marriage podcast, but definitely compromise. I mean, definitely realize that, because she’s putting up her money, too, and there is a little bit of that trust there that’s a little bit of blind trust, and she’ll admit it, too. She will support me, she will trust me. She trusts that I have put in all this effort to study this and listen to a million podcasts, and I can run the numbers and stuff. So definitely, definitely show her you’re serious, show him or her you’re serious about this, and then bring them along for as much as they want to be. So I brought her to every open house. I wasn’t going to buy a house without her ever seeing it. We went to every open house together. I communicated with her the types of things we need to look for, the types of things we need.

Dan:
And to be completely honest, I don’t know if she ever really was 100% there until we got our first duplex, and we were able to see, A, the numbers and how much sense it made financially, but also build a place that was actually better for us. We essentially had to do a lot of cosmetic stuff to it, and it was nicer than what we were living in before.

Dan:
So some of those updates weren’t the most financially savvy thing I’ve ever done, but it was like, okay, what will make her excited about living here? I want to get her into a place that for rental-wise, people are going to love it, but she’s going to love it, too, and she’s going to want to live here. And I think that’s really important. If you’re telling your partner, like you’re going to live in the basement together and then someone’s going to rent out a beautiful upstairs, then good luck. And if you find that person, maybe you should marry them because they’re very, very willing at that point. But my wife, God bless her, she supports me, but she’s not looking to live behind a curtain like Craig did for a while. So you got to tread lightly.

Tony:
Dan, you hit on some important things that I want to make sure that we’re highlighting for every single person that’s listening. This is something I’ve been saying for a while now, but if you have a goal of investing in real estate and your spouse is not on board, the first question you need to ask yourself is, have I earned that person’s trust? Have I earned the right to get my spouse to be on board with this desire that I have to invest in real estate? Because if you’ve never really put your mind towards anything in your entire life, why would your spouse or your girlfriend want to get on board, or your boyfriend, want to get on board with this idea? If you’ve jumped around from a different business idea every 30, 60, 90 days and none of them have seen any level of success, why would they think that this one will be any different?

Tony:
But what you said, Dan, was she trusted you because she saw that you poured in a bunch of time into educating yourself, listening to the podcast, reading the books. She knows that you have the analytical skillset, so there’s already some natural ability that you have to be successful in this. And then the third thing you did was you involved her in the process. Okay, we went to every single open house together. So you built the foundation of trust by yourself, and then you slowly brought her in. And I think that’s the path that people should take when they’re trying to get their partner or their spouse on board with real estate investing.

Ashley:
My cousin, she just got engaged yesterday, actually, and when she started dating her boyfriend, he owned a duplex. And after a year dating, she moved in with him, and she was just complaining, “We need a bigger place. I don’t have a closet,” all this stuff. And I said, “What are your plans this weekend?” And she named two places they were going out to dinner, they were going to, I don’t know, a concert something. I was like, “What trips do you have planned?” And she’s planning all these trips. And I was like, “Do you enjoy that? Do you love all that?” And she’s like, “Yeah, I do.” And I said, “Do you know why you can do that?” And she’s like, “Well, my boyfriend pays for me.” And I said, “Yeah, do you think he could pay for that if he has this huge house mortgage now?”

Ashley:
And she was like, “Oh, yeah.” It clicked with her, and now she just got engaged in Scotland, and they just bought this beautiful huge house and everything, and it was that delayed gratification that she had to suffer and live in a small little apartment and have a tenant downstairs for a couple years, but it is remarkable what can actually happen. And it may not seem like that much, but it actually can add up to a lot down the road. It’s almost like you think of compound interest. It’s all these compounding effects of house hacking and be able to cut those living expenses out can really add up in the long run to save for that big beautiful diamond ring she got.

Tony:
Yeah, Ashley, I just got to add one thought to that. I feel like part of the reason that delayed gratification is so difficult is it has a lot to do with the community that you find yourself in. So when my son, he’s almost 16 now, but we were one of the late ones to give him a cell phone, like a smartphone. And when we first gave him a cell phone, he had one of those old school Nokias. They still make them, but they’re like newer versions. And he was so embarrassed about using that cell phone that if he had to call us, he would go into the stall in the restroom to make the phone call. I could hear the echo of the bathroom whenever we talked to him. The reason I bring that up is because he was so embarrassed to use that cell phone because everyone else at the school already had the cool iPhone or whatever it was.

Tony:
So he was the red herring or the one that was left out in that group. But imagine if everyone in his junior high was also using that same cell phone, it wouldn’t be that big of a deal. So the same thing happens for us as adults. We get so influenced by the people that are around us that if no one else is practicing delayed gratification, if everyone else is spending today and thinking about tomorrow second, it becomes harder for us to develop the right skillset ourselves. So for all of our rookies that are listening, I think a very important next step for all of you is building that community, is integrating yourself with people who are going on the journey that you’re trying to go on. So that way, doing weird things like living, maybe not as weird as Craig about living behind a curtain in the living room, whatever, but doing these weird things that real estate investors do to achieve these long-term goals, it becomes easier when everyone else is doing it with you.

Ashley:
Okay, so Dan, let’s talk about your why. Why did you want a house hack? What was your end goal? For my cousin, it was the big beautiful house at the end of the road and the diamond ring. For Tony, it was his son to finally get an iPhone.

Dan:
So for me, my why, it definitely plays a lot into my background. So I grew up in a small farm town in Connecticut, middle class, two very loving and supportive parents. My dad really instilled this notion in me of a strong worth ethic and all his financial savviness, and he was a great saver and worked extremely hard. And because of that, he was able to retire at 50 years old, but this was after working two jobs for 30 years that he absolutely hated. For him, he had this very admirable work ethic, and I can’t take that away, but it was a lot more working harder versus working smarter.

Dan:
And that’s essentially, in his eyes, was the only way to do it. I’ll just work, work, work, and then I’ll be able to save, and then I’ll retire. But he would tell me all the time, too, it’s not what you make, it’s what you save. And up until a few years ago, I was like, I really held onto that idea tightly, that if I just work as hard as I possibly can, if I just save as much as I can, I’ll be fine. And I’m not saying that’s the wrong way, but it wasn’t until he passed away a couple of years ago, and it just was like this total wake up call for me. He died within a year of being diagnosed with cancer, and he was only 60 years old.

Dan:
So that’s so young, and I was so thankful for everything that he’d done for my family and me, and I was really happy that he got to experience retirement for as long as he did because most people don’t even retire by 60 anymore, but it was just this eye-opening moment where it was like, okay, how can I work smarter? How can I stop being obsessed with working harder?

Dan:
And real estate was always something he wanted to do. And he got his license when he was my age, but he never did anything with it. He’d always look at listings on Zillow, always make us drive by every house for sale on vacation. Even when he had the means to, he didn’t do it. He never took that initial step. So for me, it was like I swore to myself that I wasn’t going to let all the lessons I’d learned from him passing away be for nothing and result in nothing. So I swore I would take that and make it, the lowest point of my life, turn it into the escalator for my success and really just focus on, okay, I want do all the things he did for his family.

Dan:
I want give them education. I want to be there, I want to support them, I want to help them, but I want to change it up a little bit and just focus more on working smarter and not necessarily harder. And I struggled with that my entire life. I still do. I’m still trying to get away from this mentality that if I just work harder, it’ll automatically lead to more success, but I know that’s not the case. It doesn’t always work out that way. So that’s for me has really been like, I love my job. I don’t have any plans to leave it, but how do I still get all the things I want without relying on any one source of income and just focusing on working smarter and not harder?

Ashley:
Yeah, that’s great. I think that people get caught up in, I have to leave my job because that means you’re financially free and you made it in real estate, but that’s not really the case. What the goal is oftentimes, and you may not even realize it, but it’s that you have the freedom to do whatever you want. So if you all of a sudden wake up one day and decide you want to leave your W2, you can do that. But it’s that freedom that allows you to make these life decisions day to day that aren’t based on money, is that your real estate is funding your life that you can make those decisions and not have to worry about money, which for a lot of Americans, that is a huge impact on every decision they make every day, what their finances are, leads to a lot of the decision-making.

Ashley:
And imagine taking that factor out, where there’s so many day-to-day decisions that you can now make without even having to think of the financial impact. For example, here’s just something that is a very small realm. Your son is sick. You have to take off the day of work to go pick up your son from school. Maybe you have a job where you’re a waitress, you get paid from tips, and now you are missing a full day’s pay where you’re not making anything, or there’s a lot of jobs where you don’t have sick time or paid time off or things like that. And you really have to, and even if you do, you really have to pick and choose which days you’re going to use those, that certain time off, and things like that.

Ashley:
But imagine not having to even think about that implication and just being like, oh, okay, I’m not going to do any work today. I’m just going to go get my son from school, or maybe you can work from home, whatever that may be. But that is just a huge revelation, is once you realize that you can make decisions not based on money, how much freedom you actually have to kind of pursue the life that you want.

Ashley:
So Dan, let’s get into your first property then. So you and your girl are out touring houses and everything, and you finally pick one out. Run us through the numbers on that.

Dan:
Yeah, so the first property was a duplex. It was a two-one on each unit upstairs and downstairs, and we actually didn’t get it the first time. So this was listed for 475, and we went in at 501, and we didn’t get it. This was literally a couple weeks before the world shut down for COVID. We’d been searching and hunting for months now, putting in offers and getting blown out of the water.

Dan:
And we get a call literally as the world shut down that week, March 2020, that the guy who actually got accepted lost his job and that he was pulling out of the deal and if we wanted it, it was ours. So it was a very scary decision. I was like, well, it doesn’t look too great right now to own something, or we don’t know, we could lose our jobs tomorrow. Do we really want to buy something for half a million dollars? But I knew the numbers, I knew I needed to just jump in and that I just had to jump in. There was no other option for me, just get after it, and I would figure it out no matter what.

Tony:
So I guess a couple questions to drill down on there. This property, it was 475, but you initially offered 501. Why was that? Why go over asking price? The reason I ask this question, Dan, is because I think for a lot of rookies, anytime that they think of going over asking, they feel that they’re overpaying, and it’s a common misconception. But I’m just curious, why did you come in at 501 when the asking price was 475?

Dan:
Yeah, so I was going for the Price is Right style, just putting that one extra dollar than the person on my left and hoping it worked out. But for all I know, that guy could have put 502, but for me, it wasn’t… We knew, I had spent the time running the numbers and knowing what would work, and obviously if I got it for less, of course, the numbers would’ve been better, but I knew exactly what I could offer, and I also had a lot of trust in my agent, and I definitely think that’s super important. Find an agent who’s house hacking or has house hacked or knows that stuff very well because my agent not only knew the area, knew the market, knew what was realistic. He wasn’t going to say, “Put in 450.” You don’t stand a chance. We had known, we had seen the market been playing out for very… Everyone was going over asking price.

Dan:
It was impossible. One of the houses we looked at went 100,000 over asking price, not something I was going to bid on, but we just knew what to expect. Our expectations were more realistic than some people who just assumed that they can get in a house and like, oh, that asking price, I can totally get it for 50 grand less or whatever. And that wasn’t the case. And for me, my strategy, 100%, is buy and hold. So even if I overpaid, which, yeah, I mean I could have, it didn’t matter as much. I don’t do anything for the short term. My portfolio in real estate, my portfolio in the market, my 401k, all that stuff. I am thinking about it long term. So I don’t care. I’m focused. I know this is an expensive market. I’m focused on appreciation. The cash flow here is not amazing.

Dan:
It’s not enough to retire off of unless I get quite a few properties, but I know that house that I paid 501 for is now worth about 700, and that’s just in three years. So it’s like, I knew that going into it, and I was like, okay, if I got overpay a little bit, this isn’t… And people do need to do the math, too. By then, you’re probably talking to a lender, and they can tell you. It’s not a crazy difference in your mortgage if it’s a couple grand over or even 25 over. It wasn’t like a night and day difference. So that’s just math, too. It’s just like, okay, can I afford this for a couple, 200 extra a month or something, or 300 extra? And if you can, then you got to kind of know there.

Tony:
I guess one point I want to make, and I totally agree with you, Dan, but what a lot of new investors make the mistake of confusing purchase price with the actual value of the property. Those are two separate things. I could list a million dollar property for $300,000, and say you buy it for $400,000, you went $100,000 over asking, but it’s a million dollar property. Was that a bad buy? Absolutely not.

Tony:
And the inverse is true as well, where I could list a $200,000 property for a million bucks and someone might buy it for six. Is that a good deal because they got a $400,000 discount on the purchase price? Absolutely not because the property’s only worth 200. So as a real estate investor, at times, you have to separate, I think, your emotion from the purchase price and instead fall back on your numbers. What is the purchase price that makes this specific deal meet my investment criteria? What does the purchase price that allows me to get the return or appreciation or tax benefit or whatever my goals are? What is the purchase price I need to be to achieve those goals? So as a rookie, if you can separate your emotion from the purchase price and instead focus on your numbers, it’s an easier way to make decisions about investing.

Ashley:
So Dan, now that you’ve got this property, moved into it, was it vacant when you purchased it?

Dan:
Yes. The downstairs actually had been vacant for a while. I don’t think anyone had lived in it for a while. And the upstairs was an older woman who was actually moving out to a nursing home anyway. She’d been in there for 18 years and been paying nothing, so we didn’t even get to see it. Also, too, unfortunately because of COVID, she could technically not let us in. So luckily I had an agent I trusted, like I said, and he made sure that he put in the clause that we will not actually close on this house until we get in upstairs at one point.

Dan:
And they tried to call the cops and force her to let us in, but it wasn’t happening. So luckily she was moving out relatively around the same time anyway. So we just had to wait. It delayed it a little bit, two or three weeks, and we had to wait until she got out so we could actually go upstairs and see. And of course ,I was like, okay, what is this going to be like? This could be the worst ever, but we still had that option to pull out even if it was, so they knew that. So yeah, it was completely vacant, which was awesome. We knew we were going to live in the bottom floor, rent the upstairs, but it did need a lot. It was definitely a light fixer upper, for sure.

Ashley:
So did you guys move in and then how long did it take to do that rehab? Did you guys do it yourself? Did you hire contractors?

Dan:
The rehab was, luckily, there was nothing major-major except for some water issues, which we can talk about, but it was mainly cosmetic. So I’m talking like it needed new kitchens. It needed new bathrooms. Every single thing needed to be painted, every single thing. Nothing crazy, but it was still very expensive, and especially up here, too, it’s crazy how much you can spend on basic stuff. I was doing Home Depot cabinets and stuff. I was not doing custom-made, anything like that, and it was still very, very costly renovation. But we knew that, and we wanted that. We were looking for that, whereas my wife definitely had a hard time getting past that because we also saw a lot of turnkey duplexes and stuff, but we’d be paying top dollar. And I was really, and I tell people this all the time, too, really focused on how you can add value to it as quick as possible so that when it does come time to refinance, you’re so much closer than where you were.

Dan:
Because we were putting down 3.5%, so we didn’t have a lot of equity. So it did take about $50,000 to completely renovate it, but it got it to that point where my wife was like, wow, a bathtub that I’m the first person using it. That’s insane. We were coming from a old duplex in Boston that was not glamorous by any means. It was a good deal for rental in terms of price, but it was like, I don’t know why everyone tiles the ceiling in Boston. So if you go to these old places, tile, floor, wall, ceiling, yellow, blues, greens, not normal colors. It’s the weirdest thing.

Tony:
That’s crazy. I don’t think I’ve ever seen tile on the ceiling in a residential property before. That’s crazy.

Dan:
Yeah, it’s pretty common. I don’t know if it was cheap back then, so people thought… These are also bathrooms that don’t get renovated ever, but I don’t know if people were like, wow, this tile’s so cheap. Let’s stick it everywhere we can.

Tony:
Let’s put it everywhere.

Dan:
Yeah, literally.

Tony:
You got tile in the closets. Well, one question from me, Dan. You said the renovation was $50,000. How did you fund that? Was that out of pocket? Did you have an additional loan? Did you have a partner to bring that? How did you guys fund the $50,000?

Dan:
Yeah, so it was definitely a mix of everything. When I came back to Boston, I went to grad school in Georgia, I came back to Boston. I knew I wanted a house hack as soon as possible. I saved as much as I could. I got as many side hustles as I could, focused on that, knew that I would only be able to cover that 3.5% down for sure between my wife and I, which luckily, that’s the thing that people don’t get is. When something’s $500,000, 3.5% is less than 20K. I think it’s like 17,000 or something. That’s not terrible to save. 120,000 or a 100,000 is rough. So we did that grinding there for a couple months, and then I actually got, a small portion of my dad’s life insurance, my mom gave to me to do the renovations and stuff.

Dan:
So that was honestly 100% the thing that really got me going there. And I know there are plenty of people that kind of discredit that and everything, but for me, it’s all about just don’t waste any opportunity to get. So for me, yes, I knew that that 50K was a blessing and anyone would be lucky to have it. I would’ve easily given it back a million times over for my dad, but this was something I was not going to waste, and I knew he always wanted to do real estate. So I loved it. I was like, this is much, much better for me to really get in, essentially.

Ashley:
This is actually a huge pet peeve of mine is how you said that people may discredit it because you got that money from the life insurance. I can’t stand when people do that. It was like, oh, this person inherited this money or this person, their parents were really well off, gave them this money, or whatever that opportunity is that they took advantage of. How many people are out there that get those same opportunities, get ahold of that same money, and just blow it? I almost think sometimes it’s harder when you come into money like that, so easily, that it’s way easier to just blow it and not use it, where your hard-earned money, you’ve had to scrape and save forever. It’s easier to go and use that to build your future or whatever. Yeah, so definitely don’t discredit yourself because I think there are probably a lot more people who get these kind of opportunities and they don’t take advantage of it by investing or using it to build their future, for sure.

Tony:
The statistic is wealth is gone by the third generation or something crazy like that. Most people can’t handle wealth that’s passed down to them.

Dan:
Yeah.

Tony:
I also want to touch on the side hustle piece, Dan, because you said you kind of side hustled your way into saving up for that down payment. We had an entire show on side hustles. It was, gosh, I can’t remember the episode number. Maybe our producers going to help us out here, but what were the side hustles that you worked on, Dan, or that you leveraged to save up that 3.5%?

Dan:
Yeah, so I mean, I’ve definitely been a bit of a serial side hustler. I have tried everything, DoorDash, Uber Eats, building stuff, literally selling stuff, whatever I get my hands on. I did retail. I worked at Banana Republic for a while, which wasn’t fun. Literally, I’ve tried it all, and I never really stopped. So when I graduated undergrad, my first job was $38,000 a year in Boston, and I was living with my girl, who was making I think 60 maybe then or whatever. So she wanted a little bit bougier of an apartment.

Dan:
She didn’t understand that literally… We’re young. We should just be spending it all anyway, but me trying to keep up with that, making 38K a year in an apartment that it was like 1100 for each of us, I was like, all right, dude, you got to do something. It doesn’t matter. This can’t be your only job. And then I went back to grad school and luckily got a raise and stuff, but I’ve tried it all. Honestly, the one that has really stuck with me is called TaskRabbit, and I don’t know if you guys are familiar with it or not. It’s not in everywhere.

Ashley:
We don’t have it in Buffalo, but I’ve heard a lot of people talk about it, because I’ve looked to see, and yeah, we don’t have it yet.

Dan:
So for me, I like to try to, and this goes back to my problem with just working harder and not smarter. I have been doing TaskRabbit for a couple years. I’m finally at the point where I’m actually retiring from my clients, even though I should have done it already. I should have done it probably two years ago. It served its purpose, and now I’m just dragging it on, but it has been super beneficial, and I definitely encourage people to think of what stage of side hustling they’re in. Are they in the I need cash now, or I need it in a month, or I need it in a year? Because I do regret spending so much time doing that.

Dan:
And yeah, sure, I can go out and make 50 bucks tonight, but it’s not scalable. I’m trading my time for money. I’m doing awful stuff, mowing lawns, moving furniture, doing essentially whatever. I’ve had some pretty interesting tasks on it, but it’s like that one has definitely been enough to really, and that also helped, too. We did get into a little debt when we got the house, the first one, and that helped us really kind of get out of it. So I do essentially owe it a thanks, but I definitely think it’s time to retire and focus on stuff that’s a little more like, A, I enjoy, and scalable.

Tony:
So our episode was 294 where we interviewed two of our previous guys who came back for a second episode to talk about how they side hustled their ways into some of their deals. But Dan, just really quickly, what is TaskRabbit, maybe for those that aren’t familiar, and just ballpark, how much would you say someone could project to earn on a monthly basis using TaskRabbit as a side hustle?

Dan:
Yeah, so TaskRabbit, I will say, is great for the I need cash right now stage, and I recommend it. If it’s in your area and you’re comfortable, I totally recommend it over an Uber Eats or DoorDash or something. But essentially what it is it’s kind of like a handyman app. And I say that and I definitely don’t want women to get discouraged or anything because there’s so many tasks on it that you can do anything. If you feel comfortable with it, whatever. If you want to mow lawn, cool. If you want to, they have literally mowing, moving, getting rid of stuff, cleaning, organizing. They have rental property management, which I’ve never actually been picked up for, but I am open for it. They have a list, a pretty big list of essentially anything you could do. So if you feel comfortable going to these people’s houses, doing whatever, and you set your own hours, you set your own pay.

Dan:
So I do think it’s great. I’ve done it for three years. And for me, it’s always been after my 9:00 to 5:00. So doing it nights and weekends, I’ve probably made about $12,000 doing it and honestly could have realistically made more. I started off being a little too obsessive with it. The first month I made $1,600 or something because I was just like, I’m going to fill up every hour I possibly can, but you’re trading time for money. You’re working your butt off for sure. You’re literally doing stuff that no one wants to do, like build IKEA furniture and stuff. So that’s why you’re getting hired all the time super easily. And then the clients, realistically, once they know you’re pretty much that guy or person who will just do help with this or that or whatever, they just essentially keep your number there. So I built a small list of clients that keep me busy enough and stayed off the app for the past probably two years.

Ashley:
We had Honey Money Rachel on an episode, and she actually talked about how she uses it when she furnishes her short-term rentals to put all the furniture together, that she found a great guy off TaskRabbit that comes to do it, does all these little things for her when she puts together her short-term rentals.

Tony:
I actually just opened up the app just to kind of see what are the options. so you can get help moving, general mounting, TV mounting, furniture assembly, furniture removal, minor home repairs, yard work, indoor painting, cleaning, plumbing, errands, light carpentry, packing and unpacking, organization, even personal assistant work. So there’s a lot of different things you can do in TaskRabbit. So I just wanted to highlight there because I think a lot of folks are in the boat of like, man, I just need to hustle up some extra cash to get this first deal done. And there are so many options out there, guys, so many options out there. So do what Dan did, find a side hustle, grind it out after work, weekends, and there’s no excuse not to save up, what was it, 17.5 is what you had to save for that first deal? You guys can make it work.

Dan:
And I also know that, I follow Rachel on Instagram, and I know that at one point, she literally hired someone off TaskRabbit and then mentored them. They were like, “Oh, I’ll help you, I’ll help you,” I think it was like bushes or something, “if you help me talk me through how you buy all these houses and stuff.” And I’ve tried to do the same thing with clients. I have a client who I work for his whole family, and he’s got some rental properties in the area. So I’ve definitely built up the relationship to be like, “Just so you know, I’m an agent, I am an investor. I want to buy more properties. If you ever want to dump off any of these, shoot me a text, happy to talk.” So it does also help, too, to build those connections.

Ashley:
So do you want to tell us real quick about your second property that you got and just kind of run through that?

Dan:
Yeah, absolutely. So the second one was a duplex, which was essentially two streets over, and it was a four bed, two bath is the unit I’m actually in. And the first floor is a two bed, one bath. So that one was, we purchased that last September.

Ashley:
So is you lived in the first one for a year, that year occupancy?

Dan:
We lived in it for closer to two. Yeah. So I will say, too, obviously being in inexpensive area, and something I’ve definitely struggled with is just the comparison. You go out there and you see everyone else buying a million properties, or people telling you should house hack every year on the dot and stuff. And it was really hard for us. I couldn’t save that fast. I just couldn’t save what we needed for the prices continuing to go up, and it was like it wasn’t in the cards, so it took us a year and a half or something, but it worked out very well because this house, which I had at first written off, and it was my agent who kind of came back and said, “Do you know this is literally two streets over to you? Your life would be much easier.”

Dan:
I was like, you’re totally right. I’m going to self-manage these. I was like, why am I not thinking of that? We wanted a bigger place anyway, and this was definitely bigger. It was like, okay, we weren’t as obsessed with the second one as kind of the best deal possible. We really were like, we want the next one to be five years. We want to start a family in this house. We want to be comfortable. And that’s the thing, too. Again, it’s as much as you want it to be, you don’t need to be so gung-ho on, I need a $500,000 a month in cashflow. What if you just want to live in this area? I can’t afford this area right now with a single family, four bed, two bath. I’m in a four bed, two bath right now, so why not?

Ashley:
Okay, so you moved into that one and now you have, was that one vacant, too? And did you have to do any rehab with that?

Dan:
Yeah, yeah. So unfortunately where I live, both of our properties are actually 1940, which is babies compared to the rest of Boston and the area. Everything was born when the British were invading. It’s crazy how everything is so old here.

Ashley:
Tony just can’t even imagine houses like that.

Tony:
My whole neighborhood didn’t even exist until 2017.

Dan:
Oh, man, you can’t even. The stuff, you see the basements, it’s straight out of horror movies. But literally, this one was 1940, but it still needed some definitely, again, cosmetic, but unfortunately it was bigger. So it was like, okay, it needed a little more, but they had actually, the previous owners had done a little bit more. So our first one, it was smaller, but it needed every little thing. This one, we didn’t have to paint every single room. We had to paint most of them, but not every single room. So it was like, yeah, it definitely needed some love. And that was like 55,000.

Dan:
So we’re right around the same. And I use the same contractor, built a good relationship with him. My wife and I try to DIY everything we can. Like last summer, I replaced the deck boards. We did that together at my first one, paint what we can, we try to do what we can to save. Tried to give my upstairs bathroom a little more love. We ran out of money to do the tiling in the shower and all that, but I was like, all right, let me see how I can actually make this a very nice place to live on a bit more of a DIY budget.

Ashley:
So Dan, before we wrap up here, what are your best tips for people who want to start house hacking?

Dan:
I’m going to make the assumption, I could absolutely be wrong, but I’m going to make the assumption that most people listening to this want to start house hacking are relatively new and younger, maybe in their mid-20s, early 20s or whatever, which likely means that they probably need some help financially. So I definitely think that side hustle, I think do it as smart as you can, though. Ask yourself, like I said, do I need cash now, next month, or in a year? And really focus on what’s going to be best for you. And for me, I just needed the money immediately. So I found the one that could get me the most immediately. Don’t mess around there. Definitely spend some time researching that, but obviously know when to get out. And then really, you got to be a pro at analyzing these deals. And I really tell people, so I’m an agent now, and I primarily like to help people house hack, but I tell them, try to analyze 100 deals before you even talk to an agent because it’s so easy.

Dan:
Everyone wants help house hacking and stuff. And then, like you guys were saying before, there’s a chance they never ever do it. So I think that gets you serious. I think that sets those realistic expectations and helps you build kind of a buy box. And I think that’ll just, once you do talk to an agent, you’re going to look serious. You’re going to be like, I know this. I know the area. Help me get to that finish line. Help me kind of tweak some things, but really focus on that. And then that’s super important. That plays into you really needing to work with someone who understands house hacking. I tell people, “Interview three to five agents,” and I don’t tell people, if I talk to someone, I say, “Go out, go out, talk to other people. You need to see what else is out there. You need to know what realistically type of relationship and vibe you have with someone.”

Dan:
And there’s so many options out there. It’s a little challenging. So definitely kind of build that up, and then leverage your W2 as much as you can. Like I said, I’m not trying to escape the rat race tomorrow. My goal has always been by 40 to reach financial independence, but just to have options. If I still like my W2, I’m still going to ride that out. I don’t care. Literally, I just want the options. So I’m setting that goal. I’m setting it not close enough that I have to just sprint, but enough to build the momentum. So ask yourself, how can you leverage that? How can you make those connections there?

Tony:
Dan, what a great way to wrap your story there, man. I think that’s a nice little bow to put on it and perspective, I think, for a lot of rookies that are listening. So I want to take us into our next segment here, which is the Rookie Request Line. And for all of our rookies that are listening, if you liked your question featured on the show, head over to biggerpockets.com/reply and we just might use your question for the show.

Tony:
So today’s question comes from Mel Sims, and Mel Sims, would an umbrella policy be beneficial or necessary if I were to house hack a multifamily or a single family home? Or is an umbrella policy mainly used for investments where you are not a resident? So I guess to add on another piece of the question there, Dan, I guess, how are you protecting yourself from a liability perspective with your house hacks?

Dan:
Yeah, so I will say for sure, I haven’t. I probably will eventually, but I’m not in an LLC yet. Both of them are in me and my wife’s name. And that being said, yes, I did bundle up on the insurance as much as possible. So I do have an umbrella policy. I had it when I was living in the first house, still have it living in the second house. I personally think that obviously there’s loopholes either way. If someone’s really determined or figures out the right way to get to you, they realistically probably will be able to, but I definitely think that, yeah, having that umbrella policy is pretty crucial. I know mine’s for I think a million dollars or something, and it’s really not that much extra. I don’t really know. My insurance is, I think it’s relatively cheap, so I’m not overly concerned about it there. So I recommend it, personally. I know some people may be a little like, eh, but I recommend it.

Ashley:
On my personal assets, like my primary house and even our vehicles that are in our personal name that aren’t used at all as investments, we still have an umbrella policy that covers those personal assets and anything that’s in our personal name.

Tony:
All right, let’s go to our Rookie Exam. So Dan, these are the three most important questions you’ll ever be asked in your life. Are you ready for question number one?

Dan:
Absolutely. Let’s go.

Tony:
All right, man. So what is one actionable thing rookies should do after listening to your episode?

Dan:
I think they should, if house hacking is the route that they’re going, find five markets that they are potentially interested around them. And I don’t mean Georgia, California, New York, Massachusetts. I mean five towns around them that they could potentially, not meaning this is it and over with, that they could potentially house hack in. Start with that. Try to find those areas.

Ashley:
What is one tool, software, or app that you use in your business?

Dan:
I love RentCast. I definitely am at the point where… It’s hard because when you’re beginning in house hacking, real estate investing in general, there’s so many things you can spend money on, and it can add up really quickly. For me, I like RentCast because although I’m not going to claim it’s like 100% accurate, but I have found, at least in my area, I haven’t pressure tested it. I did pressure test it a little bit more to an out-of-state area, but I found it to be pretty accurate and free.

Dan:
So basically when you’re running, doing that 100 houses, I said, 100 house hacks, I said, to analyze, you’re going to need to know the rents. And after a while, you will become a pro. I just know the rent for a three bed, two bath in my area or whatever. But you’re definitely going to need to start off kind of plugging in, looking at Zillow and all that stuff. And you can totally look at Zillow and do the market research route, or you can use RentCast, which is free. I do like that one. You could get a little more accurate and do Rentometer, which I know you pay for, but I’ve just been doing RentCast. I think once you get to the agent side, they’ll help you figure out the exact price.

Ashley:
Yeah, that’s interesting. I’ve never heard of that one before.

Tony:
Yeah, I was going to ask you, Ash. Yeah, RentCast, it’s a new one. All right, question number three. Where do you plan on being five years from now, Dan?

Dan:
Five years from now. So I just turned 30 two weeks ago and like I said, I’ve always been shooting for 40 as my FI target. I’ve got it written next to me on my whiteboard. That’s always my goal. So I’ve been trying lately to figure out what the heck the next 10 years look like and it’s been a struggle because there’s so many options. But for me, five years, I want to hopefully continue to grow in my W2 because I like it, but I want to move from that side hustle stage that I talked about, where I don’t need cash right now. I want to build a business. I want to build a brand. I want to generate revenue as an agent and really focus on helping people house hack. I’m obviously biased towards that way, but just focus on that and build that as a brand as one. So I’d really like to continue to focus on that and hopefully help as many people there, especially people who think that you can’t do it in expensive markets.

Tony:
Yeah, you’re lighting the way people like myself. I live in California, another super expensive market, so it’s never about can I invest in this market? The question is always, what strategy makes the most sense to invest in this market? And that’s kind of how you go about it. All right, man. I want to finish things up by giving a highlight or a shout-out to this week’s Rookie Rockstar. And if you guys want to be highlighted as a Rookie Rockstar, get active in the Real Estate Rookie Facebook group, get active in the BiggerPockets forums, leave us a review on the podcast. Those are all places that we go to pull these Rookie Rockstars.

Tony:
So this week’s rockstar is Jamie Joseph. And Jamie says, “We just closed on our second property using the house hacking strategy, bringing us to four doors.” They started this journey back in September of 21, and they’re super grateful for the BP community and all the resources like the books, the podcast, and the forums because it’s given them a wealth of knowledge to invest and create generational wealth. So Jamie, congrats to you on this newest house hack.

Ashley:
Well, Dan, thank you so much for joining us on today’s Real Estate Rookie Podcast. Can you let everyone know where they can reach out to you and find out some more information about you?

Dan:
Yeah, thank you guys so much. Most active on Instagram, househackandhustle is my username there. Also, that’s the website, too, if you want to go househackandhustle.com. But yeah, definitely just feel free to shoot me a DM or whatever. Love connecting with people and, yeah, spreading the good word of house hacking.

Ashley:
Well, for everyone listening, if you think that you have an amazing story to share and you want to tell everyone how to become a real estate investor and how you did it, you can go to biggerpockets.com/guest and fill out our guest form to be a guest on an episode. I’m Ashley at wealthfromrentals, and he’s Tony at tonyjrobinson on Instagram, and we will be back with a Rookie Reply.

Dave Meyer:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer. Joined today by Kathy Fettke. Kathy, we have a show that I think is kind of tailor-made for you today. We’re going to have Alison Williams, who’s the senior Vice President of Small Balance Lending at Walker & Dunlop join us today. She’s going to talk about lending in the smaller multifamily space. Kathy, this is kind your wheelhouse, right?

Kathy Fettke :
It is, and I think our listeners today are going to be really excited about some new information that she’s going to share.

Dave Meyer:
Absolutely. So you’re going to want to check out this episode because we talk a lot about, first and foremost, what’s going on in the smaller multifamily market. And when we talk about this, we are talking about some one to… Two to four units, but generally speaking, commercial properties that are just smaller in asset value. So we’re going to talk about what’s going on with default rates, if valuations are going to go down. But then Alison’s also going to share with us some really helpful practical information for anyone who currently owns these types of deals or who wants to get into these types of deals, how you can appeal and get funding right now, because funding is a little bit harder. So this is a really good practical thing for everyone to pay attention to. All right, with no further delays, let’s bring on Alison Williams, Senior Vice President and Chief Production Officer at Walker & Dunlop.
Alison, welcome to On the Market. Thanks for being here today.

Alison Williams:
Thanks so much for having me.

Dave Meyer:
So today we’re going to be talking about small balance lending. For those in our audience or perhaps for a podcast host who doesn’t know what that means, could you please explain it for us?

Alison Williams:
Well, I’m not surprised you don’t know what that means if you’re referencing yourself.

Dave Meyer:
I am.

Alison Williams:
The terminology is a terminology that I think we use mostly internally and at some lender programs. But to sum it up, I work at Walker & Dunlop and I run one of our lending departments that focuses on small multifamily loans. So we call them small balance. What that really means is that our loan sizes start at a million, and our team really focuses on the $1 million to $15 million multifamily lending environment. And so asset values could be anywhere from $1,500,000 or significantly higher if it’s a really low loan-to-value in our group. But small balance just really means the size of the loan and nothing else.

Kathy Fettke :
Are you usually working with individuals or small funds at that level?

Alison Williams:
Yeah, so a lot of individuals. I would say the main difference in the group that, the borrower classification that we’re working with and maybe some of our larger institutional groups is they are either individuals that own these real estate assets outright 100% by themselves. They could be syndicators where they’re actually going out and raising funds and they’re really the general partner, but they have a lot of limited partners behind them, or they’re smaller family offices and they’re really just, I think everybody, I would say for the most part is really just trying to create generational wealth. So they all have the same goal, but they just have a different way of doing business and getting their deals.

Dave Meyer:
And in the BiggerPockets sort of retail real estate investor world, when we say small multifamily, often we’re talking about specifically two to four unit properties, is that what you’re talking about? Or just smaller asset size of commercial assets.

Alison Williams:
So for us it’s really commercial multifamily assets. So for Freddie Mac and Fannie Mae, they really define small multifamily as five units or greater, and then the single family would be the one to four units. However, this past year, Freddie Mac made a change to their program that did allow for portfolios of the two to four units to actually be eligible. So those need to be within a three-mile radius. So there is some uniqueness to that program, but it does now allow for borrowers that have larger portfolios of these assets together to be eligible for agency financing.

Kathy Fettke :
Oh my gosh. Well, I am just so excited to hear about that because we have a fund now build-to-rent with one to four units right next to each other, so you’re going to be hearing from me Alison.

Alison Williams:
That’s great.

Kathy Fettke :
But I’m curious because I heard that commercial real estate purchases were down 50%. Is that applying to you, or in small balance are you seeing something different?

Alison Williams:
Yeah. So correct, the overall multifamily acquisition market is down north of 50% this year. The lending market is down about 40% according to the latest MBA forecast. But the agency world, which is Freddie Mac and Fannie Mae, which we are the largest agency lender in America, they are only down about 20% this year. So while we are seeing a lot of capital providers stepping out of the market like banks, local community banks, regional players, maybe some private lenders that were doing some more value add bridgy-type loans, those are kind of stepping to the sidelines. The agencies are actually here to provide capital in these uncertain times, and a very accretive cost of capital as well compared to where the banks are trading. So while the market is down, we’re not down nearly as much, just given that we have access to both Freddie Mac and Fannie Mae.

Dave Meyer:
And just for everyone listening, when Alison says MBA, that’s the Mortgage Bankers Association, they released tons of great data about the state of the mortgage market in volume. A lot of it is free, so you can check that out. Alison, before we go any further, I’m curious how you got into small balance lending, and what makes you like this sub-sector of the lending industry so much?

Alison Williams:
Absolutely. So I’ve actually been in the industry for 20 years. I actually started originally as an analyst underwriting deals, and then I am moved into a sales originator role, which is like a mortgage broker. I was on the sales side for 14 years and then took a position with management to really build out Walker & Dunlop’s small balance platform.
So my historical experience had always been in the larger lens space, and we really just wanted to bring that high level of customer service, customer touch to the small balance sector. We felt that it really wasn’t getting the love and attention it needed, and so we started to focus on it. And so if you look up Walker & Dunlop, you’ll see that we have these really big audacious drive to 25 goals, and one of them was to specifically focus on the small balance sector. And I think the thing why it’s so interesting to us is that it’s highly affordable. And what I mean by that is it provides the majority of workforce housing to America. And so you cannot actually be a player in the workforce housing space without being in the small balance sector, which is why we’re really committed to the space, as well as the agencies.

Kathy Fettke :
Oh my gosh, we share a passion there of providing affordable housing to people, it’s so needed. Are you seeing distress, I mean obviously there’s distress with people trying to find housing or trying to find an affordable place to live. There’s also a lot of stress with landlords. Are you seeing that in small balances? I mean obviously we’re seeing it across the board in commercial real estate, but specifically in small balance, or is there a difference?

Alison Williams:
I wouldn’t say we’re seeing it specifically in small balance. We’re seeing it in general, and I think the common trends and the deals that are starting to have a little bit of hair on them or trouble is either maybe borrowers that grew a little too fast. They acquired too many deals at once, maybe didn’t have the experience or a professional third party management firm to really help them grow at that scale, that quickly. And those deals are struggling a little bit.
The other part is just inflation. If you look at just where operating expenses have gone on these assets between real estate taxes, insurance, just utilities, those are up 10, 15% year over year, and that’s really affecting the cashflow of these deals. And then borrowers are making hard decisions. Do you invest in capital improvements at the asset and keep it really just as a really solid quality, or do you use that money to pay debt service, which just given the inflationary aspect that we’re seeing right now.
So I would say borrowers that have deeper pockets, more liquidity maybe that weren’t so heavily syndicators are having a better time and easier time. And those that grew a little too fast or that were heavy syndication acquisitions are starting to struggle a little bit. But in general, I think, I don’t want to make it sound like it’s really bad because it’s really not. The actual default rate in our world, which is really a non-recourse space that we play in, and I can discuss that a little bit more here in a minute, is it’s less than 50 basis points. And so it’s 0.5% default rate for ours. So it’s historical lows, it’s still lower than what we saw during the COVID recession, it’s lower than what we saw in the great financial recession. And so while it’s in the news right now and a lot of people are talking about it, it’s not anywhere near the level that we saw on those two historical events.

Dave Meyer:
I saw that recently just looking across commercial assets at default rates, and they’re lower than I would’ve thought given the headlines that you see about commercial real estate right now.

Alison Williams:
Well, only the big deals make the news.

Dave Meyer:
Yes, right. I guess that’s the situation is there’s a couple high profile ones and people latch onto that. But given the environment, do you expect to fault rates to go up?

Alison Williams:
I do. I mean, I think that we are going to see them increase. I don’t think that they’ll get to the levels that we saw with the last great financial recession that we had. But the biggest thing that we’re dealing with right now is just the cost of capital has increased 3x on borrowers. And what I was talking about earlier, we do non-recourse financing. And so what that might be different from a lot of the listeners here is where you’re buying a one to four unit asset and you might go get an investment property loan from the agencies, which is more like a single family loan where they’re really underwriting your net worth, your liquidity and maybe your income that you have personally. What we’re underwriting is actually the income that comes off of these assets. And so we’re really hyperfocused on what’s the income less the expenses, and that ends up with a net income, also known as a net operating income.
And that is how we size our loans. That’s how we determine what kind of loan amount you can get. And what kind of loan amount you could have gotten at a 4.5% interest rate is significantly different than what you can get today at a 7.5% interest rate. And I think in the default question, I think what we will start to see is deals that will come up for loan maturity, which that means their loan is due. They did an initial 5-year term or a 7 or 10-year term, those loans will be coming due. And to give you an idea of the scale of this, just in multifamily alone, there’s about $250 billion that comes due next year. The majority of that is with banks. The agencies do not have a large pipeline of loans that are maturing because they typically do longer term 10-year loans, but there is a substantial amount of bank maturities that are coming due, as well as bridge loan maturities.
And those deals are going to be dealing with, they originally went in at probably a 3% rate, and today it’s a 7.5% rate. And those borrowers are either going to have to sell the asset just so they can get out of the loan, and then the new buyer will come in and rightsize the deal to whatever debt level the cashflow could actually get us through today. Or they’re going to have to come to the table with cash to be able to refinance into a lower loan amount because of just that interest rate change that happened, or they could potentially give back the keys. And that’s the benefit of non-recourse lending is those are non-recourse, that means we do not come after the client, as long as they act appropriately and they hand us back the keys, but they will lose their equity that they have in the deal.
And then it’s us as a lender, our responsibility to go and sell that asset and try to be made whole. We haven’t seen a ton of asset valuation deterioration yet. That values have come down some, but we had such a substantial amount of rent growth the last couple of years, that most of these deals could still sell for their basis. And by basis I mean what they paid plus all their improvements. Now, they may not get this massive increase in profitability at the end of the day, but that’s much better than losing everything by going through a foreclosure.

Kathy Fettke :
Well, that is just what I was going to ask is, I know there’s so many investors on the sidelines waiting for values to come down, waiting to jump in to multifamily, and that just hasn’t happened yet. Or do you think it will? Do you… I mean you just answered it, you said probably not that they may be just-

Alison Williams:
I mean, I think we will. I think we will see deals, I actually think that we’re going to see a lot of deals in the acquisition market next year. I think there’s been a lot of people that sat on the sidelines all year long thinking that the Fed was going to decrease rates in the fourth quarter. Obviously that didn’t happen. And so they’ve been postponing and kicking the can on their loan maturity thinking that, hey, I’m going to be able to refinance and rates are going to be substantially better. And that just hasn’t happened.
And so I do think that going into next year, you’re going to see a lot of these borrowers who thought they were going to be refinancing actually selling. And the positive to people out there looking is that those deals will trade at a lower value today than what it was a year ago or two years ago. But it’s not necessarily going to be like a 2015 or 2012 level. We haven’t seen enough decrease in value to get us back to that. So it will be a better deal, but it’s relative to compare to what you’re trying to go after. And I think everybody, me too, I would love to be able to get some buying powder back to the 2008 to 2012 level, but I just don’t see us getting there.

Dave Meyer:
I think that’s really important for people to remember here that even when you see these double-digit declines in values for office space or maybe in multifamily, that is off a really high peak that grew really dramatically throughout the pandemic era. And most asset values, at least what I’ve seen, are still well above pre-pandemic levels. So I think the people who bought 3, 4, 5, 6 years ago are still doing pretty well in terms of their equity value. It sounds like the people who are at risk are people who perhaps bought in late 2021 or in the last year and a half, who may have bought near peak valuations and even slight declines then could put them in trouble.

Alison Williams:
Absolutely. And I think the other thing too is there’s a lot of people that bought in ’21 and ’22 that bought an older asset trying to do an improvement plan to bring it up to a better class of an asset, and then they got hit with construction delays and construction increases. And so all of a sudden their basis, how much they paid plus their capital improvements went through the roof. They probably lost that equity. I mean, it stinks, it really does. But the answer is is they probably lost that equity, and last, they can sit in that deal for a very long time until interest rates come back down and cap rates normalize and they can get out.
But the reality is most people that are doing that significant bridge play, which is where they’re putting dollars into the interiors or exteriors, they did shorter term loans, and those loans will be coming due. And those are the deals that I think that will have a real opportunity for other people to come in and acquire. But we just have to be realistic about, what is that price? Again, it’s not going back to the great recession levels, it’s just a normalized value.

Kathy Fettke :
And for those new to the concept, can you explain that bridge loan scenario? That’s one of the reasons I stayed out. It just didn’t make sense. So yeah, if you could explain the bridge loan and why people were doing that, and what you can expect today, what an investor should be coming to the table with in terms of down payment.

Alison Williams:
Absolutely. So the popular bridge program that was really selling off the shelves was basically a three-year term. So the lender would do a three-year term, and this was ’20, ’21, ’22, and even some in ’19, honestly. And so those deals were structured as a three-year term, and then they do have extension periods, but those extension periods require a certain performance hurdle. So you don’t just automatically get your extension, you have to show that you executed on your business plan to be able to execute. The reality is most people weren’t able to execute because of construction delays and cost. So let’s ignore the fact that they might have an extension, because it likely won’t happen.
So they’re an initial three-year term, and the lender basically provides, so say it’s a $10 million loan, the lender would provide 75% of the purchase price at closing. So you could acquire that asset and then they would provide 100% of your CapEx plan.
So if you wanted to go put another $2 million in that asset, you would basically have an initial funding of the $7.5, and then you would have the ability to draw down an additional $2 million as you do those repairs. And so that loan goes from $7.5 to $9 million just by doing that. And the lender, the way they’re looking at it is they’re saying, “Well, what’s my exit strategy? How can I get out of that deal?” And when we wrote deals in ’21 and ’22, we were forecasting continued rent increases, we were definitely not forecasting expenses to increase at the levels that they have, and we absolutely were not forecasting that interest rates would be close to 7.5 or 8% to get out of it. And so that’s the trouble. And so we know for a fact all of those deals will require substantial equity. That means cash borrowers bringing cash to the table to refinance that or they’ll be forced to sell.

Dave Meyer:
So Alison, we’ve talked a little bit about potential declines, maybe increases in defaults. But as a lender, you are probably uniquely able to answer a question that has been on my mind. What does a good deal look like right now? Because you’re clearly still lending, so what deals are being done, and where are they?

Alison Williams:
Yeah, so I actually, I did some math, let me see my little sheet. I did some math to give you guys some ideas, because I wanted to speak in a language that everybody could understand. And so I think most borrowers or developers or asset owners come into this business thinking that they want decent leverage. And by leverage, I mean if you’re, again, buying a $10 million loan, if you wanted 75% leverage, that means you need a $7.5 million loan. So I’ll break it down for you what that means today.
So in order to get to a 75% leveraged loan, which means you bring 25% cash to the table, you need to buy that deal at what we would call an 8% cap rate. And the cap rate is basically taking your net income, so that’s your rent less all of your operating expenses, before your debt service payment, and dividing it by 8%.
If you can do that and get to your purchase price, you’ve got a solid deal and you can get 75% leverage. But if that cap rate is, let’s see, I did the math here. If that cap rate is 6%, you’re only going to get a 57% leverage loan today. That means you got to bring a lot of cash to the table to transact. And so my advice to anyone looking for deals is really honing in on the in-place cashflow today of that asset, not the future. Don’t assume you’re going to be able to have substantial rent growth, you’re going to be able to decrease expenses, not in today’s environment. That’s really challenging.
But look at the in-place income today and apply that cap rate to it, and if you’re not somewhere between that 7 and 8% and you need a lot of leverage to make the deal work, you should move on. And to our conversation earlier, Dave, like sellers aren’t yet hurting so much that they’re willing to just let something go at an eight cap. That’s not happening that often. So people just need to be realistic about the deals they’re chasing and whether or not they can actually transact.

Dave Meyer:
Well Alison, Kathy, before you ask another question, I just need to commend you. It took me, I just looked it up, it took me 410 pages to explain something you just explained in a minute. So thank you for making that a lot more understandable for our audience that I’ve ever been able to.

Alison Williams:
Appreciate that.

Kathy Fettke :
Wow, that seems almost impossible. I mean, one of the things, I have a lot of people pitching deals to me, and one thing that they keep leaving out, it’s amazing, is the increase in taxes.

Alison Williams:
Yeah.

Kathy Fettke :
I mean, as a lender, how are you protecting yourself in these uncertain times?

Alison Williams:
So from a tax standpoint, we actually do underwrite what the taxes would be after year one, so after a reassessment. So some states are non-disclosure states, maybe they reassess taxes every four years, but there’s a lot of states that reassess January 1 of the following year. And so we look at that and we apply that increase into our underwriting to make sure that we have enough cashflow to cover all the expenses that the property’s accruing, plus obviously the interest payment.
And then the other big increase that we’re seeing is insurance. Insurance is honestly, particularly in the Sunbelt, just a disaster. I live in Florida, so I can say that. And that is another area that those two line items are a huge, huge portion of your entire operating expenses. And so we really dig in on those two things to make sure that one, the borrower has the appropriate insurance in place. So if there was a national disaster, they’re not hurting and they’re not going to have a substantial loss that could affect us. And then on the real estate tax side, same. We’re just making sure that there’s enough cashflow to cover that and we’re not over-leveraging those deals.

Kathy Fettke :
What other blunders do you see in the underwriting that people are submitting?

Alison Williams:
What other lenders, like capital sources?

Kathy Fettke :
Oh no, like the investors trying to get loans from you and you turn them down.

Alison Williams:
Oh. Yeah, the deals that are working, we’re seeing a lot work in the central region. So that would be like the Midwest down to Texas, in some of the smaller tertiary secondary pockets. Those deals, they already started at higher cap rates, so they’ve moved a little bit and they’re probably at a 7+ cap rate. But if you’re trying to buy an asset in California or trying to buy an asset in Florida, you’re going to have to come to the table with some more cash for it. And what I always tell my clients is really look at your replacement cost.
What we’re going through right now is a little bit of a bubble. We cannot, this 8% interest rate market is not normal. I’ve been doing it 20 years, this is the highest I’ve ever seen. But if you can go in and you can bring cash to the table and you’re buying it at a solid basis that you can’t replace. Like irreplaceable location, phenomenal suburb, great schools, great economic drivers, workforce drivers, and a good replacement cost and solid bones, you should try to figure out how to make that work. And then make sure you’re staying in areas that you understand and don’t try to go out over your skis and really start investing in markets that you’re not familiar with, unless you can really pull in local third party management that has that experience.
Again, I think that people think that you can just pick up your business model and move it wherever, but the reality is you can’t, it’s not that simple. Financing is a little bit easier in terms of that’s a standard formula, but operating a property, that’s a specialty, right? That’s like a special touch, and you’ve got to figure that out.

Kathy Fettke :
So would you lend to a first time investor?

Alison Williams:
So we do… So Freddie Mac does not typically, but Fannie Mae will lend to a first time operator if they’ve been an investor in other assets. So we don’t want somebody that’s just coming in off the street saying, “Hey, I’m going to buy my first loan or first property, I’ve never done this before.” But if they have somewhat of a track record or have been in the business, then we will look at that. Now we might be a little more conservative on those loans. We definitely would want third party management, we’d want to make sure that management company has a lot of units nearby with a track record. We would do a deep dive into their resume, what is their property performance? And then we really look at net worth and liquidity, making sure that that investor has enough funds to put in this deal and that if it has a hiccup, isn’t going to have to turn the property back in. I mean, these are non-recourse loans, but we don’t want to own them, but we definitely want to make sure that somebody can handle a hiccup or two.

Kathy Fettke :
So if someone’s not experienced, then they could have a partner who is, and then they get their resume built that way.

Alison Williams:
Absolutely. We see that all the time. So we’ll have somebody come in, we evaluate them and we say, look, you can’t do it alone, but do you have somebody else maybe that was a mentor to you in the business that’s willing to come on and also sign that loan with you? And that usually is what we see happen.

Dave Meyer:
Alison, before we leave, I’m curious if you have any other advice from your experience as a lender, for investors who are trying to navigate this tricky market.

Alison Williams:
I mean, I think my biggest advice is don’t wait. A lot of people waited this entire year to do something about a loan that they had on the books because they thought rates were going to come down faster than what I think we all think now. And if you look at what the economists are kind of forecasting for next year, it’s going to stay high for quite a while. And so if you have that loan maturity coming up anytime in the next 12 months, maybe even 18 months, you should start thinking about what you’re going to do there.
And I think the thing too that people need to understand is the banks can’t lend to the level that they’ve lent historically. They have higher reserve requirements, they have capacity issues right now, they have just a lot of headwinds, to say the least. And if people are waiting on that lender and expecting that lender to be able to really just extend their loan, they may be in for a shock when they actually have that conversation.
And so it’s making sure you have the right advisor to really figure out, what is the right loan for me if I wanted to refinance that? And I think that just given where the agencies are right now in terms of being able to be a really low cost capital provider compared to other private lenders and banks, it definitely needs to be one of the options that people are looking at. And if they’re not, they may miss out on just some really great terms.

Dave Meyer:
That’s excellent advice. Thank you so much Alison. If people want to learn more about your work, your team, your loan products, where can they do that?

Alison Williams:
So it’s a very long website, so I’ll just say go to Google and search Walker & Dunlop Small Balance Lending, and you will see our website will come up. There is a requested quote form where you can fill out some information about the deals that you’re looking at. We’ve got a team of originators, which are our sales professionals that are across the US with different specialties. You can reach out to any one of them and they can be of service.

Dave Meyer:
Awesome. And we will definitely put a link to your website in the show description and the show notes for anyone who is interested. Alison, thank you so much. This has been a pleasure, really insightful, we appreciate you being here.

Alison Williams:
Yes, thank you so much. Great meeting both of you.

Dave Meyer:
This was your kind of show Kathy, what did you think of it?

Kathy Fettke :
Oh, I thought it was fascinating. One that I’ve seen so many people bring deals to me where they were assuming that rates would come down, and I was too. And I don’t think that’s going to be happening. I’m glad I passed on those deals because assumptions are just that. People are guessing, and a lot of times they’re guessing on the exit cap rate.

Dave Meyer:
Totally.

Kathy Fettke :
And I’ve been seeing a lot of deals come by where they’re like, “Oh yeah, we’re going to be able to exit at this 5% cap.” And it’s like, well, how do you know? You don’t know where the market’s going to be in a few years.

Dave Meyer:
Honestly, yeah, I was thinking during this that we should do an episode or maybe like a YouTube video on a sensitivity analysis. Whenever I invest in a fund or anything, I look at that. And you basically look at the assumptions of anyone who’s bringing you a deal and you say, they think you’re going to get a 6% exit cap, but what if it’s 4%? What if it’s 8%? And you can start looking at your returns based on different scenarios to make sure that you’re protected in case the syndicator, even if they have the best intentions, are wrong about what the exit cap’s going to be, because it has a huge implication on valuations and what your returns are actually going to be.

Kathy Fettke :
Yeah, absolutely. And we’re in times where it’s just not so stable. It’s not like, oh, we can expect more of the same. I think we can expect more of the same, and that is high rates.

Dave Meyer:
Yeah, totally. And I just think you see these deals you’re talking about with people assuming an exit cap’s going to be at 5 or 5.5%, and it just doesn’t sound realistic to me given what other assets are offering out there. The risk adjusted returns on a multifamily with a 5.5% cap rate is just not very good right now. And so I just think you’re counting on dynamics in the market changing a lot, which is obviously outside of your control. And as an investor you don’t want to bank on things that are outside of your control being essential to driving returns. That just sounds like a recipe for disaster.

Kathy Fettke :
And the part of the interview where she said next year there’ll be a lot of refinances and people were expecting that things will be better. And it could be. I mean, it could be that we do find ourselves in a mild recession next year and rates come down and they’re in a better position than they would be today, but we just don’t know.

Dave Meyer:
Absolutely not. But I did love hearing that there are still good deals out there. The Midwest, there are still deals that are doing well. And I think it was really interesting what she said about not waiting. I think that’s true for purchases, but particularly for people who need to refinance. People who are current operators who are going to be facing a loan coming due or an adjustment in interest rate, should really start thinking about what they’re going to do now. And I know it’s tempting to wait 6, 12 months to see if rates come down. But as she said, banks don’t have as much money to go around right now. So I don’t think it would hurt you to start exploring your options right now.

Kathy Fettke :
Yeah, that’s a really good point.

Dave Meyer:
All right, well this was great. I learned a lot. Hopefully everyone else learned a lot as well. Thank you all so much for listening. Kathy, thank you for joining us, and we’ll see everyone for the next episode of On The Market.
On The Market was created by me, Dave Meyer and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

This article is presented by uDirect IRA Services. Read our editorial guidelines for more information.

In today’s world, the landscape of retirement planning is shifting beneath our feet. The challenges of an aging population, an uncertain future for Social Security, and the ever-present risk of financial instability have many of us reevaluating our approach to securing our financial future. 

While self-directed IRAs undoubtedly offer some exciting benefits, it’s essential to consider the broader context of retirement planning and the strategies we can employ to mitigate risk in the years ahead.

The Aging Population Predicament

One of the most significant challenges facing retirement planning in the U.S. today is the aging population. According to the 2020 U.S. Census, there are about 73 million Baby Boomers. By 2030, all boomers will be at least 65.

As this population enters retirement, the strain on Social Security and pension systems is palpable. The sheer number of retirees relative to the workforce threatens the sustainability of these programs. The result? A possible shortfall that could force us to question the future of our social safety nets.

As our population ages, there are several significant challenges to financial stability, both at the individual and societal levels, because fewer workers are supporting more retirees. We have seen many failed pension programs already.

Mitigating this risk starts with understanding that while Social Security can provide a safety net, it shouldn’t be our sole source of retirement income because it may not continue. We must take personal responsibility for our financial well-being and look for alternatives to bolster our retirement savings.

Self-Directed IRAs: A Valuable Tool

Enter self-directed IRAs (SDIRAs), a game changer in the world of retirement planning. SDIRAs, as well as self-directed 401(k)s, offer the opportunity to diversify your retirement portfolio beyond traditional stocks and bonds. This diversification can provide a much-needed cushion against market volatility and inflation, two critical factors that can erode the purchasing power of your retirement savings.

Investing in alternative assets like real estate, precious metals, or private equity through SDIRAs can potentially yield higher returns and serve as a hedge against economic uncertainties. The ability to take control of your investments aligns with the core principle of personal responsibility in retirement planning.

Beyond Self-Directed IRAs

While SDIRAs have their merits, they are just one piece of the retirement puzzle. A well-rounded retirement strategy involves a holistic approach that considers various aspects of your financial life, including the following. 

Emergency funds

Maintaining an emergency fund can act as a safety net, helping you avoid tapping into your retirement savings prematurely during unexpected financial crises. 

Debt management

Reducing high-interest debt before retirement can free up more of your income for saving and investing.

Lifestyle adjustments

Being open to lifestyle adjustments in retirement can help you stretch your savings further. Consider downsizing, relocating to a more affordable area, or working part-time during retirement to supplement your income.

Professional advice

Self-directed IRA providers are not investment advisors. Therefore, consulting with a financial advisor who specializes in retirement planning can provide valuable insights and a personalized roadmap to meet your retirement goals. A professional advisor might recommend whole life insurance, annuities, index funds, and more to shore up your retirement savings.

Your personal real estate holdings

Your retirement cash flow can be boosted through rental income, home equity, mortgage paydown, tax benefits, and as a hedge against inflation when house payments have fixed-rate loans.

Final Thoughts

In the grand scheme of retirement planning, self-directed IRAs are a valuable tool to consider. However, the challenges posed by an aging population and uncertain Social Security systems require a more comprehensive approach. It’s about taking personal responsibility for your financial future, recognizing the limitations of traditional retirement planning methods, and being open to innovative strategies like SDIRAs and self-directed 401(k)s.

Ultimately, the state of retirement planning today demands adaptability and forward-thinking. While self-directed retirement accounts can play a vital role in diversifying your retirement portfolio and mitigating risk, they should be part of a more extensive plan that considers all the variables at play. By embracing a holistic approach to retirement planning, we can navigate the uncertainties of the future with confidence and secure a more stable and fulfilling retirement.

This article is presented by uDirect IRA Services

uDirect IRA Services has helped thousands of Americans invest their IRA outside the stock market into real estate, land, private notes, and more to improve their financial future. Educating individual investors and professionals is the cornerstone of uDirect IRA. We do not promote any investments. Rather, we provide the knowledge, tools and information you need to make self-direction easy. At uDirect, we help you get started quickly and easily, and stay with you every step of the way.

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