Ryan McKeveny, Zelman & Associates managing director, joins ‘The Exchange’ to discuss the state of housing and how the Fed’s moves will impact the sector.

Ashley:
This is Real Estate Rookie Show 371. Do you know how to find a hard money lender? Does a Yelp exist for that? Or FHA loans? What are the pros and cons? We’re going to find out today. I’m Ashley and he’s Tony.

Tony:
And welcome to the Real Estate Rookie podcast, where every week, three times a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey.
Now, today we’re going to be talking about tax strategy for real estate rookies, which is incredibly important. We’ve got a special guest, Natalie Kolodij, who is on episode 368, and she’s back to give you some more real estate strategies. But before we jump into that, first we want to talk about hard money lenders. What are they? How do you find the good ones? Let’s dive in.

Ashley:
Okay. Our first question is from Carl Anthony, “How do you decide what hard money lender to use? Is there some kind of Yelp or review system somewhere?” This is like on the MLS, like a different website, Zillow, realtor.com. You can rate your real estate agent that you used on there.
I have not run across any kind of rating system. If you do go to the BiggerPockets forums and you ask people if they have recommendations or referrals or if you’re thinking of using a certain lender, go ahead and post it into the BiggerPockets forums and see if anybody else has used that lender and get their experience from them.
I think one other thing you could do is search the county records too in your area because you are able to see who has a lien on property. And you can search that company you’re thinking of using and find the mailing address of the property owner and call them up or mail them and just say, “Hey, I’m wondering how was your experience using this hard money lender?” Tony, what about you? What kind of ideas do you have for getting referrals or recommendations on hard money lenders?

Tony:
BP does have the lender finder, so that’s a tool that you can use, Carl. And I think the biggest thing is that you want to date around a little bit. Talk to as many hard money lenders as you can, some of the big national ones, some of the more local ones, and just compare both the customer service and the cost of doing business with that lender.
Every hard money lender is going to have slightly different packages or products that they can offer to you. Some are going to charge you super high rates if it’s your first time doing this, others are going to say like, “Hey, even if you’re a first time investor, we’ll work with you. No problems.” I think talking to as many different hard money lenders as possible is good.
But what I’ve found is that if you can just talk to someone who’s already used a company before and get their firsthand experience, a lot of times that’s the best way to let someone else do that homework for you. And then you’re just drafting behind the hard work they’ve already done. Now what I will say is for a lot of folks that I know that use hard money heavily, most of them have used multiple different companies in the past. A little bit of is a trial and error, just trying different companies to see what works, but that’s what I’ve seen, Ash, to help find that right hard money lender for each investor.

Ashley:
And just real quick before we move on to the next question, some of the things you should be asking are not just bland questions like how was your experience or did it go okay? Would you use them again? Those are great questions, but get more into the nitty-gritty of it as to what was the process like when you had to draw money out for your contractors if part of the rehab cost was involved? What was it like when you closed on the property?
I had a very bad experience where we were supposed to close on a Friday and there was title issues because the hard money lender didn’t do a lot of deals in New York state. And we had to wait and close until Monday until we could get a title attorney that had to come in and clarify that me and my attorney were correct and they were wrong. Asking specifics about the different fees that you’re charged and the process of everything and also how much experience they have doing loans in your market.
Okay. Hopefully some of those questions and places to look for hard money lenders was helpful for you guys. We are going to take a quick break and we’re going to come back and we’re going to talk about estimating rehab costs. You’re going to find out if Tony was born with a construction belt on his hip or if he had to learn all of these things too.
Okay. We are back after our short break and our first question is from Rebecca. “Big newbie looking into BRRRR. For the rehab portion, how do you get the knowledge to estimate repair costs? How would you then estimate the ARV? Thank you in advance.” This is a very common question is how do you learn this stuff? And first let’s break down what BRRRR is. This is a real estate investing strategy. You can buy the property, you can rehab the property, you can rent the property, and then you can refinance the property and then repeat the process on another property. Then ARV is after repair value.
The first recommendation I’m going to give, a super easy one, is the BiggerPockets Bookstore is The Book on Estimating Rehab Costs by J. Scott. But Tony, I think if you’re a long time listener, everybody knows you don’t know a ton about construction. You’re learning, learning, learning as time goes on. But starting out you definitely weren’t swinging the hammer so how did you become knowledgeable in doing rehabs?

Tony:
Yeah. First I think that there’s a misconception from a lot of new investors that you have to be an expert in the actual rehab work itself. Like, oh man, I got to know how to lay tile. I got to know how to frame and hang drywall and I got to know how to repair a roof. That’s not necessarily what it means to be a real estate investor.
If you look at Grant Cardone or Sam Zell or the guys running guys and girls running BlackRock and all these big hedge funds, they’re probably not the ones that are laying the tile. It’s all about making sure that you can factor those costs in, which I think is what Rebecca’s question here is.
But what I found to do, and this was my approach, is when I did my very first rehab property, it was my very first out-of-state borough, that was my first real estate deal ever. My approach was super simple. I looked at my property, I got a very clear picture of what the current condition of that property was. I looked at other properties that had sold that were rehabbed in that market. And I took those rehabbed properties, I went to a few different general contractors and said, “Hey, here’s what my property looks like today. Here’s what I want it to look like. Please give me an estimate. Give me a bid on what it’ll take to get the property from point A to point B.” And I talked to three different contractors in that first deal, and that was what gave me a general sense of what I might spend when it comes to rehabbing a property.
Obviously J. Scott’s book on estimated rehab costs is incredibly detailed. That’s a great way to really nail that estimate step, but if you just want to, as beginner as you can possibly get, let the contractors who know those numbers like the back of their hands give you that number. And the goal of getting three is that you can average between those three different bids to find the most realistic cost.

Ashley:
Yeah. And for me, I took on a partner who knew construction and I learned from him our good friend, Kara Beckman from Beckman House, when she would hire contractors starting out she didn’t know a ton about rehabs or anything like that. And she would literally follow the contractor and ask questions like, “Why are you doing that?” And not because she wanted to do the work herself, but she wanted a better understanding of how the work was done so that she would know if people were doing the work correctly or not. And she had a good comprehension of what she needed to actually get a project done too. That’s something else you could always do. I mean, I think of my contractors and they would hate to have me over their shoulder, but maybe it’s something you could pay for them to teach you a couple things.

Tony:
And that’s another thing too. You could just follow the contractor around when they’re giving you a bid and just ask those questions. And that starts to give you a better sense of what it looks like as well. But Rebecca, I think don’t overestimate or don’t over-complicate the estimation piece. If it’s your first deal, lean on the expertise of the general contractor in that market.
But the second part of her question was the ARV, how do you estimate your after-repair value? And this step is honestly to me, way easier than estimating the rehab costs. All you have to do to estimate your ARV is identify properties that are similar and form function, size, et cetera, to your subject property and see what those properties sold for.
Now, there’s some caveats here. First is time. You don’t want to go back too far into the past. If you found a property, say it’s a perfect model matched to your home, but it sold three years ago, you probably don’t want to use that number. I know for me, I typically try and go to a 90-day window. If I can’t find enough, then I might push it out to six months, but that 90-day window I found is pretty solid for me. Time is important.
Style is important as well. Say you’ve got a single-family ranch style home that was built, I don’t know in the nineties, you don’t want to compare that to a two-storey new construction that was built two weeks ago. Because even if they’re right next door, those are two different styles of home that might attract a different style of buyer. And usually the appraisals look a little bit different as well. That’s a big one.
Proximity, you don’t want to go, and this will vary from city to city. Ashley, where you’re at, it’s a little bit more rural, you’ve got bigger parcels of land, you might be able to go out a little bit further. But in a traditional suburban setting, you probably don’t want to go out more than a quarter of a mile, half a mile, start with that smaller radius first. Because again, if you go a mile out, you might be crossing a major highway, you might be crossing a major street that divides the city into two different sections. Those are the things to look for as you’re looking for that ARV, for those comps for the ARV I should say.

Ashley:
For a third question, we have one that says, “Can someone please give me a rundown on the benefits or cons of using FHA loans? I’m looking to purchase my first property with plans to house hack and save for my next investment.” Okay. First thing Tony comes to mind for FHA loans, low down payment. Woo. Don’t have to bring a lot of money to the table. Okay. We’re talking three and a half percent to 5% down, but there are some conventional loans.
FHA loan and conventional loans are different. Conventional is your standard loan that you can go and buy a investment property, you could buy your primary, whatever that is. And that’s usually 20%, but they’re actually giving out that at 5%. My sister just went and got pre-approval and it was a conventional loan for 5%. Part of 5% down. Part of that pros and cons of using an FHA loan has been the con of having to do an FHA inspection.
If you’re okay with 5%, you’re going to be better off going the conventional route because you don’t have to do that FHA inspection. You’re going to do your inspection on your own, bringing in an inspector to tell you what repairs need to be done, doing your due diligence. But then FHA brings in their own inspector and they want to make sure that the property is habitable, that you can live in it.
Forget fixer uppers. The FHA isn’t going to approve those. I remember when my cousin purchased a property, she was using FHA loan. And they had to install hand railings in certain spots because they were not up to code and that’s one thing FHA flagged. There’s different criteria that they’ll look for in the inspection and they’ll want to either have that fixed before closing or tell you that, “Sorry, we won’t fund this deal.”

Tony:
And I think as an add-ons to that, Ash, because a lot of sellers know and understand that those FHA inspections can be pretty rigorous. If you have maybe say you’re offering $300,000 on this property and someone else is also offering 300,000, but you’ve got FHA and they’ve got conventional or some other type of debt, a lot of times all things being equal, all else being equal, the seller will choose the non-FHA offer over the FHA offer because they know that the likelihood of closing is higher.
That’s another con of the FHA is that it can also make your offer a little bit weaker. Sometimes you might have to offer additional things, maybe a higher purchase price, maybe a bigger EMD, maybe, whatever it may be to kind of make the seller feel more confident about your ability to close. When we bought our first home, our first primary residence, we did conventional 5% down. And we had the option of either going FHA or conventional. We chose conventional as well. There’s a lot that goes into that decision, but FHA is great for the down payment piece, but you got to make sure the property satisfies those requirements.

Ashley:
Okay. We have a special treat for you guys. We know after three questions, you guys are sick of hearing us talk. we are bringing a guest today. We have Natalie Kolodij coming on today. And she’s going to get into the one thing that you can never undo if your taxes are filed wrong. This means you can file an amended return for it. You can’t go back in time and fix this.
Who can take losses with a partnership? We’re also going to talk about that if you’re in a partnership. Does everybody get the tax benefits? And we’re going to go over so much more. Stick around. We’ll be right back after this break with Natalie.
Natalie, thank you so much for joining us for this week’s Rookie Reply. We always love it when we can have a special guest come on and give expert advice here. We wanted to start off with a question here as to what does a CPA need to know about you? What information should you be giving your CPA? And maybe these should be questions they should even be asking you. Natalie first if you want to give us a little background actually about you, and then we can jump right into that question.

Natalie:
Yeah, absolutely. I’ve been in tax for about a decade and specialized in real estate tax since 2017. And I’m also a national tax educator, so I teach CE for other tax professionals all about real estate, so I get to see both sides of the coin. When it comes to things that you want to make sure your CPA knows or your EA and that they’re asking about you, a big thing that’s overlooked is looking forward.
We hear about a lot of tax strategies, but knowing which ones make sense for you, you should really make sure that they understand how quickly you’re planning to grow and scale and what the next three to five years looks like for you to know what makes sense to implement today, what might make sense two years from now. And just create a roadmap for how you’re going to grow and what pieces should be put in place to make sure you have the foundation for the specific growth you’re looking for.
It’s not one size fits all, so you want to just have that forward-looking talk with them about what your end goal is. Because I talk to some clients who are like, “I want 40 rentals by the end of the year and want to be out.” And for other people it’s like a slow one a year, going to retire at 50. Getting on the same page with that will really help determine what applies to you.

Ashley:
And then, what about any passive losses? Do they need to know about your income, if you have active income, passive income, things like that to help with your tax planning?

Natalie:
Yeah. With passive losses, this is an area because again, with your long-term rentals, if your income’s too high, if it creates a loss, it’s passive and you can’t always use it. What that means is a few things. Make sure you’re tax professional, if you know that you had passive losses prior, maybe you switched to just using someone now or you switched firms, there’s a worksheet that tracks those, passive loss carryover schedule. Make sure they have that and make sure you see it on your return.
These get lost track of easily when you switch software, so you don’t want to lose those because they’re like a piggy bank. Something else I’ll hear from investors is, “I can’t use my losses this year. My income’s too high so my CPA said not to worry about it. We’re not going to try to generate more loss.” And that’s not the right mindset.
Even if you can’t use those passive losses today, you still want to create as much of a loss as you’re entitled to. And so you want to make sure you accountant knows everything you put in for cost. If you were traveling before you purchased the property and you had costs incurred there, you had inspections prior to purchase, maybe you paid a wholesaler or a bird dog fee, someone to find you this property, any of those costs they should know about. And those won’t necessarily be in your books or they won’t be on your purchase documents because it was prior. Make sure any costs that you incurred along the whole process, get in front of them.
And then even if it’s creating a passive loss that you can’t use today, you get to use it someday. You never want to just not maximize these. The way I like to describe this to people is your passive losses can build up and then you get to cash in on them at some point. And it’s a lot like going to the arcade. And if you start earning those tickets and instead of getting to use a few tickets this year to get a piece of bubble gum, you get to save your tickets for 10 years and buy the pinball machine on the top shelf. That’s what your losses are doing. Let those accumulate and then you just have this bank of loss.
When you inevitably sell a rental, which we all do every few years, we get tired of a market or it’s gone up a ton of value or you just hate the neighborhood, whatever it is, that gain can be offset with those built up losses. You want to save your tickets for that top shelf item. You want to save your losses to wipe out that $200,000 gain.
Even if you can’t take that $1,000 loss this year, build it up, keep accumulating it, and you’ll get to use it down the road. They never disappear. Always strategize and always make sure anything you paid for it gets in front of your accountant.

Tony:
I have a lot of partnerships, Natalie. And I want to understand how these losses play out in joint ventures and shared LLCs, things of that nature. Before I do, I want to make sure I’m tracking what you said here. It almost makes me think of everyone listening to this podcast is probably old enough to remember when cell phone plans had minutes restrictions every month. And then the cell phone providers started to promote these rollover minutes. Like, “Hey, if you don’t use all your minutes this month, they roll over to the next month.”
It sounds like the passive losses almost operates the same way where even if you don’t use all of your passive losses for this year, they’ll roll over to the next year, then they’ll roll over to next year until you actually end up using them. It sounds like there’s really no downside to trying to maximize your paper losses each year. But what I want to know is say that maybe you got bad tax advice. I’m in the short-term rental industry. Say I bought a short-term rental in 2023, but I didn’t do a cost segment because I didn’t really need the write off. Can I now go back in 2024 to retroactively create that paper loss for 2023? What does that even look like?

Natalie:
Yeah. With short-term rentals specifically because if they’re under seven days and you participate, they’re non-passive. We can often use those losses. Especially there, we want to be really strategic with creating them. When you buy a short-term rental in that year, you can do a cost segregation if you want. And what that does is separates out about 25% of the building value into stuff that you can almost always write off in that first year. It creates this large loss.
It is a year to year test is the other thing. The short-term rental, getting to use those losses is a one and done often. You have to keep buying more properties if you want to keep checking into those big losses. But it’s also something that’s looked at based on the specific year. What I’ll hear from people is, “Well, I don’t want to manage it though to be able to get this loss. I want to hand it off.” Or, “I don’t want to deal with a short-term rental. I want midterm or long-term. I don’t have time for that.”
If you buy a rental December 1st and furnish it and rent it short term for that month, where can you manage it for 30 days? Then January 1st you can make it a midterm. I do not care what you do on January 1st. There’s no negative claw-back, but it’s an annual test. If you are buying towards the end of the year, if you can have the average guest stay under seven days and manage it for just that time of that couple weeks left of the year, you would qualify to do this cost segregation and create a big loss you could use. That can be a really strategic tax plan.
If it’s a couple years down the road and you’re like, “Wait, my accountant never mentioned a cost seg. Can I do that now?” You can. If it has been any more than two years, basically if the depreciation has showed up on a tax return for only one year, you can either go back and change that year and take the loss then.
Or there’s a form 31 15 that says, “I’m going to change my accounting type, I’m going to change my method.” You can do that in any future year. What this means is if year two you decide like you learn about cost seg, you can file that form in year two. If you’re in year five, you can file that form and do the cost seg and you get to take that extra depreciation in the year you file.
This is another good planning point because if in the year you bought the rental, you don’t need those losses maybe. Let’s say you already have a big loss from something else or your income isn’t very high. You might want to wait until a couple years down the road, do your cost seg and take your losses that year with that form because maybe that year your income’s much higher and so you want to have $100,000 write off.
It’s always worth asking about a cost segregation and bringing it up with your accountant or your new tax professional, even if it’s years down the road, because you can still do it. You can still go back and get that adjustment. Now the longer you own it kind of the less benefit there is. Because if you’re in year 20 out of 27, we’ve already sucked up a whole lot of those write-offs. But if you’re in the first 10 years I would say, it is always worth looking at doing that cost segregation, even if you’re in a later year.
And with bonus depreciation, that thing that says you can write off 100% of an expense if its life is under 20 years. That was dropping down. It was 80% for this year is supposed to drop to 60. There’s current legislation that could pass that would bump it back to 100. But also with that amount, it’s based on the year you put the rental in service. Any rookies who bought a rental between 2017 and 2022, put it in service. It is always worth looking at that cost seg because you’re locked in on those 100%. It’s based on the year you started renting it, not the year you do the cost seg.

Tony:
So much good information though. And I think it’s reassuring for folks to know that even if you maybe missed it, maybe you got bad tax advice, maybe you didn’t realize it was an option, you can still go back to try and make it sound.
One other questions I didn’t want to touch on for the losses was partnerships. Again, I have a lot of different partnerships that I do. Most of them are joint ventures, but I think one that might be interesting, we just closed on our first commercial property. It’s a 13 unit boutique hotel in Utah.
I own 21%. I have another partner that owns 9% and then another 70% is owned by two other partners. There’s four of us on this deal. How does the losses work when you’ve got a mix of four people that own a property together?

Natalie:
Most often the losses are allocated based on ownership percentages. There’s more complicated ways to do it, but there’s a whole bunch of hoops. Just as a starting point, assume you’re just getting your percentage. Something to caution about is if you’re in a partnership with someone else and you’re trying to do that short-term loophole, that material participation test you have to pass is based on each person. That person needs to materially participate to get the benefits.
If you do a cost segregation on that property, and let’s say it has a $400,000 loss and you guys are all like, “Yes, this is going to be incredible.” But Tony, you’re the only one who put any time in on it. Your partners are passive and they’re like, “This is awesome. Tony knows what he’s doing, he’s managing it, he’s dealing with all the time, his hours are working on it. And we just sit back and collect a check.” They won’t qualify to take their portion of the losses against their income because they didn’t materially participate. The most common tests are 100 hours and more time than anyone else, so you’re pitted against each other.
On your large apartment complex, because the next test is 500 hours, so it’s possible two people put in 500 hours, but on a single family, probably not. If you and a friend partner on a single family in the Smokies, if one person’s putting in the time and the hours, their time’s going to trump the more time than the other guy. If there’s a short-term rental, there’s a good chance only one of the people will meet that criteria to get to use the losses against their income. The other people still get their share of the losses. It just goes into that save your tickets bucket where they might not get to use it this year.
And one other cautionary tale is if you’ve used an accountant who didn’t know real estate, or even if maybe you didn’t notice this, check your return. For that bonus appreciation, that awesome thing where you get to write off that big chunk, often 100% if you choose not to do that, there’s an election on your tax return where you can say, “Ah, we’re opting out of doing this. We’re not going to take that big write off all at once.” That’s permanent. You can’t ever change your mind about that.
If you are working with a new tax professional, look through all the pages of your return. And if you see something that says, “Under code 168(k), I’m opting out of bonus,” stop, pause, red flag, stop. Because once that’s there, you can’t go back and get it. Like you said, what if year five I work with someone new and I learn about seg and I want to go back and do it? You can always do it. But if they’ve ever put that there saying, “We’re not going to take this,” we can’t take it even if it’s down the road.
Always look for that election and you don’t want to have it. Before you sign off, if it says you’re choosing to not take bonus and you’re opting out, pause and tell them to please remove that. Unless there’s a very specific reason, it really hurts you down the road when you decide to circle back and do a cost seg. You can’t break out that 100% write off if that election has ever been on that asset.

Ashley:
Basically what you’re saying is that there is no going back and redoing it. This is one of the very few things that if you do it wrong or your tax preparer does it wrong for you, there’s no going back for it. What would be one of the reasons that a tax preparer would actually check that box for you?

Natalie:
Yeah. I’ve got some great responses on this. I interviewed someone who by default kept doing that on the trial returns. And when I asked them why they kept opting out, they said they were just taught to always do that. Option one is just they don’t know. They just always have. That could be it.
Sometimes there is a valid reason. I’ve had clients where we actually want the loss spread out across five years instead of all at once. It might line up with their income better. If there’s a specific reason to do that, sure. But I’ve had a situation where a client had a campground. It was all assets where we could have used a ton of bonus depreciation, they did a ton of renovations. We could have had this huge write-off, but their prior accountant opted out of that. When I got it and I was like, “This qualifies for this short-term loophole, we can take these losses.” We could, but we couldn’t create those extra losses with bonus because they had just decided not to.
There’s a handful of reasons they might. I think a lot of accountants do, because they either don’t know short-term rentals can be non-passive. In their head they’re like, “There’s no reason to take it. They can’t use the loss.” And sometimes they just don’t have a reason really. It’s just why would we do this? Just be cautious. Just keep an eye on that because it’s not revocable, so you can’t ever change your mind.
It is on specific classes, so you can choose not to take it on only five-year stuff or only 15. There can be planning there. But if there was no discussion, if there was no talk about it and you have it on your return, definitely ask about it first.

Ashley:
Well, Natalie, thank you so much for taking the time to come on this Rookie Reply. And if anyone listening would like to submit a question for us or an expert to answer on the show, you can go to biggerpockets.com/reply.

In case you missed it, Scott Trench, CEO of BiggerPockets, wrote this thoughtful article: Multifamily Is at High Risk of Continuing Its Historic Crash in 2024—Here’s Why. Scott and I have been discussing this topic offline anyway, so I thought I would take him up on his invitation to debate the subject online. Healthy debate is what BiggerPockets is all about, right?

I will start by saying I agree with most of what Scott wrote. I agree with most of his facts, the challenges facing the multifamily space, and especially the problems with many operators who have run into problems of late.

However, I disagree with Scott’s conclusion. I think now is a great time to save up your dry powder and pick up properties that may be financially distressed but are otherwise well-located, excellent assets taken over by proven operators. 

I will argue that the multifamily asset class as a whole is fundamentally sound despite some short-term supply issues. Patient investors who wait for the right deals will be rewarded.

The distress in multifamily is not a tidal wave—it’s more like a trickle. But rest assured, it has already started, and there are deals to be had at valuations we haven’t seen in many years.

As in any market cycle, the time to hunt for great opportunities is not when all is well, euphoria is high, and everyone is chasing the same deals. When asset prices get frothy, it is exactly the time to hit the pause button. And when blood is in the water, it is exactly the right time to go shopping. 

But I defer to the two best investors of all time, Warren Buffett and his recently deceased partner, Charlie Munger—the Batman and Robin of investing:

“Be fearful when others are greedy, and greedy when others are fearful.” – Warren Buffett

“The best thing that happens to us is when a great company gets into temporary trouble… We want to buy them when they’re on the operating table.” – Charlie Munger

That said, no one wants to catch a falling knife, which is where careful analysis and patience are critical. 

I will offer my perspective on “what good looks like” later. For now, let’s dive in and unpack Scott’s core thesis.

Scott Says: “It Just Doesn’t Make Sense to Buy Apartment Complexes at Current Valuations”

Scott’s arguments:

• Average cap rates for multifamily are too low (5.06%), making this asset class too expensive. Their sole purpose is cash flow, and they aren’t doing a good enough job producing it.
• Right now, interest rates are generally higher than cap rates (negative leverage), making it hard to make money.
• There are better, lower-risk ways to generate 5% cash returns (Treasuries, commercial debt, etc.).
• There’s more room for multifamily valuations to fall (even more than the current 30% from peak).

My response: Yes, but a deal is a deal. And there are some good ones.

Scott makes a compelling argument that average apartment valuations are out of whack with the new reality of higher interest rates and that there are better ways of making a 5% return in today’s market. 

My simple answer is: Don’t invest in those deals. You can do much better. If I’m not confident I can make a 15% to 20% annual return (cash flow plus appreciation) on a multifamily deal, I am not interested.

The issue is that, even though apartment valuations on paper have come down (20% to 30%-ish), there isn’t enough transaction volume yet to reflect the new reality. So, while there are deals that are still trading at 5% cap rates, for example, many more deals are not being traded at all because most sellers are in denial and would prefer to wait it out.

That said, I am seeing quality assets being bought at 6.5% and 6.8% cap rates, with interest rates at 5% and below. At some point, sellers won’t be able to hold on any longer, and more of these better deals will be available. 

The best apartment acquirers didn’t acquire many properties at all in 2023 for this exact reason. Investors need to be patient, just like these seasoned operators are.

The bigger point is that we, as investors, don’t buy averages. We buy specific properties in specific markets. “Average” cap rates for single-family homes are terrible right now as well because prices and interest rates are high. 

Don’t buy those deals, either. Don’t buy with negative leverage, don’t buy without cash flow, and don’t buy at inflated prices. Find better deals.

How far will multifamily values drop from their peak? My honest answer is, I don’t know. It’s hard to time the bottom.

I do know that buying now, at a 30% discount, is better than buying at the top. All else being equal, a 6.5% cap rate is better than a 5% one. If you are buying a good deal with a solid operator and hold it over a long enough period, you have a recipe for success. 

Most importantly, the fundamentals of the apartment asset class are strong. And that creates a floor for future valuation declines and prevents an apartment-pocalypse. More on that next.

Scott Says: “The Outlook for Rent Growth Is Poor in 2024”

Scott’s arguments:

• A record supply of new multifamily units will be delivered in 2024, which will push down rent prices.
• Markets like Texas, Florida, North Carolina, Denver, and Phoenix are at high risk due to excessive supply.
• Higher rates may drive more people to rent, but they also reduce demand as homeowners with low interest rates stay put.
• Renters prefer single-family homes.
• The combination of too much inventory and insufficient population and income growth could hurt apartment owners.

My response: Agreed, but just wait. Plus, demand is strong.

Scott is 100% correct about the influx of new apartment supply hitting the market in 2024. This will cause rents to stagnate in 2024, and in some markets, rent may even decline. Some markets will get hit harder than others, as Scott points out. This is a mathematical certainty.

But we, as real estate investors, should have a much longer time horizon than one year. What happens in 2025 and beyond? That’s when things get more bullish.

Take a look at this chart from CBRE’s “2024 Outlook Summary: Historical & Forecast Multifamily Construction Starts.” You can see that the huge spike of new projects that started during the pandemic is being delivered now. 

But then look what happened. Starting in 2022, new projects tanked due to high interest rates and construction costs. That means new deliveries will decrease dramatically in 2025-2026. Supply/demand should rebalance, and rent growth should accelerate again.

2024 renters should get a badly needed break from incessant rent spikes. I think that’s a good thing for society. This also supports my thesis: The lack of short-term rent growth will put more pressure on those apartment owners who are already struggling with high interest rates. 

The result for investors: More opportunity to pick up discounted properties. Smart investors with a long-term perspective will see over the horizon and past the short-term choppiness.

However, what about the demand side of the equation? CBRE forecasts that although vacancy rates will continue to surpass their pre-pandemic averages in 2024, sufficient demand will maintain the average occupancy rate above 94%. Developers have accurately gauged where demand will most effectively support new supply. 

The markets with the most extensive supply pipelines (such as Dallas, Austin, Nashville, and Atlanta) boast the highest job growth projections. So it’s not so much the new supply but the absorption rate that matters the most—and the new supply should be absorbed over time. 

Record unaffordability for home purchases also bolsters demand for renting. Scott points out the other side of this—that homeowners with low interest rates aren’t moving—which reduces rental demand as well. But the vast majority of these locked-in homeowners would be much more likely to buy than rent anyway. 

The big picture here is that the U.S. suffers from a huge undersupply of housing, and that fact ensures strong demand for all residential real estate: single-family, multifamily, affordable housing, etc. The current influx of supply won’t make much of a dent. A significant softening of employment could change that, but otherwise, the long-term supply/demand equation favors apartments. 

But as always, real estate needs to be analyzed at the local level. Investors should always evaluate the supply-demand dynamic in their local market and submarket.

How quickly is new supply being absorbed in your local market? What new projects might be coming onboard near your target property that could cause issues? These are great questions to ask the deal sponsor and require supporting data.

Scott Says: “Expenses Eat into Multifamily Profit”

Scott’s arguments:

• Property taxes and insurance costs are surging, with an average 19% increase in 2023.
• Insurance premiums have spiked by 100% to 200% in parts of the South and West.
• These cost hikes are uncontrollable and directly impact property valuations.
• Rising labor costs are squeezing multifamily operators’ bottom lines.

My response: OK, Scott wins this round.

Touché. Scott wins this one. Increases in property taxes and insurance are a leech on the bottom line of apartment owners, and there’s no good remedy in sight. 

One would think that property taxes would fall in line with falling property values. But like Scott, I am skeptical. And insurance costs are ridiculous.

A couple of points to remember, though. First, all these same factors hurt the economics of single-family rentals just as much. For example, I’m selling my SFRs in Texas because property tax spikes alone turned my once-profitable gems into a negative cash flow money pit.

Second, make sure operators are appropriately accounting for these costs in their projections—baked into the cake if you will. 

Finally, there are some niche strategies that address the property tax issue. A tactic some operators use is negotiating with local tax authorities to completely eliminate property taxes in exchange for dedicating some units to affordable housing. It’s one of my favorite strategies in high property tax markets like Texas.

Scott Says: “Interest Rates Won’t Come to the Rescue”

Scott’s arguments:

• The Fed is likely to cut the federal funds rate by 75 basis points, but no one knows what impact that will have exactly.
• Normally, cuts will also lower the 10-year Treasury, which in turn should lower borrowing costs.
• But currently, the yield curve is inverted—meaning short-term rates are normally lower than the 10-year Treasury, but right now, they are higher.
• If the yield curve normalizes, then even a Fed rate cut won’t prevent a higher 10-year Treasury rate (~6%, for example).
• Expecting the 10-year Treasury to decrease is risky. It’s safer to assume it will rise, which would lower apartment valuations.

Response: True. But a good deal works regardless of interest rates.

Scott is clearly a big interest rate nerd! Inverted yield curve prognostications aside, let me try to translate for the rest of us. 

Most people think apartment borrowing costs will go down, which would give apartment owners stuck with high variable rates some relief. Scott is the contrarian: He thinks borrowing costs could go up even if the Fed lowers rates.

What do I think rates will do? I have no idea! The biggest mistake apartment operators made over the last two to three years was assuming rates would stay low when they refinanced their bridge loans. They bet wrong, and they are now getting crushed. If borrowing costs do rise, that creates more stress and, therefore, more deals for the savvy investor to pick up.

But more importantly, your investment strategy needs to be interest rate-agnostic. In other words, it needs to work if rates go up or down. That’s why I favor fixed, long-term debt (five-plus years) on apartment deals and at least a few years longer than the property exit plan.

Rates and market values can go up and down during the hold period, but I want my property to shrug it off, spit out cash flow, and benefit from a value-added plan that will produce equity along the way. And there should always be a sufficient margin of safety built into the deal economics (equity, cash flow, and reserves) to withstand the inevitable bumps—something many new operators failed to do in the last few years. I’m sure Scott would agree.

But how do you secure long-term, low interest rate debt these days? One way is to assume it. One of the coolest features of multifamily investing is that properties sometimes come with low rates that the seller can pass on to the new owner. These properties will be more expensive, but it can be worth it, given how important the debt structure is today. 

Alternatively, operators can buy with more equity to mute high interest rates in the deal. However, I would still want to see positive leverage.

Final Thoughts

There are headwinds facing multifamily operators. But those same headwinds create opportunities for the rest of us. The apartment oversupply will work its way through the system, but perhaps not soon enough to save operators who overestimated rent projections in order to goose return projections for investors. Unless there is a recession, demand for apartment rentals should remain robust. 

Cap rates have been stubbornly low. But that doesn’t mean you have to buy at inflated prices or accept deals with high-interest rate risk. Property and insurance costs are a problem that operators need to be realistic about and account for in their budgeting.

So what does good look like? I agree with Scott Trench about buying opportunistically and only accepting conservative assumptions from operators. Assume flat rent growth in the short term, look very closely at exit cap rates, and don’t buy with negative leverage (Scott’s suggestion of cap rates that are 150 bps above agency debt is a good benchmark).

I personally look for deals with a value-added edge that creates a greater buffer or margin of error in case things go sideways. Be cognizant of where your equity sits on the capital stack.

I couldn’t agree more with Scott about demanding more operators and capital raisers. His tips there are worth a second look. The most important thing to do is to choose operators with a strong, and ideally long, track record of success. Don’t be anyone’s guinea pig! 

There needs to be more education about private equity real estate investing. Scott announced that Bigger Pockets is planning a new initiative called PassivePockets that will have expert voices weighing in on what “good looks like” for multifamily investing. I’m looking forward to it.

If you want to discuss multifamily investing, feel free to email me at [email protected] or visit ClaraInvestments.com.

Tyler Moynihan is a former executive at Zillow and managing partner at Clara Investment Group. He is an LP and GP and focuses on multifamily investments. 

Take Your Market Research to the Next Level

Need help finding the right market for your next investment? Dave Meyer created our brand new Picking a Market Worksheet to help investors like you identify and analyze the right locations for their next deals.

Download our worksheet today for quick and easy analysis when researching your next market. 

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

You can’t scroll through your daily news feed these days without seeing story after story about the impact of generative AI on virtually any and all industries. It’s here, and the good news is it can be an incredibly useful tool in real estate. 

According to a recent analysis by McKinsey Global Institute, “In our own work with AI, we have seen real estate companies gain over 10% or more in net operating income through more efficient operating models, stronger customer experience, tenant retention, new revenue streams, and smarter asset selection.” 

And this should hold true for the real estate investor as well—even those of us with fewer than 10 doors. Especially investors with small portfolios, in fact, since we often don’t have the help of slick management companies. 

Think of generative AI as a super-smart, articulate virtual assistant, and then think about all the things you would delegate to that assistant if you could. Here are a few places to start:

Create Property Listings

Have a vacancy coming up? When writing your property listing, don’t waste time agonizing over your prose.

Enter the key details into ChatGPT, including the important keywords (“view, “covered parking,” whatever works for your market), and ask it to use those inputs to create a 250-word listing optimized for your keywords using a “friendly but professional tone.” In five seconds, you’ll have a listing that you can either tweak yourself or, better yet, ask ChatGPT to keep tweaking until it’s perfect.

Time saved: 1.5 hours

Market Your Listings

Use a generative image AI tool like the creative options in Canva to create an Instagram post for your new listing. Better yet, have Canva create 10 posts, including all the relevant captions and hashtags, each slightly different, highlighting a desirable feature of your listing, and post one every other day until you’re leased. 

Time saved: 4 hours

Respond to Inquiries

Set up an auto-response within Instagram so that anytime a follower comments “details” (or whatever word you choose), an AI bot immediately sends them the full listing in their DMs (even if it’s 3 a.m.). The bot can also ask for their address—and now you’ve begun to grow your future marketing email list. 

Do they want to walk the property? The bot can send your Calendly schedule with predetermined viewing windows.

Time saved: 2 hours

Automate Emails

Every month, five days before rent is due, send your tenants a quick reminder (one ChatGPT has written for you and that you’ve auto-scheduled in advance, once for the whole year) with the link to your rent payment site. Once a quarter, automate a friendly check-in (again, have ChatGPT compose for you), asking if there are any maintenance issues that need attending to.

Time saved: 1.5 hours

Virtual Staging

Empty houses don’t sell nearly as well as furnished ones do. Show your potential tenant just how your place will look with their perfect mid-century sofa in the living room. Use generative AI to virtually stage your rental and help your hipster tenants image themselves right at home in your space.

Time saved: 8 hours and up!

How have you used generative AI to save you time and money?

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Olaolu Aganga, Mercer, joins ‘Closing Bell Overtime’ to talk investing opportunities in the current market.

When you’re talking to real estate investors, they’ll often tell you how many doors they own, meaning how many rental units they have in their portfolio. Stating door numbers, however, can often be misleading. Generally, the real metric to keep track of is cash flow because, after all, profitability is what counts in any business, right? 

Sometimes, though, the two can get conflated, and on occasion, owning just a few doors, irrespective of cash flow, can be a good strategy for building long-term wealth. 

Confused? Don’t be. Rapidly appreciating areas can often generate far more wealth than simply adding doors that make $200-$300/month without the headaches of multiple tenants. In those instances, clinging to the side of a speeding real estate train might be the best investment strategy to generate wealth quickly, giving you investment options further down the line.

Note that most landlords in America are not Wall Street behemoths or incredibly successful businesses with hundreds of doors in their portfolio but mom-and-pop owners with a few units to supplement their income. 

In other words, relax if you still need to purchase your first unit. You’re not getting left behind in the stampede touted by investment gurus to scale your portfolio. Owning just a few units puts you alongside most owners. If you already own a primary residence, turning it into a rental is relatively easy if you plan to move.

If you want to scale your portfolio, however, there are some important things to consider before starting.

Where Do You Intend to Buy Your Rental Units?

Your purchase power will be sorely limited if you intend to buy rental units in expensive areas. Assuming you’re not sitting on a trust fund or haven’t written songs for Taylor Swift or Beyoncé, there are the practical issues of how much you can borrow and earn from your day job, which will directly influence your purchasing power. 

If you are a high earner or have investors and can afford to start your rental buying quickly, scooping up dozens of properties in cheaper markets can help your scale. However, there are pros and cons to both approaches.

What’s More Important: Cash Flow or Appreciation?

In an ideal world, you can have both. If you purchase a home in a transitional neighborhood and ride the demographic and economic turnaround, you’ll score a double whammy.

For example, many homeowners in the New York boroughs of Brooklyn and Queens became millionaires over 10-plus years simply by house hacking and renting out small multifamily buildings in which they also lived. Their appreciation far exceeded any cash flow they could have made by purchasing rentals farther afield. 

If you’re not desperate to leave your job, have no problem house hacking, and live in a major city, getting an FHA 203K loan for renovations is a great way to start building wealth without the hassle of long-distance investing and leaving the running of your properties to third-party management companies.

Scaling Sensibly

If scaling your portfolio is a priority, you must decide how much time and money you can dedicate to real estate investing. If your immediate priority is to leave your job, cash flow is king.

Whatever your chosen method—BRRRRing, multiple house hacks, or syndication—you’ll need to earn over your income to cover inevitable repairs and vacancies. However, leaving your job might affect your ability to scale securely.

Choose Your Location Carefully

In a rush to earn cash flow, many new investors make the mistake of thinking that buying low in D+/C- neighborhoods will allow them to scale faster and earn more. They could be setting themselves up for disaster. High-crime neighborhoods come with a lot of risks—vandalism and nonpayment of rent being the most obvious to investors. Your only hedge against this is to buy so cheaply so you can easily absorb the rental loss.

It’s usually more profitable to add fewer doors in better neighborhoods. Although the cash flow in less expensive neighborhoods is appealing on paper, this is rarely achieved. Scaling sensibly, not over-leveraging, and remaining in solid neighborhoods where you’re not afraid to walk the streets at night almost always makes more sense than simply adding doors to your portfolio if that keeps you locked in landlord/tenant court.

Your Job is Your First Business Partner

Another mistake of newbie investors is being too quick to leave their steady, W2-paying job. Not only will banks be more willing to lend to you with a job, but the income it generates will help you manage the unforeseen expenses that come with real estate investing, allowing you to scale faster.

Case Studies

Rick Matos and Santiago Martinez live and invest in Lehigh Valley, Pennsylvania. They are friends and have done deals together in the past. Both have a similar number of properties in their portfolio—Rick has 44 units, and Santiago has 47. 

However, their investment strategies have differed. Here’s a look at each.

Rick Matos

Rick took 10 years to accumulate his 44 units, generating a gross rent roll of about $40,000/month and $25,000 in cash flow today. When he started investing, he was a full-time employee earning six figures. He took a HELOC on his personal residence (which was paid off) to buy his first investment property. At the same time, he earned his real estate license to help him purchase more properties, saving on commissions.

“A lot of the properties I bought at the time were REO/foreclosures in Center City, Allentown, and Easton, so I was buying them at a clip for cash for $20,000-$30,0000 using my 401(k), borrowing from local lenders and my dad who owns real estate in New Jersey,” Rick says. “In addition, I did a few flips and bought a few houses on credit cards. I was adamant that I wanted to keep scaling, and having a good income through my job helped me do that.”

Did Rick regret buying in a rough neighborhood? “Not at all,” he says. “In fact, if you look at how both areas turned around, all the investment poured in there, and how the property values have gone through the roof, I wish I had bought more! I was buying these houses so cheaply that I couldn’t lose.”

 “The rents paid down the loans quickly, and then I did a few BRRRRs, enabling me to scale, Rick adds. “But it wasn’t overnight. “It took me 10 years. For most of that time, I had a good income from my job, so I never touched the real estate money to live off. I could always put it back into the business. In fact, when I purchased the properties, they were often in bad shape, so I just used the income from my job to fix them up.”

When Rick finally left his job three years ago to focus on real estate full-time, he supplemented his cash flow by doing more business as a real estate agent (he is currently affiliated with the Iron Valley Real Estate brokerage), as well as managing properties for out-of-state investors from New Jersey and New York.

“I learned from my dad that real estate is not a get-rich-quick scheme,” Rick says. “It’s about buying homes that make sense and doing it slowly and methodically.”

Santiago Martinez

While in his early thirties, Santiago Martinez was an Olympic standard wrestler representing his native Colombia when he got his real estate license and began to scale rapidly. He amassed 41 units in four years (he previously purchased six from 2016-2019), borrowing private money—”usually at 8% with three points on the back end”—then refinancing and building a team to oversee renovations and management.

Although his portfolio currently generates about $43,000 per month in gross rent and he has close to $3 million in equity, thanks to the Lehigh Valley’s rapid appreciation, Santiago hardly sees any cash flow because net profits are eaten up in paying his virtual team of four to five people and three full-time contractors and various subs.

“I scaled and built the portfolio and the equity but didn’t make money personally because the drip system I was using meant that there simply wasn’t extra cash after all my expenses,” Santiago says. “Now, I’ve changed my strategy. I’m looking to make an active income by flipping and paying down mortgages. The portfolio is great, and I got some great deals, so I’m happy I could scale when I did before the rates went up, but now it’s about making them cash flow.”

Final Thoughts

Both Rick and Santiago benefitted from the Lehigh Valley’s rapid increase in sales prices to build equity. Because he got in earlier, maintained a full-time job, and built his portfolio slowly, Rick could scale without any sleepless nights, generating equity and cash flow at the same time. 

Meanwhile, Santiago’s rapid scaling is a testament to his networking, determination, and risk tolerance. It hasn’t been easy or without stress, as he readily admits, but his trade-off has been equity and doors rather than cash flow, which is no small feat. The next phase of his investment strategy is about paying down debt and realizing his portfolio’s tremendous cash flow potential.

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David:
This is the BiggerPockets Podcast show 900. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast and I’m here today with Dave Meyer joining me to co-host this momentous episode in BiggerPockets history.

Dave:
Well, thank you. I’m so excited to be here for this huge milestone. And in order to celebrate, we have something special cooked up we’ve been working on for quite a while here at BiggerPockets. We are bringing on three of our most beloved and seasoned BiggerPockets investors. These are people who have been around the BiggerPockets community for a long time. And we’re going to ask them some of the most burning important questions about the housing market. These are questions like, is now a good time to buy or should you wait for rates to drop, what strategies work in today’s market, and is real estate still a tool to help you reach financial freedom? We’re going to get into this, plus actionable, practical advice that these seasoned vets have for anyone who’s trying to get started today.

David:
That’s right. We have J Scott, we have Brian Burke, we have Scott Trench, and we have Dave and Dave all in today’s episode. So let’s get into it.
All right, let’s start with a question that is on the forefront of everybody’s mind. Should investors wait for rates to come down before they start to buy? Who would like to take a stab at this one?

Brian:
I say give it to J. That way I can disagree with him.

David:
All right. We’ll go there and then we’ll let Scott fill in afterwards. J, what do you think?

J:
I see rates being high. And when I say high, rates are relatively high. We’re at what? 6, 6.5% at this point, and that’s historically about where they’re supposed to be, but I think we all know that they’re likely to head down in the near future as opposed to up. And so from my perspective, that gives us upside. That means when interest rates were at 2%, 3%, 4%, all we had was downside. We knew the next move in rates was going to be up. And so if we bought any floating rate debt, if we bought anything that didn’t have long-term fixed rate debt, we were going to be in a position where when we had to refinance or when we had to recapitalize, that things were going to be worse than they are now.
But right now we’re in a situation where we can be fairly certain that the next move over the next couple of years is going to be down. And so if we can find a deal that works today and we can put decent debt in place, then the best case scenario is that in a couple of years, we can refinance that debt, we can bring our cost down, we can continue to cashflow or cashflow more. And our worst case scenario is we’re in the same position we are now a few years from now.

David:
Scott?

Scott:
To reframe the question, I think the right time to buy is when your personal financial position is conducive to it, right? For me, real estate investing is a long-term bet on inflation in US housing stock prices and long-term rent growth. And I buy based on that premise consistently but not aggressively over a long time horizon. That said, just to kind of disagree with J before Brian can, yes, the best scenario is that rates go down. But I think what’s much more likely is the fed’s going to do exactly what they said, lower them two to three times, and then it’s anybody’s guess after that. And if they do nothing, the yield curve will continue to un-invert and the 10 year will continue to rise and that is directly correlated with both mortgage rates and commercial debt financing rates. So I think that I’m planning on, and believe, that there’s a much higher probability that rates stay the same or begin to climb rather than stay flat or go down.

David:
Can you briefly define what you mean by the yield curve will continue to invert?

Scott:
Yeah, so when the Federal Reserve changes rates, they’re increasing kind of overnight borrowing rates, very short-term yields. The US Treasury borrows money both in a short term and long-term basis. And right now, short-term debt for the US Treasury is trading at a 5, 5.25 yield and longer term debt from the US Treasury is trading at a lower yield like 4%, 4.25 for the 10-year treasury. That’s an inverted yield curve. And what I believe is going to happen is either there’s going to be a recession that’s going to force the Fed to drive rates down dramatically very, very quickly, which they are not saying they’re going to do or planning on, or that 10-year treasury is going to be yielding more than the overnight federal funds rate and the short-term treasury rate.

J:
I think you’re overcomplicating this, Scott. And nothing wrong with that. I think it’s easy to overcomplicate, but I’m a big believer that history is the best predictor of the future. And historically, mortgage rates are somewhere between 1.5 and 2 points above whatever the federal funds rate is. Right now we’re at a smaller delta than that, but that’s historically where we are and I expect we’ll get back to somewhere between 1.5 and 2 points above the federal funds rate.
And if you look at basically what the market is pricing in for the federal funds rate at the end of 2024, it’s somewhere between 3.75% and 4%. Don’t know that that’s actually going to be the case, but that’s what the market thinks. So assuming we’re actually at 3.75 to 4% in Federal funds rate, at the end of this year, and assuming we expand back to that historic 1.5 to 2 points above that for mortgage rates, we’re probably looking at somewhere in the high 5s by the end of this year, which is a good bit below where we are right now. So I mean that’s my best guess. I know we’re all guessing and I am not saying you’re wrong. I mean you have as much chance of being right as I do, but I just think that we can take a simpler view than what you were putting out there.

Dave:
Given that we’re just guessing and we don’t actually know though, I’m curious what you think investors should be doing. Should they be waiting? Scott gave an answer that he thinks the best time is when you’re financially able to do that. Brian, what do you think? Do you think that investors, given the unknowable nature about the future of mortgage rates, should waiting or should they be jumping in right now?

Brian:
Well, I’ve often been quoted as saying the phrase that there’s a good time to sell, there’s a good time to buy and there’s a good time to sit on the beach. And as soon as the sun rises and I can open the curtains behind me, you’ll notice that I practice what I preach when you see the ocean behind me, that there’s actually good times to just sit on the beach. Now having said that, I think we’re starting to come to a point where we’re about to maybe crawl out of that hole. And I’ve been a pretty vocal real estate bear for the last couple of years. I think it’s no secret I’ve said on this show and other shows that in ’21 I started selling most of my portfolio. I sold 3/4 of all the real estate I owned in 2021 and early ’22 because I thought the market was going to come down. It did in the sector that I work in.
Now I’m in large multifamily, right? 100 unit and larger apartment complexes, commercial real estate type stuff. And in that market, it suffered a significant hit. Now conversely, single family on the other hand didn’t suffer any ills really at much at all in most markets. In some markets, single family is up over where it was a couple of years ago. So the question of whether it’s a good time to buy now is a difficult question to answer because there’s so many different components to real estate. There’s so many local markets in real estate, there’s so many different strategies in real estate that a case could be made for buying any time at any point during the cycle, no sense in waiting for interest rates to change if your strategy gels well with the current interest rate environment. So if you’re flipping, you don’t really care what interest rates are. You don’t care what pricing movement is, it’s an arbitrage play. So you can certainly still do that. So it’s a really tough question to answer.

Dave:
Scott, what do you think about this question?

Scott:
This melds perfectly with the way I think about things. In commercial real estate, large multifamily, syndicated funds, those types of things, there’s a time horizon for investments that is finite. You can’t just buy the thing and hold onto it for 30 years in most of these funds. That’s not meeting the expectations of investors. And there are debt and balloon terms and other things that force your hand at a certain point in time. So in that space, you have to do what Brian is doing to maximize returns. There has to be a buy time, a sell time, and a sit on the beach time. And I’m so glad you’re enjoying the sun soon here in Maui and got up early with us.
In the single family and small multifamily space that I play in, I don’t have that constraint because I’m using 30 year fixed rate Fannie Mae insured mortgages and I’m putting down a down payment and can operate myself if I need to and I can hold on for the decades. There is no timing pressure unless I screw something up badly in my personal financial situation. So to me, it’s always the buy time whenever as my capital accumulates, I’m dollar cost averaging into single family or small multifamily that I can hold in perpetuity here in Denver. But if I’m going into one of these other asset classes, I got to be really, really careful about when you go in because that matters so greatly to your returns and there’s a time pressure on it.

Brian:
And I would say that just to counter what Scott just said just a little bit, well yes, there’s always a time to get in somehow. If you tell a single family rental real estate investors who bought in 2004 that what their decision was a good decision, they would probably counter that point because there is times when single family can take a significant hit.
Now ultimately it recovered. It took years to do so and that was certainly an impact on the time value of money. But what you got to think about is the holistic world of real estate investing and where do you think the risks are. And in ’04 and ’05, home prices were so high. I mean they really only had one way to go. There were plenty of risks in the Fannie financing that was going on at that time and all that stuff. Now we don’t have those risks. So a sharp residential downside is probably not part of the cards. So you still have to factor in the overall market conditions and thoughts of where something’s hiding around a corner to kill you, but right now it’s not there in my opinion, especially in the single family space.

J:
And it’s also worth noting that, I mean no matter how smart we are, we are all dumb to some extent. I mean if I said to you, Brian, you sold everything in 2021, if I said to you in January of 2020 that we’re about to have a global pandemic, we’re going to be shut down for a year and a half, basically supply chains are going to be frozen, but you have the opportunity to sell your entire portfolio before March 13th, would you have done it?

Brian:
Yeah, I probably would have. And that would’ve been a huge mistake.

J:
Exactly. You’re the smartest multifamily investor I know, but even you couldn’t predict these weird macroeconomic situations. And so, this is why it’s often said that time in the market is more important than timing of the market. I’m not going to disagree that we can do this portfolio play where we say, “Hey, we’re not going to buy a whole lot when things are really frothy.” But to say we’re just going to sit on the sidelines… And I’m not talking about you. I mean, if you buy right all the time and sell right all the time, then you’re always going to have an opportunity to sit on the beach. You did that. Most of us, we don’t have that crystal ball. And so yeah, we can kind of slow down a little bit when we think things are frothy, we can speed up when we think there’s good opportunities. But to Scott’s point, I think it’s always a good time to be buying when your financial situation allows it and when your time horizon allows it as well.
And I’ll just say, I mean Scott pointed out that we can’t do that in the multifamily world. I agree. To some extent, it’s a lot harder because we do have investors. And our investors don’t want to sit on an investment necessarily for 10 or 15 or 20 years. And loan terms typically are not 30 years. They’re typically seven or 10 or 12 years. But that still gives us seven or 10 or 12 years. And if you look at historical trends again, what you’ll see is over any 10 year period in the history of this country, real estate has gone up peak to peak. And so yeah, maybe we’re not going to make a ton of money for our investors if we hold for 10 years, but we’re probably not going to lose money either.
And so if you make a good investment, and when I say a good investment, investment that’s not going to be forced to sell based on macroeconomic conditions, something that you’re going to be able to hold through a downturn, if you can hold that for five or 10 years, you’re probably going to come out unscathed and at least make a little bit of money.

Brian:
And you have to have the loan maturity to match.

Dave:
Am I the only one who doesn’t mind interest rates where they are? I feel like it’s actually a pretty good opportunity to buy right now. And I do think it sort of helps cool down the housing market and creates a little bit less competition. So for me, I’ve actually personally gotten a little bit more active in the last couple of months than I have in the previous few years.

David:
All right. We’re going to take a quick break but stick around because we’re about to answer the questions everyone is asking lately, is cashflow still possible and what strategies actually do work in this market right after this break.
And welcome back to the BiggerPockets Real Estate Podcast. We are here with some of the smartest real estate investors in the game right now, debating the most pressing questions on investors’ minds.

Dave:
Let’s transition our conversation here a little bit to what strategies actually are working in today’s market given rates. Let’s just assume they stay where they are because we don’t know what’s going to happen. Brian, I know you have a couple that you don’t think will work, but are there any that you do think are going to work in the coming months?

Brian:
I think you can flip houses in any economic climate. In fact, the best my flipping business ever did was during the ’08 to 2013 real estate down cycle. And you can do really, really well with an arbitrage strategy. You can also do really well with single family rentals. I mean, single family rentals aren’t really like… They’re not the cashflow play people want to think they are and that many people promote that they are. I mean, if you really looked at somebody’s five-year total cashflow including capital improvements and everything else, they’re not a huge money maker, but they’re a wealth builder.
I mean, the thing about real estate is there’s two things required to build wealth in real estate, money and time. And the money doesn’t have to be yours, it could be somebody else’s. But the time, you can’t do anything about. You have to give it time. And that time is going to create appreciation in two ways, rental growth and price growth. And it’s from that rental growth is where you’re going to start to make cashflow in time. And if you’re patient enough, and as J alluded to, if you can hold long enough, and I think even just as importantly, you have the financing structure that allows you to hold long enough, i.e. you don’t have a loan maturity looming and you can actually hold, you can do well. And I think I agree with you, Dave. I hate to say that. Gosh, that pains me.

Dave:
Do you want to agree with everyone or do you just come on here trying to disagree with as many people as possible?

Brian:
My role is to disagree. I’m brought on this show to be the bear or to disagree. But no, I agree that the strategy play I think right now in the single family side is, you can buy at today’s rates that are a little bit higher. And if you can find a deal that works, the numbers work at today’s rates. Then later when rates do fall, you can refinance and improve your returns and improve your cashflow. And this is a really good time to do that play. You couldn’t have done that play three years ago. That play was off the table. So when you talk about, and I talk about, “There’s times to do this, there’s times to do that, there’s time to do nothing,” there’s also times to just change up your strategy. And I think that’s the strategy play right now, Dave.

David:
Brian is like the enforcer that is brought in on a hockey team who ends up hugging everybody and being their friend when he’s supposed to be laying down the law.
Scott, what do you think about strategies that are working in today’s market? Is this a question that people are asking that they shouldn’t be or is this a relevant question that we should be putting focus on?

Scott:
I agree with the single family rental. And again, I’ll throw in the small multifamily property area. I did some research a few months ago and posted a webinar to the BiggerPockets YouTube channel, and I think released on the Real Estate feed here, around where to find the cashflow, right? And there’s markets around the country. I like upstate New York, there’s a couple of examples there. Cleveland, I love the south, especially in the build-to-rent space. A lot of people built a ton of properties. They’re brand new inventory, they’re designed to be rentals. And the institutions that were supposed to buy them aren’t there anymore. And so that’s a really good opportunity for investors to do that.
Are you going to get a ton of cashflow there with those deals? Nope. But you can cashflow with a traditional down payment and today’s rates on those. And I agree completely with Brian’s thesis here around, hey, if you’re going to be buying these types of properties, that’s a long-term wealth play. You’re letting the loan amortization go, you’re getting a solid but not incredible cash on cash return. You’re going to benefit from long-term rent and pricing appreciation on those.
If you want cashflow in a big way, the obvious answer in a higher interest rate environment is to turn to debt. For example, I purchased a couple of hard money notes last year and I’ve been re-rolling those, right? Flipping is still a great way to make money. And I feel like if my worst case scenario as a real estate investor doing this for 10 years is foreclosing on a property and finishing a project, I’m comfortable with that. And that’s given me a 12 to I think about 13% blended rate on the several loans that I’ve owned over the last year. So I think that’s an obvious solution here as well to be backed by real estate if you’re really looking for that cashflow. There’s no tax advantages to that. I paid a tax, man, on my interest by the way, unless I were to move it into my retirement accounts, but it is significant.

David:
Okay. So for years, we’ve been able to get almost every single benefit that real estate offers out of the same deal because real estate was in its heyday. You could get appreciation, tax benefits, cashflow, loan pay down, easy financing, the ability to partner with people, almost a free education from doing a deal and “Hey, if it didn’t work out, you could just sell it and make money.” There was almost no downside in general to real estate and you could get all the upside in the same deal.
It sounds like what we’re saying is that it’s not quite as easy as it was. It’s still possible, but you’re maybe not going to get everything out of the same deal. Do we think investors should be looking at building a portfolio that has some properties that are a long-term appreciation play, some opportunities like Scot just said that are going to be cashflow heavy but they’re not going to shelter your taxes, other properties that might be a good tax savings for money that you’re making in business? What’s your guys thoughts on if we need to maybe lower our expectations and become a little more strategic on the type of real estate we’re putting in our portfolio?

J:
Yeah, I think it’s important that we’re all a bit more introspective. I mean, I think the biggest lesson here is throughout again the history of this country, we’ve become accustomed to recessions every four or five, six years. That’s just the way it works. And basically what that means is every four or five six years, we as business owners and investors get our asses kicked and we learn we’re not the smartest people in the room, we’re not the smartest people on the planet and many of us have no idea what we’re doing.

Scott:
Except Brian.

J:
Except Brian.

David:
Nobody beats up the enforcer.

J:
And it forces us to really come to terms with the fact that we may not be as smart as we thought we were and it makes us get better at investing and do things the right way or get the hell out of the business. Well, the problem is, since 2008, we haven’t had that kick ourselves in the ass moment for people to recognize that they may not be as smart as they think they are, they may not be as good at an investor as they think they are. They may have been thinking for the last 15 years they’ve been doing everything right because you buy a bad flip, you take too long to flip it, you get the wrong financing, you spend too much on renovation, you don’t sell it for as quickly as you thought and you still make money because the market just kept going up.
And so I think we’re going to have a big revelation in this industry that a lot of people who have built big brands and big names, and hopefully I’m not one of them, but a lot of people that have built big brands and big names aren’t necessarily as smart and successful as they thought they were. So I just want to start with that.
In terms of what we should be doing now though, I agree with what everybody said, buy and hold. Like Scott and Brian both said, I mean there are lots of benefits. There’s cashflow, there’s principal pay down, there’s tax benefits, there’s appreciation. But the one thing we’re not going to see a lot of in a higher interest rate environment is cashflow. And so for all those people that for 10 years were saying, “I’m going to buy a couple rental properties and retire from my W2,” I still think it’s a great idea to buy a couple rental properties. Buy a property a year, but you’re not going to be retiring from your W2 thanks to the cashflow like you were doing a few years ago.
And so I think people have to kind of reset their expectations on the cashflow piece. But again, those other pieces are so valuable that if you’re buying now, in 10 or 15 years, you’re going to find that your net worth has increased significantly and you’re going to have an opportunity again at some point to recapture that cash flow. So buy and hold always good. Transactional type flipping stuff, I’d say be cautious, but it can still work.

Scott:
I think that the two kind of words that bubble to the surface in my mind in this conversation are fear and enough. And I think that over the last 10 years, there wasn’t enough fear in the real estate market, right? You talk about these commercial real estate deals, for example, like office and some multifamily in certain areas, you can be the smartest guy in the room. You can be doing this for a decade or two and there’s nothing you can do when Austin, Texas is adding 10% to its existing multifamily stock in year 2024. Rents are going down, property taxes are going up, insurance rates are going up. There’s nothing you can do and you’re helpless. And you’ve got to have fear in this business in addition to the long-term belief that I voiced earlier around depreciation and rent growth.
I have both of those at all times. I’m scared every time I buy a property to this day. I was terrified the first time in 2014. Prices have gone up for six years and we’re right around the corner from the recession that happens every five to six years that J just talked about, and in 2017, in ’18 and ’19. And there’s always a bubble. You’ve always got to have that fear I think in addition to the belief in the long-term thesis. And that comes back to me from the thing I’ve been harping on this whole time around personal finances and the ability to hold the asset for a very, very long period of time. That’s how you compound growth and don’t lose your principle.
And the other side of this is enough, the penny can’t double forever. It’s completely tied into the fear concept here. What is enough for you and do you need to keep leveraging that whole time and do you need to get there overnight? Can you accept the fact that a good real estate investor might get mid-teens returns over a 5, 10, 15 year period? A small spread to what you can get for example, against an index fund and a stock market, but a worthwhile one to chase. Not in the 20s, right? Not in the 25%. Not these huge doubling of your investment in three, four years that we experienced over the last 10 years. What is enough for you and are you structuring your portfolio to get there? And I think that those are the two things that got lost in the last 10 years by a lot of folks and some of the loudest folks in the real estate community.

Dave:
Scott, I love that so much. I completely agree with you. I think it’s so important that people have a healthy understanding of risk and reward. And everyone talks a lot about reward and how they’re getting these outsized returns, but they don’t talk about how much risk they’re taking on. And it’s okay to take on risk, but you sort of have to be thinking about that and cognizant that with reward and upside comes risk. And I think knowing when you have enough is also just probably the most important lesson I’ve ever learned as a real estate investor. You can use that to work backwards and figure out how much risk is appropriate for you and how much reward is appropriate to you to get to your long-term goals.

Scott:
It’s just super hard when these 22 year olds are racing past you from a wealth creation perspective because they’ve bought a hundred deals in the last two months with other people’s money. So I get it, but you have to have that fear and enough.

Dave:
But it’s a tortoise in the hare thing, right? You have to just be slow and steady if that’s your approach. If you want to go fast, you can, but there is more risk there.
All right. I like it. This is starting to heat up. When we come back, we’ll name the elephant in the room and ask the question, is real estate a viable path to financial freedom? Stick around.

David:
Welcome back, everyone. Dave Meyer and I are here with Scott Trench, J Scott, and Brian Burke and we’re talking about the biggest questions this market is asking. Let’s get back into it.

Dave:
Now, Brian, I want to turn it over to you, but I just first want to point out that you are perfectly blending into your background right now. Anyone watching this on YouTube, he just opened the door and he’s got this beautiful Hawaiian backdrop, but he’s wearing a Hawaiian shirt. And you can’t even see him. He just fits perfectly into this setting. But enough about that, Brian. How do you view this risk reward situation and discussion we’re talking about?

Brian:
Well, I think one of the biggest things I’ve seen in real estate in my 34 years of doing this in multiple cycles, I kind of see the same thing repeat itself time after time. People tend to fail to treat real estate investing like the loaded gun that it is, because this business can save your life and it can also kill you in a figurative sense. The risk is real and people tend to forget about it. And when you find the greatest amount of euphoria is usually the biggest signal to me that we’re nearing the end of an upcycle, and that’s what was happening in ’20 and ’21 when I decided to start selling everything, is because there was just so much euphoria, you couldn’t make a mistake, you could do nothing wrong, everyone was making money, everyone had to buy. And when everybody wants something, it’s a good to allow them to have it. So if you have it, it’s a good time to turn it over when everybody wants it. Because when nobody wants it, it’s a really bad time to sell it.
Scott nailed it. You really have to focus on the fundamentals now because no more is the market going to necessarily bail you out. Now you might get a gift in a year or two where you can refinance and get a lower interest rate and increase your cashflow, but you have to buy right. And there’s really a couple things I think that are failure points for most real estate investors. They either have the wrong strategy at the wrong time or they have the wrong capital stack. Those are the two things that kill people. They’re buying to hold when they should flip, or they’re flipping when they should buy to hold, or they’re buying and holding with three year maturities on their loan and in three years they’re going to have to refinance or sell or do something. You’ve got investors that have a short call window. You’ve got preferred equity, which means that somebody is going to knock on your door soon and say, “I want my money back.”
If there’s anybody that’s going to want their money back in a short period of time that’s involved in your real estate deal, you’re dramatically increasing your risk profile. If you have long-term capital, a long-term horizon and the right strategy, even if you bought wrong, you’re probably going to come out okay. I mean, you don’t hear a lot of real estate investors saying, “I failed because I bought this property wrong.” It’s like, “No, you failed because you got short-term financing, you had the wrong strategy.” That’s where people get tripped up.

David:
So we all agree that real estate is a great option, but it’s foolish to not consider the risk that you’re taking on when you buy it. Brian, you made some great points there of what people can do to reduce their risk.
In Pillars of Wealth I talk about, “Hey, if you want to scale up big and you want to go big, that’s great. You have to temper that with more savings, more reserves and more offense. You have to be able to make more money in your business if you want to scale up the real estate.” If it’s proportional, you’re fine, but to Scott’s point, it’s a big problem when you’re 22 years old, you have no money in the bank, you borrowed a bunch of money from other people, you don’t understand the debt instruments you’re using and you’re just throwing it all on black and trusted that Roulette’s going to work out every single time because it has before. So I thought that was some very sound advice.
Since I’ve been involved in real estate, the carrot that we’ve used to get people into this game is to buy some real estate, get some cashflow, quit your job. It’s always been the same strategy that’s been marketed over and over and over. “Do you hate your job? Do you hate your life? Does your cat sit on somebody else’s lap instead of yours? Are you having a hard time getting a girlfriend? Well, if you had some cashflow, all of that would go away, so come buy some cashflow and you can fix all your problems.” And now that the cashflow has somewhat evaporated from rates going up, nobody knows what to do and they’re all losing their minds. Is it still possible to reach financial freedom and quit your job in a couple years with real estate today? Or do we think that people should be acquiring real estate before a different purpose?

Brian:
Was it ever possible?

David:
It was presented that way, right? I mean, I think a lot of people listening to this, that’s how they got here, is that’s what they got sold, is they had a bad day at work and someone said, “Well, if you had cashflow, you wouldn’t have to listen to your boss or wake up on time or be sitting in traffic.” And so that’s why they got into the game and I see a lot of bitterness in the real estate investing communities when they’re like, “Well, I thought I was going to be able to quit and I can’t make it happen.” What do you think, Brian?

Brian:
I think that if your expectation ever was that you’re going to get all this cashflow in two years by buying any kind of real estate, you’re probably fooling yourself. Single family rentals don’t throw off enough cashflow unless you’re paying all cash, so that means you already have money and you’re already financially free. If you’re getting the money from somebody else, you’re paying them a lot of what you’re getting in cashflow. If you’re buying large apartment complexes like I do, there’s a concept called preferred return, which means that investors get 100% of the cashflow until they reach a specific return threshold. That means you as the sponsor who raised all this money is getting nothing in cashflow during that period of time. You really make your money when you sell.
So getting rich in real estate in two years, the problem with it is it’s just a misnomer. It’s a misguided expectation. Real estate has always been a long game. It’s always been a way to build wealth over time. You can buy all kinds of real estate right now and build up this huge portfolio with just a tiny, tiny, tiny bit of cashflow, and what’s going to happen is over time you’re going to be able to refinance into a lower interest rates, rents will eventually go up, those increased rents coupled with a lower mortgage payment are going to produce cashflow eventually. At some point the loan will be paid off and you’ll have massive cashflow. And if you do that enough and you can buy enough property, you’ll accumulate massive wealth. And I promise you, you will get a girlfriend and the cat will sit on your lap. All those problems will go away, but it’s not going to go away in two years. This problem takes time to solve like any complex problem.

Scott:
I completely agree with that. This has never been a two-year journey to wealth, and it never should be considered that. But I believe that if people are buying this year, next year, the year after, every other year, whatever, if you buy three to five properties over the next 10 years starting today, you have a great shot at accumulating more than a million dollars in net worth from a standing start, especially if you’re willing to house hack or do any of those strategies where you’re going to add a little bit of value or work on the portfolio yourself. And you will start seeing material cashflow by the end of that first decade in this business that has a really good boost to your life. You will see that continue to expand if we see anything like the historical appreciation rates and price growth in rents, which I expect and fundamentally believe in. But no, you won’t get there overnight. And it’s a consistent grind of continuing to accumulate, building up your cash position and steadily continuing to expand your portfolio at least in the single family space. Go ahead, Brian.

Brian:
I just want to add something to that, Scott, because what you said is absolutely true. And I just want to relate a story to people because I think it’s important. 25 years ago I made a pledge to myself that I was going to buy one house a year. That was going to be my big break. I was working, I was getting a W2, I was in law enforcement like David. I just wanted to buy a house a year and I thought that was going to make me rich. I started out on that and here I am 25 years later, I’ve bought over $800 million worth of real estate during that time.
Some of my very early single family homes that I bought, I did a 1031 exchange, which means I could sell these two properties and buy a larger property. I bought a 16 unit apartment complex. I held that 16 unit apartment complex for 15 years and then I sold that in a 1031 exchange and bought this very spot that I’m sitting in right now with this ocean view behind me in Hawaii. And that is how the road to wealth works. You start small with a goal, you take active steps to get there, you accumulate probably… It doesn’t matter if you get 100 houses in two years, like the 22-year-old you’re competing with whoever mentioned that. Where’s that guy in five years? Probably in bankruptcy court. What you got to do is just make a goal that fits for you, chip away at it one piece at a time, and eventually you’ll have what you’re seeking. It just will take time. It took me what? 20 years to get into here. And it will take you time. Just be patient.

J:
If only there was a game that taught us that if we buy houses today, in the future we could turn those into something else like hotels or something, that’d be really cool. We should create that game. The key here is that… And I think Monopoly is actually a good analogy for this because what do we do in Monopoly? We don’t spend the game trying to buy fancy cars and expensive dinners and traveling around the world. What we’re doing is we’re buying assets and we’re letting those assets grow. And most of us in Monopoly, we find every time around the board, we’re looking forward to collecting that $200 because we’re running out of money because we keep buying assets. And that’s the way to do it because by the end of the game, if you’ve done it well, you’ve got a whole lot of assets and that’s worth a whole lot of cash.
I think we kind of use the terms rich and wealthy interchangeably, but from my perspective, there’s a big difference. Rich people, they have a lot of cash. They can go out and buy a nice car, they can go out and go on fancy vacations and they can do all those things that you think about when you think about rich and flashy. But wealthy is where you want to be. Wealthy is your net worth. Wealthy is that equity. Maybe it’s tied up for now. Maybe it’s tied up for the next five years or 10 years, but at some point in the future you’re going to wake up and you’re going to realize that “I’m worth a lot of money and I can take that equity and I can convert it into cashflow or I can convert it into another type of equity and I can quit my job.”
And yeah, it’s not going to happen in two years, but again, if you do things the right way like Brian did and like Scott’s doing, like David did and Dave and me, I mean in five or 10 or 15 years, you’re going to wake up… You’re going to wake up in 15 years either way, at least wake up rich. Excuse me, wealthy.

Dave:
Great advice, J. If only there was a book that talked about return on equity that perhaps you and I wrote that people could check out, that might work out for people.
Last question here before we get out of here. I want to hear from each of you quickly what practical actionable advice would you give new investors. So we’ve talked a lot about what people who have been in the game for a while should be doing, but what advice would you give new investors who want to get started here in 2024? Scott, let’s start with you.

Scott:
It’s the age old stuff. There’s nothing new here. It’s strong personal financial position. Build up your cash reserves. Develop the mental models that you need to. That’s a pompous way of saying start learning the way that what J just said there. And look, consider a house hack or a live-in flip, right? Those are the most powerful tools you have the huge advantages when you’re just getting started that completely multiply your leverage and multiply your opportunity and upside while diminishing risk if you can live in the property, operate it yourself and maybe add a little bit of value. It’s all tax-free if you do the live-in flip correctly and live in there for two years and sell it within five years of doing that. I would strongly encourage people to be looking there for those opportunities because they’re so high upside and so low risk in any year, but at any point where you’re getting started.

J:
I meet two types of people in this business all the time. Number one, I meet people that have never done a deal. And most of the people I meet have never done a deal. 95, 96, 98% of the people I meet have never done a deal. And then the other type of people I meet are people that have done 5, 10, 50, 100 deals. There’s one type of person I never meet in this business, and that’s somebody that’s done one deal. So anybody out there that’s listening, don’t do a bad deal, but don’t give up until you get to that first deal because after you get that first one, it gets so much easier and you get your head around the process. And I promise you, if you do one deal, you’re going to do 10 or 20 or 50 or 100 deals.

Dave:
Right. Brian, what’s your advice for new investors?

Brian:
The first thing you need to be doing right now is getting your plan together. What strategy do you want to employ? What markets do you want to invest in? Where are you going to get your capital? And that includes both equity capital and debt capital. Get everything lined out. If you’re going to use investors, build your investor list. If you don’t know what you’re doing, build your partner list. If you don’t know how to turn a wrench, build your contractor list. Get everything ready, get it lined up because the opportunities are presenting themselves and they will in more quantity as time goes on. And if you’re ready for it, you’ll be ready to pounce when you see opportunity.
The people that get caught flatfooted are the ones that they have no plan, they have no money, and they just say, “Oh, I found this great deal,” and it’s like, “Okay, what do you know about great deals? Where are you getting the money? Where are you getting the debt? What are you going to do with it?”
“Oh, I haven’t thought about any of that.”
“Well, then it’s too late. The great deal is already gone.” So you have to have all that other stuff ready so that when the great deal comes along, you’re absolutely ready to do it and do it right.
The second thing I think people need to think about is don’t get in too far over your skis. One of the things that really killed investors back in the last downturn in ’05 was they took on way too much debt over what the property or they could support. The problem with this business is, if your career gets really shortened because you really screwed up, it’s even harder to get the second deal. J’s right. It’s easier to get the second deal, but it’s harder to get the second deal if your first one was a total disaster.

Dave:
Well, Brian, I totally agree with you. I think if I had to give my advice concisely, it would be to start with the end in mind, to really think about where you want to go, Scott alluded to that earlier, and what you’re trying to accomplish through real estate. And then work backwards to identify the strategies, the markets, the financing structures that work for you and are appropriate given your personal situation and your personal goals. I see a lot of people just jump right into that first deal. And J’s right, you should get into that first deal, but make sure that it’s one that’s appropriate for you and that is well aligned with your long-term goals.

David:
Nice. The thing I would tell a newbie is to think about the long-term. When you guys were talking, I was thinking about my experience that I’ve had in real estate since I got into it. And it seems like real estate tends to move in these really big waves. If you think about the market as the ocean tides, it goes up very quickly when we print a bunch of money and it goes down very violently when we get into a recession. And there’s occasionally times where it just slowly increases at that 2 to 3%, but we can never predict when that’s going to happen. So the idea is how do you get as many buoys in the water in the best markets that you can, and then you ask yourself the question, “How do I keep them there? How do I not lose the properties that I bought?” Obviously, cashflow is a really strong way to do that, but that’s the profit and loss of a property.
Think about the profit and loss of your life. Are you saving money? Did you get a little bit of cash and immediately go buy yourself a Mercedes-Benz and jeopardize the health of your investment portfolio because you can’t stop spending money? If you could be disciplined with your own finances and always be bringing more value to your employer, more value to the marketplace, more value to your customers, increasing your income while keeping your expenses low, you’ve now earned the right to take the risk that is involved with real estate investing that will pay off if you can wait long enough. So just stop trying to outsmart the market and out time the market and ask yourself, “How do I get the best buoys in the water, in the best markets and keep them there for as long as possible?”
And then what happens is 10 years, 15 years, 20 years later, you got a butt load, that’s a technical term everybody, of equity, and you can ask these cool questions like, “How do I move this into a different asset class?”
All right, gentlemen, thank you all for joining me here on this stellar 900th episode of the BiggerPockets Podcast. I was first featured as a guest on episode 169. And I can’t believe how quickly we are flying towards 1,000.

Scott:
I just want to throw something out there. You first appeared on Show 169. J, what was your first episode? Do you remember that one?

J:
Episode 10.

Scott:
Whoa! 10. That’s pretty good. Brian, what was your first episode?

Brian:
Episode 3.

Dave:
Talk about OG on this. J and Brian. Wow. Thank you guys for being around from the very beginning and coming back all the way here for 900.
If you are one of those people who have listened to all 900 episodes, please find me on BiggerPockets and shoot me a message. We want to hear from you and your experience. We would love to know if you have listened to all 900.

David:
And let us know in the comments on YouTube what your favorite BiggerPockets show was. All right, I’ve got to record episode 901, so I’m going to get us out of here. Thanks everyone.